Strategic Equity Advisors LLP is a boutique advisory firm empowering closely-held business owners to act strategically regarding illiquid private company investment. We recently sat down with partners of the firm, Scott Yoder (SY), Doug Hendrickson (DH) and David Broderick (DB) to explore SEA's unique capabilities in all areas of business ownership.
What does your firm do and why do you do it?
SY: We are trying to change the often mentioned statistic in our industry whereby 75% of business owners who have transferred their companies, reported having post-exit remorse. The PricewaterhouseCoopers study cited that a majority of the transfers didn’t accomplish the business owner's financial and/or personal goals. When these same owners were asked if they could do it all over, what would they do differently, their response was that they would have been better informed and more prepared.
At the core of our mission is to get owners fully informed and to understand all of their value enhancement and monetization/transfer options.
Our end game is then to align the stars for our clients so they are financially and emotionally prepared, the company’s transferable value has been maximized, and the tax planning is complete. So, when the timing is right, the business owner can monetize and or transition on their terms.
How far in advance should business owners start to plan to sell their business to ensure a successful outcome?
DB: Too many business owners do not plan ahead for the transition of ownership or sale of their businesses as they approach retirement. At least five to six years before a potential exit event, the owner should begin to formulate a strategy for the future of the business. This may involve a transition of ownership to other family members or employees, or a sale to a third-party buyer.
Ideally, the owner should be able to call upon an interdisciplinary team of professionals who, working together, can formulate a sound exit strategy. The team should include experts in estate planning, tax, accounting and sales of businesses. Often, structural or other changes to the business - such as changing tax elections, form of legal entity or accounting practices - can be put into place sufficiently in advance that they will have a significant impact on, for example, the price that a potential buyer will pay for the business, or the tax impact on the owner and his or her family members. Such advance planning can pay tremendous dividends down the road.
SEA can serve as a great resource to business owners in identifying these issues and in pulling together the types of professionals and other resources that are needed to ensure a smooth, coordinated approach to this major event.
At what point should business owners come to you?
SY: We can add value anytime a client knocks on our door, even at the end the process – at the transaction stage. We have proven this numerous times in the last 24 months as a result of the merger and acquisition (M&A) revival that began in 2013. But we can add the greatest value if we can get involved 3-5 years in advance of a business transition.
There are strategic planning and value enhancement opportunities, advanced tax savings options, pre-sell/transfer preparedness and personal wealth planning strategies that all take time to develop and implement so owners are assured they can accomplish their wide array of goals and maximize their proceeds.
The earlier owners begin, the more options they will have to transfer and monetize the business on their terms.
Is now a good time in the marketplace for a business owner to consider selling their business?
DH: Yes, this is an excellent time to be considering a transaction for the following reasons. Valuations are high exhibited by the average 10 X EBITDA valuation being paid for well run, growing middle market companies. Interest rates are low and banks are actively financing mergers making it easier for strategic companies and private equity firms to execute transactions.
Also, with relatively low inflation and slow organic growth in several industries, acquisitions are a critical part of corporate strategy today.
Last, but not least, there is considerable capital sitting in private equity funds that needs to be invested in buyouts. All this equates to an excellent environment to be considering selling a business.
You provide many areas of expertise. Who is on your team to help in all the many facets of value enhancement and transitioning of a business owner?
SY: The holistic nature of our process requires various disciplines and expertise. Our specific subject matter expertise is strategic planning and value enhancement. Collaborating with owners, their families and their advisors is centric to our client’s success and ours. We bring the comprehensive approach and the proven process and then work with various disciplines of advisors to develop, vet and implement the client’s strategic plan.
What does Value Enhancement mean to the business owner?
SY: First of all let’s define “value”, as it is a widely and often loosely used term. We focus on transferable value which is value from a buyer’s perspective no matter if the buyer is an external party or the next generation. The common objective of any buyer is that the business produces sustainable and growing cash flow with the least amount of risk for disruption.
These are the two levers to transferable value – the buyer’s expected cash flow stream and the risk to achieve that stream. We address both in our value enhancement process, but spend most of our time on the latter - reducing risk. It’s easier, more controllable, more predictable and more effective than chasing sales or margins.
It’s the process of strengthening the business from the inside out, which in turn increases its value, and as a consequence, sales and margins also increase.
Wealth conversion - what do you mean by that phrase?
SY: Business owners are usually millionaires, but most times, only on paper. Typically a majority of their net worth is tied up in one concentrated illiquid asset – their privately held business. Thus, until they monetize this asset either over time or in one event, their wealth is illiquid and at high risk relative to a diversified portfolio.
Monetizing this asset is a challenge especially when you consider the personal and family dynamics often in play with closely-held companies. Our mission is to assure owners are able to make this wealth conversion, on their terms.
Why are you different from almost everyone else?
SY: We often hear, "Between my attorney and CPA, I can get everything I need."
While there may be plenty of technical expertise between those professionals, our definition of exit and succession planning is very holistic and thereby incorporates personal, business, taxation and wealth planning into the equation. This is far beyond the resources that most people have available to assist them through this complicated process.
DH: SEA brings considerable value to a business owner dealing with succession issues. SEA has direct experience and knowledge of the critical aspects of dealing with ownership succession which most accountants never deal with. Issues relating to critical personnel decisions, valuation methods used in transactions, preparing a company for sale, marketing a company, selecting an investment banker, the private equity industry, to name a few are all areas that SEA specializes in. They are a perfect complement to the services provided by an accountant and lawyer.
SY: It’s definitely a very unique approach that we use for exit or succession planning. We are not selling just one product, such as insurance. We are providing the whole spectrum of services pertaining to wealth management.
It’s tough to compare SEA to other firms as we are one of a very few who are so hyper-focused on just this practice. Our systematic process and subject matter expertise enable a very robust discovery process which deals with the personal areas, family, business value enhancement, tax and wealth.
This discovery process in turn creates an assessment report from which we collaborate with the client and a multi-dsciplined team to create a very detailed and living plan. Taking this a step further, we interject our proven value enhancement process through the entire engagement.
We don’t take this process lightly, and it shows in our end results.
