Will appear on Seller pages – RECENT SELLER ARTICLES

M&A Advisor Tip: ESG Diligence on the Rise in M&A

Companies that are able to showcase their Environmental, Social and corporate Governance (ESG) capabilities stand to gain a competitive advantage and make themselves more attractive to potential acquirers.

ESG issues cover a wide range of corporate practices that could include everything from environmental stewardship, health and safety policies, employee well-being, community support, to corporate culture issues.

In recent research from Datasite, 84% of dealmakers rated ESG as an “important/very important” M&A due diligence consideration. And 78% have terminated M&A discussions due to concerns about a target company’s ESG credentials.

We are definitely seeing buyers pay greater attention to environmental, social and corporate governance issues in our sell-side M&A engagements. From a buyer perspective, misalignment in these areas reduces valuation and increases integration challenges and costs. As a result, we are incorporating more ESG analysis into our company valuations and exit planning assessments, and making more of these types of disclosures in our offering memorandums.


For advice on exit planning or selling a business, 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 in the Cornerstone International Alliance.

 

Exit Strategies Group Represents Shareholders in the Sale of Gibson Engineering

Exit Strategies Group is pleased to announce that Applied Industrial Technologies has acquired Gibson Engineering Company, a value-added distributor and system integrator of industrial automation technologies. Exit Strategies Group served as the exclusive M&A advisor to Gibson shareholders.

Gibson Engineering, based in Norwood, MA,  distributes advanced robotics, vision systems, sensors, motion and machine controls, material handling and other industrial automation products, and integrates mixed technology systems. For over 40 years, Gibson has been a trusted supplier partner to major OEM and end user manufacturers throughout the Northeast and Mid Atlantic region. Under the principled leadership of CEO Dan O’Brien, Gibson Engineering has developed into one of the most capable and respected automation solution providers in North America.

Al Statz, who led the engagement for Exit Strategies said, “Our sale process generated keen interest from several top firms. Applied ultimately presented the right balance of strategic opportunities and cultural alignment for our client. I am confident that Gibson’s suppliers will benefit from this partnership and I look forward to seeing what the Gibson team can accomplish as part of the Applied family.”

Financial terms of the transaction were not disclosed.

About Applied Industrial Technologies: Publicly traded AIT is a leading multi-national distributor and technical solutions provider of industrial motion, fluid power, flow control, automation technologies, and related maintenance supplies. Read the Applied news release.

About Exit Strategies Group, Inc.:  Founded in 2002, Exit Strategies Group is a boutique M&A advisory firm providing full-service sell-side representation, business valuations and exit planning assistance to owners of private lower middle market businesses in automation, material handling and other industries.

Key Deal Terms – Fall 2020

GF Data collects and publishes proprietary business valuation, volume, leverage and key deal term data contributed by over 200 lower-middle market private equity groups and other M&A deal sponsors.  Two of the acquisition deal terms that they monitor are the survival period¹ on general reps and warranties and the cap on indemnification² against breaches of general reps and warranties.   The following table shows these limits for deals in the $10 million to $25 million enterprise value range.

The indemnity cap in the first six months of this year across all industries was 10.0% of the purchase price, well below the 17.1% average from 2015 to present.  The indemnification period was 20.8%, up slightly from the 2015-to-present average of 18.8%.

  1. Indemnification cap refers to the general indemnification provided by the seller to the buyer against breaches of reps and warranties. This does not include carveouts for specific issues or items. For example, parties often agree that the general cap will not apply in the event of fraud.
  2. Survival period refers to the period after closing during which a buyer may assert a breach of the reps and warranties against seller. Again, this does not include carveouts. For example, exposure on tax, environmental, and ERISA issues often exceeds the general survival period.

For assistance with selling a lower middle market business, contact Al Statz in Exit Strategies Group’s Sonoma County California office at 707-781-8580 or alstatz@exitstrategiesgroup.com.  Exit Strategies Group, Inc. is a partner in the Cornerstone International Alliance.

M&A Advisor Tip: Be able to articulate your growth story.

Buyers want to acquire businesses with profit AND growth potential.

Where is your business headed? Will it still be relevant in 5 years? Where will growth come from? How will it outperform its industry peers?

If you don’t have an expansion strategy at the ready, talk to an M&A advisor or an exit planner. We can uncover which parts of your business are most attractive to buyers. Then we can help you plan to increase value – whether that means continuing to operate the business on your own or taking on an equity partner to help you take it to that next level.

For advice on exit planning or selling a business, 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 in the Cornerstone International Alliance.

 

M&A Advisor Tip: How you know when it is time to sell

It may be time time to sell your business when …

  1. Revenue has plateaued and you no longer see how to grow the business.
  2. You’re not sure how to reach the next level on your own.
  3. Your industry is consolidating around you.
  4. The current probable selling price of your business will satisfy your personal financial goals and a major economic or political shift could erode value.
  5. You’d like to diversify your assets and are ready take some chips off the table.
  6. Your interest and passion for the business are waning.
  7. You prefer to do something different with your money and/or time.

With smart preparation, you can ensure that your business is ready to sell when you are. It’s time to start the conversation.

For advice on exit planning or selling a business, 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 in the Cornerstone International Alliance.

Better to sell early in consolidation. Here’s why.

Consolidation is inevitable in maturing industries.  As an M&A advisor working with owners of private wholesale distribution and manufacturing companies, one of the questions I get asked is whether it is better from a valuation perspective to sell early in a consolidation phase, or hold off.  My answer is always case-specific, but generally earlier is better, all else being equal.

Before I explain why, I want to point out that industry consolidation is not always at the top of a seller’s list of sale timing considerations. More important factors may be:

What is your exit time frame?

Next year or so?  Three to five years?  Five or more years?  The answer is often driven by how much money you (or a majority of the shareholders) will need to retire or fund your next venture. Obviously, as with any investment, the shorter the time frame, the more conservative one should be with respect to anticipated returns.  Maybe the value today isn’t quite what you think it can be in the not too distant future – but eliminating risk may be worth a lower price tag.

For a seller who either wants to stay and manage the acquired/merged business or help the consolidator in a strategic (e.g. corporate development) role, that tail of income is above and beyond the sale consideration. Sellers who prefer to buy a boat and sail to the Bahamas had better have a strong management team to lock that future strategic value down. If not, they will likely be passed on by the buyer for another acquisition with a stronger management team and lose out on that strategic value.

Is your company performing well?

Last I checked, fundamental financial performance was still king when it comes to acquisition values. If your business is performing well (relative to industry peers and alternative investments) and further improvement is likely, now may be your best opportunity to maximize value in an M&A sale process.  If not, you’ll have to decide if and how you and your management team are going to change that performance and by when. And, by the way, what is your track record of achieving past projections?

Is the macro-environment favorable?

Does the economic outlook portend for several more years of strong economic growth, or is there increasing uncertainty or even signs of an imminent slow down?

If the former is the case, perhaps you have time to continue to grow revenues and profit margins to increase value and better position your business for future sale.  If the latter is likely, are you prepared financially and mentally to wait it out indefinitely and hope to again consider achieving liquidity several years from now?  If that’s not an option, maybe now’s the time to take some or all of your chips off the table.

Conditions can change quickly for all sorts of reasons and you can be stuck, not just with a reduction in valuation, but closed private capital markets altogether.  M&A came to an abrupt halt in Q2 of this year and has only recently started showing signs of life in certain industries. And look at what happened in the wake of The Great Recession.

Why earlier is usually better.

Industries consolidate at different times and in different ways.  So, to make my answer more informative, let’s use the example of industrial distributors, where regional and national players have acquisition-based growth strategies. Driving consolidation are mergers and product line expansion by upstream manufacturers (suppliers) and both vendor reduction programs by and consolidation among downstream customers.

  1. If I’m an aspiring consolidator/acquirer, I’m probably willing to pay a nice premium for the first acquisition in a particular region – to attract the best of the options available and to secure that foothold ahead of my competitors.  I may want to make a statement in the geography and elsewhere with regard to the quality of organization I intend to build.  Hence, there is more of a strategic component in the valuation of earlier platform acquisitions, whereas later add-ons may be more simply about purchasing market coverage and earnings.
  2. Further, the first couple of acquisition targets are likely to have more to say (and be credited for) relative to the manufacturers they are aligned with.  As the map fills in, later acquisitions may be forced to discard certain lines and replace them with others to conform to the acquiring organization.  You can count on the acquirer considering the risks and costs of making those transitions when determining the value of an acquisition.
  3. Early on, there are likely to be more strategic acquirers in the market. As the market consolidates further, the number of viable strategic match-ups will decline, which may favor the remaining buyers and reduce the likelihood of a strategic premium for sellers. Eventually, the only option for the last few independents standing may be to sell to pure financial buyers – such as private equity groups (if the independent is large and profitable enough), their management teams, families or private individuals.  For some owners these are perfectly acceptable options, for others they are not.
  4. Then there is the likelihood that consolidators will eventually have competitive advantages over independent operators – in terms of buying power/terms with suppliers, proprietary products, lower administrative costs, ability to attract and retain talented employees, better access to growth capital, financial stability, etc.  To the extent true (which sometimes it’s not and/or there are other associated disadvantages) the market share and value of the smaller independents will gradually deteriorate.

Conclusion

Going to market early in a consolidation phase is likely to produce a stronger valuation than waiting around, all else being equal. However, when making exit plans, company owners should carefully consider shareholder needs, business performance and market conditions, in addition to what stage of maturity their industry is in.

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Al Statz is the founder and president of Exit Strategies Group, a leading 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.

 

Discover Exit Strategies’ New Checklist of COVID-Era Normalization Adjustments

For most of us, 2020 has been one of the most challenging years of our lives. The pandemic has affected business performance both negatively and positively, temporarily and structurally.  It will permanently reshape the global economy in several ways, most of which we are just beginning to understand.

Change and uncertainty makes the job of valuing and appraising businesses and business assets more challenging. At the core of every business valuation analysis is the process of normalizing or recasting the financial statements of the subject company from an historical accounting basis to a proforma economic basis.  If you get this wrong, the value conclusion will be wrong.

Exit Strategies recently developed a checklist of nonoperating and nonrecurring revenue, COGS, expense, assets and liabilities that should be considered for valuations performed during the COVID-19 era. Developed by our team of seasoned valuation analysts and M&A advisors, this checklist provides a framework for private investors, business owners, financial executives and other business valuation professionals to use.

COVID-19 Normalization Checklist

Download the COVID-Era Normalization Adjustments Checklist now.  And check back for updates. This checklist is a work in process as the effects of the pandemic on the economics and financial statements of businesses continue to unfold and evolve.

Best regards,

The Exit Strategies Team

M&A Advisor Tip: Finish Strong

Begin the sale process while your business is on an upward trend. Buyers pay a premium for businesses with well-defined opportunities and a strong growth story.

Too many business owners get tired or complacent and psychologically retire early, before the sale. In fact, after retirement, burnout is the number two reason business owners sell. Unfortunately, burnout usually leads to declining revenues and reduced leverage in the sale process. Stay focused until the end and sell while you still have energy and enthusiasm for your business.

The fact is, many buyers base their valuations on the financial performance of your company over the last 12 months. So after decades of hard work, waiting just 12 months too long can leave significant money on the table.

For further information on finishing strong or to discuss a business acquisition or valuation need, contact Al Statz in our Sonoma County California office at 707-781-8580 or alstatz@exitstrategiesgroup.com.  Exit Strategies Group is a partner in the Cornerstone International Alliance.

Lopsided Market Drives M&A Values in Pandemic

With all the upheaval in the world right now, you’d expect M&A deal values to take a dip. But recent market analysis shows that’s anything but the case.

According to GF Data [1], companies with an enterprise value of $10 million to $25 million sold at an average multiple of 5.9 times EBITDA in the first two quarters, versus a 5.7 average from 2003 to present.

Similarly, business sales with a transaction value of $25 million to $50 million transacted with an average 6.8 multiple, which is again higher than the 6.4 average over the last 17 years.

Deal volume is down, but values are not. The market has seen a significant pullback from sellers who are waiting out this period of uncertainty – assuming that now was not a good time to go to market.

We know that some buyers too, have hit the pause button on acquisitions. But not all. Private equity, which is still sitting on an estimated $1.5 trillion of dry powder, has continued to push ahead in the current market. In conversations with firms across the country, they’re telling us they are “absolutely open for business.”

Meanwhile, strategic buyers (i.e., existing companies) are still at the table, though in fewer numbers. Corporations were in generally strong shape before the pandemic and still have the balance sheets to move ahead with strategic acquisition and consolidation strategies.

So what’s driving such strong multiples, despite the downturn we’d expect to see in times of uncertainty?

It’s coming down to supply and demand. There are still active buyers in the marketplace, but it’s sellers who are holding off.

We’ve had an imbalance in the marketplace for years, with more buyers than sellers with good, solid companies looking to exit. But now the imbalance is even more pronounced, and the number of buyers competing against each other has allowed values to stay strong through the first half of this year.

Based on conversations with industry peers, we do believe there will be a spike in the number of companies going to market in the fourth quarter. It seems sellers and advisors alike were waiting for summer to be over and the new normal to settle in.

It will be interesting to see if an uptick in sellers will have any effect on value multiples. What I can say is that it would take a significant increase in sellers to get even close to rebalancing the supply and demand equation. The market is lopsided right now, and sellers in the lower middle market still have leverage.

[1]  GF Data collects and publishes proprietary valuation, volume, leverage and key deal term data contributed by over 200 lower-middle market private equity funds and other deal sponsors.


For further information or to discuss a current M&A need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com in our Sonoma County, California office. Exit Strategies Group is a partner of Cornerstone International Alliance.

 

Selling Your Business in the Covid-19 Era

Business owners contemplating a sale may be asking the question: Is this a good time to sell my business or do I need to wait until the Covid-19 economic disruption is over?

Let’s explore three interrelated factors to help an owner answer that question for their situation.

Market Conditions

  • Are their buyers for my business during this pandemic?  Yes, there is no shortage of buyers for well-run companies.

That statement was true before Covid-19 and it is true during the era of Covid-19. As a M&A professional, I get inquiries almost daily from buyers who are interested in acquiring a well-run business that fits within their industry and financial parameters. In addition, buyers have access to capital at historically low interest rates, and deals are getting done.

Business Value

  • Will I be able to get the price I want in this market?  Yes, is the short answer.

The longer answer: Yes, if the seller has reasonable expectations based on past, present and future earnings, growth and risk. Yes, because buyers are competing. Yes, price is one component of value when selling, terms are the other component. The best offer is really a combination of the best price and terms available in the market.

Personal Needs

  • What is the best timing for me personally? The answers stem from asking yourself these questions: Are you ready? What will you do if you exit? How long do you WANT to work? Is your family taken care of? Are you slowing down?

Some people think – My business is always for sale, if the price is right. Right? No. Telling people you’re not for sale is no way to sell, at least not on your terms and preferred timeframe. Selling should be proactive, planned and deliberate. Selling a business is a process that takes time, on average, from start to finish 9 months.

Summary

The three factors discussed above don’t align perfectly in most business sales. The best outcome for a seller is a proactive and planned exit strategy. If you are thinking of selling within the next 2 years, now is the time to start the process.  Obtaining a professional assessment of value and sale readiness is normally one of the best first steps an owner can take in the sale process.

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