Consolidating Industry Leaves Few Transition Options for Struggling Business

Situation

A 25-year-old professional service firm was struggling under an unprofitable business model that went against industry norms. As the two founders/owners neared retirement and sought an exit strategy, they were disappointed in how prospective buyers did not value their omplete business. In the meantime, they suffered from ongoing financial stresses that impacted their personal compensation.The owners’ desire was to maximize their valuation and increase financial security for retirement.

Challenges

• Cost structure of the business was much higher than competitors, yet owners were reluctant to change the business model.
• One owner’s son was in the business, but not needed and was not likely to buy it.
• Both owners were looking to cut back and transition into retirement.
• Financial stress led to owner compensation issues on a regular basis.

Response

Platinum was hired to provide an independent, third-party sounding board and facilitation to the two founders/owners to consider new leadership and/or transition options.Through regular discussions, it became evident that present growth initiatives were not succeeding. Therefore, the owners needed to accept that the business model was unlikely to return to profitability through growth. In a consolidating industry, it could neither attract nor retain larger accounts.What’s more, the one owner’s son was at a crossroads and ready for more challenges yet did not see himself working for new leadership or as a buyer of the business.

Based on personal and organizational stresses, Platinum helped the two founders to recognize that it was time to prepare to sell the business and help the son to move on in his career.The key transition was handing over the day-to-day responsibilities to the current CFO, who was a good fit and welcomed the COO role. His presence, secured with a phantom stock plan, transferable non compete and monetary rewards,was deemed favorable for future suitors. Platinum aided the change in banking relationships to gain better terms and ongoing cash flow to minimize the financial stress.

Results

The business and all of its employees were successfully transitioned to one of the industry consolidators. One partner pursued his outside passion in religious work and the other is working in the new business as an investor. Both partners realized far more than they expected because of the multiples paid by the industry consolidator.