Market Pulse – Quarter 4, 2021

Seller’s Market

Presented by IBBA & M&A Source

A seller’s market occurs when demand exceeds supply. There are more interested, active buyers than there are quality deals on the market. In a seller’s market, buyer’s compete in order to win deals. This typically translates to increased values and more favorable deal terms for the seller.

In Q4 2021, seller market sentiment rebounded, setting a new peak in all but the $5M-$50M sector.

“Business confidence, and competition, is high. It’s amazing how fast we rebounded to record levels,” said Anthony Citrolo, managing partner of The NYBB Group. “This is the strongest upwarad swing we’ve seen in any 12-month period.”


For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

Small business values up in 2021

Business values increased in 2021, despite ongoing challenges from the pandemic, talent shortages, and supply chain disruption. Deal activity continued at an intense pace, with advisors across the country reporting increases in both incoming deal flow and completed engagements.

More advisors characterized this as a seller’s market than nearly any other time in the last decade, according to the year-end Market Pulse report from IBBA and the M&A Source. Buyer confidence is high, as is competition for quality deals.

Businesses with enterprise value of $5 million to $50 million earned an average multiple of 6.0x EBITDA (a survey peak), realizing an average final sale price at 113% of the internal target benchmark. Multiples remained at or near market peak throughout the Main Street and lower middle market.

Meanwhile, time to close shrank in nearly all market segments. Time to close was likely facilitated by the high rate of buyer competition as well as a push to get deals closed before year-end.

The year end is always a hot time to get deals done as buyers and sellers push to meet self-imposed deadlines. We also know a number of sellers entered the market in early 2021, planning to get ahead of potential increases in capital gains taxes. Many of those deals would have had accepted offers and been in due diligence by the time it became clear tax changes were not yet coming.

Main Street activity

In the Main Street market last year, individual buyers accounted for 71% of business transitions. Of those, 40% were first time buyers and 31% were repeat business owners or what we call “serial entrepreneurs.”

Another 26% of Main Street buyers were existing companies. These are the strategic buyers acquiring other businesses as a way to expand or eliminate competition. A small percentage, just 3%, were private equity acquisitions.

While market definitions vary, businesses are generally considered “Main Street” if they have an enterprise value of less than $2 million. The majority of the transactions that happen in this sector are small, less than $500,000.

In 2021, the most active industries trading hands in the Main Street market were personal services (15%), construction (12%), business services (12%), consumer goods/retail (12%), and restaurants (11%). This represents a small drop-in restaurant activity, likely due to ongoing fallout from the pandemic.

Of those Main Street sellers who went to market in 2021, 53% were preparing for retirement. Another 11% were selling as part of a recapitalization. In a recap, the seller (or sometimes their management team) keeps some level of equity stake in the business while a buyer infuses new capital for growth. Other reasons Main Street sellers went to market included burnout, health issues, relocation, and family issues.

Lower middle market activity

In the lower middle market, where businesses are valued between $2 million and $50 million, the buyer pool shifts. Here individuals accounted for a third (34%) of buyers in 2021, relatively on trend with past years.

The number of individuals buying businesses in 2021 is notable given the highly competitive talent market. It’s likely these buyers (and Main Street buyers, too) could have their choice of employment opportunities. And yet there remains a definite draw to being a business owner. People still want to build something of their own and control their own destiny, even in a job seeker’s market.

Existing companies accounted for 40% of lower middle market transitions in 2021. Generally, these companies have strong balance sheets and are looking to acquisition as a way to grow at a time when organic growth is difficult due to talent shortages.

Private equity continues to remain active in the lower middle market, accounting for 24% of all business transitions. Private equity buyers generate financial returns by acquiring businesses. They typically plan to hold a business for 5 to 7 years, often acquiring similar types of businesses to bolt on, before reselling a larger, more lucrative operation.

These financial buyers tend to focus their efforts on middle market opportunities of $50 million or more. But with competition for those larger deals running hot, we see many firms ticking their attention down to the lower middle market. Here it’s possible to find deals that are large enough to make a difference in their portfolio and yet small enough to go unnoticed by some of their competitors.


For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.comExit Strategies Group is a partner in the Cornerstone International Alliance.

Six Benefits of Monitoring Company Value

Even if your business is not for sale, monitoring its market value can be incredibly helpful. This article describes six ways that understanding value over the life of a closely held business benefits shareholders, directors and managers.

1. Value Report Card

Like financial statements, an annual independent business valuation is a type of report card on company health. CEO’s can use this report card to educate, align and focus executive teams on maximizing enterprise value. Owners and boards of directors can use it to hold management accountable for value creation.

2. Equity Transaction Enabler

Having a business appraised periodically enables equity transactions. I am talking about buy-sell transactions between shareholders, redeeming stock of retiring owners, and buy-ins by managers, key employees, family, or investors, to name a few.  Most experienced business attorneys will tell you that not agreeing on valuation is the #1 impediment to successfully completing these transactions.  An independent business valuation is usually the fastest route to an agreement on value.

3. Shareholder Agreement Test

A business valuation can be used to test the composition of your shareholder buy-sell agreement from a valuation perspective. In our experience, there are as many faulty buy-sell agreements out there as there are good ones. By faulty I mean that the valuation terms are incorrect or ambiguous, or produce unfair share values, which ultimately leads to surprises, divisiveness, and disputes among shareholders. Also, all buy-sell agreements, regardless of how well-written, lose relevance over time and should be tested periodically. A valuation expert can identify potential problems and recommend solutions.

4. Versatile Planning Tool

A comprehensive valuation report can provide a solid foundation for strategic planning and a roadmap to increasing value. Shareholders can use periodic valuations for their own retirement planning, estate planning, buying life insurance, and maintaining appropriate liquidity for future buyouts. Without an accurate valuation, these planning activities involve a lot more guesswork.

5. Executive Education

The very act of going through a valuation process is educational for owners and leadership teams. They will see what information goes into the valuation and learn what factors are driving or detracting from business value. Experiencing the valuation process also prepares them for what will happen if the buy-sell agreement is triggered or if the company becomes involved in an acquisition.

6. Compliance

You may be aware that ESOP companies are required by law to obtain an annual independent valuation of their shares.  Companies that have stock option plans are required to have regular valuations for IRC 409A and financial reporting purposes. Companies that have executive teams whose compensation is tied to company value through the use of stock appreciation rights or phantom stock plans need valuations as well.

Getting This One Done!

An experienced business appraiser can usually recommend the appropriate scope of analysis and reporting for your intended use and circumstances after a brief phone call with you. In many cases, a full scope business valuation (appraisal) is necessary or strongly recommended. In other cases, a limited scope calculation of value may be sufficient. At issue are accuracy, the knowledge of intended users, credibility, compliance requirements and cost.

Working with the same valuation analyst (appraiser) over time has additional benefits.  Your team gets to know and trust the valuation expert. The expert’s knowledge of the company and its industry grows, and they become better able to offer insights into improving business operations, financial results, enterprise value, sale readiness and marketability. Also, valuation updates are generally faster, less expensive and more consistent.


Al Statz is the founder and president of Exit Strategies Group. For further information on this topic or to discuss a potential business sale, merger or acquisition, confidentially, Al can be reached at 707-781-8580 or alstatz@exitstrategiesgroup.com.

From 60 days to 6 months: Why you need an M&A attorney

We had a signed letter of intent in April and were set to close the transaction in June – until the seller’s lawyer got in the way. What should have taken 60 days ballooned into a full six months. Luckily, it still closed.

Why you need an M&A attorney

When selling your business, the M&A attorney looks out for your best interests. They help you understand the risks involved and how to mitigate them. They know how to translate legal jargon into plain language and help you evaluate the pros and cons of various deal structures and terms.

An M&A attorney is part negotiator, part contract lawyer, part educator. They work with your broker or investment advisor to provide input on deal structure and value. They draft and review all pertinent contracts, including deal terms, the transferability of existing client and vendor contracts, real estate contracts, warranty liabilities and more.

Finally, they’re there to advise you on your rights and responsibilities in the transaction. Even if you are selling 100% of the business, you will likely have certain continued liabilities and operational obligations after the transfer.

Why you need a specialist

Its exceedingly difficult for general practice lawyers to have the experience to move a deal forward effectively and efficiently. M&A transactions are increasingly complex agreements, and different deal structures can present challenging legal issues. Has your general practice attorney ever completed an M&A transaction using an F reorganization or 338 election? In today’s world of sophisticated buyers, its likely you will get offers with some of these provisions.

A seasoned M&A attorney has seen it all before. They know the language, the sticking points, and all the ways a deal can go wrong. What’s more, they understand negotiations and how to protect their client’s interests without blowing up the opportunity. The right attorney is a deal maker, not a deal breaker, and will keep a transaction moving forward – as long as it meets your goals.

Why our deal took six months instead of 60 days

In this particular transaction, the client insisted on working with their real estate attorney. The lawyer had handled a few smaller Main Street transactions before, but nothing of this size or complexity.

To complicate matters, our client was a type-A engineer who wanted to take a deep dive into the legal issues and understand them all on his own terms. That process certainly would have been smoother if he’d had an attorney who understood the transaction issues himself.

Instead of drawing on experience to educate the client and make recommendations, the attorney simply laid out the challenges and asked the client to provide direction. He brought more fear than clarity to the process.

To top it off, the attorney was a one-man-show. That meant when he took a vacation or had to spend a week in court, all work stopped. There was no one else in his office who could keep the process moving forward.

All in all, this attorney was learning on the job. But instead of paying for his education, he got to charge his client an extra-large “tuition” bill in the process.

Why faster is better

We were fortunate to be working with a patient buyer who stuck with this deal to the end. This buyer did not offer the highest price (it was the second highest), but it was clear from the outset that they’d be the most lenient and tolerant of the seller’s need for total analysis and control. Having that right fit can be the difference between a deal that gets closed and one that falls apart.

The other saving grace is that the seller had an extremely stable business. The employees were well-tenured and most revenue was under contract.

What’s more typical, though, when negotiations drag on, is that something negative or positive happens (e.g., a key employee leaves, big contract loss/gain) and either party tries to renegotiate the deal. Emotions run high and it gets increasingly likely someone will throw up their hands and walk away.

That adds up to a lot of lost time, money, and momentum on either side of the equation. Once the seller accepts an offer, it’s in everyone’s best interest to keep the deal moving forward – and that means you need specialized legal support who knows how to get that done.


For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.comExit Strategies Group is a partner in the Cornerstone International Alliance.

M&A Deal Terms: Average Capital Structure

The following chart from GF Data shows the average capital structure over the past 5 years for middle market business acquisitions. Equity contributions have varied only slightly over that time, in the range of 46% to 49%. Overall there was a slight rise during COVID, but nothing major. There are two different stories based on deal size however. In the $10-50 million total enterprise value (TEV) bracket, average equity contribution dropped. However, for deals in the $50 to 250 million TEV range, average equity share remained at or reached the mid-50s, suggesting the room for continued valuation increases is greater on sub-$50 million deals.

GF Data collects and publishes proprietary business valuation, volume, leverage and key deal term data on private equity sponsored merger and acquisition transactions with enterprise values of $10 to 250 million. GF Data gives M&A deal participants and advisors more reliable external information to use in valuing companies and negotiating transactions.


For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com.

 

M&A in 2022: Is this the year to sell?

If you’re a business owner, you’ve probably had a rough couple of years – and the challenges aren’t over. While COVID-19 may be weakening its grip, talent shortages, supply chain issues, and inflation are still very much at play.

And yet, the economy is surging. Many of the business owners we talk to have all the work they can handle and strong balance sheets. So on the plus side, performance is good. On the negative, managing the business is really challenging.

If you’re analyzing the pros and cons and wondering if 2022 is the year to sell, here are some things you should know:

Buyers outnumber sellers

The buyer pool is as strong as it’s ever been, and there are significantly more buyers than sellers. Private equity has been driving demand and will continue to do so for the foreseeable future. This group of buyers is exceedingly well capitalized and needs to put their investors’ dollars to work.

Meanwhile, we expect to see corporate buyers ramping up their acquisitions. After a couple of years sitting back and waiting things out, these buyers are feeling a new sense of urgency. With the tight talent market limiting organic growth, companies will be looking to acquisition as a way to expand and evolve.

In terms of making an offer, strategic buyers could offer higher values because of the synergies that can be gained from a merger. And yet, private equity is up against deadlines to place their money in new investments. Pit these active buyer pools against each other and the battle should be pretty good.

Values are at an all-time high

Sellers are realizing record valuations right now. According to GF Data, a company that collects data on privately held M&A transactions, multiples for Q3 2021 hit the highest level they’ve seen in their 16-year history.

Lending is strong

Banks are looking to put their money to work in the same way buyers are. What we’re hearing from lenders is that their traditional clients are flush with cash. So instead of extending lines of credit to their established customer base, they’re out there looking for new loans to make.

Money is cheap. So even though valuations are high, buyers can still meet those prices with a smaller equity stake. According to GF Data, buyers’ total debt as a multiple of EBITDA “surged” by half a percentage point in Q3 2021 – a significant increase by debt standards.

Tax increases are still a danger

We didn’t see an increase in capital gains in 2021, but there’s a sense that it’s still coming. If the Democrats win the mid-term elections, some analysts predict we’ll see an increase in 2023.

The threat of tax increases sent sellers to market in 2021, hoping to get out in time. Now, we’ve basically reset the clock for another year. Business owners who sell today face a 20% tax burden, but if predictions come to pass, we could see capital gains rates increase by an additional 5% or more.

Business inventory will grow

With the uncertainties of the last two years, many sellers have been waiting on the sidelines. That exacerbated supply and demand issues and heightened competition for quality businesses.

But now the economy is going strong, and the market is gaining a new sense of equilibrium as we all learn to live with the lingering specter of COVID-19. As confidence increases, more business owners will enter the market. If you were planning to sell soon, it might be a good idea to act before supply increases.

Deal support teams are stretched

Deal teams are always running full bore in Q4. Between due diligence, financial reports, environmental inspections, contract negotiations, lending, etc., it can take a lot of third-party service providers to move a transition through to closing.

As one buyer’s banker told us, “We’re committed to getting this deal done. But this transaction is twelfth in line.” (And it isn’t a very big bank!) Sellers that don’t move fast enough could run the risk of missing their ‘close-by-year-end’ goals.

Selling your business is likely the largest financial transaction you’ll make in your life, and there are a lot of variables to consider. It’s a good idea to keep tabs on your business value as the market changes. Talk to advisors who can evaluate your unique business and circumstances. Find out what the numbers look like for a sale in 2022. You may have some big decisions ahead.


For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.comExit Strategies Group is a partner in the Cornerstone International Alliance.

How Supply Chain Issues are Complicating M&A Dealmaking

Many businesses are struggling with supply chain issues right now. After vaccine programs and government stimulus monies kicked in and economies roared back to life this past year, global supply chains came under immense strain as weaknesses were exposed. Though conditions have improved slightly in just the past few months, experts in most industries are forecasting that supply chain troubles will persist well into 2023.

This article discusses some of the ways that supply chain problems are complicating M&A transactions for business owners looking to sell in 2022.

Earnings Performance

One of our M&A clients, a durable goods distribution company, currently has a record order backlog of 11 months, as customers place large orders to combat long lead times. Normal backlog before COVID was around 1-2 months. Lead times on popular SKUs that were once 2-3 weeks are now 5-6 months, and scheduled deliveries on some products are a full year out! Meanwhile many vendors are missing promised delivery dates, and the order backlog keeps climbing, for now. Sales (shipments) are totally dependent on the supply chain.

EBITDA is the most talked about, relied upon, and argued over earnings metric in the world of mergers and acquisitions. When a business has solid orders but is struggling to ship products, it becomes difficult to establish an earnings run rate and to forecast earnings. That in turn makes it difficult for acquirers and sellers to see eye to eye on EBITDA and therefore enterprise valuation. And how well correlated is trailing twelve-month (TTM) performance with expected future performance anyway under these conditions? Often not well at all.

And this is part of a broader question―where will growth stabilize after COVID restrictions and government stimulus ends, and inflation and GDP growth are back to normal? Since different buyers will have different views of TTM and expected future EBITDA performance (not to mention working capital and capital spending needs) the best way for sellers to optimize value in today’s market is to run a structured sale process where multiple buyers come to the table.

Supplier Due Diligence

As acquirers seek greater supply chain resilience, we’re seeing them do more due diligence in this area than ever before. In the past, buyers were relatively relaxed about supply vulnerabilities, focusing more in other areas. But now we’re seeing more scrutiny of supplier quality and on time performance, length of supplier relationships, supplier concentration, location of supplier operations, supplier commitment to the target, capacity for growth, strategic plans, recent or potential change of ownership, contracts, proprietary content, history of price increases, long lead time items, economic order quantities, sole sourced items and alternative sources of supply, and other potential areas of risk.

We brought an electronics business to market recently that had backups or workarounds for nearly every component in their products. Frankly, we’d never seen a company put so much time and energy into supplier redundancies. Yet, they had one essential PCB with no alternate supplier.

Buyer concern was so significant, we took the business off the market until a reliable second source was identified and qualified.

Working Capital

Another aspect of M&A dealmaking that is being complicated by supply chain issues has to do with working capital negotiations. Working capital is like gas in a car – you need it to run a business. When selling a business, the buyer and seller agree on a “sufficient” amount of working capital (usually on a cash-free debt-free basis) to be left in the business to support ongoing operations. In a typical economy, unless a business is growing or declining rapidly, this “target” working capital level is based on a TTM average calculation.

But right now, many businesses are holding onto bloated levels of inventory to compensate for parts shortages and long lead times. Manufacturers that used to buy inventory on a just-in-time basis are now overstocking. Not only are inventories much higher than normal, but in many cases the price-per-unit has skyrocketed as well. Companies are paying whatever they have to in order to keep critical parts in stock and keep customers happy. The same goes for shipping costs.

So, businesses selling now based on a TTM average working capital target will be including more working capital than if they had sold 12 or 24 months ago. This is one of the areas that can really upset sellers – no one likes to leave money on the table. Fortunately, with all the competition in the market today, many buyers are willing to throw out the book on working capital to win the deal. The key is to negotiate the target earlier in the process when there are still multiple buyers at the table. In the past we often negotiated the working capital target during due diligence. Today we almost always negotiate it in the LOI.

What to do

Owners looking to sell in a world reshaped by the pandemic should select an M&A advisor who anticipates issues like these and has strategies for addressing them. Owners planning to remain independent may want to consider protecting their supply chain by vertically integrating upstream through a strategic acquisition.


For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.comExit Strategies Group is a partner in the Cornerstone International Alliance.

Valuing Personal Goodwill

What is personal goodwill?

Before starting our discussion about personal goodwill, it is necessary to establish a common ground to understand the concept. First, it is an identifiable intangible asset that will generate future economic benefits to the asset owner. While there is no standard definition. Adam Mason and David Wood searched various textbooks, articles, and leading court cases[1]that define this term. From that exercise, we chose to utilize the following definitions for our discussion;

“Personal goodwill is the value of earnings or cash flow directly attributable to the individual’s characteristics or attributes.”[2]

“Personal goodwill, sometimes referred to as professional goodwill, is a function of the earnings from repeat business that will patronize the individual as opposed to the business, new consumers who will seek out the individual, and new referrals that will be made to the individual”.[3]

Personal goodwill differs from the concept of corporate or enterprise goodwill. Corporate goodwill is the simple calculation of the excess price paid for a company above the value of its tangible and identifiable intangible assets (i.e. brand, customer relationships). In some instances, goodwill can be negative, but that is the topic of another blog.

What is so relevant about personal goodwill?

In summary, it is a tax issue. In the sale of a C Corporation, an owner can have significant tax benefits when a portion of the purchase price is related to personal goodwill instead of corporate goodwill. This identification of goodwill as personal will allow the owner to avoid getting taxed twice for the same value. Let me explain. Assuming that all the goodwill is associated with the company, the sale would likely generate a tax at a corporate level before the after-tax value is allocated to the owners of the company’s stock. Once the owner receives the net proceeds, they would be taxed again at a personal level. Identifying a certain percentage of the goodwill as personal allows the owner to split the tax bill between personal goodwill and corporate goodwill and pay taxes on each only once.

Which characteristics or elements must have personal goodwill?

As with any other intangible asset[4], personal goodwill must have the following characteristics. It can be separated individually from the entity. In other words, if the business owner leaves her or his company, that intangible asset goes with them. For example, the ability of the business owner to generate sales because of its personal relationships. The other element to be recognized as personal goodwill is that the business owner has contractual or legal rights over that intangible asset. In that respect, the owner of the personal goodwill must not transfer it through an employment or a non-compete agreement.

How to estimate the fair value of personal goodwill?

We have found that the most logical and defendable way in which we estimate the value of personal goodwill is the “With and Without Approach.” This methodology consists in estimating the present value of the entity’s future cash flows as it is; that is, the “With” scenario. This “Without” scenario has several key inputs such as the impact the owner has on the company’s future revenues, the cost at which the company must replace the owner, and the time it takes to ramp the business up to its original “With” forecast. The difference in the value of these scenarios is the fair value of personal goodwill. An appraiser needs to provide strong support for some of these “qualitative” inputs, specifically the top-line impact of the owner. That diligence starts with a simple question to the owner as to his or her impact on sales as a % of the total and drills down to the detail of the revenues and the sales responsibility of each customer. An owner may suggest that the business would lose 50% of the revenue if he or she left but an analysis of the sales relationships with each customer may only suggest that impact to be 25%. In defending the “Without” scenario to the IRS, the more defendable number is always the right choice. The owner may disagree but the extra layer of support helps mitigate future audit risk.

What is the real impact?

It is important to note that there must be a balanced relationship between personal goodwill to total goodwill. According to David Wood[5], personal goodwill should fall within 20%-to-40%. This range is supported by the tax court rulings and guides the appraiser in reconciling the analysis. While there may be a strong case for a higher percentage, it goes without saying that any conclusion above this range may trigger audit concerns unless the appraiser has presented strong support for an outlying opinion. Below is a simple analysis and calculation of the potential tax savings.


[1] Business Valuation Resources, LLC. Personal Goodwill: A Current Survey of Definitions. Adam Manson and David Wood CPA/ABV, CVA.
[2] Wood, David. (2007). Goodwill Attributes: Assessing Utility. The Value Examiner.
[3] Wood, David. (2007). “MUM’s the Word”TM: A formal Method to Allocate Blue Sky Value in Divorce. Business Valuation Update.
[4] Under ASC 805; asset recognition criteria.
[5] Business Valuation in Divorce. Case Law Compendium. Third Edition. Business Valuation Resources, LLC.

Exit Strategies Group, Inc (ESGI)

At ESGI, we are a team of seasoned appraisers to help you with your valuation needs, either to estimate the fair value of personal goodwill or any other. Our business valuations are commonly used in estate, gift, and other tax filings, dispute resolution, expert witness and litigation support, and mergers and acquisitions transactions.

Buyer’s top focus is employee team

Employees. Finding them. Keeping them. It’s on everyone’s mind right now. And for the company or person who buys your business, it just may be their number one concern.

In the latest IBBA and M&A Source Market Pulse Report, a quarterly survey of M&A advisors, respondents indicated that employees were buyers number one due diligence concern so far this year.

Employee issues, specifically longevity, loyalty and work ethic, ranked ahead of other due diligence priorities like operations, revenue and customer concentration.

We’ve been hearing from sellers for a couple of years now that finding qualified employees is their number one barrier to growth. Many can’t find the talent they need to meet customer demand, much less open new divisions or expand to new territory.

This shortage of good talent is also one contributing factor in the strong M&A market right now. When businesses can’t grow organically, they look to acquisitions as a path to expansion. That’s why buyers are putting increased scrutiny into the quality of a company’s employee team.

As an industry, we’ve been talking for years about how important it is to have a well-developed management team in place before you sell. Buyers want a leadership group – or at least one key manager – who can maintain the business in the owner’s absence.

What’s interesting, is that in the recent Market Pulse Report, management team ranked number five on the buyer due diligence list. A good succession plan and backup support is still incredibly important to the saleability and value of your business, but it seems that the strength of your overall employee team is – at this moment in time – an even bigger priority.

Here are some of the issue areas buyers are looking at:

 

Retention

How long do employees stay with you? What practices do you have in place to keep people loyal and committed to your organization? People stay with their employer for more than salary and benefits. Buyers need to understand why employees are loyal so they can make sure it’s a good fit for their own culture and expectations.

Culture

Do employees have an ownership mindset? Do they pitch in and support each other in times of need? Have they built a self-policing culture of quality and performance? And again, will the factors shaping that culture mesh with the buyer’s workplace?

Learning and development

Millennials are currently the largest percentage of the U.S. workforce, and this employee group, more than any other, cares about training and growth. Workplaces with established learning and development programs, as well as those with an organic culture of internal mentoring and promotions, will win employee loyalty – and points with buyers.

Cross-training

COVID-19 shone a spotlight on the benefits of cross-training. When business conditions are changing rapidly, it’s critical to have the ability to move employees from role to role. What’s more, cross-training benefits your people by broadening their skillsets and enabling more flexible scheduling.

Cross-trained employees are better able to fill in and cover for colleagues who want time off, who need extra help during a busy shift, or those who are sick or quarantined and unable to come into work for an extended period of time.

Niche, high-demand skills

In a tight talent market like this, an acquisition can be a way for a company to gain access to highly skilled talent. In some cases, this can even be the primary reason for an acquisition.

If you have employees with hard-to-find skills and employees who could take on new challenges and help a buyer grow, think about how you can retain them and keep them engaged in the run-up to selling your business. That said, we generally do not advise disclosing your exit plans to employees in advance.

A pending sale can cause anxiety among your employee group. Some will look for a new job rather than risk an uncertain future with a new owner. Talk to your M&A advisors about your key employees, stay bonuses, and what kind of succession planning is right for your situation.

Depending on your exit goals, we may be able to target buyers who will offer small equity positions to key employees. For the right employees – the opportunity to gain a real ownership stake in your business could be a meaningful incentive that keeps them committed to your company.


For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.comExit Strategies Group is a partner in the Cornerstone International Alliance.

M&A Advisor Tip: Take a vacation to grow your value

Build a strong management team and work on transitioning yourself out of the business. Buyers want to see that the business can run—and run well—without your constant attention.

What would happen if you took the summer off? What would you come back to? If the answer is locked doors, then you’ve got some work to do. If your team might call you and have a meeting once a week, you’re moving in the right direction.

Start with a long weekend and build up to multiple weeks then months off. It will be an exercise your spouse and family will be happy to participate in and will allow your management team to grow.


For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.