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Exit Strategies Advises Olympus Controls on Sale to Applied

PORTLAND, OR (August 22, 2019) — Exit Strategies Group, Inc. is pleased to announce that Olympus Controls Corp. has been acquired by Applied Industrial Technologies.  We represented Olympus and its shareholders as their exclusive M&A advisor.

Established in 1998, Olympus Controls is a leading distributor of world-class machine automation products focused on assemblies and engineered solutions. Olympus specializes in motion control, robotics, machine vision, sensor and IIOT technologies, and is one of the largest and fastest-growing automation technology centers in the U.S., with 80 skilled employees serving 12 Western states from 5 office locations.

Clients look to Olympus Controls for advanced technologies as well as sophisticated application support, electromechanical assembly, custom system design and integration, and software development. Olympus automates machines in many industries including life sciences, pharmaceutical and biotech, semiconductor, electronics and display, food and beverage, warehousing and third-party logistics, cloud services (data centers), packaging, machining/forming/3D printing, aerospace and others.

Applied Industrial Technologies (NYSE: AIT) is a leading value-added distributor of power transmission products, engineered fluid power components and systems, flow control solutions and other industrial products, with revenue exceeding $3 billion. The acquisition of Olympus serves to establish an automation technology platform.

Scott Hendrickson, Olympus founder and CEO, noted “The synergy and strategic fit between Applied Industrial Technologies and Olympus Controls was way too strong to overlook. We can instantly leverage our shared client relationships and unique Engineered Solutions business models to make an immediate and impactful dent in the machine automation market. Our team has always had a high degree of respect for Applied’s dominance in the fluid power space and Olympus Controls brings an exciting opportunity for them to strengthen and expand their technology offering in motion control, machine vision, robotics and industrial networking.”

“Engaging Exit Strategies to help us navigate the sale process was a great decision. Al Statz and his team brought a wealth of experience, and provided outstanding advice, service and value from start to finish.” Mr. Hendrickson added.

Exit Strategies is honored to have helped Olympus shareholders and management achieve this outcome. We congratulate both companies and look forward to seeing them innovate and grow in the years ahead.

We see interest in industrial automation and robotics acquisitions, recapitalizations and mergers remaining strong for some time as the industry grows and consolidates. Trends driving growth in automation include the need to improve productivity and quality in the face of scarce skilled labor and rising labor costs, increased use of electronics and internet connectivity in all types of products, continued miniaturization of electronics, rapidly-changing consumer tastes, new warehouse and data center applications, and recent advances in enabling technologies such as vision, 3D sensing and AI. U.S. Companies have no choice but to invest more in automation in order to compete on the global stage, or they risk extinction.

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Exit Strategies is a California-based M&A brokerage and business valuation firm serving lower middle market U.S. companies in several industries including automation distribution, system integration and manufacturing.  For further information about Exit Strategies’ services, contact Al Statz at 707-781-8580.  Terms of the Olympus-AIT deal will not be disclosed.

Profit from Intangible Assets in a Business Sale

The sale of a business includes intangible assets. This article explains what intangible assets are and how articulating, supporting and protecting them enhances business sale outcomes. Let’s get started.

What is an Intangible Asset?

Intangible assets are things that are non-physical in nature that you can identify, describe, document (e.g. a contract, list, logo, drawing or schematic) and, most importantly, transfer. Intellectual property is an example of an intangible asset.

The Financial Accounting Standards Board (FASB), in its ASC 805 standard for reporting of Business Combinations, separates intangible assets into these categories:

  1. Marketing-related: such as trade names, trademarks, non-compete agreements and URLs
  2. Customer-related: customer lists, contracts and relationships, order backlog
  3. Artistic-related: works of art, magazines, books and articles
  4. Contract-based: permits and licenses, licensing and royalty agreements, franchise agreements
  5. Technology-based: trade secrets, databases, patented technology

Do all intangible assets have value?

Just because an intangible asset exists, doesn’t automatically give it economic value. To have value it has to produce some form of economic benefit. For example:

  • Generate operating or licensing income
  • Reduce operating expenses or future capital spending
  • Reduce business risk

Of course, an intangible asset must be transferable in a sale to have value to a new owner. (Intangible asset valuation is a topic for another day.)

Goodwill is excluded from the above list because it is considered to be a blended residual asset. Goodwill is influenced by factors such as high profit margins, barriers to market entry, competitive advantages, a regulated protected position or lack of regulation, longevity in the market, a trained work force, etc.  Synergistic value associated with premiums paid by strategic buyers are often considered “blue sky” value above a “justifiable” goodwill value.

Document to Impress

After you take an inventory of your company’s intangible assets, the next step is to be sure that the key ones are documented in a manner that will satisfy buyers. For example, support for customer-based intangibles may include: a well-populated CRM database, master supply agreements, vendor quality audit records, open quote files, important correspondence, sales and contribution margin by customer history, AR aging schedules, purchase orders, etc.

Protect Your Assets

While documenting your company’s primary intangible assets, you are likely to uncover some that need better protecting through public registration (e.g. patents), securing or improving contracts, or better restricting access.

For many of our clients, trade secrets are their most valuable intangible assets. Suppose a significant portion of your company’s profitability is attributable to a proprietary production process. Ask yourself these questions: Is the process perfected and well documented? Are you taking appropriate measures to keep the process secret? Is access sufficiently limited? Do you have appropriate data security? Do you have non-disclosure agreements with third parties?  Do you have confidentiality agreements with your employees? If not, you know what to do.

Capitalizing on Intangible Assets in a Sale Process

Your intangible assets become the focal point of the Confidential Information Memorandum (CIM) prepared by your M&A advisor. The CIM can also articulate those intangibles that are underutilized and have potential to produce economic benefits to a new owner. We use our knowledge of your intangible assets to decide which target strategic acquirers are likely to derive the greatest benefit from them. We tailor our outreach strategy and communications accordingly. In the end, this generates more interest and better offers for the company in an M&A auction process. The M&A advisor can also advise on how and when to disclose sensitive details about key intangible assets during the discovery and due diligence phases of a merger or acquisition process.

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An investment in perfecting, identifying, documenting and protecting intangible assets is usually well rewarded in a sale. Exit Strategies helps clients take full advantage of the intangible assets in their businesses when going to market. If you’d like help in this regard or have any questions, you can reach Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Phase I Environmental Assessment in M&A Transactions

A Phase I environmental site assessment is commonly required by buyers and lenders in merger and acquisition transactions that include commercial real estate. One may even be called for when the target company (seller) uses or stores hazardous materials at a leased facility.

Sellers are generally rewarded for conducting a Phase I assessment before taking a deal to the marketplace. Understanding environmental risk allows sellers to argue for a higher price and increases the likelihood of closing a deal. This article explains why.

What is a Phase I Environmental Assessment?

A Phase I environmental site assessment (ESA) consists of a thorough inspection of a commercial property and research into its current and historical use to identify potential environmental contamination liabilities. These assessments are conducted by independent, certified and trained professionals. The environmental expert produces a written Phase I report. When site contamination is found to be likely, a Phase II investigation follows, which involves taking soil, groundwater or material samples.

What All Buyers Want

When acquiring a business, buyers want to understand the potential liability for environmental contamination on facilities owned or operated by the target company; any past non-compliance with environmental laws and regulations; and costs to comply with any post-closing environmental compliance obligations. An understanding of their potential liabilities as a parent or successor dictates their acquisition strategy.  The scope of a buyer’s potential liability for existing environmental contamination issues can influence the basic structure of the transaction — asset or stock purchase — and proposed purchase agreement provisions.

How Sellers Benefit

Obtaining a Phase I report before putting a business with real property up for sale provides several benefits to sellers. It flags potential problems that the seller can mitigate or remediate in advance. If contamination is reported to be present or likely, the seller can better compare the value of bids and make better decisions regarding indemnities and potential insurance products. Having a Phase I report increases a buyer’s comfort, and results in better offers, less renegotiation and a smoother LOI-to-closing process.

Al Statz is founder and President of business valuation and M&A brokerage firm Exit Strategies Group, Inc., which has offices in California and Oregon. For further information on this subject or to discuss a valuation or M&A question or need, confidentially, you can reach Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Roundup of Recent Sale Transactions

Sitting down and writing quality articles on business valuation, exit planning, mergers and acquisition strategy has taken a back seat this year, thanks to a strong M&A market. In this post I will recap many of the transactions for which Exit Strategies (ESGI) provided sell-side advisory services during the first half of 2019.

I haven’t included deals that we were asked not to announce. Nor have I included the internal buy-sell transactions, management buyouts and generational transfers for which ESGI provided an independent business valuation. As always, deal terms are not disclosed to respect the privacy of our clients.

Sale of Eldercare Services to Home Care Assistance

Eldercare Services is one of the San Francisco Bay Area’s top professional eldercare management and home care services providers. The baby boomer owners of ES were looking to turn their business investment into cash (i.e. “liquify” their investment), maximize value and retire. Home Care Assistance is a leading provider of home care for seniors in 150 regions throughout the United States, Canada, Puerto Rico and Australia. (service, health care)

Sale of DC Precision to Tecan Group

DC Precision, established in 1999, manufactures high precision plastic valve assemblies for life science OEMs and metal products for Silicon Valley high-tech manufacturers. Our client was ready to pursue other business interests. Tecan Group is a Swiss manufacturer of automated workflow equipment for pharmaceutical and biotechnology companies, university research departments and diagnostic laboratories. (contract manufacturing, CNC machining, proprietary technology, turn-key assembly)

Sale of Precision Asphere to II-VI Optical Systems

Precision Asphere produces aspherical optical components (lenses and mirrors) using proprietary surface-forming technology. The majority owner wanted to retire. II-VI Optical Systems develops and produces highly engineered materials and material systems for medical, defense, aerospace and military clients.  (manufacturing, technology)

Sale of Axis of New England and New York to Motion Industries

Read the ESGI announcement here.  Our clients were looking to take advantage of industry consolidation and maximize value through a competitive M&A sale process. (distribution, manufacturing, robotics, technology, service, system integration)

Sale of DZINE Living to Haworth

DZINE is an interior design services and contemporary European furnishings retailer in San Francisco. Our clients were looking to align with a major industry player that would help DZINE to expand its footprint. Haworth is a global company that designs and sells furniture, furniture systems, architectural products, textiles, wall surfaces, and ergonomic and technology tools for workspaces, education and health care. (retail, service)

Sale of You & Me Children’s Center to an Industry Investor

Founded in 1981, You & Me Children’s Center is a local preschool committed to providing a nurturing, safe and educational environment for children. The owner wanted to retire, liquefy her investment and see her legacy survive. The buyer is an experienced preschool operator. (service, education)

Sale of Home Tutoring Plus to a Private Investor

Home Tutoring Plus is a tutoring company serving schools and home school families throughout much of Northern California. Professional tutors provide individualized lessons, in-home and online. Our client engaged us to locate a buyer that would preserve her legacy while maximizing her investment so she could pursue new interests in retirement. (service, education)

Sale of Redwood Building Maintenance Company to Silicon Valley Building Services

Founded in 1965, Redwood Building Maintenance is a full service janitorial and building maintenance company serving the North San Francisco Bay Area. The family owners were ready to retire.  Silicon Valley Building Services primarily serves the south and east Bay Area and this gave them an opportunity to expand. (B2B services, contract maintenance)

Sale of Banner Enterprises to Valley Comfort

Banner Enterprises and Valley Comfort Heating and Air are both full service commercial HVAC companies serving the Bay Area. Our client was looking to sell his business and building in order to retire and reinvest. (construction, services, real estate)

Sale of Communique Interpreting to DCARA

Since 1994, Communique Interpreting has provided in-person sign language interpreting services from Monterey to the Oregon border, in medical, employment, education, legal, performing art and social services settings. Our client wanted to sell her business and building and retire. DCARA, a 501(c)3 charitable organization, provides interpreting, advocacy and employment services for hearing impaired children, adults and families in Northern California. (services, non-profit, commercial real estate)

Sale of a Dietary Supplements Producer to a Strategic Buyer

A producer of herbal supplements sold through U.S. medical practitioners. The owner engaged us to find a strategic partner that could scale the company and allow him to reduce his involvement in operations and transition to retirement. (health care, manufacturing)

Market Observations

Two themes jump out at me: most acquirers were strategic and most sellers were looking to retire. Indeed, we’re seeing tremendous strategic acquisition activity in most industries. Most sellers are well positioned to maximize value through a structured auction (competitive bid) process run by a professional M&A brokerage firm like ours. As long as baby boomers continue to age out, Exit Strategies will be here to facilitate their retirements.

Action Items

If you are considering exiting your company for any reason, call or Email us to discuss your goals and circumstances, and how you can leverage Exit Strategies’ process, resources and experience to improve your results. If you are waiting for market conditions to improve, stop waiting and start the process!


Al Statz is founder and President of business valuation and M&A brokerage firm Exit Strategies Group, Inc., which has offices in California and Oregon. For further information or to discuss a valuation or M&A question or need, confidentially, you can reach Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.

The Sale of a Business May Actually Excite Employees

Many sellers worry that employees might “hit the panic button” when they learn that a business is up for sale. Yet, in a recent article from mergers and acquisitions specialist Barbara Taylor entitled, “Selling Your Business? 3 Reasons Why Your Employees Will Be Thrilled,” Taylor brings up some thought-provoking points on why employees might actually be glad to hear this news. Let’s take a closer look at the three reasons that Taylor believes employees might actually be pretty excited by the prospect of a sale.

Taylor is 100% correct in her assertion that employees may indeed get nervous when they hear that a business is up for sale. She recounts her own experience selling a business in which she was concerned that her employees might “pack up their bags and leave once we (the owners) had permanently left the building.” As it turns out, this wasn’t the case, as the employees did in fact stay on after the sale.

Interestingly, Taylor points to something of a paradox. While employees may sometimes worry that a new owner will “come in and fire everyone” the opposite is usually the case. Usually, the new owner is worried that everyone will quit and tries to ensure the opposite outcome.

Here Taylor brings up an excellent point for business owners to relay to their employees. A new owner will likely mean enhanced job security, as the new owner is truly dependent on the expertise, know-how and experience that the current employees bring to the table.

A second reason that employees may be excited with the prospect of a new owner is their potential career advancement. The size of your business will, to an extent, dictate the opportunities for advancement. However, if a larger entity buys your business then it is suddenly possible for your employees to have a range of new career advancement opportunities. As Taylor points out, if your business goes from a “mom and pop operation” to a mid-sized company overnight, then your employees will suddenly have new opportunities before them.

Finally, selling a business could mean “new growth, energy and ideas.” Taylor discusses how she had worked with a 72-year-old business owner that was exhausted and simply didn’t have the energy to run the business. This business owner felt that a new owner would bring new ideas and new energy and, as a result, the option for new growth.

There is no way around it, Taylor’s article definitely provides ample food for thought. It underscores the fact that how information is presented is critical. It is not prudent to assume that your employees may panic if you sell your business. The simple fact is that if you provide them with the right information, your employees may see a wealth of opportunity in the sale of your business.

Copyright: Business Brokerage Press, Inc.

Steps in a Management Buyout

As a friend of Exit Strategies you know us as M&A brokers and appraisers, but you may not know that we advise on management buyouts.

By management buyout (MBO) I mean selling a company or business unit to managers and key employees using a combination of equity and debt. The assets and cash flows of the company are used to finance most of the purchase price, with the equity portion supplied by management or a Private Equity investor, depending on the size, profitability and nature of the company.

Business owners who choose the MBO exit option typically have strong non-financial motivations. Don’t get me wrong, price is important to them. However, factors such as company legacy, employee welfare and local community are often equally and sometimes more important.

Typical MBO Steps

When advising company owners on management buyouts, we start by understanding our client’s short- and long-term goals, needs and circumstances. If an MBO appears to be appropriate, we will:

  1. Prepare an independent business valuation (fair market value) to provide guidance on pricing and feasibility
  2. Work with financial, tax and legal counsel to determine a deal structure that achieves the owner’s liquidity and income goals
  3. Obtain confidentiality agreements from interested parties
  4. Meet with managers to understand their interest level, goals and resources; educate them on the MBO process; confirm feasibility
  5. Develop a transaction roadmap
  6. Collect details on buyer experience, credit, funds and collateral
  7. Prepare a confidential information memorandum, source documents and disclosures to fill management’s knowledge gaps and explain the merits of the transaction to their advisors and lenders
  8. Recommend wealth management, legal and tax professionals (if needed) and coordinate with them
  9. Evaluate debt financing options (including seller note) and the potential of “rollover” equity
  10. Determine if private equity capital is necessary or desired, and available
  11. Recommend and liaise with best-fit debt and equity providers
  12. Propose terms and facilitate sensitive negotiations while buffering emotions
  13. Draft a nonbinding memorandum of understanding on key deal terms, transaction process and timeframes
  14. Facilitate buyer, seller and lender due diligence
  15. Assist buyers with financial models, business plans and shareholder agreements as needed
  16. Work with the parties’ legal teams to finalize definitive agreements
  17. Advise on leadership transition
  18. Coordinate satisfaction of closing conditions, resolve problems that arise, and maintain momentum for a timely deal closing

Every buyout is unique. We add, remove and rearrange steps as needed, and help both sides navigate the process. In some cases, management, not the owner, initiates the buyout.

Biggest Challenges

Owners and management employees usually lack the time and deal experience to complete successful buyouts on their own. The interdependent owner-employee relationship raises the stakes for all parties and magnifies the consequences of a failed negotiation. Three areas seem to be especially challenging for owners and management:

  1. locking in a fair purchase price (business valuation),
  2. determining the right deal structure, and
  3. financing

Most Common MBO Mistake

For a management buyout to succeed, a business usually has to have a solid earnings track record in order to prove it can service the debt. Management must demonstrate the requisite skills, experience and commitment. Putting everything in place can take months or years of preparation. Waiting too long to begin this process is the most common mistake I see owners make.

Backup Plan

Of course, there is always the possibility that the MBO will fall through, and you should be prepared for that possibility. That may involve creating incentives for management to stay on and being ready to market and sell the company to third party strategic and/or financial buyers.

The First Step

If you are considering selling your company to management some day, feel free to call us to discuss your goals and needs, confidentially.

Al Statz is the founder of Exit Strategies Group and a senior M&A advisor in the firm’s Sonoma County California headquarters. Email Al or call him at 707-781-8580.

Financial exit planning, Is your business ready?

I recently had a client looking to sell their medical supply business and retire. I worked with management to pull together all the documentation and financials needed, and conducted conduct a probable selling price analysis. With report in hand I met with our clients to review the results and plan a go-to-market strategy.

Unfortunately, the probable selling price fell slightly short of what the client needed to retire (after taxes). We identified excessive inventory as one of the factors that was limiting enterprise value. How did inventory reduce value and spoil our client’s exit strategy? What can they do resolve this limitation? Read on for the full story.

The company had thousands of SKUs, colors, shapes, types and sizes of medical supplies in inventory. Fully 78% of its assets were in inventory. Current assets exceeded 99% of total company assets. We compared our client’s financials against 10,000+ companies in the industry. The industry was averaging 35 days of inventory on hand (11 turns per year). By comparison our client turned its inventory less than once per year. Keep these figures in mind as we continue.

Cash Flow is King

It’s no surprise that buyers of going concern businesses buy primarily to get returns on their time and money invested. Tying up cash in inventory means less cash to operate or invest in the business (or pay dividends to investors) and increases the risk that you won’t get your money back out of your inventory. But there’s more to this story about how inventory affects value.

The income approach to valuation is based on the concept that a business is worth the present value of its expected future cash flows to its owners. The other approaches to value (market and asset approaches) are also important, but cash flow is ultimately king.

A common income valuation method involves dividing the forecasted net cash flow by a capitalization rate (Cap Rate). The capitalization rate is a function of the expected growth and risks inherent in a company. There’s a lot that goes into calculating appropriate risk and growth rates, but here’s the basic formula:

Value = Net Cash Flow / (Risk – Growth)

Crunching the Numbers

Working Capital = Current Assets – Current Liabilities

  • With minimal current liabilities and high current assets, the company had high working capital requirements.

Working Capital Turnover (Sales / Working Capital)

  • I previously mentioned that the company turns over inventory less than once a year. This suggests either too much inventory or not enough sales, or both.
  • The working capital turnover for this company was an average of 2 (i.e. sales were 2x working capital cost).
  • Industry data showed an average working capital turnover ratio of 7-8.

Net Cash Flow Calculation

  • Net cash flow to equity (NCFe) measures the cash flow to shareholders in a company (equity interest holders).
  • NCFe = normalized after-tax net income + depreciation – less capital expenses – increases in working capital +/- changes in interest-bearing debt.
  • Notice the NCFe formula subtracts increases in working capital. As a company grows, working capital increases, which means less cash for shareholders. For this client, working capital growth reduced cash flow by 25%.

Enough Numbers – Back to Our Story

Our client’s business has a high risk of not selling through years of inventory before that inventory becomes obsolete, expired, lost, stolen or damaged. Therefore, the value from the income approach came in lower than the market approach and asset approach results. In fact, the cost of inventory was higher than the value of the company on a going concern basis. Even in liquidation, the full value could not be realized after the costs of liquidating.

The moral of this story is that a hard-earned business exit can be busted by excessive inventory and inefficient use of working capital. In this case, we advised our client to put their exit on hold for a few years and work strategically to reduce inventory and increase sales. Not only will the reduction in inventory increase future value, but it will also put more cash in the client’s pocket along the way.

If you’re considering a sale and wondering what financial shape your company is in, Exit Strategies’ team of M&A brokers and business appraisers can help you determine value, evaluate strategic alternatives and maximize results.

Michael Lyman CVA is a certified valuation analyst and M&A broker specializing in health care, technology and education fields. With 15 years’ experience working in and building his knowledge in these markets, Michael understands the needs of sellers, buyer and investors. His background includes university positions, two successful e-commerce startups and president/CEO of a small pediatric health care business.

See our related blog post on Managing Working Capital to Increase Business Value.

Exit Strategies Group Advises Axis on Sale to Motion Industries

BOSTON, MA (March 1, 2019) – Transaction advisory firm Exit Strategies Group served as exclusive M&A advisor to Axis of New England and New York on its successful sale to Motion Industries, Inc., a subsidiary of Genuine Parts Company (NYSE: GPC).

Axis, with facilities in Danvers Massachusetts and Rochester New York, is a leading provider of advanced industrial automation products and engineered systems, specializing in robotics, motion controls, machine vision, sensors and IIOT technologies. Axis, an authorized distributor for many premier automation brands, helps clients in many industries automate their products and processes. Value-added assembly and custom-engineered mixed-technology systems feature prominently in the company’s value proposition. Founded in 1994 by Todd Clark, Axis is the market leader in New England and New York, and one of the largest independent automation technology providers in the U.S.  Industries served by Axis include life sciences, pharmaceutical and biotech, medical, semiconductor, electronics, food and beverage, warehouse automation, packaging, machine tools, 3D printing and robotics.

Axis CEO Todd Clark said, “We’re pleased to be part of the Motion family. Their relationships, systems and financial resources will to allow us to expand our technical sales force and systems engineering and manufacturing capabilities more rapidly in the coming years. Selling to the right buyer was important to us. We are proud of the culture of excellence that we created at Axis and believe that Motion will allow us to continue that legacy and provide a great place for our employees to work and advance their careers.”

“Exit Strategies did a tremendous job guiding us through the process. Their automation industry knowledge, competitive bid process and creative deal making were essential in achieving a successful outcome”, Mr. Clark observed.

We are pleased to have advised Axis on the sale process and to have helped them achieve a great outcome. The acquisition by Motion represents a win for Axis’ shareholders, employees, customers and vendors. And Motion acquires one of the most respected and capable automation solution providers in the U.S.

We expect U.S. companies to continue to increase investments in automation and robotics to compete on the global stage and to improve productivity and profits. Trends driving industrial automation include the shortage of skilled labor and rising labor costs, increasing mass-personalization of consumer goods, growing internet connectivity, product miniaturization and the increased use of electronics in products, and the adoption of new enabling technologies such as AI. As a result, we expect the industrial automation technology mergers and acquisitions market to remain strong for a while.

About Motion Industries

Motion Industries, Inc., headquartered in Birmingham, Alabama, is an industrial distributor with annual sales of $4.9 billion. Its products include mechanical power transmission, electrical and industrial automation, hydraulics and pneumatics. It also provides systems design, fabrication and repair services. This is Motion’s third acquisition of an advanced automation solutions provider.

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 Al Statz, 707-781-8580.  Terms of the Axis-Motion deal will not be disclosed.

Business sale planning: Three lessons from Shark Tank

As an M&A advisor having participated in the sale of businesses ranging in price from $500 thousand to $100 million, I enjoy watching ABC’s Shark Tank. On the show, entrepreneurs pitch their businesses to a panel of five investors (“sharks”) who then decide whether or not to invest. Today I want to pass along three key takeaways from Shark Tank for every business owner who plans to sell their business some day.

1. The business valuation has to be realistic and defensible

Many times on Shark Tank, the valuation of a company is way too high. The asking price is not based on sound valuation principles and is not defensible. The Sharks opt out because the owner is unrealistic. This is an important lesson for business owners looking to sell their company. A realistic and well-supported valuation invites serious and capable buyers who seek a reasonable return on their investment, and an unrealistic valuation chases away buyers.

2. Presentation is fundamentally important

The Sharks don’t know anything about the companies prior to the pitch, and the sellers get one shot at presenting their information in the Tank. This is the same in a business sale process. Potential buyers don’t know much about the seller’s business, and if they are familiar it, they don’t know the details of the financials, operations, personnel, markets, customer base, systems, etc. Brokers know the kind of information buyers want and need, and how to position a company for sale or investment. They prepare a Confidential Information Memorandum for use in the sale process to give qualified buyers the information they need to make their best offer, and an offer that will survive due diligence.

3. Deal negotiations – competition is key

Sharks, like all buyers, hate competing for a deal. Sellers love competition because they get to choose the best terms available in the market. Having a broker in a deal creates competition among potential investors (buyers) because brokers promote the acquisition opportunity to a broad and targeted audience. Envision a shark feeding frenzy! Even if only one buyer prospect comes along and begins the negotiation process, they know that low-balling a fairly priced business will likely not fly in a competitive open market of buyers being orchestrated by an experienced broker. In the absence of a broker, it’s anyone’s guess where things will end up, but not likely as good of a deal in the absence of a competitive environment.

Keeping these three lessons from Shark Tank in mind as you go through the exit planning and business sale process will likely lead to a better outcome for you and your stakeholders.

Not familiar with Shark Tank? Shark Tank is an Emmy Award-winning structured reality television series on ABC, now in its tenth season.  Watch Shark Tank on ABC.com

For more information on buying or selling a business, Email Louis Cionci at LCionci@exitstrategiesgroup.com or call him at 707-781-8582.

How Does an M&A Auction Process Work?

This blog covers the basics of an M&A auction process for those of you considering selling your company.

As M&A advisors, we use auctions to maximize price and terms for seller clients. An auction is a type of business sale process that involves competitive bidding. They are incredibly effective when done properly, but are a ton of work and involve strategy and nuance. Auctions are most effective in a strong M&A market like the one we’re in now.

Steps in an M&A Auction Process

  1. First we determine if the business and the seller are right for an auction. An auction is appropriate when multiple buyers are present and when our client is open to selling to more than one buyer. If either of these is not true, a serial negotiated sale process is likely more appropriate. As a general rule, most middle market and lower middle market businesses are auctionable and most main street businesses are not. An auction is usually not appropriate when a client is more interested in who buys the company than in maximizing value.
  2. Preparing a Confidential Information Memorandum (CIM) is the next step for the M&A advisor (a.k.a. broker, investment banker, etc.). The CIM is a prospectus on the company that contains 90% of the information buyers need to submit offers. Offers can be in the form of an Indication of Interest (IOI) or Letter of Intent (LOI) depending on whether the auction will have one or two bid rounds.
  3. Broad auctions can involve over 100 target buyers. Limited auctions typically have anywhere from 2 to 20 targets. A broad auction is likely to involve two rounds of bids and a limited auction is more likely to have a single bid round. The decision to have one or two rounds can also also be driven by the need for speed of execution due to financial distress or market forces.
  4. The M&A firm conducts research and works with the client to develop a prioritized list of target buyers. The list may contain a combination of strategic and financial (private equity) buyers, depending on what type of transaction and continued involvement the client wants. The broker will help the seller understand these options.
  5. In a formal auction process, the CIM lays out a timeline for discovery, initial bids, site visits, final bids, etc. A formal auction is appropriate when we are certain that we will have multiple bidders or when speed is critical. In an informal process, dates are set later on.
  6. Next we contact the appropriate executive at each target company. After screening buyers for fit and obtaining non-disclosure agreements, we provide the CIM, grant data room access and address follow up questions.
  7. In a two-step auction, IOIs are generally requested next. The purpose of round one is to narrow the field of buyers to a manageable number for more detailed discovery. Only the top bidders are invited in for a site visit and meeting with company owners and top management. After these meetings, we update the data room and a issue a CIM supplement to the buyers still in the process.  Equally informing all bidders is critical to a successful auction.
  8. When we are ready, we send final bid instructions (a.k.a. bid process letter) outlining procedures and important issues that we want to see addressed in an LOI.
  9. Once final bids are in, we help the client, in conjunction with the CPA and attorney, select the best offer and negotiate a final exclusive LOI with one party. Due diligence and preparation of definitive agreements begin at that point. Unsuccessful bidders are notified.

How long does an M&A auction process take?

Typically 3 to 5 months from market launch to a signed LOI, depending on whether the auction is broad or limited, formal or informal, one or two rounds. Expect another 2 to 3 months to close the transaction depending on the buyer, scope of due diligence, financing needs, third party consents and other factors. When a compressed time frame was required, we’ve done these in as little as 3 months start to finish.

A well-run auction processes can have a substantial impact on the value and terms received by sellers. In one recent eight figure deal, we had 115 target buyers, 11 IOIs in round one and 5 LOIs in round two. The elapsed time from market launch to closing was 6 1/2 months.

Al Statz is a senior M&A advisor in Exit Strategies Group’s Sonoma County California office. For more information on M&A auctions or to discuss what type of sale process best suits your needs and your company, Email Al or call him at 707-781-8580.