Tim Kinane

inner-image

Interesting Items

Friday, April 3rd, 2020

SPECIAL ALERT: Updated C.A.R.E.S Act Executive Summary with New PPP Information

By: Patrick Ungashick

Sick Dollar

To help our clients and other business owners and leaders respond to the unprecedented leadership disruptions caused by the coronavirus (COVID-19) outbreak, the team at NAVIX offers the following crisis management information series.

Responding to Coronavirus: Updated C.A.R.E.S. Act Executive Summary with new PPP information

Our 11-point Executive Summary of the C.A.R.E.S Act has been updated, to reflect important changes just announced by the Treasury Department and Small Business Administration. Many of these changes deal with the Paycheck Protection Program (PPP) forgivable loan opportunity. Click below to download this important updated resource.

Download Summary

The NAVIX team has helped hundreds of business owners prepare for exit. We have also helped countless owners and leaders deal with recessions, liquidity crises, and economic upheaval. Our experience and perspective enable us to guide our clients through difficult times, such as these.
Contact Tim 772-221-4499, to discuss strategies for your business.
Wednesday, April 1st, 2020

SPECIAL ALERT: Forgivable SBA Loan Application Now Available

By: Patrick Ungashick

Sick Dollar

o help our clients and other business owners and leaders respond to the unprecedented leadership disruptions cause

d by the coronavirus (COVID-19) outbreak, the team at NAVIX offers the following crisis management information series.

Responding to Coronavirus: Forgivable SBA Loan Application

March 31, 2020 – 4:00pm EST

The US Small Business Administration just released today further information about the new forgivable loan called the Payroll Protection Program (PPP), as well as a loan application form. See the links below to access this information.

Additionally, click here to download  our free C.A.R.E.S. Act Executive Summary, which contains actionable information on 11 of the major tax, stimulus, and business programs created in response to the COVID-19 public health and economic crisis.

SBA Information and links:

Be sure to review this information and contact an SBA approved lender to proceed with this program. And contact us if you have any questions.

The NAVIX team has helped hundreds of business owners prepare for exit. We have also helped countless owners and leaders deal with recessions, liquidity crises, and economic upheaval. Our experience and perspective enable us to guide our clients through difficult times, such as these.
Contact Tim 772-221-4499, to discuss strategies for your business.
Friday, March 27th, 2020

SPECIAL ALERT: $2 Trillion C.A.R.E.S Act Executive Summary

By: Patrick Ungashick

Sick Dollar

To help our clients and other business owners and leaders respond to the unprecedented leadership disruptions caused by the coronavirus (COVID-19) outbreak, the team at NAVIX offers the following crisis management information series.

Responding to Coronavirus: C.A.R.E.S. Act Executive Summary

The U.S. federal government today authorized a $2 trillion stimulus package, the largest emergency aid package in U.S. history. It was enacted in response to the social, economic, and health crises created by the coronavirus (COVID-19) pandemic.
The legislation contains hundreds of provisions impacting consumers, specific industries, and U.S. employers of all sizes. This executive summary highlights 11 of the stimulus elements, tax provisions, and business benefits that are most likely to be relevant for our clients and related parties.

 

Click here for a free PDF of the report.

 

The NAVIX team has helped hundreds of business owners prepare for exit. We have also helped countless owners and leaders deal with recessions, liquidity crises, and economic upheaval. Our experience and perspective enable us to guide our clients through difficult times, such as these.

Contact Tim 772-221-4499, to discuss strategies for your business.

Thursday, March 26th, 2020

Business Response to the Coronavirus Crisis – $50 Billion from the SBA

By: Patrick Ungashick

Sick Dollar

 

To help our clients and other business owners and leaders respond to the unprecedented leadership disruptions caused by the coronavirus (COVID-19) outbreak, the team at NAVIX offers the following crisis management information series.

Responding to Coronavirus Crisis: $50 Billion from the SBA

In response to the coronavirus crisis, the U.S. Small Business Administration (“SBA”) has made available $50 billion in lending to eligible small businesses through the Economic Injury Disaster Loan Program. Eligible companies can borrow up to $2 million for a term of up to 30 years.

In order to qualify, a company or non-profit must meet SBA size standards and must be located within an SBA-declared Disaster Area . As of March 23, 2020, businesses in every state plus American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands can apply.

If approved, the SBA may loan up to $2 million with a term of up to 30 years for repayment. Annual interest rates currently are 3.75% for small businesses and 2.75% for non-profits. Loans in excess of $25,000 require collateral. However, the SBA has stated it will not decline a loan simply because of a lack of collateral. Loan proceeds can be used for working capital, payroll and other expenses the qualifying small business could have paid had the disaster not occurred. However, these proceeds are not intended to be used to replace lost profits or to finance business expansion. To learn more and potentially apply for a disaster assistance loan, visit the SBA site.

In addition to this Disaster Loan Program, additional federal legislation is under consideration that would make available other SBA loan programs directed toward assisting small businesses impacted by the COVID-19 pandemic. Enroll in our news updates to stay fully informed.

At times like these, cash is king. If you are already a NAVIX client, your advisor stands ready to help you model your cash flow needs and discuss your company’s financial alternatives during this crisis. If you are not a NAVIX client, work with your advisors or contact us about our services.

The NAVIX team has helped hundreds of business owners prepare for exit. We have also helped countless owners and leaders deal with the recession, liquidity crises, and economic upheaval. Our experience and perspective enable us to guide our clients through difficult times, such as these.

If you have a question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.

Tuesday, March 24th, 2020

Business Response to the Coronavirus Crisis – Tax-Free Aid for Employees Share

By: Patrick Ungashick

Sick Dollar

 

 

To help our clients and other business owners and leaders respond to the unprecedented leadership disruptions caused by the coronavirus (COVID-19) outbreak, the team at NAVIX offers the following crisis management information series.

Responding to Coronavirus: Tax-Free Aid for Employees

With the coronavirus crisis continuing to evolve, employees across the country are facing increased financial stress and uncertainty. Now that the coronavirus crisis has been declared a national emergency, employers have access to a little-known tool called “qualified disaster payments” to aid their employees. These payments can be tax-deductible to the company and income-tax-free to the employees.

Under Internal Revenue Code (IRC) Section 139, companies potentially can reimburse or provide employees with tax-free qualified disaster payments for expenses not covered by insurance, such as:

  • Over-the-counter medications
  • Hand sanitizers and home disinfectant supplies
  • Child care or tutoring due to school closings
  • Work-from-home expenses (like setting up a home office, increased utility expenses, higher internet costs, printer, cell phone, etc.)
  • Increased costs from unreimbursed health-related expenses
  • Increased transportation costs due to work relocation (such as taking a taxi or ride-sharing service from home instead of using public mass transit)

Section 139 expense reimbursements or payments should not replace wages, nor used for non-essential or luxury items or services.

Qualified disaster payments are federal tax-free to employees and are deductible to the employer. There is no federal reporting or disclosure, so these payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding. However, qualified disaster payments may still be treated as wages under state unemployment insurance tax. Employers should determine on a state-by-state basis whether income tax withholding and/or unemployment insurance tax contribution obligations may arise in connection with Section 139 payments.

Additionally, Section 139 does not cap the amount or frequency of qualified disaster payments that can be made to any individual employee or all employees in the aggregate. Employers are not legally required to have a formal program to utilize Section 139. Still, some written plan is recommended to communicate the plan and set guidelines on how and when payments to employees may be made.

Like with any tax matter, employers should consult their tax advisors to discuss how Section 139 applies to them and their situation.

If you are already a NAVIX client, your advisor stands ready to help you discuss additional strategies to protect against the loss of key employees. If you are not a NAVIX client, work with your advisors or contact us about our services.

The NAVIX team has helped hundreds of business owners prepare for exit. We have also helped countless owners and leaders deal with recession, liquidity crises, and economic upheaval. Our experience and perspective enables us to guide our clients through difficult times such as these.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.

Wednesday, March 18th, 2020

Business Response to the Coronavirus Crisis – Manage & Secure Cash

By: Patrick Ungashick

Sick Dollar

To help our clients and other business owners and leaders respond to the unprecedented leadership disruptions caused by the coronavirus (COVID-19) outbreak, the team at NAVIX offers the following crisis management information series.

Responding to Coronavirus: Manage & Secure Cash

In response to the economic uncertainty created by the coronavirus outbreak, we suggest you take steps necessary to ensure that your company does not run into a cash crunch. In times of crisis, cash is a company’s lifeblood. Consider these steps to assess your company’s financial position:

  • Identify the company’s immediate cash needs and demands.
  • Calculate the cash needed to cover the business’s core operations for at least the next 45 days.
  • Run and update each week a cash flow forecast to monitor the company’s short-term cash position carefully.

If your company’s cash position is sufficiently fragile or uncertain that you risk a shortfall, consider the following actions:

  • Make a maximum effort to collect on accounts receivable—now is not the time to let others hold onto your company’s cash.
  • Draw on your line of credit (if available) to establish at least a 45-day liquidity cushion. Depending on the risks to your revenue presented by this outbreak, an even larger cushion may be prudent.
  • If you do not have a line of credit or have already fully drawn it down, consider making a list of cash outlays which can be cut or deferred in the near term if cash becomes tight.

At times like these, cash is king. If you are already a NAVIX client, your advisor stands ready to help you model your cash flow needs and discuss your company’s financial alternatives during this crisis. If you are not a NAVIX client, work with your advisors or contact us about our services.

The NAVIX team has helped hundreds of business owners prepare for exit. We have also helped countless owners and leaders deal with recessions, liquidity crises, and economic upheaval. Our experience and perspective enable us to guide our clients through difficult times, such as these.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.

 

Navix Logo

Monday, March 16th, 2020

Eight Tactics to Escape the Dark Side of Owner Dependency

By: Patrick Ungashick

Dark

In one of the Star Wars movie’s pivotal scenes, Darth Vader attempted to lure his son Luke Skywalker to the dark side of the Force, warning “You don’t know the power of the dark side.” Luke’s skill and talent with the Force made vulnerable to the dark side, and thus the target of his nefarious father’s attention.

There is a powerful lesson here for business owners like you. Your skills and talents may come back to haunt you when you ultimately try to exit from your businesses. Within many companies, the owner is the most valuable and vital employee. Your knowledge, relationships, and vision are what drives the business. Undoubtedly you have help—no CEO/owner build a sustainable business by himself or herself. However, for years or even decades, much of your company growth has mostly been due to your personal presence and efforts. Then, one day, you wish to exit. If at that time you remain an essential employee, you may be unable to achieve commonly held exit goals: financial freedom, a sustained business legacy, and an exit on your own terms. You may find yourself in the dark side, trapped inside the company.

To overcome this, owners must build businesses that are not dependent on them. You must create a business that has the leadership, resources, and plan not merely to survive a transition, but to thrive after you have exited. Reducing owner dependency is, like resisting the dark side’s temptations, easier said than done. Most owners enjoy what they do, and understandably do not wish to become irrelevant within their own companies. Additionally, the company is accustomed to tapping the owner’s talents and skills to the fullest. Yet, as you move closer to exit, owner dependency, if left unaddressed, becomes a serious obstacle to exit success.

Listed below are eight tactics to reduce dependency between now and your future exit.

1.Build a leadership (and/or management) team that can handle day to day operations without you. Ideally, the team can run the company for at least thirty days’ normal operations without your involvement.

2.Collaborate with your leadership to devise and follow a written business growth plan for the next two to three years. Meet periodically during the year to measure performance against the plan’s waypoints and address any lagging results.

3.Conduct leadership team meetings according to a set published schedule. Make sure meetings are run effectively and occur even when you are absent. Meetings should lead to clearly defined and documented decisions.

4.Ensure that the leadership team members have current, written job descriptions and that their job performance is measured against clearly defined and tracked benchmarks.

5.Create a business development team and systems that perform effectively, all the way from lead generation to closing the sale, without your involvement.

6.Verify that your normal daily/weekly duties are either not essential to the business or could be readily filled by other employees cross-trained in those areas.

7.Brief the company’s top employee leaders on your exit goals. These employees must be sufficiently trustworthy for you to share your exit goals in confidence with them. In return, you must create the win-win for them. This can be accomplished using specialized compensation plans to incentivize top leaders to build company value and stay with the organization up to and beyond your exit.

8.Avoid meeting alone with important external relationships, such as customers, prospects, vendors, and lenders. It sends a message that you are the company. If you must participate in these meetings, delegate as much of the conversation as possible to others from your team.

Maximizing Business Value

Creating a company that can survive and thrives without you typically takes several years of focused effort; another reason why preparing for exit must begin no later than five years prior to your intended exit age. The good news is that a company that can operate independently of you is usually a more valuable business if you intend to sell, and a more stable business if you want to exit by way of turning it over to family or employees.

To help, download our popular free ebook: Your Last Five Years: How the Final 60 Months Will Make or Break Your Exit Success. Then, contacts us to schedule a free phone conversation to learn how we have helped hundreds of business owners plan for and achieve a happy exit.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499,

 

Navix Logo

Saturday, March 7th, 2020

The Five Years’ Fallacy: Exit Planning Facts vs Fiction

By: Patrick Ungashick

5

Much of the conventional wisdom suggests you should start serious planning no earlier than five years before you are ready to exit. This misperception is so common; we call it the Five Years’ Fallacy. This approach gets owners in more trouble than perhaps any other mistake.

There are four major flaws with this approach:

1. Many exit planning tactics require at least five years or more to implement fully or to see the full benefits of implementing that tactic. Therefore, if a business owner is less than five years away from exit, some exit tactics become unavailable, or their positive effects may be diluted. Consider the following examples:

  • Selecting the ideal business entity is an important consideration, especially in the event of a sale, because the type of business entity may greatly impact taxes. For example, owners of C corporations, in some cases, may reduce taxes upon a sale by converting to S corporation status prior to sale. However, the tax savings are reduced if the company is subsequently sold within a five-year holding period after conversion. In another example, the reverse may be true—owners of S corporations seeking to implement an ESOP as an exit strategy may secure tax-free proceeds from the sale if they convert to a regular C corporation. Matching up your exit plan with the appropriate business entity may require years to implement.
  • Business owners seeking to pass a business down to the next family generation often desire to make tax-free gifts of business interests to the successor generation. Congress limits the value of gifts that can be made without triggering gift or estate taxes, including annual gift limits. As a result, passing down a large family business can take many years to accomplish. Too little time inhibits the effectiveness of gifts and other family-business transfer strategies.
  • If you intend to sell to a third-party buyer, your business’s brand and intellectual property may be an important factor in driving value. US law sets timelines required to register, file, and protect your intellectual property. If you wait until five years or less to develop an intellectual property strategy, you may have forfeited many of the opportunities available to create brand value.
  • Owners seeking to sell their business to one or more employees need to hire, train, and groom a key employee or entire team prepared to run your business after your departure. Developing successor leadership may take many years.
  • Many exit tactics benefit from the “miracle of compound growth” on invested assets. For example, funding an income tax-deductible retirement plan creates potential future income outside the business. If you have only a few years to implement this tactic, your results likely will be significantly diminished.

2. Waiting until the last five years to prepare for exit, reduces your control over many factors that influence the business’s sale price.

Road market conditions, interest rates, capital markets, your industry’s health, and other external forces influence the availability of cash, the cost of capital, and the demand for businesses in your industry or market. Many economists note that these cycles can take as long as ten years to complete. If you are restricted to exiting within a specific time frame such as five years, you may choose a time when your business’s price is lower due to external conditions. Your investment advisor probably has been telling you, “Don’t try to time the market,” when investing in publicly traded stocks, bonds, and mutual funds. But when it comes to selling your business, you must carefully consider market conditions. Leaving only a few years’ preparations to sell may limit the ability to achieve the most favorable external climate.

3. Limiting your exit planning preparations to the last five years is you simply cannot predict the future.

A prospective buyer with a large checkbook may walk through your front door tomorrow. Your industry may go through an unexpected consolidation (often called a “rollup”,) which heats up your potential market price but only for a window of time. You may become seriously disabled and unable to work. You may die. Who guarantees how much time you have? Life happens.

4. The fourth and final reason why you cannot wait to start serious exit planning is that if you have not clearly defined where you want to end up, then you do not know if the decisions you are making today will get you there.

In Stephen Covey’s best-selling book, The 7 Habits of Highly Effective People, the second habit is to “Begin with the End in Mind.” His lesson applies here. To paraphrase Mr. Covey, the successful owner must be able to visualize the desired outcome and concentrate on activities that help achieve success in the end.

Align your business growth plan with your business exit plan. Every day, you are making decisions that in some small or big way will impact your success at exit. Making today’s important business decisions without considering the ultimate impact on your exit, causes great difficulties down the road.

The bottom line is that if you are a business owner telling yourself you want to exit (or have the option to exit) sometime within the next five years, then you are already in the homeward stretch. It’s now time to start serious and effective planning and preparation for your exit. To help, download our popular free ebook: Your Last Five Years: How the Final 60 Months Will Make or Break Your Exit Success. Then, contact us to schedule a free phone consultation to learn how we have helped hundreds of business owners plan for and achieve a happy exit.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499,

Navix Logo

Friday, February 28th, 2020

The One Exit Tactic You’ve Probably Never Heard Of

By: Patrick Ungashick

Directions

Selling your company to a strategic buyer…Private equity…ESOPs…IPOs…There seems to be a dizzying list of different ways to exit from your company. You have likely heard of most of them, and perhaps you are considering one versus another. Yet there might be one undervalued exit tactic that you have not heard of and need to know about. It is called a “non-control recap” in short vernacular (recap is an abbreviation of recapitalization). Here’s how it works and why it may help achieve your exit goals.

What is a Non-Control Recap?

Simply put, a non-control recap is selling a minority interest (non-controlling) portion of your company to an investor (recapitalization). Historically for mature companies, non-control investors were largely private equity groups (PEGs), but family offices are an emerging player in this market. Non-control recaps are an alternative to a full sale of the company, although a full sale can still be pursued at a later date.

Why Consider a Non-Control Recap?

This exit tactic offers business owners a number of important advantages, particularly in comparison to selling the entire company. If you are your company’s sole owner, you can gain significant liquidity by taking home cash from the partial sale while continuing as a partial owner and leader of the company. You can reduce personal risk, as you diversify your net worth by gaining cash and potentially reducing or eliminating personal guarantees with an additional equity partner involved. Non-control investors prefer a passive role in the company, leaving you in control of day to day operations and decisions. With the right investor, you gain a valuable strategic ally in growing the company. Non-control investors may bring strategic opportunities to the company that were previously not available, such as opening new markets, introductions to prospective clients, or perhaps identifying and assisting with acquisitions for growth. Non-control investors typically require minority representation on your board, bringing experienced leaders to assist the company to its next level of growth. Finally, you can remain the majority owner of the company until a later date, at which point you may choose to sell the entire company at your full and final exit, gaining another round of personal liquidity.

What If You Have Partners?

If you are not the company’s sole owner but have partners, the advantages of a non-control recap include all of the above, plus flexibility to customize the investment to the needs of individual co-owners. The level of liquidity can be tailored such that each co-owner can decide to sell some to all of his or her interest. The ongoing roles can be customized for each owner as well, permitting some to leave at closing and others to continue working in the company. A non-control recap can also be the vehicle for key management to own a portion of the company going forward, as a retention and incentivization strategy and/or as a stepping stone toward a future full sale of the company to the next generation of employee-owners.

Is There a Catch?

Non-control recaps are not for every owner or every company. Investors look for companies that are profitable, offer strong growth potential, and have capable leadership. While a minority investor remains hands-off mainly in the day to day operations, non-control investors will require supermajority rights on issues like selling the entire company or raising additional capital or debt. Another point to consider: the non-control sale may receive a lower valuation multiple than what might be achieved with a full sale, reflecting the investor’s minority position. However, this potential disadvantage is offset with the opportunity to pocket some liquidity now and retain ownership for the full sale at a later date–hopefully at a higher total valuation after having grown the company to the next level.

Non-control recaps may not be the right tool for every business owner, but they offer compelling advantages that should be considered prior to deciding to sell the entire company. To learn more, review our webinar on this topic called “Cashing Out Without Walking Out” or contact us to discuss your individual situation.

Interesting Items

Saturday, February 22nd, 2020

How to Avoid Getting Burned by Earn-Outs When Selling Your Company

By: Patrick Ungashick

Burning Money

The term “earn-out” usually sends a shiver down the spine of business owners. And for a good reason. Business owners seeking to sell their business at exit overwhelmingly prefer all-cash deals. Owners know that any portion of the purchase price held back at closing is at risk—you might never see those dollars. Despite owners’ overwhelming preference, most deals are not 100% cash transactions, but instead, include any number of mechanisms that pay additional dollars to the seller after closing only upon achieving certain results. One of the most common mechanisms is an earn-out. Here’s why owners seek to avoid earn-outs, and how to avoid getting burned by them if part of your deal.

Selling Your Company

First, a quick explanation of earn-outs. An earn-out is a provision defining how a selling owner may receive additional payments after closing, contingent upon specific results such as stipulated financial performance or milestones. Earn-outs are used to bridge valuation gaps between the seller and buyer. In essence, with an earn-out, the buyer is saying to the seller, “We will pay you more for your company later if you actually go out and achieve [blank]…”

Here’s an example. You believe your company is worth $15 million, in part because you trust the company will continue to grow 25% per year like it has the last few years. Your buyer is not convinced that the growth rate is sustainable and is only willing to pay $10 million at closing. To bridge the gap, your buyer agrees to an earn-out that may pay you up to an additional $5 million after closing if the company sustains the 25% (or better) growth rate over the next several years.

Earn-outs can be useful in bridging value gaps, and some deals might never be closed without incorporating an earn-out into the agreement. However, an earn-out often trades one problem (i.e. the buyer and seller do not agree on the price) for another set of problems:

  • You and your buyer have to agree on the specific performance or milestones needed to receive earn-out payments. For obvious reasons, buyers prefer to tie earn-outs to the bottom line. Sellers, however, beware. After you have sold the company (or a portion of it), you probably are in control of very few factors that determine the bottom line. Sellers should seek to tie the earn-out to top-line results, as they are easiest to measure and hardest to manipulate.
  • If you have an earn-out tied to financial metrics somewhere below the top line, you and the buyer must agree on key definitions and how those metrics will be calculated. It’s not enough to tie an earn-out to “net profits” without defining what goes into net profits, and what does not. The issue is more complicated than just agreeing on the meaning of certain words and phrases. After purchasing your company, the buyer may allocate some of its overhead and liabilities onto your company’s financial results. This could be a nasty surprise if you and the buyer did not precisely define net profits during the sale negotiation.
  • Regardless of which metrics the earn-out is tied to, as the selling owner, you are still at risk if the buyer mismanages (unintentionally or intentionally) the company’s operations after the sale, undermining or outright killing any chance of hitting the earn-out targets. For example, assume you have an earn-out tied to top-line results. Using top-line revenue seems simple and clear. But the new owner can take any number of actions that make it hard or impossible to achieve the top line milestones: What if newly hired leaders are not competent? What if the new owner raises prices, ultimately decreasing sales or even losing customers? What if the new owner raids the company and redeploys some of your best salespeople to another department? What if the new owner changes the company name and, in doing so, disrupts marketing and lead generation? You, the selling owner, bear the risk of any decisions or actions that negatively impact company performance to the point that you do not hit your earn-out targets.
  • You and your buyer have to agree on additional important terms and definitions, such as: How long will the earn-out last? Is there a cap on the potential payments? Can the missed earn-out installments be recovered if the company later catches up? Can the buyer offset indemnification claims against earn-out payments? These are only some of the critical issues that must be addressed and negotiated.

Maximizing Cash at Sale

Owners seeking to one day sell the company at exit must build a company that is so attractive to potential buyers that they will offer all-cash terms. Earn-outs at their core are a mechanism for buyers to limit risk: risk that the company will not perform as desired after sale; risk that existing customers will leave or decrease their volume; risk that top employees will flee, etc. Building a business that sells for all-cash terms involves more than just growing revenues and profits. To avoid earn-outs altogether, you must hire and align a quality leadership team, eliminate your involvement in routine sales and operations, achieve a strong track record of growth, reduce customer concentration, and have effective financial systems and processes. Building a business that is robust in these areas reduces buyers’ risk to the point that buyers do not see any need for an earn-out.

Earn outs

The second step to avoid getting burned by an earn-out is to hire and work with an experienced exit advisory team. Your accountant, lawyer, investment banker, and exit planner must have extensive experience with situations like yours and be qualified to give you sound advice. Your investment banker and lawyer, in particular, will be your A-team in negotiating the deal terms, especially any earn-out, and protecting your interests. Do not use general purpose advisors when selling your company. You carry the risk that any fees that you might save will be paid back multiple times over in future costs and losses.

At NAVIX, our clients are prepared to potentially sell their business for all-cash deals and have advisory teams qualified to help avoid the fallout caused by an ill-negotiated earn-out.

To learn more about how to prepare your company to sell for 100% cash, contact Tim to schedule a complimentary, confidential consultation 772-221-4499

Navix Logo

Friday, February 14th, 2020

17 Signs You Might Need a ‘Partnerectomy’

By: Patrick Ungashick

Partner Break

Webster’s Dictionary defines a “partnerectomy” as “the procedure to remove a diseased or failing business co-owner.” Well, OK, that’s not true — it is a word that we made up. But sometimes partnerships need to come to an end. Here are the symptoms to watch for to determine if you have a business partner who needs to go.

Business Partnerships

According to our proprietary research, about seven out of 10 U.S. companies have more than one owner. These partnerships feature two or more leaders coming together with the shared goal of growing the company. Their combined effort and often complementary skills fuel the company’s growth and success. That’s the positive version of the story — and it is often true, especially in the beginning. However, sometimes business partners realize they may not be exactly on the same page on multiple issues. Sometimes it’s possible to reconcile their differences and resume a productive relationship. Other times, the necessary and perhaps the only course of action is to remove the partner in question. In other words, the company needs a partnerectomy.

Some partnerectomies are more difficult than others. Some are painful, angry, risky, expensive, and cause lasting scar tissue. Others are more controlled, safer, less emotional, and leave the organization much stronger than it was before the procedure. Either way, before resorting to this invasive and irrevocable course of action, business co-owners should exhaust every effort and resource to find another resolution to their core differences.

Reasons to Buy Out Your Business Partner

Here are the symptoms that indicate your organization may need a partnerectomy, any of which suggests that it’s time to take action. You may need a partnerectomy if:

1.You and your partner(s) disagree about where to take the company and how to get there.

2.One or more partner(s) want to take all of the company profits home while one or more partner(s) want to reinvest all of the profits back into the company for growth.

3.You believe that there are important topics that you cannot discuss with your partner(s) for fear of damaging the relationship.

4.Deep down, you are not sure that you can trust your business partner(s).

5.Deep down, if you could turn back the clock you would not enter into a partnership with that person(s) again.

6.Deep down, you believe that if that partner(s) were to leave the company, then employees, customers, suppliers, or other third parties would be relieved.

7.You and your partner(s) have very different timelines for when each wants to exit from the company.

8.You and your partner(s) have very different opinions about your company’s value.

9.You and your partner(s) have not signed a buy-sell agreement.

10.Your employees clearly prefer or are aligned with one partner or another, such that divisive factions exist in your organization.

11.Members of your leadership team are unclear what a particular partner actually does inside the company.

12.You believe that if that partner(s) departed from the company tomorrow, the company would not experience any setback or difficulties.

13.You find yourself frequently having to do any of the following for another partner(s): “cover for” him or her, do “damage control,” or “take precautionary steps” to ensure that the other partner does not cause the company problems, intentionally or not.

14.Your partner(s) has ongoing personal habits or issues that create a serious risk for the business.

15.You and your partner(s) do not have current, written, mutually agreed-upon job descriptions.

16.You and your partner(s) are working at different commitment and energy levels but take home the same pay.

17.You and your partner(s) are doing different jobs inside the company but take home the same pay.

It is worth noting that some of these symptoms set off obvious and immediate alarm bells, whereas others seem trivial or harmless. Yet, as the word symptom implies, each of these items may be a surface manifestation of a deeper root issue that, if left unaddressed, can lead to real catastrophe. If you are experiencing any of these symptoms, just like any true medical issue it is advisable to discuss your situation with a knowledgeable advisor, and if necessary, do “more tests.”  Contact us to confidentially discuss your situation.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499

Navix Logo

Saturday, February 22nd, 2020

How to Avoid Getting Burned by Earn-Outs When Selling Your Company

By: Patrick Ungashick

Burning Money

The term “earn-out” usually sends a shiver down the spine of business owners. And for a good reason. Business owners seeking to sell their business at exit overwhelmingly prefer all-cash deals. Owners know that any portion of the purchase price held back at closing is at risk—you might never see those dollars. Despite owners’ overwhelming preference, most deals are not 100% cash transactions, but instead, include any number of mechanisms that pay additional dollars to the seller after closing only upon achieving certain results. One of the most common mechanisms is an earn-out. Here’s why owners seek to avoid earn-outs, and how to avoid getting burned by them if part of your deal.

Selling Your Company

First, a quick explanation of earn-outs. An earn-out is a provision defining how a selling owner may receive additional payments after closing, contingent upon specific results such as stipulated financial performance or milestones. Earn-outs are used to bridge valuation gaps between the seller and buyer. In essence, with an earn-out, the buyer is saying to the seller, “We will pay you more for your company later if you actually go out and achieve [blank]…”

Here’s an example. You believe your company is worth $15 million, in part because you trust the company will continue to grow 25% per year like it has the last few years. Your buyer is not convinced that the growth rate is sustainable and is only willing to pay $10 million at closing. To bridge the gap, your buyer agrees to an earn-out that may pay you up to an additional $5 million after closing if the company sustains the 25% (or better) growth rate over the next several years.

Earn-outs can be useful in bridging value gaps, and some deals might never be closed without incorporating an earn-out into the agreement. However, an earn-out often trades one problem (i.e. the buyer and seller do not agree on the price) for another set of problems:

  • You and your buyer have to agree on the specific performance or milestones needed to receive earn-out payments. For obvious reasons, buyers prefer to tie earn-outs to the bottom line. Sellers, however, beware. After you have sold the company (or a portion of it), you probably are in control of very few factors that determine the bottom line. Sellers should seek to tie the earn-out to top-line results, as they are easiest to measure and hardest to manipulate.
  • If you have an earn-out tied to financial metrics somewhere below the top line, you and the buyer must agree on key definitions and how those metrics will be calculated. It’s not enough to tie an earn-out to “net profits” without defining what goes into net profits, and what does not. The issue is more complicated than just agreeing on the meaning of certain words and phrases. After purchasing your company, the buyer may allocate some of its overhead and liabilities onto your company’s financial results. This could be a nasty surprise if you and the buyer did not precisely define net profits during the sale negotiation.
  • Regardless of which metrics the earn-out is tied to, as the selling owner, you are still at risk if the buyer mismanages (unintentionally or intentionally) the company’s operations after the sale, undermining or outright killing any chance of hitting the earn-out targets. For example, assume you have an earn-out tied to top-line results. Using top-line revenue seems simple and clear. But the new owner can take any number of actions that make it hard or impossible to achieve the top line milestones: What if newly hired leaders are not competent? What if the new owner raises prices, ultimately decreasing sales or even losing customers? What if the new owner raids the company and redeploys some of your best salespeople to another department? What if the new owner changes the company name and, in doing so, disrupts marketing and lead generation? You, the selling owner, bear the risk of any decisions or actions that negatively impact company performance to the point that you do not hit your earn-out targets.
  • You and your buyer have to agree on additional important terms and definitions, such as: How long will the earn-out last? Is there a cap on the potential payments? Can the missed earn-out installments be recovered if the company later catches up? Can the buyer offset indemnification claims against earn-out payments? These are only some of the critical issues that must be addressed and negotiated.

Maximizing Cash at Sale

Owners seeking to one day sell the company at exit must build a company that is so attractive to potential buyers that they will offer all-cash terms. Earn-outs at their core are a mechanism for buyers to limit risk: risk that the company will not perform as desired after sale; risk that existing customers will leave or decrease their volume; risk that top employees will flee, etc. Building a business that sells for all-cash terms involves more than just growing revenues and profits. To avoid earn-outs altogether, you must hire and align a quality leadership team, eliminate your involvement in routine sales and operations, achieve a strong track record of growth, reduce customer concentration, and have effective financial systems and processes. Building a business that is robust in these areas reduces buyers’ risk to the point that buyers do not see any need for an earn-out.

Earn outs

The second step to avoid getting burned by an earn-out is to hire and work with an experienced exit advisory team. Your accountant, lawyer, investment banker, and exit planner must have extensive experience with situations like yours and be qualified to give you sound advice. Your investment banker and lawyer, in particular, will be your A-team in negotiating the deal terms, especially any earn-out, and protecting your interests. Do not use general purpose advisors when selling your company. You carry the risk that any fees that you might save will be paid back multiple times over in future costs and losses.

At NAVIX, our clients are prepared to potentially sell their business for all-cash deals and have advisory teams qualified to help avoid the fallout caused by an ill-negotiated earn-out.

To learn more about how to prepare your company to sell for 100% cash, contact Tim to schedule a complimentary, confidential consultation 772-221-4499 

Navix Logo