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Market Pulse: Selling Price vs Asking Price

How much do businesses actually sell for as a percentage of asking price?  The following chart shows the results of this survey question from the latest Market Pulse Survey.

Presented by IBBA and M&A Source in Partnership with Pepperdine University

The groupings in the chart are selling price ranges for deals, in US dollars.  It should be noted that most $5-50 million enterprise value companies go to market without a price.

Each quarter, the M&A Source and IBBA (International Business Brokers Association), in partnership with Pepperdine University’s Private Capital Markets Project, publish the results of a survey of North American lower middle market M&A advisors and business brokers, called the Market Pulse Survey.

Feel free to contact Al Statz with any questions, at 707-781-8580.

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

When you no longer have the fight, get out of the ring.

Burnout is the second leading reason business owners sell, after retirement. Many business owners hold on too long, long after their drive has gone. When that happens, the business stops growing or even starts going backward – and the value of the business declines.

The best time to sell is when you’re energized and motivated by your work. If you see burnout on the horizon, find ways to reduce your burden or start preparing to sell your business.

For further information contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

Selling Your Business to a Family Office

Business owners looking to sell their business, or attract an investment partner, may want to add family offices to their outreach strategy. These private family firms, established by high net worth families to manage their wealth, can offer unique advantages.

While family offices aren’t new, they have become more active in M&A in the last decade. In the past, family offices may have looked to private equity firms as a resource to grow their wealth, but new trends have many family offices investing directly in private businesses.

For a family office, direct investment can offer several benefits such as higher returns, greater control, and the ability to invest in industries that best fit their family expertise. By the same token, family offices can prove attractive to certain business owners and sellers. Here’s why:

Patient Capital

Private equity firms typically have five to seven years before they need to resell their investments and deliver a return to investors. But family offices aren’t limited to specific timelines and can hold their investments longer.

That buy and hold strategy can be a good fit for business owners looking to take some chips off the table without exiting entirely. A longer investment period gives them more time to grow the business with support from their new, prestigious partners. Sellers concerned about employee job security, community presence, and legacy issues may also prefer a longer time-frame.

Industry Specialists

These families made their fortune in business, and they tend to invest in the industries they know best. For business owners looking to retain a portion of their business, these buyers can provide untold value in terms of connections, influence, and expertise.

Less Controlling

Some family offices have a reputation for being somewhat hands off. They’ll provide resources to help your business grow, while generally taking a more flexible approach to oversight.

Often, family offices aren’t interested in replacing management. This can be good for owners who will retain equity and continue to lead. But it means that sellers looking for a fast exit may not be the right fit (unless you’re leaving a proven leadership team behind).

The takeaway is that family offices can offer a better fit for business owners looking at a variety of exit options. If you’re selling, talk to your advisor about adding these groups to your target buyer list.

Be aware that these groups can be hard to reach on your own. Many family offices operate under the radar. They don’t actively promote themselves or announce they’re searching for acquisitions. What they do is build relationships with advisors known to present quality investment opportunities.

To access these groups, work with an M&A firm with widespread industry connections, a large buyer database, and access to exclusive M&A research tools.

Contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com for further information on what these family offices are looking for and how to best approach them.

The Four P’s of Selling a Business

Marketers sometimes talk about the four p’s (product, placement, price, promotion) of marketing. Known as the “marketing mix,” the emphasis a company puts in each area can have a direct impact on sales and profits.

And while selling a business is not like selling a product, we can use this idea to think about how certain factors impact a company’s value and sale readiness. The right mix will make your company more desirable to buyers and more likely to attract multiple competitive offers.

People

Human resources plays a critical role in your business’s saleability. As an owner, you need to be replaceable. Ideally, your business should continue to operate and grow even if you aren’t a part of day-to-day operations.

In the lower middle market, you’ll gain extra value by having a management team or key employee group that can run the business with little to no input from you the owner. Buyers want to know they can maintain your success even after you’re going.

When talking up your business to would-be buyers, talk up your people. Say “they did that” or “we did” whenever possible, instead of highlighting your own solo contributions.

It may seem counter intuitive, but the less your company needs you, the more it’s worth. Because if you truly are the only one with all the magic dust, your business is a risky proposition and will be harder to sell.

Performance

Generally, buyers want a business with a stable record of profits and preferably a growth trend. They will typically look at the last three years of financial performance, paying attention to the last 12 months.

A business is generally worth a multiple of its cash flow, specifically EBITDA adjusted for the owner’s salary and benefits. Drive cash to the bottom line, and avoid hiding unnecessary perks inside your financials, particularly in the last few years before a sale.

Look at cash-related issues like working capital, capital expenditures, fair market rent, and fair market payroll. If you’re underpaying yourself in terms of rent, your cash flow might not reflect the new owners cash flow. And if you’re working 80- hour weeks (longer than any paid manager could be expected to work), your current salary might not be an accurate reflection of the necessary replacement salary.

Cash flow is one of the most important numbers buyers will use when valuing your business. Make sure yours is accurate and tells a good story.

Potential

Buyers want a growth story and a vision for the future. They want you to sell them on the company’s growth potential.

You may be proud of what you’ve built, but it doesn’t do any good to tell would-be buyers that the business is doing “the best it possibly can.” That means there’s no where to go but down. Spend some time thinking about growth opportunities and what you might do if you had more energy, more capital, or were willing to take on new risk.

If you don’t have a vision for growth, talk to an advisor. Different buyers bring different assets and advantages to the table.

Price, aka Value

Not every company can go to market without an asking price. But for the ones that can, a no-price strategy gives the seller an advantage.

Ask two professional valuation experts to determine your business value, and you’ll probably get similar numbers. But ask two or more buyers to value your business, and their target price may vary significantly. That’s because your business is worth more or less to different buyers, depending on their motivations, resources, and business synergies. How they value your business will depend, in part, on how badly they want to reach their goal.

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

M&A Advisor Tip: Drive Cash to the Bottom Line

We all like to save money on our taxes. But hiding personal expenses in your tax return can do more harm than good. Most businesses are purchased as a multiple of cash flow (roughly EBITDA less capital expenditure needs, less increases in working capital as the company grows). If buyers and lenders can’t find your personal expenses in the financials or if the adjustments are so severe they border on tax evasion, they’ll be suspicious and possibly scared off.

It’s in your best interest to drive cash to the bottom line in the last 2-3 years before a sale.

Take a hit on taxes for a few years to get a much larger return when the company sells.

For further information on this topic or to discuss a potential business sale, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: When the Kids Don’t Want the Business

Many business owners are surprised to find out their kids don’t want to take over.

Maybe the kids never wanted it. Or maybe they changed their mind after working in the business for a while. Either way, some business owners get caught having to make quick decisions about transferring their company to a third party.

Our advice: Talk to an M&A advisor, EVEN IF you plan to sell to your kids.

It can take years of planning to position a business for a successful sale, internal family transfer, or management buyout. Working with an advisor gives you options and a backup plan. We can help you create a transition plan that fits your goals … and your kids’ goals.

For further information on this topic or to discuss your exit options confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: What Does It Feel Like When You Sell?

“Immense satisfaction tinged with loss.” That’s how one business owner described selling his business.

After putting years of hard work into building a business, many owners have a hard time letting go. Emotions run high, and those emotions can lead to some regrettable decisions.

As advisors, part of our role is to help you make sound choices when it comes to selling your business. We can help you sort through your emotions and your goals to find the right buyer to carry on your legacy, at the right time.

Smart preparation and planning make it easier to find the right fit. It doesn’t matter if you’re not ready to let go yet. Let’s start the conversation today.

For more information contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

Building Value Means Building Leaders

It’s the New Year, that time when many business owners make a fresh resolve to develop their business. For some, that means updating equipment and driving sales. But others will focus on something more personal and possibly more pivotal: developing their leaders.

GF Data shows that a solid management team will increase the valuation multiple. For smaller businesses, the quality of your management team can be an even bigger factor, influencing whether your business sells at all.

Here are five ways to develop your managers and bring out their best:

1.  Coach, Don’t Rescue

A lot of leaders are “rescuers.” We care about our people and we want to see them succeed. But instead of onboarding correctly or coaching, we take over for them every time they have a problem.

Try coaching your team member to a solution. Help them find the courage to voice their own suggestions.

Questions like, “What do you think you should do?” often yield “I don’t know” answers. But a simple reframing can take the pressure off and encourage people to share their own thinking. If you’re trying to get someone past “I don’t know,” try one of these approaches:

“Suppose you did know. What’s a possible answer?”
“What if you knew you couldn’t fail?”
“Who’s the smartest person you know? What do you think they would do?”
Getting people to reframe the answer from someone else’s perspective can take away some of the discomfort we all feel about being wrong. What’s more, it helps them stretch and develop their own capabilities and confidence.

2.  Set a No-Penalty Zone

Create an environment where it’s okay for people to make mistakes. Begin by setting boundaries (wide boundaries, preferably) around decisions and actions they can take on their own. As long as people are acting ethically and in adherence to your corporate values, support the choices they make.

You can always coach people and explain why you would have made a different decision, but don’t impose any negative consequences. It’s better to have a proactive team than people who sit in a state of paralysis waiting for you to sign off on a course of action.

3.  Assess Your Team

Behavioral assessments can go a long way toward employee retention and development. From MBTI to DiSC, Strengths Finder, and others, tools like these can help your team identify their unique gifts and areas for improvement.

Invest in a business psychologist or other professional facilitator to take your team through the assessment. With the right guidance, the results can help improve team dynamics and equip you to be a better coach to each individual on your team.

4.  Give them a Voice

Give people a place at the table. For a long time, I made the vast majority of my business decisions based on what I thought was best for the company. But over the last few years, I’ve gotten better at listening to my internal team.

My management team has helped me challenge my assumptions, develop new initiatives, and most critically for me, stay the course on a promising business plan instead of following my next big idea.

5.  Get Out

We’re working with a husband and wife team who haven’t taken a vacation in five years. That’s not great on many levels. I don’t know if they haven’t developed their people or if the issue is more about an emotional, personal need for control.

If that sounds familiar, start slow. Take a long weekend away. Leave early on Fridays. Build up your ability to step away. As you leave your team in charge, their confidence will grow, and so will yours.

In terms of value, the ideal goal is to work yourself out of the business. Get yourself to a place where you can take extended vacations. Transition your role from working IN the business to working ON the business.

Buyers want businesses with transferable value. That means you need a leadership team that can sustain operations and, better yet, drive growth, without your direct involvement. If the business can’t survive without you, its value declines.

At the end of the day, building out your management team is a critical investment in your business. If it makes your life easier in the process (and it will), that’s just a nice side bonus.

For further information on what buyers look for in a management team, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Earnouts Break Valuation Deadlocks

Earnouts are often used to bridge a valuation gap between a buyer and a seller. It’s a compromise, of sorts, to break a purchase-price deadlock when the seller wants more than the buyer is willing (or able) to pay.

In an earnout, a portion of the purchase price is paid out later, based on the company’s financial performance over time. Earnouts typically last from 1 to 3 years, subject to negotiation.

Some earnouts include acceleration provisions, stipulating that payments are due immediately if certain events occur e.g.,:

  • Buyer breach of post-closing covenants
  • Termination of key employees
  • Sale of the company or a substantial reduction in assets

These provisions are designed to protect the seller from changes that would harm the company/buyer’s ability to meet their earnout targets.

For further information on earnouts and other common M&A deal provisions, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

‘No Shop’ Protects Buyer Investment in M&A

A no shop provision is an important part of M&A transactions. Also known as an exclusivity clause, a no shop clause prohibits the seller from sharing information or negotiating with other would-be buyers for a specified time frame.

Prior to this, the seller is negotiating with several buyers. The goal is to entertain multiple offers and figure out which buyer will ultimately provide the best deal for the seller.

Once the seller has identified their preferred buyer, both parties sign a letter of intent (LOI). At this point the buyer will begin more comprehensive due diligence to validate their assumptions and make sure the business is everything they believed it to be.

Due diligence is an intense process that could include FBI background checks, equipment appraisals, environmental studies, and more. Some buyer groups conduct industry studies or hire a consultant to call the business’s customers under the guise of a confidential customer satisfaction survey.

Financial due diligence will be a massive focus, of course. Securing a quality of earnings report could cost anywhere from $15,000 to $150,000, depending on the size and complexity of the target acquisition.

Then there’s the necessary legal fees. The buyer’s attorney will draft the asset or stock purchase agreement. This takes the framework of the LOI (typically five to seven pages) and puts it into comprehensive legalese (approximately 50 to 70 pages).

I’ve seen attorney fees as low as $15,000 for a small, routine deal and as high as $250,000 for a lower middle market acquisition (average range $30,000 to $50,000). Private equity firms, which make up a major buyer category, are not shy about spending fees to make sure they have the necessary protections in an acquisition.

At the end of the day, it might not be uncommon for the buyer to spend $100,000 to $500,000 in total transaction costs. That’s why most buyer groups are adamant that they get a no shop provision for 30 to 90 days.

That exclusivity period is the protection they have, ensuring that if they’re going to spend time and money going down this path, the seller is not going to negotiate the deal out from under them and sell to another group.

From a seller’s standpoint, a no shop period can help limit buyer’s remorse or post-deal litigation. If multiple buyers are trying to be the first to the closing table, buyers might skimp on due diligence. Rushing due diligence can lead to unexpected discoveries after the deal is closed, and that can lead to conflict and litigation.

Conversely, long no shop periods are not in the seller’s best interest as there is always a risk that a deal will fall through in due diligence. A shorter no shop period gives sellers a better chance of recapturing interest from a competing buyer if the transaction is terminated.

For further information on exclusivity and other common deal provisions, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.