What makes your company Marketable? Part 1 of 2Chia-Li Chien, Ph.D., CFP®, PMP®, CPBC
Chia-Li Chien | Jan. 23, 2014
I see it quite often, even with well-known clients in the media, community, and market leaders in their industry. They need my advice because they receive calls and inquiries from investment bankers on a weekly basis and are often approached with investment leads and complex and numerous discussions that would become confusing to any business owner.
In part, this is because owners often believe that 3rd party buying is the only option and the only way to sell the business and maximize their profit. In fact, there are two major transfer channels: Internal and External.
Internal channels would include transfers to:
• Partners/ Co-owners
• Family members
• Charitable trusts
External channels would include:
• Retirement/Leaving the business
• Public offerings
(For detailed information, see page 71 in my book, Work Toward Reward.)
The viability of all these channels helps to determine your company’s marketability.
Everyone has an opinion—from his or her own point of view
I’ve worked with a client whose business was growing, so they decided they should create an incentive plan for their key management team. This client felt that all the right people were in the room—HR, their corporate attorney, business planners—to advise on how to incentivize employees.
This owner was thinking in terms of bonuses, retention, stock options, etc. However, he failed to ask himself if these methods were ways to create marketability.
It’s true, the minute you open stock as an option, it is a way to increase internal interest in the company. Stop to think, though, and ask yourself it it’s the best way.
Twitter’s 2013 IPO officially created a public market for the social media platform company. Once public, anyone could own a portion of Twitter. It became publically owned.
With an internal transfer, the same logic applies.
A client of mine, 3-4 years ago, decided to create a bonus plan with cash and stock shares for eligible managers. They had forecasted number of shares, price of stocks, and carved out a portion of that to predict that this stock would move from point A to point B. They believed strongly that an incentive plan would allow them to enable the employees to help the company grow.
They used EBIDTA (Earning Before Interests, Depreciation, Tax and Amortization) to predict how and which employees would get a percentage of company.
However, there were a few problems with this plan:
The client failed to engage a certified valuation company to help create the plan or determine if it was viable before moving forward. A valuation company works like a home appraisal company in that they will come in to determine price to value. They will compare your business to other companies in your industry. This gives the owner much more insight about marketability.
No one understood the incentive. The owner did not engage the right firm to communicate plan. The employees were convinced they would never see anything from the plan and were alienated.
Engaged downstream advisors. Their CPA, attorney and auditor communicated plan was fine. It was fine from their point of view, in that it looked fine on the books, was legal and fair. Their point of view had nothing to do with marketability.
It was not set-up properly as a Stock Appreciation Right. When owners are setting up a plan for marketability, must think beyond incentives or risk ruining a good deal.
This client clearly wanted to sell to third party, so he should not have set up an internal incentive stock plan with employees in the first place.
It’s easy to get sidetracked from your business model and marketability goals and objectives. Before you consider incentives, stock transfers, or interesting offers, please consult with a business value/succession specialist.
My team at Value Growth Institute is ready to answer your questions and guide you in determining and increasing your business marketability.