LUTZ BUSINESS INSIGHTS
The m&a client experience
An exit planning success story
The following is a story of Bob Henrichs and his experience working with Lutz M&A over a seven-year time frame. Bob recently sold his business with the help of Lutz M&A and his story is a good example of how proper planning can produce great results.
Bob Henrichs acquired The Walling Company back in 1985 where he had been employed since 1981. The company, headquartered in Omaha, Nebraska, is a distributor of engineered mechanical equipment to customers throughout the Midwest. They offer this highly engineered equipment to fit the unique mechanical requirements for all types of industries and utilities in today’s fast-paced, high technology world. The Walling Company (TWC) prides itself in being informed and aware of the most beneficial applications to keep its customers on the very forefront of progress. The emphasis on absolute integrity in serving engineers and companies with the ultimate in mechanical equipment has been responsible for continuous and substantial growth since 1946.
During 2012, Bob was approached by a large competitor that was aggressively buying up companies to fulfill their growth plan. During his tenure as owner, Bob had grown the business significantly, and at the time of the opportunity with this buyer, the company was profitable with revenues of $6.8M. At this time, Bob was approaching the age of 60 and was intrigued by the possibility of cashing out of the business. On the recommendation of his banker, Jason Hansen at American National Bank, Bob contacted Bill Kenedy at Lutz M&A to get advice on valuing his company, and assistance in negotiating a potential sale. Here the story begins.
In the fall of 2012, Bob met with Bill Kenedy and Ryan McGregor of Lutz M&A to discuss the potential sale of TWC to a large competing business. This initial (no cost!) meeting was filled with questions to Bob regarding the business. Topics included entity type, cash flow of the business, history of growth in the business, employee base/management team, etc. In turn, Bob had many questions for Lutz regarding how the sale process works, taxes, post-sale requirements, etc. As a result of the meeting, Bob hired Lutz M&A to prepare a valuation analysis specific to the purpose of potentially selling the business – at a cost to Bob of about $1,500 to $2,000.
Results of Initial Analysis
The initial valuation project uncovered several key issues that Bob did not know prior to hiring Lutz M&A:
- Due to the company being a C-Corporation, and the buyer expressing an interest in buying the assets of TWC, the tax consequences of a sale of TWC assets were punitive. This issue alone made Bob unwilling to pursue the sale.
- Even without the negative tax consequences, Bob did not believe selling TWC at a fair price was right for him at that time. Bob still enjoyed working in the business, and the profit he made each year was significantly more than what he would earn by investing the net proceeds from a sale.
- Bob had grown a successful business and had several long-term, key employees, but ultimately if Bob were not there, the company would struggle to survive. This meant that if Bob had pursued a sale, he would have likely had to stay employed for the buyer for a few years until a replacement was identified and trained.
- Bob and TWC did not have a CPA. Bob’s brother, a former CPA working for a private business, was preparing Bob’s tax returns annually. Due to the complexities involved with the transition planning Bob saw ahead of him, he decided to hire Lutz to help him with tax advice and preparation of tax returns.
At the end of the initial valuation analysis, Bob determined that he did not want to pursue a sale at that time. He decided to continue operating TWC as he had previously but adding Lutz as the CPA firm for TWC.
TWC continued its steady growth, and several more meetings between Bob and Lutz occurred during 2013 and 2014. The first simple move was to make an election to have TWC taxed as an S Corporation. This election did not cause any tax liability for the business and was a simple way to limit the taxes on its sale in the future (at least five years after election).
Next, Lutz assisted Bob with identifying the key value drivers of his business to help him think about ways to increase its value. One piece of advice was to consider hiring a higher-level employee to take over some of Bob’s responsibilities. Initially, Bob did not like this idea, as it did not make sense to him to hire someone to do things that he could do relatively easily.
Instead of Selling the Business, Let’s Buy a Business!
In early 2015, Bob received a call from the owner of The Donald Corporation (TDC), a friendly competitor located in Ankeny, Iowa. The owner, who was in his 70’s, had decided he wanted to sell his business and that Bob and The Walling Company would be a good fit. Bob met with the owner and came back with financial information to share with Lutz.
Over the next several months Lutz worked with Bob on negotiating the acquisition of TDC. They tackled how to structure the business in the most tax-effective manner and how to integrate accounting between companies. The transaction closed successfully in the middle of 2015, and TWC was now operating with significantly more revenue, profit, employees and territory. The acquisition opened the door for TWC to customers in several new states and was immediately paying dividends.
Get the Monkey Off Your Back
The success of the TDC acquisition was apparent early on, and so was the additional burden on Bob’s daily routine. By early 2016, TWC was humming along, and Bob was now at 60 years of age. Although Bob was still enjoying the business, he was looking to spend some more time enjoying his success.
Lutz had repeatedly been telling Bob that he should look to hire a high-level person to take over most of the day to day operational functions. The only way Bob would be able to sell TWC eventually and retire was to have people in place to run the business without needing Bob around. Bob was skeptical but agreed to try to find someone to fit this role.
Bob tried on his own and also hired an executive search firm recommended by Lutz Talent to assist. After meeting with several candidates, the executive search firm introduced Bob to Rob Barie. Bob had a good feeling about Rob and after several meetings agreed to hire Rob for the role.
This was a difficult decision for Bob; he had to pay a significant salary to get someone of Rob’s caliber into his business. In fact, it cost Bob about 10% of his prior year profit to hire Rob. However, knowing that it was a critical move for him to be able to exit from the business someday, he gave it a try.
Rob learned the business quickly and meshed well with the other employees of TWC. He brought new ideas, advanced the company’s technical capabilities, and quickly proved to be a valuable asset to the company.
Shortly after being hired, Rob mentioned to Bob that he had an interest in buying the company when Bob was ready. He stated he had some financial backing and was willing to work with Bob on this in the future. This idea sounded good to Bob. Rob would know the business and employees, and there would be less of a disruption in the business if Rob purchased it, as opposed to an outside third party.
The Time is Right
At the beginning of 2019, Bob decided he was ready to sell the business to Rob. Bob was comfortable with Rob taking over and was ready to start his new phase in a post-sale role. Bob and Lutz developed a reasonable valuation for the business and provided the information to Rob.
At that point, Rob hired his own team to assess the value of the Company and prepare an offer to purchase the business. After minimal negotiations and coordination with the company’s bank (still Jason Hansen at American National Bank!), a deal was struck. The transaction closed July 31, 2019, and all parties were happy with the sale and the overall process.
From the time that Bob first met with Lutz, the top-line revenue and total value of the business almost doubled. Additionally, due to the proper tax planning, the tax bill as a percentage of the sale price was practically cut in half!
The combination of Bob’s expertise, the acquisition of TDC, the hiring of key employees and strategic (including tax) planning from 2012 to 2019 produced a fantastic experience for Bob Henrichs of the Walling Company. His story is a perfect example of how putting effort into transition (exit) planning can pay off. Bob will tell you that it was not that hard to do. It took some time and some money, but the return on investment was incredible, financially and for the peace of mind knowing the company he built was in good hands.
ABOUT THE AUTHOR
BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER
Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.
AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- Accredited in Business Valuation
- Certified in Financial Forensic
- Certified Exit Planning Advisor
- BSBA in Accounting, St. John’s University, Collegeville, MN
- Construction Financial Management Association, Past Treasurer, Board Member
- A Time to Heal (non-profit focused on cancer patients), Past Board Member
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