By ALEXIS SEELEY
As part of the Construction Association of Michigan’s continuing Roundtable Series, a gathering of experienced construction leaders gathered on September 12th for an exclusive discussion focused on the nuances of ownership transition planning. Sponsored by Q5 Experience and moderated by Matt Dery from Financial Architects, Inc., the roundtable featured panelists representing a diverse group of professionals in the areas of business valuation, banking, coaching, and mergers and acquisitions.
Self-Diligence Is Due-Diligence
Opening the discussion, panelist Joseph DeVito from Taft Stettinius & Hollister presented an overview of the current trends in mergers and acquisitions (M&A). According to DeVito, the current state of M&A activity is quite active, particularly driven by private equity firms. DeVito explained that private equity firms have been aggressively buying up large and mid-sized strategic companies as "bolt-on" acquisitions to build bigger platforms.
Even though factors like high interest rates may be putting some downward pressure on business valuations, DeVito noted that there is still strong demand across many industries for solid, well-run companies. He advised business owners to take a proactive, strategic approach to prepare for a potential sale process, rather than just reacting to unsolicited buyer calls. Getting the company's financials, operations, management team, and other key aspects ready well in advance of going to market, rather than waiting until the last minute, can help ensure a smoother and more successful sale process.
“We always say you want to work on your business, not in your business,” DeVito said. “If you're working in the business every day and you're critical to the day-to-day operations of the business, it's very hard for a buyer to buy your company and let you do that…you'd have to sign on for a term to be with the company.”
Sarah Greifenberger, a panelist from Arbor Valuation and Q5 Experience, said the more you know about your company’s true worth, the better off you are. Obtaining a formal business valuation helps owners better understand their overall businesses and prepares them well in advance of moving down the path toward a transition.
The formal valuation process provides an objective, comprehensive analysis, where the valuator thoroughly examines the business, conducting extensive financial due diligence. This in-depth assessment allows the valuator to identify the key drivers of the company's stability and future cash flow, as well as the biggest risks facing the business.
These valuations aren’t just for business owners looking to sell. Greifenberger explained that having formal valuations several years in advance of a potential sale or transition event gives business owners ample time to assess the valuation report and focus on addressing areas that need attention. By understanding the factors that impact their company's value, business owners can make strategic decisions to enhance the worth of their enterprise before an eventual ownership change.
Shawn Spencer with Cogent Advisors underscored the value of formal valuations for their detailed analysis, likening it to the necessity of grasping the various elements that contribute to healthcare and employee benefits costs, such as percentages for broker fees, reinsurance, pharmacy, and medical expenses. He stressed the importance of business owners taking a proactive approach to examining these cost drivers, instead of passively accepting yearly increases, emphasizing how optimizing healthcare costs can significantly affect a company's profitability and overall valuation.
Three KEY DRIVERS owners can focus on that impact business valuation are GROWTH, PROCESS EXCELLENCE, and TEAMWORK.
Growth is predicated on the idea of coming up with a value to deal with all the cash the business is going to generate in the future: its worth. If that cash flow is growing, it's going to drive the value higher. “What is astounding to me is about 90% of the companies that I work with, when I walk in the door, and I say, ‘Hey, do you have a one-year plan, three-year plan, five-year plan?’ It’s just, you know, glazed eyes,” Greifenberger said. “Nobody's planning for it, and I would suggest to you that if you aren't planning for growth, it may not happen.”
The last driver, and most important, is teamwork. Greifenberger has seen cases where the owner is great, but the second-in-command is 85 years old. That’s an indicator the company has not allocated its workforce for its long-term success. She shared a metaphor of a bus being the business and the owner being the driver … you must have the “right people in the right seats” on the bus.
Strong Workplace Culture Promotes Success
The panelists emphasized that a company's culture is essential. A strong, positive culture can act as a powerful magnet, attracting top talent to the organization. When a business has cultivated a great company culture, it becomes a very appealing place for high-performing employees to want to work.
Additionally, the panelists explained that culture directly drives team performance and productivity. When the employees within a company are aligned around a consistent set of values and behavioral expectations, it enables them to work together much more effectively. This reduces risk and uncertainty for the business, as the "right people are in the right seats."
“A great culture in one company will eat the lunch of their competitors over time,” said Chris Meso, a panelist from T-Rex Advisory and Q5 Experience. He stressed that it is important for the owner and leadership team to clearly articulate and model the desired culture, as this shapes the overall identity and character of the organization. Ultimately, a company's culture has a significant impact on its valuation, as buyers and investors place a premium on businesses that demonstrate stability, cohesion, and growth potential - all of which are byproducts of a healthy, productive culture.
The Three-Legged-Stool for Business Financing
Panelist Kyle Anne Johns from Independent Bank pointed out that three factors - cash flow, collateral, and character - comprise the "three-legged stool" that lenders evaluate when considering financing a business. All three legs need to be strong and stable for a business to secure the necessary funding.
This assessment, looking at the financial, asset-based, and leadership/management aspects of the company is crucial for lenders to determine the overall creditworthiness and risk profile of the borrower.
“Our association is dedicated to providing informative opportunities like this roundtable to help our members make informed decisions about their businesses,” said Kevin Koehler, President of the Construction Association of Michigan. “We are committed to fostering these discussions in future business development events, ensuring that our member companies are well-equipped for success today and into the future.”
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