Will appear on Seller pages – RECENT SELLER ARTICLES

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.

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.

Controlled Private Short Sale using UCC Article 9: a Winning Alternative to Bankruptcy Sale

Louis Cionci, ABVAs a business sale advisor with Exit Strategies Group, I help business owners obtain the best price and terms available in the market during a sale process.

We sometimes encounter situations where the owner would like to sell the business, but the business is in a distressed position with the following characteristics:

  • the fair market value of a business is less than the outstanding debt on the business,
  • the business cash flow does not support the current debt service
  • the asset value of the business is less than the debt owed on the business.

When a business is in a distressed position, there are few attractive exit options for an owner. Typical options include bankruptcy reorganization or liquidation. However, for a distressed but otherwise viable business, there is another exit option available that often produces a better financial outcome for the seller. That sale option is a UCC Article 9 Controlled Private Party Short Sale.

In this type of a sale, the business is sold to a single purchaser of the business with the intention of continuing to operate the business and the first position creditor agrees to accept the sale proceeds as satisfaction of their debt.

Winning Outcomes for the Exiting Owner

This structured sale process creates several winning outcomes for the exiting owner:

  1. A successful exit option for the owner when there was none
  2. Avoidance of bankruptcy
  3. Avoid taking on additional expensive debt
  4. Preserve the business and employee jobs the owner created
  5. Earn from the new company through an employment agreement
  6. The ability to resolve personal guarantees on subordinated creditor debt
  7. The structured sale process can be completed in 45-60 days

My goal is always to obtain the best exit strategy possible for my business owner clients. For company owners facing financial distress, this type of structured sale may offer the best exit option.

For more information on the Article 9 short sale process, or buying or selling a business, Email Louis Cionci at LCionci@exitstrategiesgroup.com or call 707-781-8582.

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.

Can you sell a distressed business?

We’ve been getting this question from more business owners over the last few weeks. As with many important questions, the answer is, “it depends”.

Financial distress occurs when a firm can’t generate enough profit to meet its immediate or long-term financial obligations. If your business is consistently accumulating debt, has unseasonable and sustained increase to accounts payable, or is falling behind on payroll taxes, it is likely distressed.

Buyer’s Perspective

The potential to sell a distressed business depends on the ability to attract a buyer that believes that, based on their skills, resources and synergies, they can address the cause of distress and create a profitable future for the business. A strategic investor would look to profitably integrate the target business into their own operations. Strategic investors that can take advantage of synergies are more likely to buy a distressed business than financial buyers. However, there are well-funded “distressed investors” that specialize in acquiring and turning around distressed businesses, in good times and bad.

When assessing an opportunity to acquire a compromised business, savvy buyers will consider many factors including the cause, severity and duration of the distress. The causes of financial distress fall loosely into four categories.

Four Categories of Distress

Often, financial buyer prospects will not be able to address “unmanageable” issues any better than the current business owner. This makes the business inherently difficult to acquire and turn around.

However, even in an extreme event like a world-wide Covid 19 pandemic, there are exceptions. For example, a strategic buyer may be able to redeploy the assets of a whiskey distillery that lost its restaurant and bar customers to manufacture a product in exceptionally high-demand, like hand sanitizer. A good broker or intermediary can help to identify these opportunities and bring buyer prospects that can capitalize on them to the negotiating table.

Manageable causes of distress may be event-driven (like loss of a key customer) which often results in an acute crisis for the business. Or there they may be systematic causes of distress (like poor cost structure) which slowly impairs the business over time, as per the diagram below. Left unresolved severe distress will eventually lead the business to bankruptcy.

Path to Bankruptcy

Generally speaking, the less enduring and less severe the distress, the easier it will be to find a buyer that can turn the business around. Initiating the sale process early enough is critical. Waiting too long is a common mistake.

The likelihood of selling a distressed business depends on the circumstances. If you own a business showing signs of distress and are considering selling, please contact me at awiskind@exitstrategiesgroup.com or (707) 781-8744 for a confidential, no-obligation assessment of your situation.

M&A Advisor Tip: You are Not Stuck with Your Business

Worried about a recession? Burned out? No energy to do this all again?

You are not stuck. Businesses sell in all market conditions, including in uncertain times like these.

Yes, we’re coming off a period of peak demand in M&A. Buyers were lined up for quality opportunities. And they stretched their target parameters in order to find something that would fit. But many of those buyers are still active.

There are buyers out there who will see this pandemic as an opportunity to get out ahead, while their peers wait-and-see. We might be in a temporary hold, but buyers will be back soon.

If you don’t have another recession in you, talk to us. You may have better options than you think. Solid businesses that were successful before the pandemic will certainly be successful again. Owners of distressed businesses should act as soon as possible.

For further information on today’s M&A market conditions to discuss a potential business sale or acquisition, contact Exit Strategies Group CEO Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

 

The Seven Stages of Selling Your Business

Smart preparation and planning can help you build a business that’s ready to sell when you are. Ideally, you’ll start preparing for sale early in your business life-cycle. The more you know about what buyers want, and what you can expect from the market, the more options you’ll have to exit your business and maximize value upon exit.

Seven Steps in the M&A sale process:

1. Status and strategy:  The first step is to check in with yourself and your business. Are you ready to sell? Is the timing right in terms of market conditions and business performance? Does the value of your business match your goals? What are your exit options and how might different scenarios affect your readiness?

We recommend a status and strategy check every couple of years. A regular Estimate of Value can provide important benchmarking information. It’s an affordable tool to ensure your business is on track to hit your value milestones. If not, we can show you how to unlock hidden value in your company while you still have ample time to make adjustments.

2. Valuation enhancement:  The value enhancement stage is really part and parcel of status and strategy. Sometimes we may suggest some changes that would make your business more salable and increase its value in the marketplace.

Depending on your goals, this might be a six-month period of minor changes or a multi-year strategy to make your business more desirable to buyers who will bring the most value. In an ideal world, we’d talk to business owners years before they actually wanted to exit.

Early planning allows you to better time the market so you can exit during a market peak. The more time we have, the more room we have to make meaningful changes that impact business value.

3. Preparation:  Before going to market, we work with the seller in an intense period of preparation and information gathering. We’ll recast your financials to highlight your cash flow and incorporate projections to show where the company is going. And, depending on your business, we may also recommend select pre-due diligence activities to uncover issue areas that might be of concern to buyers.

At this stage, we’re also doing exhaustive buyer research. Businesses in the lower middle market often have an enormous pool of potential buyers. Some of these potential buyers come from your contact lists, some come from our global network, and others from our sizable investment in data mining tools that allow us to target the most relevant, qualified set of possible buyers.

4. Going to market:  As we go to market, we’re focused on getting in front of the right buyers at the right time, telling your story, and protecting your confidentiality. It’s all timed and carefully packaged in a sensitive mix of marketing and preliminary negotiation that should, ideally, bring multiple buyers to the table in a competitive auction environment.

Part of the marketing process involves pre-qualifying would-be buyers, securing nondisclosure agreements, and tracking information access via a secure data room. At this stage, we’re carefully weeding out the tire-kickers and smoking out “buyers” who are more interested in competitive intel than a legitimate acquisition.

5. Negotiation:Generally, sellers get better results when negotiating with multiple qualified buyers. The market is hot and buyers know there will be competition for the best deals.

The key is to control the process with respect and professionalism. We provide clear, consistent timelines and expectations. There’s a lot of activity out there right now, and buyers will pass over deals with inexperienced advisors who might waste their time.

Purchase price is only one point of negotiation. Deal structure, financing, employment contracts, working capital, reps and warranties are just some of the bigger issues that factor in. We will negotiate with multiple potential acquirors until you find the best fit for what is important to you.

6. Due diligence to closing:  At this stage, your target buyer has a period of time to complete due diligence and confirm they want to proceed with the deal. Together, both the buyer and the seller teams will be working through legal and financial requirements to ensure everyone is on the same page, appropriately protected, funded, and ready to close on schedule.

7. Post-closing transition:  After closing, you’re usually involved in a transition period. How long you’re staying and in what capacity will have been hammered out in earlier negotiations, based on the type of buyer and deal structure you approve. Post-closing commitments may involve transitioning relationships, explaining trade secrets, and otherwise helping set the new owners up for success.

Sellers routinely tell us how surprised they are at how much time the sale process took and how glad they are they didn’t try to run a sale process on their own. The final year before a transition is a critical time when strong business performance matters most.

At the end of the day, you want to exit your business with peace of mind and satisfaction, knowing you got what you wanted and didn’t leave money on the table. Sellers who start planning early can sleep easy at night confident that they did the best thing for their business and their family.

It’s never too early (or too late) to have a conversation about maximizing value in your business. For further information contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Organize Your Financials

Buyers that pay top dollar usually expect to see clear, well-organized financial statements prepared according to generally accepted accounting principles (GAAP) and reviewed by a reputable CPA firm. If your business has more than $10 million in revenue, you should probably start investing in annual financial statement reviews at least three years prior to selling. Or, have a transaction-oriented CPA firm complete a “quality of earnings” report prior to going to market.

For a referral to a good CPA firm for your company or to receive further information, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.