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.

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.

 

To complete deals in 2021, ahead of possible tax changes, owners and deal teams need to act fast.

With the Democrats in the White House and having the tie-breaking vote in the senate, it is likely that taxes on corporations and wealthy individuals will increase during this administration. When and how much are unknown. With COVID recovery as the administration’s immediate priority, many think we will have until 2022.

Biden has proposed raising long-term capital gains tax to 39.6% on income above $1 million, nearly double the current rate. That change would have a major impact on business transfers.

To help understand the impact, I ran some quick numbers … Say a business has $20 million in revenue in 2021 and is growing 5% annually. Assume a consistent 15% EBITDA margin and 6x price/EBITDA multiple at sale. To simplify the math, let’s assume a $0 basis and ignore state taxes and transaction costs.

Option A: The owner sells in 2021.

With EBITDA of $3 million and a 6 multiple, that’s $18 million enterprise value. At the current 20% capital gains rate, the tax liability would be $3.6 million, for net proceeds of $14.4 million.

Option B: The owner holds and grows the business, and sells in 2023.

With 5% annual growth, revenue is now $22 million and EBITDA is $3.3 million. At 6x, that’s an enterprise value of $19.8 million. At a 39.6% capital gains tax rate, the tax liability would be $7.8 million, for net proceeds of $12 million – a significant reduction from $14.4 million.

Under those conditions, a business owner would need to hold and grow the business for six years to yield the same after-tax proceeds.

Yes the owner would receive cash distributions during those years; however, they would also have the risk and headaches of owning the business and would have to delay retirement.

If you are a business owner and are thinking about selling and retiring in the next few years, start talking to your advisors now. It takes 9 months on average to sell a business, and preparing for the sale process can take some time. Work with your financial advisor to understand how much in assets and/or income you need to fund your retirement. Obtain a value and sale readiness assessment from an experienced M&A advisor like Exit Strategies Group. Then have your CPA advise on the current and potential tax burdens now and in the years ahead.

---

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.