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Case Study: VEER Assessment for a residential services company

Everybody likes a good story.  So in this post, we thought we would share a “real life” case study of how a Value Enhancement and Exit Readiness (VEER) Assessment can add value for business owners preparing to exit.  We have changed the names and a few facts to protect the anonymity of our client, but the basic essentials are accurate.

Pacific Automated Home Services Ltd. (PAHS) was started in the mid 1980’s by its present owner, Mark Holmes.  It installs, services and maintains home automation systems in high end homes in Greater Vancouver.  Mark thought he had a deal to sell PAHS to its long time General Manager, Max Prophet, but the deal fell through, and Max has moved on.  Now 65 years old, Mark is back to owning and managing his company.  He isn’t necessarily in a hurry to sell, but does not want to be running it.

Step 1 in the VEER Assessment is identifying Mark’s personal, family and business objectives.  In this case, Mark wants to sell in 3-5 years, is prepared to finance up to 30% of the selling price, wants to be out of managing the business ASAP, has no family interested in owning the business, and targets net proceeds of $1.5 million in his pocket at the end of the day.  He does not care too much who buys the business, but wants his key employees to be retained by the new owner.

In Step 2, we reviewed Mark’s personal financial plan (prepared by a certified financial planner) to ensure $1.5 million will be enough to meet his retirement objectives.  In this case, Mark has sufficient family assets to fund retirement, independent of the proceeds from selling PAHS.  This is good news – in many cases this review indicates a shortfall, suggesting we may need to build the value of the business before selling in order to fund retirement.

In Step 3, we estimated the current value of PAHS, in the eyes of a potential purchaser.  While an accurate estimate of value can only be determined by exposing the business to the market, we combined experience, business valuation principles and our understanding of the current business marketplace to estimate a baseline value.  In the case of PAHS, we estimated a baseline value of between $1 and $1.2 million – 30% to 50% lower than Mark’s objective.  It suggested we had some work to do.

Step 4 of the VEER Assessment is where we really roll up our sleeves.  We look at every aspect of the business in what we call our Value Factor Analysis.  We look at 54 separate value drivers – factors that prospective purchasers will evaluate to determine their interest in buying the business, and what they think the business is worth.  We particularly want to find the challenges – those factors that create risk for prospective purchasers, and will inhibit their interest in buying the business, or will decrease the price they are willing to pay.  From an optimist’s viewpoint, these are the opportunities to increase value.  In the case of PAHS, we identified four main issues:

  1. The company had not replaced Max as GM, and Mark did not want to run the company; so we needed to find a new GM who could lead the business forward.
  2. Tension between Max and Mark over the previous couple of years had negatively impacted the culture of the company.  A couple of key managers had left, and others were not happy.  These issues had trickled through to front line staff, and ultimately to customers.  The base of maintenance contracts had slipped about 10%. The positive culture, a strength of the company for most of its existence, needed to be restored.
  3. The company had developed a proprietary software system to manage contracts, schedule installation, service and maintenance staff, and provide financial and operational information to management.  But this proprietary system was becoming obsolete, and needed significant investment to upgrade and maintain.  The company needed to convert to standardized Enterprise Resource Management (ERP) software that was readily available and would transfer the future costs of upgrade to the software provider.
  4. The company did not have a documented strategic plan, and had not engaged key management and staff in the strategic planning process.  The mission, values and objectives of the business were not communicated, and major decisions were not evaluated in light of them.
    These factors impacted our estimated baseline value of PAHS.  We knew we would have to address them in order to enhance the value and sellability of the company.

In Step 5, we look at the exit options open to a business owner, and identify the two or three options most relevant to their situation.  It’s usually easy to rule a few options out right away; PAHS is too small for an Initial Public Offering, or for most Private Equity investors.  Mark has no family members, or existing partners in the business, who might want to buy it.  In the case of PAHS, we identified the following three exit options:

  1. There may be strategic purchasers – competitors, suppliers or other industry-related businesses who might perceive synergies in acquiring PAHS.  There had been some consolidation in the industry, and we were able to identify a few companies who might have a special interest in acquiring PAHS.
  2. While the sale to Max had not worked out, the next GM might be interested in acquiring the business.  We had the opportunity to refine our search criteria to identify GM candidates interested and capable of acquiring the business in 3-5 years (perhaps with a little financing help from Mark and from third party lenders).
  3. There may be financial buyers – third parties without a strategic interest in PAHS, but who were interested in acquiring (and potentially managing) the business as a financially sound investment.

Step 6 is a Net Proceeds Analysis – we evaluate the company’s corporate structure and tax planning to ensure that they are optimized for selling the business.  Most business owners are aware that in many circumstances, the first $800,000 of capital gains might be tax free, but many are unaware of the strict eligibility requirements for this exemption, and most are not aware of tax planning opportunities that might increase significantly the amount of the exemption.  In the case of PAHS, their accounting firm had been very proactive in their tax planning, and they were optimally organized from a tax perspective.

Step 7 is the final and most important step in the VEER Assessment – identifying and planning the actions that are required to achieve the owner’s objectives, address the value factor challenges, and make the business most attractive to potential purchasers.  We prioritize the actions to address those that provide the “biggest bang for the buck” first.  We also recognize that business owners and managers are already busy running the business – we must be careful that adding actions to their workload won’t limit their ability to do their jobs.  As such, we typically deal with only 1 or 2 actions at a time.  We meet regularly to review the status of actions, and to evaluate how changing circumstances might impact the plan.  And we develop measurement systems so that we can evaluate how achieving actions impacts value and sellability.  We cannot manage what we cannot measure.

In the case of PAHS, we attend bi-weekly management meetings to discuss the business in general, and the actions in progress.  We have quarterly update meetings, where we evaluate progress, identify those actions that are complete, and assign new actions when appropriate.  We always keep Mark’s original objectives in mind, as we move towards increasing the value of the business to at least $1.5 million, in time to sell the business in 3-5 years.  And when the time comes, we will introduce Mark to a business broker, M & A lawyer and/or other team members that will make the sale happen.  And we will be with him every step of the way until he has a cheque in his hands.
If you would like more information on how a Value Enhancement and Exit Readiness (VEER) Assessment might help your business, or your client’s business, please contact us for a no-obligation consultation.

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