Spring cleaning is good for business

/in , /by Al Statz

It’s time for spring cleaning, at home and at work. I only wish my clients did a regular Spring cleaning. It would make due diligence and the whole business sale process a lot smoother. Here’s what I mean:

  • Clean financials: I harp on this a lot. Messy numbers and casual accounting practices create headaches when it comes time to sell. Audited financials, on the other hand, can actually increase a buyer’s offer. Hopefully, you have a good relationship with your CPA. If not, due diligence can be painful for all involved. Answers trickle in, responses drag out, and parties on both sides get frustrated.
  • Clean facility: Neatness matters. Buyers will always comment with pleasant surprise when a facility is clean and organized, with a logical place for equipment and inventory. This goes for office teams too. If you have even one manager who hoards paperwork and lets things pile up, buyers will notice.
  • Digital files: We brought on some new team members a while back and quickly realized our digital recordkeeping needed some help. Now our file systems are better labeled and more intuitive, and that’s going to make work more efficient for everyone. One company I know has even planned a digital spring cleaning as a team. They’ll spend an hour or so going over their file systems, agreeing on things that should be deleted, moved, or renamed.
  • Excess equipment: There’s something about machine shop owners—they love going to auctions and getting good deals. But a lot of that equipment goes unused. Then we have a problem when it’s time to sell, and I have to tell them that their $10 million in asset value is only worth $8 million on an operating basis. Take that unused equipment to auction. That revenue, together with what we can get for the business, will get you closer to your financial goals. There no reason to have excess equipment on the books in a sale.

So take some time to clean and organize this Spring. Get your entire team involved. You’ll all be more productive and you’ll be better prepared when it comes time to sell. Buyers will take note and reward these efforts.

Al Statz is President and founder of Exit Strategies Group, a leading California-based M&A advisory firm with decades of experience selling manufacturing, distribution and service companies in the lower middle market. For further information, or to discuss a potential sale or acquisition, confidentially, contact Al Statz at 707-781-8580.

Avoid the Mistake of Selling on Your Own

/in , /by Al Statz

One of our former clients, Joe, reflecting on the sale of his company said, “only those of us that have toiled at it know what it really takes to succeed in this business.” How true. Until we risk our own capital and spend years building a team, perfecting products and processes and managing through multiple business cycles, we can’t fully appreciate what it takes to succeed in a given business. Similarly, its hard for business owners, who sell a business once or twice in their lives, to understand the value that a professional M&A advisor brings to the table.

Fortunately, owners can take a lesson from private equity groups who always hire an M&A advisor or investment banker to sell a portfolio company, even when they know the likely buyers. Why? They know they do better financially when an independent M&A advisor runs the sale process. And keep in mind, these are sophisticated operators. Most are former investment bankers! They also recognize that their time is better spent on things like business performance and sourcing new investments. They also know that using an M&A advisor helps convince limited partners that they have obtained the best deal available in the market.

Why then are owners tempted to sell on their own?

I can save money.

Would you ever file your own taxes, draft your own living trust, manage your own 401(k) or sell your own house to save money? Why on earth then would you try to sell a company on your own? Aside from the probability of making costly mistakes, your time will be better spent optimizing business performance than moonlighting as an M&A expert. Buyers’ obsession with trailing-12-month (TTM) business performance is hard to overstate — so focus on it!

We don’t provide legal or tax advice, but attorney and CPA hours can easily double when you don’t have an M&A advisor leading the sale process. And the likelihood of closing a deal goes down, so you may spend more on professional fees and end up with no deal. Please understand that I have the utmost respect for M&A attorneys and CPA’s and their critical roles in the process, but those are the facts!

Most importantly, the impact that an M&A advisor has on price and terms usually covers their fee many times over.

I can negotiate a better deal.

Just because a buyer is willing to pay $40 million, doesn’t mean that they will offer $40 million. You usually only see their best offer if they think they are going to lose the deal to another bidder. It is that simple. Owners who represent themselves usually negotiate with one buyer, maybe two. We bring additional serious buyers to the table, which creates competition.

And signing a letter of intent (LOI) for $40 million doesn’t mean your deal will close at that price. M&A advisors spend a great deal of time and effort educating buyers prior to LOI negotiation to avoid re-trading during due diligence. They make sure that LOI terms are clear and detailed so that you know what you are getting. They clarify overly broad and ambiguous language that buyers will interpret in their favor. Skills like this only come with deal making experience.

More likely than not, you will leave money on the table if you go it alone. Recently we sold a company to a buyer who’s final bid was double their initial offer. Many times, we’ve increased purchase prices 20 to 50 percent through competitive bidding.

I will have more control.

When a buyer approaches you directly, they will have you sign their NDA, dictate discovery and meetings, and control the negotiation process (probably ask you to name a price). As their process unfolds, you will feel more out of control than you’ve ever felt in business, and you will be playing right into their hand.

If the time is right for you to sell, better to take a step back and get an M&A advisor on your team to evaluate your situation and run a professional sale process. Someone who will answer your questions, help you prepare, gain control of the process, and advocate for you throughout the process. Someone with years of experience, preferably in your industry, who has either been referred, done a good job for someone you know, or at least has good references.

With an M&A advisor on your team, not only will you get more in the end, but you are more likely to get a deal done, and get it done faster and more efficiently.

I will have a better relationship with the buyer.

The fact is, hiring an M&A advisor preserves your relationship with the ultimate buyer. We do the heavy negotiating, so you don’t have to, and we bring objectivity and expertise to your team.

You may be approached by representatives of a company with whom you have a relationship, and so far they’ve been very cordial. But don’t be fooled. Sure, they’re great people from a solid company, but there’s a reason they want to deal directly with you, not with an M&A advisor. They know they can buy at a lower price and on better terms.

Their strategy is to become your friend, keep competition out, keep you underrepresented, and control the process. Often, when going it alone, it is only after you have been worn down with discovery, due diligence and negotiations and are emotionally exhausted, that you see their final terms. It is also possible that by then TTM performance has declined because you and your team got distracted, and one or more key employees, vendors or customers has gotten wind of the potential sale, further eroding your negotiating position.

Of course, it is important to like and trust who you are selling to. An M&A advisor provides for that AND allows you to retain control, maintain confidentiality, see offers from other buyers, and secure the best deal for you, your partners and your family.

The truth is that, other than the fact that they will likely pay more, buyers like having a sell-side M&A advisor involved because it makes the rest of the process smoother. For example, the advisor will tee up a Confidential Information Memorandum (CIM) and data room that provides the information they need to confidently bid on the company. And rather than create financial models from scratch, they often just build on the models prepared by the advisor.

Do the right thing, get an M&A advisor.

To improve your financial outcome and have a more efficient transaction process, get an M&A advisor involved. The terms of your deal will soon be forgotten by the buyer. For them, time cures overpayment; but you don’t get a second chance to sell your business. You must get this right the first time!

A few years ago, a survey of lower middle market sellers found that the most valuable services provided by M&A advisors (investment bankers) were “managing the M&A process & strategy”, “structuring the transaction”, and “educating and coaching the owner”. Interestingly, the least valuable service was “identifying and finding the buyer”. Here’s a summary of that survey.

Another one our former seller clients, Brian, said something really insightful. He said, “Al, when I hired your firm, I had been CEO of our company for 20 years and was our best salesperson; but thankfully I recognized that selling our company was an entirely different thing.”

Al Statz is President and founder of Exit Strategies Group, a leading California-based M&A advisory firm with decades of experience selling manufacturing, distribution and service companies in the lower middle market. For further information, or to discuss a potential sale or acquisition, confidentially, contact Al Statz at 707-781-8580. This article was inspired by a post by Al’s friend and CIA colleague Mike Mensch an M&A advisor to insurance agencies across the U.S.

 

8 Situations in Which Setting an Asking Price for Your Business Makes Sense

/in , /by Al Statz

As M&A advisors, our objective in most sale processes involving a privately held lower middle market business is to help our client obtain the best price and terms available in the marketplace. In many of our sale engagements, we go to market without an asking price and use a broad or targeted auction format to elicit the best price and terms from multiple suitors.

When buyers feel competitive pressure, they are more likely to make their best offers in each round of bids. If a buyer doesn’t step up in a bid round, they risk being dropped from the process and losing out on the acquisition opportunity. Often, especially when strategic buyers are present, one or more buyers will place a significantly higher value on the business, sometimes a much higher value.

When should a seller consider setting an asking price for a business?

  1. When selling a smaller main street business. Buyers of these businesses are usually inexperienced financial buyers who need pricing guidance.
  2. When a seller is motivated to get a deal done quickly and is prepared to accept the first bonafide offer at a certain minimum price. Perhaps a seller has a health issue and needs to sell quickly.
  3. When similar businesses have been trading within in a narrow valuation range and the probability of obtaining a strategic premium is low. For instance, accounting firms trade in a fairly narrow range.
  4. When selling an asset intensive business having its primary value in the underlying tangible assets like inventory, vehicles, machinery and real estate. Hotels and wineries with marginal cash flows are good examples.
  5. When there are no interested buyers at the present time and the business will be advertised on several business for sale websites.
  6. When selling to management, employees, family or other related parties. Best practice is generally to present a price at Fair Market Value as determined by an independent business valuation.
  7. When the business is so unique that bidders need pricing guidance.
  8. When required to set a price for regulatory or legal reasons.

Pricing strategy is just one of the many services our team of seasoned M&A advisors provide during a business sale engagement. Optimizing client outcomes is the result of many things done right.

Al Statz is the founder and CEO of Northern California based M&A brokerage and business valuation firm Exit Strategies Group, Inc. For further information on this topic or to discuss a current M&A or valuation need, Al can be reached at 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A ADVISOR TIP: What happens to employees after I sell?

/in , /by Al Statz

Business owners often come to us concerned about employee jobs and retention issues after a sale. They worry that selling their business will lead to job losses if certain positions become redundant.

However, buyers today are often just as focused on retention issues. Your experienced talent can be a key driver of enterprise value, and buyers want to make sure these people stick around.

Your management team is the highest priority retention target, and deal structures will often involve some sort of retention bonuses or shareholder equity options for top leadership. Many buyers, particularly private equity, will consider management retention incentives a routine component of the deal.

While the remaining employee group is less likely to receive financial incentives, buyers ARE looking at culture, communication, and change management. Today, HR is more likely to be involved early in the process in an effort to help the organizations blend culture rather than impose new corporate will.

For advice on human resource issues in business sales, mergers and acquisitions, contact Al Statz in Exit Strategies Group’s Sonoma County California office at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Exit Strategies Group is a partner of Cornerstone International Alliance.

 

March 2021 – Now may be the time to sell your business

/in , , /by Roy Martinez

It typically takes 6-12 months (or more) to sell a business. So… if you want to sell your business in 2021, you really need to start now.

Selling a business has many steps:

1. Assess the business to establish probable selling price and validate your decision to sell
2. Create a plan
3. Build a business sale team – intermediary (Exit Strategies), attorney, CPA, others
4. Develop market materials – NDA, Executive Summary, CIM (confidential information memorandum)
5. Build a buyer prospect (BPro) target list
6. Outbound outreach to targeted buyer prospects
7. Business for sale website advertisement
8. Buyer prospect management and qualification (lead → prospect → qualified BPro → Offer)
9. Facility visits and buyer-seller meetings
10. Offers
11. APA – asset purchase agreement
12. Financing
13. Due Diligence
14. Escrow
15. Close

Exit Strategies’ role is to quarterback the seller team through this process – the entire process, from start to finish.

Right now many business owners are sitting on the sidelines (not selling). They are waiting to see what happens as the COVID-19 pandemic winds down. There may be a flood of seller interest starting in Q3 or Q4 of this year. If you want help selling your business, we encourage you to start soon, before that flood hits.

No time like the present.

Roy Martinez is a business intermediary with Exit Strategies Group, a leading California-based M&A advisory firm with almost two decades of experience selling small-to-medium-sized and lower middle market businesses. Prior to Exit Strategies Roy was VP of Finance at WineDirect where he completed two acquisitions. For further information, or to discuss a potential sale or acquisition, confidentially, contact Roy Martinez at 707-781-8583. This post was adapted from Roy’s response to a question from a Sonoma County small business owner.

Tax changes could accelerate business sales in 2021

/in , /by Al Statz

To complete deals in 2021, ahead of possible tax changes, owners and deal teams need to act fast.

With the Democrats in the White House and having the tie-breaking vote in the senate, it is likely that taxes on corporations and wealthy individuals will increase during this administration. When and how much are unknown. With COVID recovery as the administration’s immediate priority, many think we will have until 2022.

Biden has proposed raising long-term capital gains tax to 39.6% on income above $1 million, nearly double the current rate. That change would have a major impact on business transfers.

To help understand the impact, I ran some quick numbers … Say a business has $20 million in revenue in 2021 and is growing 5% annually. Assume a consistent 15% EBITDA margin and 6x price/EBITDA multiple at sale. To simplify the math, let’s assume a $0 basis and ignore state taxes and transaction costs.

Option A: The owner sells in 2021.

With EBITDA of $3 million and a 6 multiple, that’s $18 million enterprise value. At the current 20% capital gains rate, the tax liability would be $3.6 million, for net proceeds of $14.4 million.

Option B: The owner holds and grows the business, and sells in 2023.

With 5% annual growth, revenue is now $22 million and EBITDA is $3.3 million. At 6x, that’s an enterprise value of $19.8 million. At a 39.6% capital gains tax rate, the tax liability would be $7.8 million, for net proceeds of $12 million – a significant reduction from $14.4 million.

Under those conditions, a business owner would need to hold and grow the business for six years to yield the same after-tax proceeds.

Yes the owner would receive cash distributions during those years; however, they would also have the risk and headaches of owning the business and would have to delay retirement.

If you are a business owner and are thinking about selling and retiring in the next few years, start talking to your advisors now. It takes 9 months on average to sell a business, and preparing for the sale process can take some time. Work with your financial advisor to understand how much in assets and/or income you need to fund your retirement. Obtain a value and sale readiness assessment from an experienced M&A advisor like Exit Strategies Group. Then have your CPA advise on the current and potential tax burdens now and in the years ahead.

Al Statz is the founder and president of Exit Strategies Group, a leading California based lower middle market M&A advisory and business valuation firm. 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.

M&A Advisor Tip: ESG Diligence on the Rise in M&A

/in , , /by Al Statz

Companies that are able to showcase their Environmental, Social and corporate Governance (ESG) capabilities stand to gain a competitive advantage and make themselves more attractive to potential acquirers.

ESG issues cover a wide range of corporate practices that could include everything from environmental stewardship, health and safety policies, employee well-being, community support, to corporate culture issues.

In recent research from Datasite, 84% of dealmakers rated ESG as an “important/very important” M&A due diligence consideration. And 78% have terminated M&A discussions due to concerns about a target company’s ESG credentials.

We are definitely seeing buyers pay greater attention to environmental, social and corporate governance issues in our sell-side M&A engagements. From a buyer perspective, misalignment in these areas reduces valuation and increases integration challenges and costs. As a result, we are incorporating more ESG analysis into our company valuations and exit planning assessments, and making more of these types of disclosures in our offering memorandums.

For advice on exit planning or selling a business, contact Al Statz in Exit Strategies Group’s Sonoma County California office at 707-781-8580 or alstatz@exitstrategiesgroup.com.  Exit Strategies Group is a partner in the Cornerstone International Alliance.

 

M&A Advisor Tip: Be able to articulate your growth story.

/in , /by Al Statz

Buyers want to acquire businesses with profit AND growth potential.

Where is your business headed? Will it still be relevant in 5 years? Where will growth come from? How will it outperform its industry peers?

If you don’t have an expansion strategy at the ready, talk to an M&A advisor or an exit planner. We can uncover which parts of your business are most attractive to buyers. Then we can help you plan to increase value – whether that means continuing to operate the business on your own or taking on an equity partner to help you take it to that next level.

For advice on exit planning or selling a business, contact Al Statz in Exit Strategies Group’s Sonoma County California office at 707-781-8580 or alstatz@exitstrategiesgroup.com.  Exit Strategies Group is a partner in the Cornerstone International Alliance.

 

M&A Advisor Tip: How you know when it is time to sell

/in , /by Al Statz

It may be time time to sell your business when …

  1. Revenue has plateaued and you no longer see how to grow the business.
  2. You’re not sure how to reach the next level on your own.
  3. Your industry is consolidating around you.
  4. The current probable selling price of your business will satisfy your personal financial goals and a major economic or political shift could erode value.
  5. You’d like to diversify your assets and are ready take some chips off the table.
  6. Your interest and passion for the business are waning.
  7. You prefer to do something different with your money and/or time.

With smart preparation, you can ensure that your business is ready to sell when you are. It’s time to start the conversation.

For advice on exit planning or selling a business, contact Al Statz in Exit Strategies Group’s Sonoma County California office at 707-781-8580 or alstatz@exitstrategiesgroup.com.  Exit Strategies Group is a partner in the Cornerstone International Alliance.

Better to sell early in consolidation. Here’s why.

/in , /by Al Statz

Consolidation is inevitable in maturing industries.  As an M&A advisor working with owners of private wholesale distribution and manufacturing companies, one of the questions I get asked is whether it is better from a valuation perspective to sell early in a consolidation phase, or hold off.  My answer is always case-specific, but generally earlier is better, all else being equal.

Before I explain why, I want to point out that industry consolidation is not always at the top of a seller’s list of sale timing considerations. More important factors may be:

What is your exit time frame?

Next year or so?  Three to five years?  Five or more years?  The answer is often driven by how much money you (or a majority of the shareholders) will need to retire or fund your next venture. Obviously, as with any investment, the shorter the time frame, the more conservative one should be with respect to anticipated returns.  Maybe the value today isn’t quite what you think it can be in the not too distant future – but eliminating risk may be worth a lower price tag.

For a seller who either wants to stay and manage the acquired/merged business or help the consolidator in a strategic (e.g. corporate development) role, that tail of income is above and beyond the sale consideration. Sellers who prefer to buy a boat and sail to the Bahamas had better have a strong management team to lock that future strategic value down. If not, they will likely be passed on by the buyer for another acquisition with a stronger management team and lose out on that strategic value.

Is your company performing well?

Last I checked, fundamental financial performance was still king when it comes to acquisition values. If your business is performing well (relative to industry peers and alternative investments) and further improvement is likely, now may be your best opportunity to maximize value in an M&A sale process.  If not, you’ll have to decide if and how you and your management team are going to change that performance and by when. And, by the way, what is your track record of achieving past projections?

Is the macro-environment favorable?

Does the economic outlook portend for several more years of strong economic growth, or is there increasing uncertainty or even signs of an imminent slow down?

If the former is the case, perhaps you have time to continue to grow revenues and profit margins to increase value and better position your business for future sale.  If the latter is likely, are you prepared financially and mentally to wait it out indefinitely and hope to again consider achieving liquidity several years from now?  If that’s not an option, maybe now’s the time to take some or all of your chips off the table.

Conditions can change quickly for all sorts of reasons and you can be stuck, not just with a reduction in valuation, but closed private capital markets altogether.  M&A came to an abrupt halt in Q2 of this year and has only recently started showing signs of life in certain industries. And look at what happened in the wake of The Great Recession.

Why earlier is usually better.

Industries consolidate at different times and in different ways.  So, to make my answer more informative, let’s use the example of industrial distributors, where regional and national players have acquisition-based growth strategies. Driving consolidation are mergers and product line expansion by upstream manufacturers (suppliers) and both vendor reduction programs and consolidation by downstream customers.

  1. If I’m an aspiring consolidator/strategic acquirer, I’m probably willing to pay a nice premium for my first acquisition in a particular geography – to attract the best of the options available and secure that foothold ahead of my competitors.  Or I may want to make a statement with regard to the quality of organization I intend to build.  Hence, there is more of a strategic component in the valuation of earlier platform acquisitions, whereas later add-ons may be more simply about market development and earnings expansion.
  2. Further, the first couple of acquisition targets are likely to have more to say (and be credited for) relative to the manufacturers the consolidator aligns with.  As the map fills in, later acquisitions may be forced to discard certain lines and replace them with others to conform to the acquiring organization.  You can count on the acquirer considering the revenue loss, risks and cost of making those transitions when determining the value of an acquisition.
  3. Early on, there are likely to be more strategic acquirers in the market. As the market consolidates further, the number of viable strategic match-ups will decline, which may favor the remaining buyers and reduce the likelihood of a strategic premium for sellers. Eventually, the only option for the last few independents standing may be to sell to pure financial buyers – such as private equity groups (if the independent is large and profitable enough), management teams, families and private individuals.  For some owners these are perfectly acceptable options, for others they are not.
  4. Then there is the likelihood that consolidators will eventually have competitive advantages over independent operators – in terms of authorizations and terms with suppliers, access to proprietary products, lower administrative costs, ability to attract and retain talented employees, better access to growth capital, financial stability, etc.  To the extent true (which sometimes it is not — there are associated disadvantages) the market share and value of the smaller independents will gradually deteriorate.

Conclusion

Going to market early in a consolidation phase is likely to produce a stronger valuation than waiting around, all else being equal. However, when making exit plans, company owners should carefully consider shareholder needs, business performance and market conditions, in addition to what stage of maturity their industry is in.

*          *          *

Al Statz is the founder and president of Exit Strategies Group, a leading lower middle market M&A advisory and business valuation firm. For further information on this topic or to discuss a potential business sale, merger or acquisition need, confidentially, Al can be reached at 707-781-8580 or alstatz@exitstrategiesgroup.com.