Business Growth and Exit Strategy

Issue: A business owner was looking to hire a person to oversee sales. Prospective sales leader wanted an ownership stake in the company.

Significance: From 2017-2018, the business had seen a sharp decline in revenue, from $2.5 million to $1.4 million. The business had to lay off more than 50% of the staff, and the owner needs to increase sales before attempting to sell the business again.

Background: Due to practice mergers and acquisitions, the business had lost three of its nine customers. The owner attempted to sell the business at the start of 2018 because of these concerns, and also because the owner sought to go back into the more enjoyable work of consulting. A local business person offered to take over sales but wanted a 40% ownership in the business.

Actions Taken: The business owner drafted an agreement of sales and employment, but the initial agreement will not work due to issues with existing partners.

Ideal Outcome: Business owner partners with prospective sales leader, grows the business to $3 million by the end of 2020 and to $5.5 million eventually, enabling the business owner to sell the lab. Business owner maintains 51% of business, existing partner owns 10%, prospective sales leader owns 39%. Owner hires a lab manager to take over the day-to-day operations. Owner sells business in 1-2 years unless business continues to grow.

Roadblocks: There are complications with the existing Operating Agreement. The owner has taken over management of the lab, diminishing capacity with his consulting business. In addition, the owner is ready to sign consulting agreement with another company. Finally, the owner is reluctant to take on a new partner.

Recommendations:

  • Hire the sales manager and devote your time to PLS. Structure the ownership agreement based on performance and award compensation for sales success.
  • Create an ironclad agreement that allows for buying back shares for underperformance. Tier percentage of ownership with strike points at predetermined levels, for additional ownership interest.
  • Be sure to understand the potential partner’s motivation. Have trusted advisors speak with potential partner as well.

Final Results:

  • The owner met with potential sales leader and established terms, then drafted an agreement with his attorney. The owner’s attorney reviewed the agreement, and stated it would not work legally as proposed. Negotiations ended.
  • Shortly after negotiations ended, the company was awarded a new and exclusive contract. After the award, a competitor reached out to collaborate with the company.
  • The potential sales leader soon offered to purchase the business, and offer the current owner a salaried position. An agreement was drafted but then fell apart during due diligence for several reasons. The owner wanted more money due to new contract than potential buyer was willing to pay.
  • Owner currently working with new business on new contract.

Lessons Learned: The owner of the business became prone to potentially unwise offers as a result of concern for diminished sales and a desire to change his career path. He wisely trusted his instinct and paid attention to potential red flags, put protective measures in place, and performed due diligence on offer. As a result, the owner voided a potentially damaging decision and managed to grow the business on his own, with a brighter future ahead.

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