Source: Michael Frantz, CFP®, UBS Financial Services
The popularity of net-zero carbon emissions goals combined with the current low interest rate environment may provide tailwinds for merger & acquisition (M&A) activity. Given this landscape, it could be worthwhile for cleantech owners and entrepreneurs to plan for their firms to be acquisition targets. Business owners can take the following four actions today to help them financially and mentally prepare for possible M&A activity in this industry sector:
- Discover Thy Number
Most business owners have an ideal valuation in mind at which they would sell their business, but what price would facilitate the owner to maintain his lifestyle and pursue other opportunities of interest? There are several rules of thumb regarding calculating the appropriate size of a retirement nest egg, but they are mediocre at best because everyone’s situation is truly different. I have some clients that want to leave a large family legacy to their heirs and others that want the last check to bounce. The difference between their savings plans and distribution rates is, and should be, significant. Further differences in hobbies, philanthropic interests and other business pursuits introduce additional capital requirements. Provided that the business is currently the main source of income, it would be a mistake to exit prematurely without adequate savings or before the enterprise reaches its full potential. Seeking advice from a CERTIFIED FINANCIAL PLANNER™ professional who has the capability to model cash flow scenarios can help shed some light on the appropriate level of expenditures and savings. Before engaging in a full M&A process, a competent financial advisor will work with trust and estate counselors to build an integrated financial plan to help maximize net proceeds of any future potential sale for you, your family and the causes you care about.
2. Know and Grow the Multiple
For a proprietor and her family, the biggest asset is usually not their house, investment account or collection of family heirlooms; it’s the business, and most owners only have an educated guess as to its value. If an owner receives an unsolicited bid for his company tomorrow, how will he know whether it is an acceptable offer? When interviewing financial advisors, enquire whether they have the capability to assist you in understanding the range of value for your business. With this information as a point of reference, the conversation can pivot towards how to grow the value of the company over time and what actions may have the greatest impact on the business’s multiple.
3. Forge Relationships with the Future Deal Team
The role of the M&A advisor is to help owners put their best foot forward when negotiating with potential acquirors. This generally involves coaching owners and their management teams on how to prepare for the rigorous due diligence the acquiring company will likely conduct pre-sale. Often the due diligence process will reveal points of concern that the acquiror will use to negotiate discounts to the final price. The sooner an owner can begin preparing for this ruthless exam, the better they should fare. Given how much is at stake during this process, it’s important that an owner finds an M&A advisory team that understands their goals, values and objectives. Financial advisors should have several M&A teams in their contacts list with cleantech industry experience and can facilitate introductory meetings.
4. Skip Seller’s Remorse
Within the business advisor community, it is widely known that owners can experience a sense of loss and purpose after selling their firms. This may come as no surprise, since most owners and entrepreneurs spend most of their waking hours thinking about their businesses. Mitigating these emotions involves imagining life after being a proprietor and setting post-exit goals. Which charitable endeavors would the owner like to pursue? Who does she want to spend time with? What other enterprise is she interested in building? One useful exercise is to create a weekly calendar that allocates time to activities of interest. This can help facilitate a positive, productive transition from one life phase to another.
Over the last 12 months, the importance of business planning for the unexpected became self-evident during the pandemic. As we enter the post Covid-19 era, the focus of business owners will begin to shift from survival to opportunity. The potential of the cleantech sector to reduce power generation costs and greenhouse gas emissions and drive investment returns may make it an attractive industry group for many years to come. Business owners and entrepreneurs of cleantech companies should begin planning for this expected outcome.
Michael Frantz, CFP® is a financial advisor with UBS Financial Services Inc., 925 Fourth Avenue, Suite 3100 in Seattle, WA and he is a member of the CleanTech Alliance. Michael and his team focus on sustainable investing and work with business owners and entrepreneurs in the cleantech sector. He can be reached at 206-628-8517 and firstname.lastname@example.org.
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