Early orchestration of a strategy for your business’ brand will create additional value at the time your business is sold. A brand represents the face of the business; a unique and recognizable design, sign, symbol, or slogan employed to create an image that identifies a product and differentiates it from its competitors. Aside from generating increased revenues and profits, strong brand recognition and reputation may clearly drive higher multipliers of cash flow for the potential business value for these reasons:

• Higher customer retention; repeat business; effects reliability of future sales and sustainability of existing customers
• Competitive edge in the market; identifies your product/services, differentiates it from the competition
• Higher barrier for competition; customer recognition of credibility, quality/satisfaction with the brand; possible protected intellectual property
• Owner is less essential to business success; company’s reputation stands for certain benefits/value
• Attraction/retention of employees and management; strong successor management in place
• Loyal customers who insist on product by brand name; prepared to pay a premium for it

An experienced, motivated and stable management team is the most significant value driver of M&A transactions. Businesses with a strong management team focus on the sustained growth of cash flows and profitability, command higher valuations in the marketplace, and allow for the seamless exit of the owners.

In the eyes of prospective buyers, there is no greater reassurance of continued business success than a talented management team. Therefore, business owners should consider the following while acquiring and developing their team:

• Clearly defined job description, roles and responsibilities
• Documented and measurable employee assessments
• Alignment of employee goals with company goals
• Non-compete or non-solicitation agreements
• Performance incentives and stock ownership plans

Even if a business owner doesn’t exit their business for years to come or lacks a clearly defined exit strategy, a deep bench will accelerate growth, increase profits, and allow more time away from the office!

Earnouts, although palatable in principle, may be complex in structure, difficult to define, and subject to unintended consequences. Thus, the gut reaction of most investment bankers to the proposed use of earnouts as an instrument to close transactions is unequivocally: “Don’t use them!” This declaration will more than likely be superseded by a full disclosure of the realities of the private capital marketplace. Earnouts are used every day in middle market mergers and acquisitions (M&A) transactions, and under the direction of an experienced M&A Team, properly structured earnouts provide motivated buyers and sellers with a viable solution to otherwise “dead deals.”

An earnout tends to be most impactful when it is used to:

1. Provide Measurable Incentives – motivate sellers to be growth-focused post-closing; retain key employees; acquire new customers; renew contracts
2. Align the Needs of Both Parties – reconcile value differences – historical versus projected financial performance
3. Mitigate Risk – assure future earnings/growth; address uncertainties

Ownership can be a powerful tool in the effort to attract and retain talented people, have employees think and act like owners, create an ownership culture, and build successful succession plans.

Restricted stock gives employees the right to earn shares of stock over some period of time through continued service or the accomplishment of certain goals. Restricted Stock Award (RSA) Plans have many options, and when properly designed, will provide your Company with an equity compensation plan that works. Advantages include:

• Restricted Stock Award Plans either grant shares at no cost, or provides employees with the right to purchase shares at fair market value or at a discount.
• RSA shares are subject to vesting requirements; vesting may occur all at once or gradually. The restrictions may be time, performance, and/or transaction based.
• Restricted shares may be issued at grant; RSA shares remain subject to vesting restrictions; however, the shareholder receives dividends, has voting and other rights before vesting.
• Employer may loan money to the awardees for purchase of the restricted shares. The RSA Plan gives key employees the ability to own shares.

Most business valuations calculate the value of a private company using fair market value, and this value is rarely suitable for making investment and financing decisions. Fair market value, although compliance-oriented and theory-based, fails to consider a business owner’s objectives or reasons for a transaction. The type of transaction will determine the owner’s exit channel, and the exit channel will identify the buyer or investor. Therefore, private company value is relative to the exit channel and the buyer or investor type, and may encompass numerous correct values at the same point in time! Each exit channel has a different value, and these values may include:

• Synergistic value – value to strategic buyer
• Financial value – value to investor (minority, management)
• Collateral value – value to bank from repossession
• Incremental business value – value added from an investment
• Fair market value – value to IRS or Courts
• Others – Insurable, Public, Fair Value