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.

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

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.

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Exit Strategies Group is a partner of Cornerstone International Alliance.