Punching Out! Exit Planning 101

As an owner, you’ve spent perhaps 20–30 years building your business, so it’s important to spend a little time to prepare it for sale. Proper exit planning is essential to get the most for the business, increase the amount of cash at closing, help ensure a smooth transaction, get more in after-tax proceeds, and make sure that the owner’s personal goals are met.

1. Plan

The biggest obstacle to many deals is the owner. If the owner is not prepared or is unsure if they want to sell, it is difficult to get a deal done. Many tech companies are founded with an exit plan in mind from the beginning, but that is not usually the case for manufacturers. If the owner has sold businesses before or acquired the business from the founder, then there is no substantial emotional attachment. If you’re selling your baby, however, it can be rough. Owners who are too emotional create unnecessary delays and can unwillingly establish an environment of mistrust. Having a plan can take away the uncertainty and prepare the owner mentally for retirement and beyond.

2. Assemble the Team

It is critical to have a good team, which consists of a deal attorney, a CPA with M&A experience, a business broker/investment banker, a wealth advisor, and other advisors depending on the nature of the business. In advance of a sale, the attorney can review all material contracts to see if there are any major issues. The CPA can prepare the books, remove any obvious issues, and help the owner identify EBITDA addbacks. While compiled financials are okay for smaller businesses, we recommend getting reviewed or audited financials for three years.

Lately, many sellers are getting a quality of earnings (Q of E) report from their CPA as well. A business broker, M&A advisor, and/or investment banker—depending on the size of the business—can help inform the owner about the process, discuss valuations, and identify any pros and cons of the business. The wealth advisor can help the owner prepare for retirement as well as identify tax strategies to maximize the after-tax proceeds of the sale. Although there is an expense for the above services, that can generally be added back to EBITDA as one-time transaction-related expenses.

3. Environmental

Particularly for PCB shops, but for almost any other manufacturing business, it is best to make sure that there are no environmental issues. Get a Phase 2 done based on the findings of a Phase 1. Be sure that all permits are up to date and check on their transferability. If the permits are based on the standards of the ‘70s, things may change if another owner takes over. You do not want to kick the can down the road on these issues. If there is a problem, it is best to take care of it right away, whether you are planning to sell tomorrow or in five years.

4. Strategic Review

Flip the table and try to look at your business as if you were a strategic (same industry) or financial (private equity, etc.) buyer. What would you do differently? Are there changes that you would expect a buyer to make, but you won’t make them? Do you have 13 cousins in the business that do not work hard, but you promised your aunt that you would take care of them? The owner can decide whether or not to make these changes, but remember that for every $1 of increased EBITDA, the valuation may go up by the purchase multiple.

5. Expense Review

Particularly if an owner is planning to sell, but in any case, it is probably a good idea to review expenses at least once a year. Many businesses review COGS items often, but other expenses—such as telecommunications, IT services, utilities, freight, insurance, etc.—can be up for negotiation from time to time. As a business grows and everyone gets busier, it is easy to forget that the mat cleaning service had automatic 10% price increases after two years, or you might have missed that the bubble wrap charges have been creeping up. A buyer will probably review all expenses once they take over, so why let them get all of the savings?

6. Get Educated

An educated client is definitely the best client in these circumstances. Talk with other owners/peers who have sold a business, read books and watch videos on the process, and talk with your advisors about how deals work. Explore options to selling, such as an ESOP or management buyout or moving to chairperson and hiring/promoting a CEO.

7. Personal Goals

We get a little nervous if a seller does not have some particular post-sale goals in mind. While we would not recommend booking an around-the-world cruise for the day after closing, having some concrete plans for retirement will help the owner through the ups and downs of the sale process.

8. Make the Business Easy to Buy

We do not mean that you should roll over and ask the buyer for a belly rub. You and your advisors can still negotiate hard, but take away any knowable obstacles to buying the business. If we get into due diligence and the buyer finds out that your WIP calculations are off, the etcher is about to die, there are three expired UCCs on equipment that you no longer have, and all of the I-9s are out of date, it is going to cause delays and reductions in value/terms or possibly kill the deal.

Conclusion

A great offer might come through the window tomorrow, or it may take years to find the right buyer at the right price. In either case, it pays to be prepared. It’s not easy to assemble all 100 items of a due diligence request list while opening up a living trust for your grandkids in one day, so it is best to prepare well in advance of a sale. Proper planning can take away many headaches for the seller and buyer as well as increase the value of the company, help obtain better terms, and overall, make it easier to complete a transaction.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. He is a registered representative of StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC—and securities transactions are conducted through it. StillPoint Capital is not affiliated with GP Ventures.

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2019

Punching Out! Exit Planning 101

06-26-2019

Proper planning can take away many headaches for the seller and buyer as well as increase the value of the company, help obtain better terms, and overall, make it easier to complete a transaction.

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Punching Out! Delegate and You Shall Be Set Free

05-29-2019

It is good for owners/CEOs to step back a few times a year and think about what they do well, what they like to do, and what others can do better. Delegating simple tasks, like sweeping floors, is easy, but delegating sales management or quality control might be tougher. Although delegating is difficult, almost no business can grow solely on the efforts of the owner.

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Punching Out! What’s Special About Your Business?

04-29-2019

To help sell your business to buyers, or to sell your products and services to customers, it is a good idea to find out what is special about your business. It is also important to know how to communicate what's special. Read on to find out how you really compare to the competition, and what concrete metrics and KPIs you can use to judge your own performance.

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Punching Out! Getting to a Signed Letter of Intent

03-28-2019

The letter of intent (LOI) serves as a roadmap for the buyer’s attorney to begin drafting the purchase agreement, so it is important that there are enough details in the agreement. Any major terms that are important to the parties should be included. Here's a list of the very important items in the LOI.

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Punching Out! Why Sell to a Private Equity Group?

02-27-2019

One category of buyers that is often overlooked is private equity groups. PCB/PCBA owners either think that their company would not be of interest to a non-strategic buyer, or they have a negative impression of financial buyers. Here are six reasons why companies should consider selling to a private equity group.

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Punching Out! Beware of Cultural Issues in M&A Deals

01-28-2019

Company culture is hard to define and manage, but it is a critical factor in making an M&A deal successful. It is also often ignored or misunderstood during and after due diligence because culture is a "soft" science instead of a "hard" subject like finances, legal contracts, IP, or accounts receivable, among other things, which makes culture a difficult factor to deal with.

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Punching Out! Creating PCB Industry Giants and Mid-majors Through Acquisitions

01-03-2019

Summit Interconnect announced the acquisition of Streamline Circuits. Summit itself was created in 2016 through the merger of KCA and Marcel, and is backed by a private equity firm. In the PCB and PCBA industry, TTM Technologies is the giant King Kong of acquisitions, growing from just $80 million in revenues 20 years ago to over $3 billion today.

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2018

Punching Out! Avoid Surprises During the M&A Process

11-27-2018

No one likes surprises, especially in merger and acquisitions (M&A) deals; there are enough unknown variables to start with. As the deal progresses, tensions start to rise, so any additional variables can cause a disproportionate response. Below are some ways to avoid surprises, and how to deal with them when they come up.

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Punching Out! How to Avoid Key-Person Risk

09-06-2018

PCB West 2018 is next week in Santa Clara, California (September 11–13). Can you go to the show and visit a winery or two without your shop falling apart? Have you taken a vacation in the past few years? Can you afford to not do board rework on a holiday weekend, like this past Labor Day? If you answered “no” to any of these questions, you may have key-person risk.

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Punching Out! Beware of Customer Concentration Risk

08-08-2018

One of the biggest risks in M&A is customer concentration risk. It is hard to avoid as a business owner; if a customer is giving you orders, you generally take them! The next thing you know, your customer has 90% of your sales and they own you. We see this a lot in both the PCB and contract manufacturing industries.

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Punching Out! Dealing with Family Businesses

06-28-2018

Some families may have spent this past Father’s Day discussing family business issues, including when, how or whether to pass the baton. There are several issues to consider when dealing with a family business.

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Fact or Myth: Do 80% of M&A Deals Fail?

05-09-2018

We are often asked by business owners if the commonly quoted figure is true that 80% of mergers fail to meet expectations after closing. There is a fair amount of research on large ($1 billion+), public deals that suggests that the 80% post-closing failure rate may be true.

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How to Prepare for a Smooth Post-M&A Deal Transition

04-05-2018

Selling a company is an exciting process, as well as time-consuming, stressful, and complex. Both sellers and buyers are sometimes so caught up in the deal that they forget to properly plan the post-deal integration.

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Cross Border Deals: What to Look for and How to Manage

02-22-2018

My firm has been approached by foreign firms several times this year and in 2017 who want to acquire PCB, PCBA, or other electronics companies in North America.

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Punching Out! Top 10 M&A Deal Killers

01-25-2018

I am often asked about some of the reasons why M&A deals die. Although this is a very painful subject, hopefully through sharing these reasons we can help some deals survive the M&A process. Here are my top 10 M&A deal killers (and some of the solutions).

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2017

Punching Out! Survey on State of the North American PCB M&A Market

12-29-2017

Recently, my firm surveyed about 20 PCB manufacturers in North America with an estimated greater than $10 million in revenue. Quite a few replied, and we have spoken with many others throughout the year, which gives us a good view on the state of the PCB market. If I did not contact your shop recently, it is because we already talked within the last 12 months.

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Punching Out!: PCB/PCBA M&A Top 10 FAQs

11-13-2017

We talk with owners a lot about the possible sale of their businesses. Here are the top 10 questions asked by PCB/PCBA shop owners about the process.

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Punching Out! Case Study—Lessons on a Deal

10-19-2017

This is a story of one of our clients, a U.S. contract manufacturer that sold a few years ago. To maintain confidentiality, the names have been changed and the details slightly modified.

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Punching Out! Making the Process Easy (M&A Process Engineering)

09-06-2017

In the M&A world, there are companies that make it easy (or at least easier) and those that make it difficult. By making the process easier, sellers should see better valuations and terms, and have a smoother deal process.

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Punching Out! Bridging the Valuation Gap Between Buyer and Seller

06-13-2017

PCB acquisitions in the U.S. are down so far in the first five months of 2017, with only two announced deals (HT Global Circuits’ acquisition of Pho-Tronics in April; American Standard Circuits’ acquisition of Camtech in May); and one anonymous deal that I am aware of that has not been announced. This compares with 11 announced deals in 2016. There are a variety of reasons for the decline, but one reason could certainly be the valuation gap between buyer and seller.

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Punching Out! How to Put a Wrench in the Rumor Mill During the Sale of a Company

05-23-2017

When selling a house, the owner’s agent puts a sign in the front yard, posts info on the Web, and invites buyers over for an open house. When selling a car, we put a sign on the windshield and take out an ad with our phone number on it. However, when selling a business, some owners do not even tell their spouses.

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Punching Out! Selling a Company—Seeing it as a Triumph, Not a Defeat

04-25-2017

Somehow, there is a still a stigma that selling a company is a negative for the owner. Many people think that there must be something wrong, otherwise, they would not be selling. In reality, exiting a business should be looked at as a triumph for the owner, not a defeat.

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Punching Out! 10 Ways to Increase the Value of Your PCB/PCBA Shop

03-22-2017

I have worked with a wide range of companies in the PCB, PCBA, and other tech and electronics sectors. Through the years, I have developed some ideas on how companies can improve their valuation. Some of these ideas are simple and involve little cost, other ideas are more long-term and involve more effort or investment.

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Punching Out! When Should I Call an Investment Banker?

02-20-2017

The quick answer is ASAP. Even if you are not considering the sale of the company for 5−10 years, it is best to be educated and prepared. Give your advisor (or a few advisors) a call to discuss what can be done to get the company ready for a future sale. The worst time to call an i-banker or business broker is when you are forced to sell due to poor performance, health issues, pending bankruptcy, or dispute with a partner or manager.

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Punching Out! Types of Company Buyers in the PCB and EMS Sectors

01-09-2017

Mergers and acquisitions in the U.S. PCB sector have been in the news recently, with at least 12 deals completed over the past year, and several more in the works. In contrast, the EMS sector has been relatively quiet, but that may change now that the presidential election is over.

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2016

War Stories from the Front Lines of Deal-Making

09-16-2016

Here are some war stories from my experience in working on M&A deals in the PCB, EMS, and electronics fields. The names and details have been changed to protect the innocent.

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Timing: When is the Best Time to Sell?

08-18-2016

A few of the top questions we receive relate to the timing of the sale of a business. The first is, "Is now a good time?" The second one is, "How are market conditions?" These are the top FAQs.

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The PCB Sector—What Buyers Look for and Recent Deals

07-14-2016

The past few months have seen a rash of PCB deals in North America, for a variety of reasons.

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What the Heck is Adjusted EBITDA?

06-07-2016

If you are looking to sell or buy a business, you will most likely come across the term ‘adjusted EBITDA.’ Other common terms are adjusted cash flow, owner’s discretionary earnings, earnings after add-backs, etc. What do these terms mean, and why are they important?

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The Additive Process: Tips on How to Buy a Board Shop or Assembly House

05-14-2016

One of the quickest ways to grow a business is to acquire another business. At the same time, acquiring a business can be risky, and a really bad deal may put your original business in jeopardy. Here are some tips on how to make acquisitions.

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Your Baby’s Ugly, Now Get Over it (How to Work with Buyers)

04-14-2016

Here’s a scenario: An owner has gone to market and is starting to get feedback from buyers, and shockingly, not everyone appreciates the hard work and achievements that went into the business. Buyers may not understand the business, or they may be trying to position things for a low offer. In any case, it is important to know how to work with buyers.

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Putting Together the Deal Team

03-21-2016

When preparing to sell, remember the old saying, “He who represents himself has a fool for a client.” While many owners might be tempted to go it alone, in my experience it pays to have a deal team to help prepare a company (and the owner) for a sale

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Punching Out: How to Sell Your PCB/Assembly Shop

02-04-2016

You are thinking of selling your PCB or assembly shop. Perhaps you are contemplating retirement, you have no successors, and the thought of going to the office on Monday is driving you crazy. This column is designed to help your planning efforts. Future columns will go deeper into each subject

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