In this session you will learn about:
- The three things any owner can start doing now to prepare for an exit;
- The most common mistakes Bruce has seen owners make when planning an exit;
- The best way to discuss exit strategy with internal and external shareholders; and
- Case studies of successful and failed transfers.
About the GuestBruce C. Rosetto, Esq. is the co-managing shareholder at the Boca Raton, Florida office of Greenberg Traurig. He represents private and public companies, private equity funds, banks, investment banks as well as M&A candidates and companies seeking financing. His practice focuses on entrepreneurs and small to middle market public companies throughout the United States in a variety of industries including life sciences, bio-tech, banking, environmental, manufacturers, technology, entertainment and many others. He frequently counsels clients in the areas of M&A, corporate finance, corporate governance, investment banking and banking.
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Read the Full Transcript Here:Noah Rosenfarb: Hi. This is Noah Rosenfarb here with the Divestopedia Podcast and a great guest in, Bruce Rosetto. Bruce is the Co-Managing Shareholder of the Boca Raton Office for Greenberg Traurig. He represents public and private companies, investment banks, M&A candidates and companies seeking financing; a very well experienced counselor to the business owners. Bruce thanks for joining us today.
Bruce Rosetto: It’s my pleasure. Thank you for having me.
Noah Rosenfarb: So, Bruce, our audience are primarily business owners that are thinking about exiting, what do you think they should be thinking about right now—maybe the top three things that they should be doing right now to prepare for an exit?
Bruce Rosetto: Well, I think if folks are thinking about an exit some time down in the future, I hope that they first realize that this is not a very quick process. It’s not usually a process that takes 30 or 60 days. I like for the client to understand that in order to maximize the value of their business, they need to really begin by setting forth a plan of attack and usually what I ask them to do as far as the top three things are concerned is first organize their company and their due diligence into a file for later on. It becomes very, very helpful and it will help shorten the process in going through any evaluation whether it’s with a potential suitor or with an investment bank or whatever. I also suggest that they get the professionals involved very early on the process. It’s never too early to really start talking to either your investment bankers, your accountants, your lawyers, or other financial advisers because their expertise will not only help guide you through the process but will also enable you to discuss what strategies might work best on either for yourself or your family as you put together an appropriate exit plan. And an exit can include a lot of things. It could be an outright sale, it could be a merger, it could be a spin off, or it could be alternative they may not even think of like selling it to your employees under an ESOP plan. So going to the right professionals I think will open up the alternatives for the business owner and avail themselves of options that they probably wouldn’t even consider. The last point that I would ask clients to do is really to start the cleanup process and again, this is something that should be done in conjunction with their professionals. They may not have done a good job of doing simple things like board resolutions, more written consents, they may need to finalize certain agreements or get some open issues off the shelf in order to really maximize their value. So going through all of the type of due diligence items that a buyer or suitor is going to be looking for, it makes a lot of sense to go through that with the professionals and start the cleanup process now. Again, it will shorten the actual seller exit strategy process and perhaps increase the potential targets that might be interested in looking at the company because they’ll see that the company really has its act together and it thought this out and planned out all aspects of the possible exit.
Noah Rosenfarb: Yeah, great advice. And so those clients that maybe haven’t taken this advice, have you seen any common mistakes among them?
Bruce Rosetto: Yeah, the answer is you do see what normally happens in these situations. It’s the process that takes longer than they anticipate. It ends up with a lot of frustrations on both the buyer’s side and the seller’s side. It usually ends up devaluing the value of the business. Owners don’t always appreciate that but believe me; a good plan that’s put together early on significantly increases the value.
Noah Rosenfarb: Yeah.
Bruce Rosetto: If I could tell you one company where I can give an example where they did it the right way, it’s about 2 years ago at this point, about the company who came to us, set up their plan, told us what they wanted to do, told us what they thought the valuation of their company was, and after analysis with our firm and the investment banking firm, they ended up closing a sale price that was in excess of 10 million dollars north of their original price. So that was about a 30 percent increase in price. It can make a big difference for families.
Noah Rosenfarb: Yeah. And do you think that value change was primarily a result of being prepared or the process of planning?
Bruce Rosetto: I think there was no question that it was a result of being prepared and thinking towards strategic plans and bringing in the right professionals to help get their deal done because they didn’t even realize the value of certain assets in their company but again, that’s where professionals come in because they see this stuff everyday and sometimes owners might be hesitant because they’re saying, "Wow, you know, it’s going to cost me X dollars." Well, it’s not going to cost you X dollars if it’s going to increase your value in excess of those of those additional dollars and allow you to get to the end game in a much smoother and faster transaction and might otherwise be the case.
Noah Rosenfarb: So I think that’s a motivating factor for the owners that choose to partake in an exit plan in an orderly fashion but unfortunately, the statistics are that 90 percent of owners don’t have a plan before they exit and they kind of fumble through and then unfortunately I’ve heard 70 percent of deals never get done.
Bruce Rosetto: That is correct. And then they blame everybody but themselves, right?
Noah Rosenfarb: So owners need motivation and I think you and I might try to motivate them with this ability to increase their value and the pushback that I often hear is, "I’m busy fighting fires everyday." How have you been able to persuade owners to take action and start doing their planning?
Bruce Rosetto: One way that I do it is out of the office. That type of interview, if you will, between myself and the owner, I prefer to do if sort of at a dinner or lunch meeting where people tend to be more relaxed and they’re really focused on the conversation. Then you can give some thought overnight while they’re sleeping and basically to some of the points that are being made. And I find that to be sort of successful. I think it’s very difficult to have an initial meeting inside the office because now they’re focused on the problems you keep looking at minute to minute and certainly I understand those problems but for something as important as potential exit strategy, they need to put all the problems aside and just focus on the task at hand.
Noah Rosenfarb: And so kind of with that in mind, once they’ve made this decision to take control, at some point they need to bring in their management team and also to discuss with their external stakeholders what they’re looking for. How do you suggest owners go about that process once they have committed to the idea of an exit?
Bruce Rosetto: I find that that sort of changes from client to client. It really depends upon the personality and chemistry between the client and the employees per say. One of the things that I like to recommend that my clients do is to sort of have ongoing evaluation strategy discussions if you will with their management. Not to say that per say we’re looking at killing the company but to say, "Hey, look. You know it’s the benefit of all of us because we’re a team here to always look at what our value is and what is the best way to maximize our value for not only owners of course but also for senior managers and other members of our company." And if you have those kind of discussions with them on a regular basis, then someday when that transaction does appear, it’s not a big a shock for the family if you will or for the senior management team because they will sort of understand that the strategy has always been to try and maximize value for everybody. And include things like succession discussions, not just exit strategy discussions with management and with members of family and I think all of that helps to sort of achieve a daily management goal that everybody is on the same page and then again, when the transaction comes, it’s easier to sit down with people and say, "Hey, you know what? You know that we’ve always looked at opportunities; we’ve always at the evaluation strategies. Well here’s one that maybe of interest to all of us. Why don’t we sit down and talk about it and see what we think?"
Noah Rosenfarb: And how about the owner that hasn’t done any of that advanced planning? Have you sat in on any meetings where an owner talks to his team about this upcoming exit and maybe some dos and don’ts that you’ve noticed if you’re going to have that springing it upon them type event?
Bruce Rosetto: Yeah. If you’re going to sort of spring it upon them, what I find that most owners do - and I don’t necessarily recommend this - is they keep everything very quiet and very inside. In some sense, they’re at a closing table and then at the end of the day when they have successfully closed a transaction, they go back to their office and they tell everybody, "Oh, by the way, I’ve just sold this company." I would tell you that that’s something I do not advice my clients to. I think that’s at least a bad taste in everybody’s mouth, everybody gets overly nervous, overly anxious, and is concerned about their job at that point. So when I see it work, it’s usually works that when the point that the management team, the owner if you will, gets through a letter of intent and because he wants to makes sure that he has a real deal on the table, he then includes management and has a meeting and says to them quietly that frankly that here’s a term sheet, here’s a letter intent that I received, he may not share all the terms of that because the financial details may not be anybody’s business depending upon who’s at that meeting but he will often at least share what his strategies are and whether he intends to stay on board and continue with the company or not. Often times, the transition teams stay in place for quite a long time and that provides a bit more comfort to managers that there maybe soon some new owners in who are putting capital onto the company but since the management is going to stay the same so nobody’s job is at jeopardy and the company will be better financed so we’re going to finally be able to achieve some of the goals that we’ve been putting off, that sort of thing. You always look for whatever positive thresholds might exist in the exit plan to begin with and try to have the employees understand or the management teams understand but this is something of value to them as well. It’s a good thing, not a bad thing.
Noah Rosenfarb: And kind of taking that same attitude towards family members, obviously you want clients to introduce the concept early on to their family member that this is a process, not a transaction, to have discussions around succession, we need to think about the value of this company, and that we can hold this asset or another asset - but for those families that aren’t as proactive, how do you suggest infusing that conversation? Do you think spouses are often involved early? Do you think children get involved? What’s your general take on that?
Bruce Rosetto: Yeah, I would say that to the extent you can get spouses and children involved earlier I think that’s better for the same reason. I think it makes it easier on the entire family in the end other than being surprised at the end but as part of any of that planning, whether it’s the spouse or the children, you have to decide whether you want those at the same meeting or whether you want separate meetings. A lot of that depends again upon the chemistry between the children and the spouse and it could be a situation where the children are from a first marriage and he’s now married to somebody in a second relationship who might not necessarily see eye to eye and some of those difference are part of the agenda for those meeting should once again be focused on trying to explain to the family members not only why you think it’s appropriate that perhaps somebody new comes into place to take over the company who understands my vision and legacy as an owner and how that ultimately is going to benefit to all members of the family and what positive attributes of such an exit strategy are for their individual positions.
Noah Rosenfarb: So some of the families that I’ve seen - which again maybe it’s not quite the best practice but perhaps it’s better than nothing in some cases - is they have this kind of conversation around estate planning with their estate planning attorney and they’re talking about, "Well, maybe I’m going to give you some shares because we’re going to have this transaction and here’s what it might mean for you. This is some planning that I’m doing and we’re setting up this trust." What I find is that when parents take that up with their children, it becomes very focused around the money and the financial aspects of a deal and not necessarily the emotional transition for both the parents that are operating the business and the children which may or may not be employed there and therefore they’re not getting to some of the heart of the issues which is - how is dad going to spend his day and is mom’s going to go crazy with him at home or whatever the issues might be. Have you seen that in any of your experience?
Bruce Rosetto: I’ve seen that a lot and I can agree with you more fully in that. If you talk to them, beyond the meeting with an estate planning attorney and you’re talking about we’re setting up this trust and I’m gifting you this or I’m gifting you that or whatever it is. Everybody is focused on the money aspect. I think that at least initially, the conversations with whether it’s children or spouse, "I want to do this for the reason I’ve been working in last 50 years of my life. I need to slow down, it’s good for my health; I want to spend some time traveling." Whatever it is, you want to bring out that family emotion and say, "This is important to me. I worked hard to build this business and now I want to spend the next decade of my life hopefully in good health, you know, enjoying a little bit of the fruits of the last 50 years of my hard work." I think children and spouses will understand that and welcome that message more than the financial end. Then all of the sudden, now they’re on your side saying, "You know, this is a good thing for my father to do, for my mother to do, or for both of my parents to do so that they can enjoy some of the remaining years in their life while they’re still healthy and young and are able to." And ultimately you’re going to get into the financial conversations but I usually like to say those are down the road.
Noah Rosenfarb: In kind of staying along with that theme, a lot of the owners that I talk to are concerned about the impact that the new found liquidity might have on their family. It’s very different than holding a closely held business interest to have a big pile of money so to speak and they want to make sure their legacy is going to be long lasting and positive and that they’re not going to have entitled grandchildren that make demands and don’t work hard and become diligent and productive members of society. What kind of insights would you have to share with those owners that might be listening and thinking about that potential outcome?
Bruce Rosetto: Well, whenever you have an exit strategy situation, it’s sort of very difficult to get into an owner’s head and find what is the right form beforehand because it’s going to be different for every single owner. The first issue he’s got to deal with is whether or not my business can transition to my family or whether that might not be the best interest of the family. There might be children who are very capable of owning the business but have no desire to, there maybe children who have a lot of desire to run the business but don’t have the acumen or the personality or the get up and go in order to keep his successful organization. So in certain situations, it may be better to transition to a third party rather than into the family. Now going out and finding a third party that’s going to understand the vision and the legacy of the owner is not an easy thing but again, I think that’s where professionals can come in whether it’s financial advisers or especially investment bankers or they can go out and really—because they know the market, they know the industry—go out and really assist the owner in seeking the right king, if you will, who can go on with the particular vision and legacy that an owner has while making sure that we’re doing the right thing by the family members in terms of their financial longevity and stability if you will over the decades to come.
Noah Rosenfarb: Can you share with our listeners a story that maybe you were personally involved in about owners that didn’t take this decision perhaps in a very well thought out way and they were given some advice, they have might have had to make a difficult decision whether it was terminating a family member or they didn’t develop an exit strategy, something that they didn’t do because maybe they were fearful of the consequences but the shortsightedness that they had resulted in maybe something that was a little bit worse.
Bruce Rosetto: The most difficult decision I think for any owner is to terminate a family member because they don’t think that that family member is the right person for the best interest of the company if you will. It’s difficult because of the emotional baggage that goes with that kind of decision and yeah, I’ve seen a lot of situations where owners failed to do the right thing by the company because they don’t want to look their family in the face and say, "It’s just not working. I’m sorry but it’s not working and so we will need to adjust our plan or do something differently or perhaps you need to get more years of experience or more education or whatever it is in order to be able to fulfill this role properly." And try and create a situation that they either understand that there’s a two-way street and they need to help lift some of the weight to move the company forward or they could get out of the way. I’ve seen many situations where an owner has refused to deal with that situation like an adult if you will and deal with it head on and ended up resulting in nothing but family turmoil and many times destroying the value that’s in the company to begin with.
Noah Rosenfarb: Yeah, and I guess that’s my point, which in the cases that I’ve seen it happened, a lot of times they’re destroying value that they’ve created over a lifetime.
Bruce Rosetto: And they don’t see that.
Noah Rosenfarb: Yeah, it’s really harming to people that have helped so they want put the best interest of their children first in some instance and they want to keep them employed and they don’t want to demoralize them or have a conflict with their spouse or their other children but in the end, they really give up everything.
Bruce Rosetto: Right. And in the end, the family member that was terminated would rather be in a situation where he or she was terminated but they have a trust or something now to their benefit that helps provide support for them in the future and stability from an economic standpoint as opposed to losing it all. If they were ultimately given that choice, they would probably chose the financial stability over the family turmoil but people don’t think about that upfront unless they think they have the proper guidance when somebody help and support them through those decisions.
Noah Rosenfarb: Yeah. So I guess the more of these stories that you and I could probably share for a long time with the owners that are listening is if you do face one of these difficult decisions, call a wise counselor and if you don’t have that person already on your team, either your accountant or your attorney, look for one because there are people out there that want to help you overcome these issues and do what’s best in the long term interest of your family and often times they require you taking a step back and maybe taking a different position and looking at things with a different perspective.
Bruce Rosetto: And often times, we can even assist the owner in having those discussions with that family member. I’ve been in meetings where I’ve sat with disgruntled family members but helped the owner achieve the goal that the owner wasn’t able to do by himself and get a message across to that family member that in the end, it’s taken as a positive and not as a negative. People have a lot of common sense. They get the picture. Sometimes they may not like hearing some of the issues as they you through them but in the end, if they do understand that what you’re trying to accomplish is in their best interest, you’re not trying to hurt them, they often come along. And save the family.
Noah Rosenfarb: Yeah, when I facilitate family meetings for business owners that are preparing a transition, I often talk about a code of silence that exists and my job as a facilitator and as a counselor to families is to help break that code of silence, get the issues on the table and I think what’s been most rewarding is that, in my experience, by putting the issues out front and dealing with them head on that it’s amazing how resilient families can be when you are willing to talk about them. Have you shared that experience as well?
Bruce Rosetto: Very much so. I thought your point was very well taken.
Noah Rosenfarb: So how about a kind of opposite? A client that you may have been working with that had to make difficult decisions but did it with courage and conviction. Do you have any stories like that that you can share so maybe our owners can identify with some success stories?
Bruce Rosetto: Yeah, the answer is yes. I mean I had one client that had an issue with a family member and whether to continue with that family member or not. Ultimately, it was determined that it was not going to be in the best interest of either the business or the family member. They were able to sit down and he had an intelligent discussion regarding what really was in the best interest of the family; what the potential exit strategies were. And ultimately what happened in that case is they ended up hiring us as counselor and the professional investment banker to review and plan an exit strategy. At the end of the day, what happened was a very successful transition to a new owner that included both the owner and the family member as management members of that team, senior management members of that team for a 3-year period. And the added value that was brought to the company as a result of having the right exit plan and strategy at work from the significantly increased the price in excess of about $7,500,000. So it ended up being meaningful to the family members and they were able to work together as members of the management team on a Board level basis which provided additional stability if they had some—they had very serious issues and because they were able to come together as a family and work together for the next couple years of that employment, they earned all of their earnouts which brought about another 5 or 6 millions dollars on the table for them at the end of they day.
Noah Rosenfarb: That’s great.
Bruce Rosetto: Yeah, so it ended up being a very successful result.
Noah Rosenfarb: So is there anything else you’d like to share with our listeners that maybe are contemplating their exit based on all of your experience in working with various companies at various stages and time?
Bruce Rosetto: I guess every situation is somewhat unique. Every family is unique, every industry has its positives and negatives to it. So I can’t emphasize enough that the earlier you start talking to your professional advisors, the better off you are. At some point, you’re going to exit the business whether you sell it, whether you merge, whether you do an ESOP with your employees, or whether you die. So it makes sense to begin thinking about this stuff very early on in the process. Plan for, strategize over it, and make available to yourself and to your family as many options as possible.
Noah Rosenfarb: Sounds great. So, Bruce, I want to thank you so much for joining us today and I want to make sure our listeners can get in touch with you if they have questions or a follow up. So why don’t you tell them the best way to either call you, email you, go to your website. What’s the best way for them to reach you?
Bruce Rosetto: They can always call me. My name again is Bruce Rosetto. My phone number is 561-955-7600. My email address is email@example.com or you can look me up at Greenberg Traurig which is www.gtlaw.com and my entire bio and history will be on the website.
Noah Rosenfarb: Sounds great. Bruce thanks for joining us today and thanks to our listeners. Catch us for another Divestopedia Podcast. Visit us online and look at our blogpost and a ton of content around exit planning. We hope you find the information valuable and we look forward to having you join us again.
Bruce Rosetto: Thank you, Noah. I appreciate it very much.