Business Values May Not Decline

A recent survey of M&A advisors and business brokers showed that of all small and medium businesses on the market at the end of Q1, about 35% had closed (temporarily at least), 40% were operating at partial capacity, 4% had benefited, and 21% remained unaffected by COVID-19. Not surprisingly, advisors indicated that 46% of lower middle market deals were delayed at the end of Q1 and 11% had been cancelled altogether. For deal cancellations, 25% were attributed to sellers pulling out, 46% due to buyers backing out, and 12% due to changes in bank financing.

For business owners, the COVID-19 pandemic was like getting punched between the eyes. It knocked people down. And even when they could stand up again, their head was still spinning. But now, we’re starting to see the cobwebs clear.

Advisors like us saw an instant drop in buy-side activity in March. We had some new buyer conversations in April, but nothing solid. By early June, though, we started to see a resurgence.

Affect on Valuations

The question now, as buyers move forward with acquisition plans, is what will happen with business valuations?

For those businesses that remained fully active, their valuations will likely stay solid. Even businesses that partially closed or were negatively affected may find that valuations remain consistent. Businesses that were essential or able to pivot to an online or contactless model will be attractive to buyers.

And while declining cash flows typically do impact business values, we may see special considerations granted for the pandemic. Most businesses trade on a multiple of “normalized” historical cash flow or EBITDA. Normalizing financials includes making adjustments for one-time and unusual events. As buyers and lenders evaluate your business, they may accept normalization adjustments due to COVID-19, after your business recovers.

Affect on Deal Structures

In terms of deal structures, though, sellers who want to receive full value for their businesses should be prepared to carry more risk. Buyers will be seeking more of the purchase consideration in the form of seller financing, earn outs, or equity rollover.  Here’s what that might look like for sellers:

Seller financing. 

Seller financing can bridge a buyer’s resources with the value they see in your business. Essentially, it’s a loan from you, typically structured with monthly payments over a number of years.

In the past year, seller financing has hovered between 10-15% for Main Street deals, and 6% or less for deals over $5 million, per the Market Pulse Survey. The more perceived risk (e.g., COVID-19 closures and declines), the more seller financing buyers tend to request. So, we expect we’ll see these numbers climb in the year ahead.

Earnouts.

An earnout is a commitment by the buyer to pay you a certain amount of money tied to future business performance after a sale. If the business meets certain benchmarks, you receive additional value.  An earnout is a way of sharing risk.

Equity rollovers.

In an equity rollover, the seller maintains an ownership stake in the business. They roll a portion of their equity into the new capital structure in lieu of cash proceeds.

Rollovers are common with financial buyers, such as private equity groups. These buyers generally acquire businesses with the intention of holding them for five to seven years before reselling at a profit. Financial buyers often want sellers to receive a portion of their consideration as equity. It’s part of their financing model and it demonstrates the seller’s faith in the business.

Rolling over some of your equity gives you get a second bite at the apple when the business sells again. If the new owner successfully grows the business, that minority stake could be worth as much or more than your original sale.

Deal structures will also be driven by lending activity in the months ahead. If lenders pull back, both buyers and sellers will be motivated to reach alternative financing arrangements.

For further information on M&A market conditions or to discuss a current need, contact Al Statz, 707-781-8580.

M&A Advisor Tip: SBA debt relief incentivizes buyers

SBA debt relief is is a big incentive for buyers to move ahead with small business acquisitions right now.

The SBA will pay six months of principal, interest, and any associated fees that borrowers owe for all current … as well as new 7(a), 504, and microloans disbursed prior to September 27, 2020.

As an added incentive, SBA lenders have the authority to defer loan payments for six months. That means some buyers could acquire a new business and have almost a full year free of loan payments.

For further information on this topic, or selling a business, or financing a transaction, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

Hard Times: Great Opportunities

Don Ross, CBBThe effects of the Covid -19 Pandemic have been real and apparent.  GDP in the first quarter declined by 4.8% according to the Bureau of Economic Analysis and economists are predicting the American economy to contract by as much as 30% in fiscal year 2020.  Brutal.

So what is there to get excited about?

Opportunities are laying in the weeds – that’s what.

Entrepreneurs of newly acquired businesses are aggressively moving forward in their business pursuits, predicated upon two newly emerging dynamics:

  • Greater availability of resources
  • Evolving customer needs

In the case of resources:

  1. Capital is more plentiful and interest rates are at historical lows.
  2. Commercial landlords are becoming more negotiable as vacancies and available inventory increase. The service industry – finance, human resources and internet – related – for example, are encouraging more office at home and shrinking their office building footprint. Leases of restaurants and other retailer brick and mortar retail facilities are being renegotiated on the basis of net useable, “socially distanced” square footage rather than the conventional gross square footage.
  3. The labor pool, with unemployment projected to be as high as 25%, is a growing resource for unskilled and skilled workers.
  4. Liquidated furniture, fixtures and equipment are available at discounted costs.
  5. Existing supply chains anxious to get back to business are offering better terms. Newly emerging domestic supply chains are developing and eliminating over-reliance on unreliable overseas suppliers.

As for customer needs:

Given the change in the social landscape as a result of the Pandemic, entrepreneurs are forecasting the future needs of a society that arguably may have more time and less space.  Restricted travel and working from home, for example, may translate to a healthier environment and greater family life at the expense of travel overseas and large sports and music venues. I am reminded of my great grandfather who after World War I and the Spanish Influenza (and the Model T Ford) transitioned from the largest carriage making operation north of the Golden Gate Bridge to a successful tire and farm equipment dealership.

“If it works, don’t fix it” will be a hackneyed expression that will go the way of the buggy whip.  Entrepreneurs will re-invest and re-tool physical plant, operations and labor resources to meet the newly evolving needs of their customers.

Opportunities await those who are inspired by optimism, gifted with vision, and empowered by hard work.

For further information contact Don Ross, 707-778-0210 or donross@exitstrategiesgroup.com.

M&A in Pandemic, Not Panic

Business advisors are digging in right now, trying to figure out how COVID-19 will affect their clients. We’ve been talking with business owners, active buyers, and other advisors around the country.

Right now, we know that some M&A deals are getting delayed over routine process points. Certain bank approvals that used to happen in regular in-person review meetings are being held up as discussions take place via email chain instead.

Some businesses with real estate transitions are no longer able to get appraisers or environmental assessors out to their property. That’s a standard part of the process, and if it can’t happen the rest of the transaction must hold.

Of course, some deals are getting pushed out over more than procedural issues. Certain businesses, particularly anyone in travel or hospitality or key vendors to those industries, are getting beat up right now and will want to wait until conditions normalize.

But other business owners are unaffected, as of yet, and moving forward with plans to sell in 2020. We are still having conversations with potential sellers and prepping businesses for market. The key will be to mutually agree on when it makes sense to take actually “go to market” with each specific client.

Money to Invest

What we know is that many companies and private equity firms have been doing well for years. The private equity industry alone had $1.5 trillion of “dry powder,” that is capital to invest, at the start of the year. They still need to honor their commitments to investors and put that money to work.

What we’re hearing is that some buyers are putting all equity into deals right now. They’ll refinance later when things calm down, rather than wait on bank approvals to get things done.

That’s a sign of the times. The market has been very active up until now, and many buyers aren’t going to let up. In fact, some are getting more aggressive because they think they might find a better deal in the months ahead.

Considering Valuations

Herein lies the real question. Are sellers going to take a reduction in business value?

Imagine your company manufactured sanitizing wipes and was already in active negotiations with a buyer when the pandemic started. Your EBITDA is going through the roof with numbers your business has never seen before. But will the buyer adjust the price up for that extra cash flow, based on a one-time anomaly? My guess is no.

So, will buyers get away with asking sellers to take a haircut over a one-time dip? Perhaps a bit. Most likely we’ll see a shift in deal structures. Buyers will put in less cash at close, with slightly more hinging on earn outs or other contingencies based on future performance.

Still, given the competition in the market just a month or two ago, buyers will need to be cautious about pressing sellers for a bargain. The underlying, long-term value of most companies will remain the same, despite a temporary dip in cash flow. Savvy buyers understand that and will be judicious in their valuations.

What about right now?

If your business has been affected, and you still have slow times ahead, look at this as an opportunity to catch up on all the things you didn’t have time for before. Spring clean, if you’re allowed to be on site.

Document business processes. A business is more saleable, and will typically sell for more money, when there’s less risk involved. And there’s less risk when all systems and procedures are documented on paper instead of secreted away in the owner’s mind.

Think about how you can be training and growing your employees during this time. This might be a good time for online training, or even expanded team conference calls to discuss things like process improvements or strategic planning.

Focus on ways you can grow from the situation. Complete this sentence: The challenges we face today will help our business be __________. (If you can weather the storm and use this time for development, the answer could be: more valuable.)


For further information on M&A market conditions or to discuss a current business sale, acquisition or valuation need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

Market Pulse Survey: Deal Cancellations due to COVID-19

M&A advisors saw many of their business sale/acquisition deals delayed, put on hold or cancelled in March 2020 as a result of the COVID-19 Pandemic.  Who was cancelling these deals?  The following chart shows the results of this survey question from the latest Market Pulse Survey.

Presented by IBBA, M&A Source & in partnership with Pepperdine University

“Deal activity is always expected to constrict during times of uncertainty. Both sellers and buyers are being conservative right now, taking a wait-and-see approach,” said Scott Bushkie, managing partner, Cornerstone Business Services. “Once we have some clarity on when businesses will be allowed to reopen and in what capacity, some deals will continue to move forward.”

“For many business owners who had already put their businesses on the market, this is a temporary pause,” Bushkie continued. “Owners who were burned out or near retirement will still be looking to exit their business. The nature of that exit will look different now, but once you get so close to the finish line, it can be difficult to envision holding out for much longer.”


For further information on M&A market conditions, or to discuss a current business sale, acquisition or valuation need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

Exit Strategies Group Advises Health Concerns on Sale to Life Seasons

Transaction advisory firm Exit Strategies Group served as exclusive M&A advisor to ADG Concerns, Inc. DBA  Health Concerns on its successful sale to Life Seasons, Inc.

Health Concerns is at the leading edge of research in herbal medicine and is known for bringing the centuries of knowledge amassed in the Chinese herbal tradition to the West. Health Concerns was the first company to manufacture Chinese herbal products in the United States for practitioners. Today Health Concerns continues to research, test, and adapt traditional formulas by applying the science of modern biochemistry. As a result, Health Concerns can offer a variety of formulas for a full range of TCM treatment protocols as well as many products that address the specific conditions of Western patients.

Health Concerns President Andrew Gaeddert said, “We’re pleased to be part of the Life Seasons family. Selling to the right buyer was important to us. Their relationships, systems and financial resources will allow us to expand our technical sales force and systems manufacturing capabilities.”

“Exit Strategies did a tremendous job guiding us through the sale process. Their M&A process and deal-making knowledge really helped us navigate through the ups and downs of the sale process and were essential in achieving a successful outcome”, Mr. Gaeddert observed.

About Life Seasons

Life Seasons Inc., headquartered in Delaware, with operations in Texas, Utah, and Pennsylvania, is premier provider of natural health supplements. Life Seasons is an organization that was formed for the sole purpose of formulating medication for the health issues that arise throughout the different phases of life.

Life Seasons CEO Darren Peterson said “we are very pleased to add Health Concerns products to our product list. This acquisition extends our ability to provide wellness solutions to healthcare providers. We are excited to also have Andrew Gaeddert join our team with his extensive knowledge base and teaching skills.”

Mr. Peterson noted “I was very pleased to work with Louis Cionci at Exit Strategies Group. He helped guide the process with honesty and integrity, and his expertise in the M&A process helped the deal come to fruition.”

About Exit Strategies

Exit Strategies Group is a California-based merger and acquisition advisory and business valuation firm serving lower middle market companies in a variety of industries.  For further information about investment banking and M&A advisory services contact Louis Cionci , 707-781-8582.  Terms of the Health Concerns – Life Seasons deal will not be disclosed.

Begin with the Knowns and Unknowns

The world feels like it’s turned on its head right now. People are anxious, with good right to be. There’s so much we can’t predict about the weeks and months ahead. When planning your response, begin with what you know and what you don’t know.

What we know:

We’re in a pandemic, and social distancing can flatten the curve, meaning slow the rate by which the illness spreads. And, at this point, we can probably say this pandemic will be linked to an economic recession.

Start by responding to what we know. If you’re a business owner or in another position of influence, this begins with supporting social distancing efforts and following guidance from the CDC. For many, this means finding creative ways to keep your employees engaged and working so you can keep paying them for as long as possible.

Whether you’re shoring up remote work operations, or innovating your business model, remember your employees are anxious. Many of them are trying to balance work and childcare. Others are alone and will be feeling the isolation more keenly.

Now is the time to practice compassionate leadership. You can’t really know how much this situation is affecting each employee – who has vulnerable family members, who is most economically at-risk, and who has underlying mental health issues that will make this situation more difficult to bear.

Prioritize social connection as part of your workday. Plan virtual coffee meetings or happy hours via conference call. Managers, make it a point to check in on employees. Find out how people are doing, and not just in terms of work and technology. Ask how they’re feeling. Find out how the separation from the office is affecting them and what else is raising their anxiety.

Communicate. Rumors fly in uncertain times. Give your employees clear, reliable information. If you don’t know what your plan is yet, it’s okay to say that. Employees need to hear from you, and even those “we’re still considering our options” messages can head off misinformation.

What we don’t know:

The unknowns are many. We don’t know how long this situation will last. We don’t know the depth of the economic impact. So how do we respond in uncertain times?

Madison, Wisconsin based futurist Rebecca Ryan recommends scenario planning. Map out your worst fears, your highest aspirations, and your reasonable expectations (what feels most plausible over the next 18 months).

Do this together with your leadership team. Part of the value, as Ryan explains it, is stating your assumptions to the group. Which possibilities are you putting in the plausible zone, rather than the best- and worst-case scenario boxes?

Any scenario is possible, so spend time on each. Try to imagine how your business will respond to each possible future. A few weeks or months from now, you will have more information and can revisit your scenarios again.

If you tend toward pessimism, this kind of scenario planning may help lift you up out of fear by forcing you to imagine positive outcomes. That slight lift, that shift in perspective, can be extremely beneficial in times of stress.

But more than that, scenario planning helps you make thoughtful decisions in uncertain times – times when informed decisions aren’t always possible.

 

COVID-19 Exit Planning Insight: Keep a Journal

Al StatzThere’s no shortage of information out there right now on how company owners and CEO’s are responding to COVID-19. [By now, leaders have taken steps to survive and fight another day. Most now understand what business will look like for them until restrictions are lifted, and they’re formulating plans to thrive again post-pandemic.] With few companies going to market during this crisis, our insights will focus on exit planning, acquisition opportunities and non-elective sales for a while.

Today we have a simple but powerful suggestion for owners who wish to sell in the next three to four years: Keep a COVID-19 Journal.

Why a COVID-19 Journal

When you sell a business, the buyer’s financial diligence usually focuses on the past three years. Like it or not, what happens during this COVID-19 disruption will generate lots of pointed questions. It’s unavoidable. Your M&A advisor / investment banker will help you tell your unique story, but you’ll need to have the supporting facts and data.

Keeping a COVID-19 journal means tracking and documenting key events, management decisions and business performance data, in real time, during this crisis. Key events and decisions are those that will have a substantial impact on current or future business performance or risk. Decisions should be well documented, including timing, rationale and expected results.

The more data and details you have the better your story can be told. Don’t try to remember it all. Some of this data may not be captured in or stored by your ERP system. For example, you may need to be manually recording weekly RFPs, quoting activity and order backlog.

Examples of Key Events and Decisions:

Financial/Liquidity

  • draw-down on the credit line
  • renegotiated bank covenants or asset-base
  • cancelled all company credit cards
  • sold surplus assets to generate cash
  • other key cash preservation actions taken
  • government subsidies received and how accounted for

Customers

  • change in key customer payment terms or collections
  • major order cancellations
  • downstream verticals shut down and aided by crisis
  • customer loss or gain due to or during the crisis
  • impact on orders, sales and accounts receivable

Marketing & Sales

  • implementation of new remote/online sales strategies
  • implementation of new marketing initiatives
  • RFP inquiries and quoting activity

Suppliers

  • renegotiated payment terms
  • changed payment practices
  • notified that critical components unavailable
  • major order cancellations
  • major supply chain interruptions and changes
  • renegotiated lease or mortgage payments
  • impact on accounts payable

Employees

  • salary reductions, job-sharing, furloughs and layoffs (and severance paid)
  • major staff redeployments
  • organizational restructuring
  • new hires/rehires – impact on payroll

Products & Services

  • diversified (new product line or service) to generate sales
  • decision to stop replenishing certain inventory (to preserve cash)
  • major resource shifts
  • suspension of a product development initiative

Strategic/Operations

  • shifts in target markets, products, services or customers
  • major re-positioning or change in business model
  • permanent operational changes made
  • a new strategic alliance
  • acquisition of a distressed competitor

Action Steps

Start your journal today and cover historical events as best you can. Assign someone to take detailed minutes of weekly or daily executive team meetings and compile KPI’s. Schedule time each day to summarize key events, decisions and performance metrics.

One of my clients finds writing this journal to be “therapeutic, amid the chaos”. And he’s looking forward to telling his unique COVID-19 story to prospective acquirers (and their lenders).

As a result of this surprise economic crisis, acquirers may be adding “Evaluate the potential impact of future unpredictable business disruptions” to their acquisition due diligence check lists. We’ll soon find out.


If you are wondering what information to include in your COVID-19 Journal, Exit Strategies Group’s M&A advisors and valuation experts can provide invaluable insights. Don’t hesitate to call if we can help you prepare your journal, make a strategic acquisition, or prepare for a post-pandemic exit.

Previous COVID-19 M&A Updates:

COVID-19 M&A Update: Survival Mode

As of 4/6/2020

The fact is, no one knows when this public health crisis will be resolved or when commerce will return to normal.

The fact is, most businesses are struggling. They have scaled back or stopped operating. Leaders have taken quick decisive action to stem losses and preserve cash. They are taking advantage of government assistance. Luckier ones are less affected; some are thriving. Indeed, these are unprecedented times.

Affected company leaders are taking stock.

Business owners and management teams are taking care of their employees first, as they should, and reaching out (by email, phone and video conferencing) and staying close to customers and suppliers. They are remaining calm, intentionally limiting their media intake. They are monitoring KPI’s and dashboards more frequently than ever – hourly or daily instead of weekly or monthly. They are getting a handle on what business is going to be like until restrictions are lifted.

And they are looking ahead.

They are formulating strategies to strengthen their market position and thrive when we come out the other end of this. They are revising their quarterly and annual business plans and executing on those plans. Many are working on systems, marketing, policies and procedures, and picking up some of those “B” projects that fell by the wayside.

Exit Strategies Group is here for you. Please don’t hesitate to call us if we can help you navigate this crisis, or just to touch base.

All the best to you, your families and your companies,
The Team at Exit Strategies Group

Exit Strategies Group Joins Cornerstone International Alliance

Exit Strategies is pleased to announce that we have combined resources with some of the best independent M&A firms to deliver more value to lower middle market business owner clients.

Cornerstone International Alliance (CIA) is a global alliance of independent M&A firms. Formed in early 2019, it is the world’s only such alliance focused exclusively on the lower middle market. Member firms are selected for their extremely high integrity, extraordinary ethics and extensive mergers and acquisitions experience.

Alliance members share industry expertise, regional knowledge, transaction experience, contacts, resources and best practices. This exclusive partnership will allow Exit Strategies to provide company owners, strategic buyers, private equity firms and trusted advisors with more resources and more expertise in a wider range of industries. It will help us assemble the best possible team for every client engagement.

To learn more about CIA, visit www.cornerstoneia.com or give Al Statz a call at 707-781-8580.