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Burnout drives business owners to sell their companies

Business owners are burned out, worn out, and getting out. More than 1 in 4 business owners who put their business on the market this spring did so because of burnout. That’s according to a first quarter survey of business brokers and M&A advisors conducted by IBBA and M&A Source.

Retirement still leads as the number one reason sellers go to market. That hasn’t changed in the Market Pulse survey’s nine year history. But this time we saw a real jump in burnout as the reason business owners are selling.

Even more concerning, 15% of sellers had some kind of health issue driving them to market. That’s also higher than previous surveys and suggests the pandemic has taken a heavy toll on business owners.

Business owners already deal with a lot of stress and pressure. Getting qualified employees has been a constant challenge – and we’ve been hearing about that for a couple of years already.

For many, the pandemic was the straw that broke the camel’s back. And we’re not just talking about businesses that had financial struggles. Even those businesses that stayed operational through the pandemic still had worries over employee safety, PPP versus unemployment, and retaining their talent.

It’s not that big of a surprise that business owners are saying, “Enough is enough.”

In addition, to burnout and health reasons, 7% of sellers went to market to get ahead of potential increases in capital gains tax. The Biden administration has indicated it will ask for significant increases in the capital gains tax rate in the near future.

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.

Even if a business owner is projecting 5% annual growth, they’d have to run their business another five years just to net out the same amount they could today after increased capital gains.

Business brokers and M&A advisors say they’re already seeing an uptick in activity with 41% reporting stronger deal flow over a year ago. They predict M&A will continue to pick up through the rest of the year.

Without some big resurgence in COVID, the market is going to finish out hot by year end. Right now we have double the deal flow we typically do, and our peers across the country are reporting the same thing. Everyone is busy.

Sellers are coming back to market, but the buyers never left. Sellers with COVID-proof, or at least COVID-resistant, businesses are seeing competitive bids and getting strong values.

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.

M&A Advisor Tip: Be ready when you are ready

When a business owner says it’s time to sell, I ask, “How fast do you want to be out?” The answer I hear most is, “Yesterday.” But sellers underestimate how long the process takes. Once we sign our engagement agreement with the business owner, it takes about 9 to 12 months to sell. After that, expect a six-month to one-year transition.

In an ideal world, you’d be working with an advisor 2-3 years before you put your business on the market. Plan ahead and there are several things you can do to maximize value or better position your company for sale. The more you plan, the more options you will have at the time of your exit.

Figure out what you want and then work the numbers backwards. Start talking with your advisors now, so when you’re ready, you’re ready.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

Know the 3 types of business buyers and what motivates them

When selling your business, you may receive offers from three kinds of buyers: Individual, financial, and strategic. Here’s a look at the most common buyers and where their motivations lie.

Individual buyer:

A first time buyer looks at the business to get out of corporate America and control their own destiny. Some of these buyers are passive searchers and others have very specific targets and timelines in mind.

The more motivated an individual buyer is, the more they’ll pay. But because they haven’t purchased a business before, they also tend to be more cautious. They will likely have personal guarantees on their loan, which means if the acquisition does not go right, they could lose everything.

Individual buyers will look at the business’s existing cash flow, determine what kind of salary they want to make, and then look to see how much cash flow is left over to pay the lender.

Another individual buyer is a serial entrepreneur—someone who started or bought a company, had a successful exit, and now wants to do it again. They have much the same risks and motivations, but they have more confidence because they have been successful before. That confidence means they may pay slightly more than the first-time buyer.

Financial buyer:

The largest group of buyers in the financial category is private equity (PE) firms. Twenty years ago, this was a very small segment of the buyer category. Now there are an estimated 4,000 PE firms throughout North America.

These PE firms have over $1.5 trillion of “dry powder,” in other words financial assets they need to put to work. And with interest rates as low as they are, investors will continue to pour money into PE firms as they have out-performed most other investment options.

A quick overview of how PE firms work: A PE firm will go out and raise a fund. They may get money from high-net-worth families, from individuals, or they may go to institutions, pension funds, large banks, insurance companies, etc.

Once the fund is raised, the PE firm typically has 10 years to find companies, purchase them, grow them, and sell them again. Therefore, most hold times are around five years +/-. PE firms may be motivated to pay more for a business to hit their investment timeframe.

The family office is much like the PE firms, but they can be a little more flexible. Generally, a family office is investing the funds from one high net worth family, usually $200+ million net worth.

They typically have “patient capital” which means they do not have to sell the company within a certain predetermined window of time.  Also, they don’t have a set mandate to put capital to work by a certain deadline. Therefore, if they like a deal but see that several buyers are bidding it up, they may back out as they don’t have as strong a motivation to get their funds invested quickly.

In terms of deal structure, PE firms and family offices are most likely to offer the seller an ongoing equity stake in the business. This allows sellers to take advantage of future growth and get a second bite at the apple when the business is resold.

Another kind of financial buyer is the search fund. A search fund is often an investor-backed individual looking for a company to buy. These individuals will manage the company with the goal of providing a financial return for themselves and their investors.

One of the downsides here, is that if you get to the Letter of Intent (LOI) stage with a search fund, you often have to “resell” the deal to their investor team. When narrowing your buyer pool, you need to be careful that a search fund buyer really does have their investors on board.

Strategic buyer:

The strategic buyer is a company that is looking to grow by acquiring another business that has synergies with its own. For a synergistic buyer, 1+1=3.

Strategic buyers may be looking to grow market share in the same industry, find new products or services to sell to their existing customer base, get more control over their supply chain, acquire distribution channels, etc.

The strategic buyer can typically offer a higher value, but sometimes that value comes at a price. There may be redundancies or facility closures after a sale, for example. Likewise, strategic companies are least likely to offer the seller equity in the business going forward.

The takeaway here is that different buyers will see different value in the same company. They will also have different preferred deal structures. Which buyer you choose will often depend on what you value most in a deal.

Al Statz is the CEO of Exit Strategies Group. For more information on exit planning or to discuss a potential M&A or business valuation need, contact Al at alstatz@exitstrategiesgroup.com

Seller’s Market Sentiment Back to Pre-Covid Levels

What a difference a year makes! Sellers of $1M+ enterprise value businesses have an advantage, with roughly 2/3 of M&A advisors and business brokers calling it a seller’s market for these larger businesses. Confidence is rising across all sectors.

Market Pulse Survey – Quarter 1, 2021 Presented by IBBA & M&A Source

Al Statz is the CEO of Exit Strategies Group. For more information on exit planning or to discuss a potential M&A or business valuation need, contact Al at alstatz@exitstrategiesgroup.com

Put Time into Planning Sale of Business

Over my 19 year M&A advisory career, I have met many business owners who spent more time planning their children’s wedding, their 50th wedding anniversary, or even their fantasy football draft, than they spent planning for the sale of their business.

According to the quarterly Market Pulse Report, we know that when it comes time to sell their business, less than half of all business owners plan ahead. That means that most owners wait for some type of trigger event before they go to market. Those triggers are unplanned and unpleasant in nature, stemming from a family health issue, conflict, or burnout.

According to Christopher Snider, CEO of the Exit Planning Institute, 50% of business owners exit because of one of the “Dismals Ds”: death, divorce, disability, distress, disagreement.

Unfortunately, that often means business performance is on the decline. Or, at the very least, it means the business owner hasn’t made specific changes that will better position their company for a sale or transition.

Selling a well-prepared business is a completely different experience than selling due to a Dismal D trigger event. You have more leverage, and the process is less stressful as you are proactively executing a strategy versus reacting to an event in your life. With planning, you’ll be able to walk away from the closing table feeling satisfied and confident that you made the right choices.

It’s true that you may still be able to sell your business without planning. But the more you plan, the more options you have when you want to exit. When a business owner is well-prepared with an attractive business, they typically receive more offers. That gives you more leverage in the sale negotiations.

The holy grail is when you have prepared the business, you are emotionally ready, and the M&A market is robust. If you can pull that off, it’s typically a win in terms of valuation and deal structure. Plus, the sale process will go faster and smoother, reducing the inevitable emotional turmoil for you.

Not everyone achieves such perfect timing, but your chances are significantly better if the sale is part of a planned exit strategy. Whether you’re 10 months or 10 years away from exiting your business, take time now to truly think about how and when you will leave.

Have a conversation with an M&A advisor. It doesn’t mean you have to sell right away. But you become better educated about your exit options, the importance of timing, and how the process works.

Al Statz is the CEO of Exit Strategies Group. For more information on exit planning or to discuss a potential M&A or business valuation need, contact Al at alstatz@exitstrategiesgroup.com

M&A Advisor Tip: Confidence in Numbers

Most of our clients have CPA Compiled or Reviewed financial statements, and some go a step further with Audited statements. Reviewed financial statements are acceptable, and you can do even better with Audited statements a year or two before you sell.

With validated financial accuracy, you increase buyer confidence, shorten due diligence, and help get your company sold. We’ve had buyers tell us they’ll bid a quarter to a half to a full turn more on price/earnings multiples for a business with Audited financial statements.

As your business grows, a quarter turn can make a big difference in the purchase price that far exceeds the additional cost of an Audit.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com.
Exit Strategies Group is a partner in the Cornerstone International Alliance.

M&A Advisor Tip: Go ugly early

We have a common saying: “Go ugly early.” When you’re selling a business, put issues on the table right away. Whether you’ve just lost a customer, your backlog isn’t what it was, or you’re operating at capacity—be up front.

Providing clarity around your business flaws serves two purposes. First, it makes the whole process more efficient. If customer concentration is a no-go issue for a buyer, let’s flush them out early before we’ve invested any time or money. Transparency also brings credibility, establishing you and your advisors as honest, ethical people. That goodwill can go a long way in negotiations.

For further information on this topic or to discuss a current M&A need, Al can be reached at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Exit Strategies Group is a partner of Cornerstone International Alliance.

Ten Commandments of Successful Business Exits

Business owners contemplating a sale may be asking the question: What are the most important principles to achieve a successful business exit? Listed below are ten practical directives to help you make better exit planning decisions and achieve a successful sale.

I. I shall plan ahead.

II. I shall not depend on miracles

III. I shall prepare my business

IV. I shall not wait for perfect timing

V. I shall help buyers buy

VI. I shall have buyers competing to buy

VII. I shall keep my eye on the ball and my lips sealed

VIII. I shall not go it alone

IX. I shall use experienced professionals

X. I shall not let time kill my deal

For expanded explanation of these ten practical directives to help you make better exit planning decisions and achieve a successful sale, click here to download the pdf:

Ten Commandments of a Successful Exit • Exit Strategies Group, Inc.

For more information on the business sale process or exit planning, email Louis Cionci at LCionci@exitstrategiesgroup.com or call him at 707-781-8582

Market Pulse Survey – Why business owners are selling

The following chart shows the reasons business owners decided to sell their businesses in 2020. As in the past, owner retirements led the way.

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.