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Market Pulse Survey – Quarter 4, 2020

The following chart shows 8 reasons business owners decided to sell their business in 2020. These are the results from the Market Pulse Survey conducted in the 4th quarter of 2020.

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.

Spring cleaning is good for business

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

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

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

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

7 Keys to Making Your Business Sellable

A business owner recently asked me what she could do to increase the value of her business. She wants to sell and retire in a few years.

My advice was:

  1. It is easier to sell big businesses than small businesses. The magic number is $1 million in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). When a business has more than $1 million EBITDA,  it becomes attractive to all buyer types: individuals, strategic buyers, and Private Equity Groups. By the way, $2 million in EBITDA is even better.
  2. to be attractive for sale, a small business needs to make enough money to support a working owner in that geography.  So, if a new owner requires $150K/year in salary, wages, perks, and draws to support themselves and their family, the business needs to be more profitable than that. Below that threshold, a small business just isn’t attractive.
  3. ideally a business can operate and continue to grow without the owner involved every day. That way a new owner can step in without needing any special skills or training. Or a strategic acquirer may be able to integrate the business without hiring a general manager. You still should be running the show. When you are present, the company will run better. But…operationally it should have all the pieces in place to run without you. I advise business owners who want to sell in a few years to start taking more vacations. That forces them to make their business able to operate day-to-day without them.
  4. a key to making a small business attractive to buyers is to have a reliable lead/prospect/customer engine. A good business development engine systematically identifies leads and converts them into prospects and customers. The front end of the engine/funnel could be advertising. It could be prospecting. It could be networking. Ideally, this engine will have the resources to work with and without you, the owner, at the business every day. Steady customer flow is the lifeblood of small businesses.
  5. of prime importance is to determine the products or services at which your business excels, and focus on those products and services. Knowing your focus will help you design your company’s business generation engine. It seems counter-intuitive, but it is easier to sell a specific product in a smaller market segment than a wide array of products into a larger market segment. Of course, the market segment you choose has to be big enough. A great lead/prospect/customer engine will help your business garners more than its fair share.
  6. Growth is important. An attractive business is growing steadily and sustainably. Both top line and bottom line should increase predictably. A consistently growing company will sell at a higher multiple than a company with flat or declining sales.
  7. Paramount is profitability and cash flow. A profitable business is attractive. Cash flow is always king.

Essentially, I advised this owner to pursue business excellence and grow her business to make it attractive to as many types of buyers as possible. If you are considering selling your business one day, this may be good advice for you.

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

Avoid the Mistake of Selling on Your Own

One of our former clients, Joe, reflecting on the sale of his company said, “only those of us that have toiled at it know what it really takes to succeed in this business.” How true. Until we risk our own capital, spend years building a team, perfecting products and processes, and manage through multiple business cycles, we can’t fully appreciate what it takes to succeed in a given business.

Similarly, its hard for business owners, who usually sell a business once in their life, to understand the value that a professional M&A advisor brings to the table.

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

Why then are owners tempted to sell on their own?

I can save money.

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

We don’t provide legal or tax advice, but attorney and CPA hours can easily be 2X when you don’t have an M&A advisor leading the sale process. And the likelihood of closing a deal goes down, so you may spend more on professional fees and end up with no deal. Please understand that I have the utmost respect for M&A attorneys and CPA’s and their critical roles in the process!

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

I can negotiate a better deal.

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

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

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

I will have more control.

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

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

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

I will have a better relationship with the buyer.

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

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

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

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

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

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

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

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

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

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


Biden tax plan driving business owners to market

During his campaign, President Biden proposed tax changes that could have a significant impact on business owners. Any business owner contemplating an exit in the next few years should consider how potential tax changes could reduce their net proceeds from a sale.

If Biden’s tax plans come to fruition, the capital gains tax rate could effectively double, from 20% to 39.6% for income exceeding $1 million. Right now, that means business owners need to shift their focus from maximizing total transaction price to maximizing after-tax proceeds.

Let’s assume your company sells for $10 million in today’s tax environment. Under the current tax rate, you’d net about $8 million after federal taxes. The same company selling for $10 million under Biden’s new tax proposal would net approximately $6 million.

Now let’s say you intend to hold your company and grow it for a few more years. Suppose you grow 5% a year for the next three years for a business value of roughly $12.2 million. Selling under the proposed capital gains taxes you’ll net about $7.3 million. That’s a $700,000 loss in net proceeds, despite three more years of hard work.

These are simplified calculations and other factors will come into play. But under our basic scenario, an owner projecting 5% annual growth would need to run the business for an additional five years to reach a breakeven point after increased capital gains.

Some analysts suggest that new tax legislation won’t pass until year-end 2021 with an effective date of 2022. That could give us a year of breathing room before new taxes go into effect.

As we know, Democrats have control of Congress. And yet, that doesn’t mean tax hikes are a sure thing. With the Senate divided 50-50, and a slim margin in the House, the Democrats don’t have room for dissention in the ranks. Party moderates concerned about economic recovery may push for a more tempered approach.

Business owners contemplating a sale in the next five years should meet with their advisors and consider their exit strategies under different tax outcomes.

Furthermore, business owners without immediate plans to sell should understand the potential impact of increased corporate taxes. Higher ongoing tax bills could have a material impact on an owner’s wealth-building strategies and, consequently, their intentions to sell.

According to the most recent M&A Source and IBBA Market Pulse report, it takes an average of 10 months to sell a lower middle market business. If you’re a business owner and you were thinking about exiting in the next couple of years, start talking to your advisors now.

Begin with an M&A advisor to get a valuation and see if it even makes sense to take your business to market. Then talk to your CPA and run the tax scenarios to understand the best- and worst-case possibilities ahead.

If predictions hold true, M&A deal teams (investment bankers, CPAs, attorneys, and lenders) could have a stressful fourth quarter in 2021 as sellers make a collective push to get deals across the finish line before year end. To my industry colleagues I say, forget those post-COVID travel plans. You’re going to be busy.

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

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

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

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

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

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

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

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

Exit Strategies Advises Vege-Kurl on Sale to Private Equity group

Exit Strategies Group is pleased to announce that its client Vege-Kurl, Inc., a manufacturer of high-quality personal care products, has been acquired by private equity group Hemingway Capital.

Founded in 1959, Vege-Kurl Inc. and its subsidiary Joar Labs is a private label contract manufacturing partner and formulator of high quality organically certified efficacious cosmetic, cosmeceutical, health & beauty, and household products. The company provides a wide variety of products such as shampoos, conditioners, hairsprays, serums, permanent waves and relaxers. Vege Labs specializes in skincare treatments, creams and lotions, alcohol-based products such as colognes and fragrances, plus spa and esthetics products and botanical extracts. It has an inhouse FDA approved R&D OTC Laboratory.

“After decades in the business, owners/executives Eric Huffman and Joe Desens wanted a path to retirement and to find a new owner that was capable of building on their legacy and providing rewarding careers for their loyal and dedicated staff,” said Bob Altieri who led this engagement for Exit Strategies Group.

Exit Strategies represented Eric and Joe through all phases of the sale process, from pre-market assessment and sale planning, to deal book preparation, target buyer identification, confidential outreach and marketing, obtaining bids, negotiation, due diligence and closing. We secured several good offers for our client and Hemingway Capital ultimately provided the right combination of price, terms, capital and business plans.

Hemingway Capital teamed with a seasoned industry executive to take over the CEO role. CVF Capital Partners provided financing acquisition and expansion capital.

If you would like more information about Exit Strategies Group’s M&A advisory or business valuation services, contact Bob Altieri at boba@exitstrategiesgroup.com. Deal terms will not be disclosed.

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

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

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

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

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

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

Exit Strategies Group is a partner of Cornerstone International Alliance.


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

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

Selling a business has many steps:

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

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

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

No time like the present.

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

M&A Financing During the Pandemic

The pandemic has put lower middle market business sales and acquisitions on somewhat of a roller coaster ride. Deal volume declined sharply in Q2-Q3 and came back strong in Q4. Valuations have remained strong throughout the pandemic, at least for COVID-resistant businesses. Though there was a slight Covid-effect in Q2-3.

In terms of M&A financing, capital structures shifted to slightly more less debt during 2020, before edging back up to pre-pandemic levels in Q4. To compensate, the capital stack was being filled in with more buyer equity and more rollover equity.

Interest rates are still low and banks keep lending, but they have pulled back slightly. Lower middle market deals have typically had senior debt of around 3x EBITDA. According to GF Data, that ratio dipped to 2.7-2.8 in Q2-3 (the lowest level in 5 years) and returned to 3.2 in Q4 2020.

GF Data reported an uptick in buyer equity from 2019 to 2020, from 46.1% to 49.1%. We are still seeing buyers bring more equity to the table than pre-pandemic, and showing more interest in seller rollover equity.

Rollover equity is when a business owner retains a minority stake in the enterprise. For businesses valued between $10 million and $25 million, rollover equity accounted for 13.9% of deal funding in 2020.

At the start of the pandemic most of us were expecting to see more earnouts (contingent consideration) in transactions, but that hasn’t materialize. Because demand for acquisitions remained high during the pandemic, most sellers have been able to avoid earnouts.

If risk and uncertainty subside and interest rates remain low, we should see a return to more typical M&A funding levels in 2021.

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