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What is an equity rollover when selling your business?

/in , /by Exit Strategies

In M&A, an equity rollover, or recapitalization (recap), occurs when a business owner sells their company but chooses to reinvest, or “roll over,” a portion of their proceeds into the newly acquired business. An equity rollover allows a shareholder to maintain an interest in the business and benefit from future growth and value creation.

How an Equity Rollover Works

When a business owner is selling, a potential buyer may propose a deal structure that includes cash, debt, and equity. Typically the seller’s M&A advisor will signal in advance to buyers whether an equity rollover or recapitalization will be considered, and buyers factor that into their offers.

Equity rollovers are common when the buyer is a private equity firm or family office. These financial buyers are often looking for the seller or their management team to continue running the business for a number of years until the business is sold again. Equity rollover ensures that all parties are aligned, and that sellers have “skin in the game” and are committed to the ongoing success of the business.

Equity Rollovers by the Numbers

Let’s say a private equity firm is acquiring a software company for $20 million. The seller agrees to rollover $2 million of the proceeds back into the company. In simple math, the seller would retain a 10% ownership stake in the post-acquisition company if the buyer paid the other $18 million in cash.

However, most acquisitions are funded with a combination of equity and third party debt. This leverage increases the share value of rollover funds, meaning the seller’s $2 million translates into a larger percentage of the equity in the new entity.

For example, let’s say the software company is acquired with 50% leverage, or $10 million in debt. With total shareholder equity of $10 million, the seller’s $2 million now equals 20% of the equity (vs 10% in the earlier example). So, the seller receives 90% of the transaction value at the time of sale but retains 20% in the future business.

In reality, the calculation also accounts for transaction fees, capital gain taxes and working capital, but the above scenario provides a fair baseline estimation.

Advantages of an Equity Rollover or Recap

There are several reasons why a seller might choose to roll over equity in an M&A transaction:

  • Potential for additional gains:  Sellers who roll over equity have the opportunity to benefit from any increase in the value of the company’s shares.
  • Increased buyer confidence:  When a seller rolls over equity, it sends a positive signal to the buyer. It means the seller has confidence in the company’s future prospects and belief in the buyer’s strategic vision for the business — and may result in a higher initial purchase price.
  • Tax considerations:  In some cases, equity can be rolled over on a tax deferred basis.

For more information, read our previous posts on equity rollover (recapitalizations):

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

M&A Glossary: Quality of Earnings (QofE) Report

/in , , /by Exit Strategies

A Quality of Earnings (a.k.a. “QoE” and”QofE”) report is prepared by a CPA firm to provide a detailed analysis of a target company’s revenue, expenses, working capital, EBITDA adjustments, etc.

While not an Audit, a QoE provides buyers with important assurances on cash flows and risk. When buyers do this work internally its often just called “financial due diligence”, and when they outsource it, it’s called Quality of Earnings.

See this post comparing a QoE analysis to a financial Audit.

As sell-side M&A advisors, we often recommend a sell-side QofE for companies with more than $10 million in sales and over $2 million EBITDA or when their financials are not clearly organized or their revenue recognition is not straightforward.

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

Time to Close

/in , /by Exit Strategies

Median time to close remains somewhat consistent year-over-year, with businesses generally selling within one year of a listing engagement. Main Street deals typically close faster due to reduced due diligence demands.

Follow these links for more information on Exit Planning Benefits, common Exit Options, and the Exit Planning Process.

About the Market Pulse Survey — Each quarter, the M&A Source and IBBA, in partnership with Pepperdine University’s Private Capital Markets Project, survey North American lower middle market M&A advisors and business brokers and publish the results here.

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

Why Some Testing, Inspection and Certification Companies Sell for More than Others.

/in , /by Adam Wiskind

Testing, Inspection, Certification (TIC) companies play a crucial role in various industries, from agriculture to manufacturing to construction, by providing services that verify adherence to standards, regulations, and specifications. TIC services are typically nondiscretionary, regulation driven, recession resistant, and predictable, which makes businesses in this sector a priority investment opportunity for private capital and strategic investors.

However, owners of TIC companies that are preparing to sell should know that in the eyes of an investor, not all TIC companies are created equal.  Beyond financial performance, companies that are built to reduce risk and ensure long term growth are more valuable to potential buyers. Companies in this sector that exhibit the features below will be particularly attractive to investors:

  1. Critical-Path Service Offering: TIC companies that occupy a vital position in the business ecosystem by providing solutions to regulatory safety and quality control requirements. They act as gatekeepers, ensuring that products meet stringent standards before reaching the market. TIC businesses that fulfill regulatory or industry requirements become essential partners for customers striving to maintain compliance and uphold consumer trust.
  2. Turnkey Solution Offerings: TIC firms that offer turnkey solutions that comprehensively address customer needs. From initial assessments to ongoing compliance monitoring, these companies provide end-to-end services that streamline processes and alleviate the burden on clients. By offering integrated solutions, TIC businesses simplify complex regulatory requirements, enhancing efficiency and peace of mind for their customers.
  3. Depth of Customer Relationships: TIC companies that cultivate long-term and contractual relationships with their customers. These enduring partnerships are built on trust, reliability, and a proven track record of delivering value. By understanding their clients’ unique needs and challenges, these TIC firms become trusted advisors, securing recurring revenue streams and fostering loyalty in a competitive market landscape.
  4. Technology-Enabled Services: Leading TIC companies leverage technology to offer products and services that are more efficient, consistent, and precise. Advanced laboratory equipment, data analytics, and automation tools enable these firms to conduct tests and inspections with unprecedented accuracy and speed. By embracing technological advancements, these TIC businesses enhance their competitive edge and deliver superior outcomes for clients.
  5. Technical Expertise: The cornerstone of TIC services lies in the technical expertise of their workforce. Companies with highly trained and experienced labor forces excel in conducting rigorous tests, interpreting complex data, and providing actionable insights to clients. Investing in ongoing training and professional development ensures that TIC firms remain at the forefront of industry standards and best practices.
  6. End Market Diversity: TIC businesses that serve customers across a wide range of industries. End market diversity not only mitigates risk but also exposes TIC firms to diverse growth opportunities and emerging trends in various industries.
  7. Dedicated Training and Workforce Development: TIC companies that prioritize employee development reap rewards. By investing in training programs, certifications, and skill enhancement initiatives, these firms cultivate a highly skilled and motivated workforce. A well-trained labor force not only benefits service quality but also drives innovation and operational excellence, fueling long-term growth and profitability.
  8. Sales Pipeline Development and Conversion: A robust sales pipeline is indicative of a TIC company’s growth potential. Companies with effective sales strategies and strong lead generation mechanisms consistently attract new clients and opportunities. Moreover, a demonstrated ability to convert leads into contracts underscores a TIC business’ competitiveness and market position.
  9. Broad Service Area: TIC companies with large service areas enjoy distinct advantages in terms of market reach and scalability. Regional and national-scale operations enable these firms to serve clients across diverse geographic regions, tapping into regional market dynamics and regulatory landscapes. Furthermore, a broad geographic presence enhances brand visibility and competitiveness in the marketplace.

Owners of TIC companies that are preparing to sell their business will optimize their results by building these features into their companies. Investors seeking stable returns and long-term growth opportunities see TIC businesses as a compelling investment proposition.  But in addition to financial performance both financial and strategic investors are particularly interested in companies that are differentiated by features that create defensible and enduring moats for their product and services.

Exit Strategies Group helps business owners to value and exit their testing, inspection and certification companies.  If you’d like to have a confidential, no commitment discussion on your exit plans or have related questions, please contact Adam Wiskind, Senior M&A Advisor at (707) 781-8744 or awiskind@exitstrategiesgroup.com

Exiting Without a Plan

/in , /by Exit Strategies

Even though retirement is far and away the biggest reason that business owners sell, many owners are doing little to no exit planning before going to market. The above chart shows that the smaller the business, the less likely owners are to plan. Of those owners who did plan, most started less than a year before putting their business on the market.

Follow these links for more information on Exit Planning Benefits, common Exit Options, and the Exit Planning Process.

About the Market Pulse Survey — Each quarter, the M&A Source and IBBA, in partnership with Pepperdine University’s Private Capital Markets Project, survey North American lower middle market M&A advisors and business brokers and publish the results here.

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

Seller Sentiment Declined in 2023

/in , , /by Exit Strategies

A seller’s market is when sellers feel they have an advantage or it’s a good time to sell, for instance when demand exceeds supply and there are more interested, active buyers than there are quality deals on the market. In a seller’s market, buyers compete in order to win deals. This typically translates to increased values and more favorable deal terms for the seller.

The results of the latest Market Pulse Survey (Q3 2023) show a decline in confidence year-over-year. This could be due to any number of market headwinds, including high interest rates, inflation, and geopolitical uncertainty.

 

Small main street businesses face the biggest challenge as they have not seen a seller’s market for a decade now. On the other hand, companies in the $2-50 million range still find themselves in a seller’s market, although the strength of the market has declined in the past year.

Exit Strategies Group operates in this $2-50 million segment of the market, where we are generally able to generate multiple offers and business valuations remain strong.

About the Market Pulse Survey: Each quarter, the M&A Source and IBBA (International Business Brokers Association), in partnership with Pepperdine University’s Private Capital Markets Project, survey North American lower middle market M&A advisors and business brokers and publish the results here.

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

Expect M&A to Recover in 2024

/in , /by Al Statz

Global M&A deal value nearly reached a 10-year low in Q3 2023 (Q2 2020 excepted). Deal count and total deal values both declined, as shown in this graph produced by Pitchbook. And these declines were evident across almost all most industry sectors and among all types of acquirers and sellers.

However, several factors are pointing to a recovery in M&A activity in 2024. The global total of $1.4 trillion in unspent PE dry powder is just 9.7% shy of its all-time high, and an even larger cash pile is on the books of corporations, positioned for new deals. There is also pressure building on the valuation front. Public markets are looking expensive again relative to private markets. Lower private-market valuations may spur rich public strategic buyers to scoop up private targets.  Also, a halt in interest rate hikes or reversal would put less upward pressure on borrowing costs, which have been a major headwind for dealmaking this year.

If you’re contemplating a sale, we would be happy to discuss current market conditions and whether the time is right to achieve your goals.

Al Statz is the founder and President of Exit Strategies Group, Inc. For further information on this subject or to discuss an M&A, exit planning or business valuation question or need, Email Al or call him at 707-781-8580. 

North American M&A Activity

/in , /by Matthew Gutowsky

As business owners continue to toggle with the idea of selling their business, they often ask us, when is the perfect time to sell? Are current market conditions going to give me the return I am looking for? The graphic above shows M&A activity over the past decade. As you can see, the amount of deals performed each year have remained flat for most of this time period. Instead of attempting to time the market based on deal value or deal count, we always encourage our clients to focus on their company’s health and growth while our team of accredited advisors does the heavy lifting of preparing a swift and successful approach to the market.

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 Glossary: Multiple

/in , /by Exit Strategies

A multiple is a way to measure how much a company is worth. If a company has $2 million in EBITDA and it sells for $10 million, we say it sold at a “5 multiple.” Multiples are used as a valuation tool by analyzing the multiple similar companies obtained in a sale.

For example, if a similar business sold in your industry for 6x EBITDA, valuation analysts will use that as an indicator in predicting what your company could sell for in the open market.

Do you have friends who’ve shared their multiple with you? Convinced your business will earn the same? Be sure you’re not comparing apples to oranges. We can help.

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 Glossary: Indication of Interest (IOI)

/in /by Exit Strategies

An IOI is a non-binding letter used to express interest in acquiring a business. The IOI will typically include a value range, due diligence plans, a high-level proposal for deal structure, and expectations for seller transition. An IOI and an LOI are not the same thing. An IOI is like asking someone on a date, while an LOI is closer to an engagement ring.

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.