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Exit Strategies Advises RST in Strategic Sale to Subsite Electronics

/in , /by Al Statz

Exit Strategies Group, Inc. (ESGI) is pleased to announce the acquisition of its client, robotic inspection equipment manufacturer RS Technical Services, Inc. (RST), by Subsite Electronics, a Charles Machine Works company. Exit Strategies served as exclusive M&A advisor to RST.

Acquired by:

Since 1984, R.S. Technical Services, Inc. (rstechserv.com) has been a leader in the design and manufacture of robotic video inspection equipment used to monitor and repair municipal water and wastewater collection and conveyance systems, mainly pipelines too small to allow man entry. Its systems are designed around a unique technology that incorporates all power and control functions into a single conductor, making its equipment more reliable and safer to use than competing solutions. RST has facilities in Kentucky and California.

Subsite Electronics (subsite.com), a Charles Machine Works company, manufacturers utility locators and horizontal directional drilling (HDD) guidance systems. The RST acquisition adds proven remote video inspection capabilities to Subsite’s line of underground awareness solutions. Employee-owned Charles Machine Works, founded in 1902 in Perry, Oklahoma, has several brands and divisions, and is perhaps best known for its Ditch Witch brand of HDD and trenching equipment. For more information visit charlesmachine.works.

Al Statz, President of Exit Strategies, who led the transaction, stated “We are proud to have represented the owners of RST in this successful sale to Subsite. Our team identified, profiled and had preliminary talks with over 100 target buyers, both strategic and private equity, and qualified 6 finalists. Subsite was selected not only on economic terms, but also because they demonstrated a strong culture of customer care, innovation, integrity and commitment to employees that was important our clients.”

For advice and representation in the valuation, sale, merger or acquisition of your company, contact Al Statz at 707-781-8580 for a free confidential consultation. Financial terms of the RST-Subsite transaction will not be disclosed.

About Exit Strategies

Exit Strategies Group, Inc. (ESGI) is a California-based M&A brokerage and business valuation firm focused on producing exceptional exits for closely-held and family owned lower middle-market companies. ESGI brings M&A experience, process management and close attention to detail to help companies sell, merge, recapitalize and acquire businesses successfully. Our advisors have sold companies in a variety of industries including sophisticated technology design, manufacturing, distribution and value-added services.

Buy Low, Sell High

/in , /by Exit Strategies

Timing is everything. Almost everyone is familiar with the world’s greatest tip to stock investors, “buy low, sell high.” These simple words of wisdom are equally useful to private business owners; however, sage advice is not always easy to follow in the same moment you’re reaping the benefits of high profitability.

With the current bull market in its eighth year, the lower middle market is economically healthy across many industries. I talk to business owners and CEOs every week. By and large, they are experiencing year over year increases in revenues and profitability – and therefore, exit strategy is one of the last things on their mind.

Selling in an upbeat, healthy economic climate makes sense; at the cost of incremental short-term profits – which are effectively turned over to the acquiring buyer. However, it’s difficult to gauge just how long the bull market will last. A rising tide surely lifts all boats; but it’s wise to consider that tides go in both directions.

There are many factors at play, when contemplating the best time to sell your business. As M&A intermediaries, we see first hand that buyers pay higher valuations for companies that show rising revenue and profits over several years, and when it is reasonable to expect continued growth in the years ahead. And likewise, buyers pay less for companies when the inverse is true.

While many aspects of your business are unpredictable, certain things can be predicted with fairly good accuracy; for example, the movement of tides, and the usefulness of simple stock advice. Buy low, sell high.

Is 2017 a good year to sell my company?

/in , , /by Roy Martinez

Sellers often ask us if it is a good time to sell their business. My response is usually, “yes, but it depends”.  The optimum time to sell a particular business depends on many factors, and this article discusses some of them.

First of all, timing depends on the company:

  • How are its business fundamentals?
  • Is it growing? Flat? Shrinking?
  • Is it profitable? How is the quality of earnings?
  • What is the outlook for the business for the next 5 years?
  • Does the company have a good management team in place if the owner leaves?
  • Does the company have intellectual property? Is it robust? Is it protected?
  • Does the company have concentration risk? Customer, supplier, etc.?
  • How many family members does the company employ?
  • How many personal expenses does the owner run through the business?
  • Is working capital being optimized?

The state of the industry is important too:

  • How are industry fundamentals?
  • Is the industry growing? Flat? Shrinking?
  • Are there industry buyers?
  • Is the industry consolidating?
  • Are there any trends or changes on the horizon that could have an impact (good or bad) on your company?

The economy also matters, and market conditions factor in. When the world, U.S., state or local economy stalls, it can be difficult to sell businesses, at any price. Economic factors include:

  • Is the economy growing? Flat? Shrinking?
  • Is the economy stable? Any risks looming?
  • What is going on with interest rates?
  • What is the status of the Mergers and Acquisitions (M&A) market? Are strategic buyers and Private Equity Groups (PEGs) active or sitting on their wallets?
  • Are lenders lending?
  • At the low end of the market, are individual buyers buying? This may be contra-cyclical. In good times, individuals may not want to leave lucrative jobs. On the flip side, when people lose their jobs, some decide to buy a small business.

Last, but not least, your situation as the owner has a major influence on sale timing:

  • Why sell? Retirement? Illness? Death? Divorce? Burnout? Generally its best to have a good reason.
  • What are you planning to do post-sale?
  • If the business sells at its probable selling price, will you have the funds to support those plans, after taxes? Will you need all cash, or can your provide some seller financing?
  • Are you interested in retaining a stake in the company for investment?
  • Do you have family or management that want or expect to take over the business? Are you willing to leave some money on the table (vs. a strategic sale)?
  • How do you want to be involved with the company after the sale? Is there a time by which you have to be completely out?
  • How important to you are the ongoing success of the company, continued employment of staff, customer or supplier continuity, etc., versus maximizing proceeds?

There are more questions, but this is a good start. The point is, deciding when to sell a business is complex and deserves thoughtful analysis. Some of the answers will be easy, others require more analysis and assistance.

So, is 2017 a good year to sell?

For the first time in a long time, most small-to-medium-sized businesses can look back and see five solid years of financial performance. And, importantly, owners and investors can look forward with an expectation of good years to come. It has taken almost a decade, but most companies have completely shaken off the effects of the Great Recession. Furthermore, in most industries, strategic acquirers, private equity groups and lenders are writing checks and valuations are strong.

So, fundamentally, YES, 2017 is a very good year to sell, in the U.S., in California and in the Bay Area, and in nearly all industries. Of course, the full answer depends upon your specific company and personal circumstances.

Contact Roy Martinez with an immediate need or for further information on exit strategies and the market for your business.

Exit Strategies helps ProtoFab Expand its Prototyping Capabilities in the Northern California Machining Services Market

/in , /by Al Statz

Exit Strategies recently advised on the merger of two closely-held Northern California precision machining companies.

Founded in 1996 by Grant Kerr, GMAN Precision LLC is a full-service precision machine shop specializing in complex machined parts and services for R&D, prototyping, and preliminary production work. Its markets include aerospace & defense, biotech, electronics, energy, food processing equipment, medical device, and others. ProtoFab, Inc., based in Petaluma, California, is an ISO9001:2008 certified Northern California manufacturer of precision-machined components for low and high volume production. Major industries served by Protofab are medical, automotive, commercial and test and measurement.

Acquired by

Operationally, adding G-Man’s superb R&D prototyping expertise to Protofab’s world-class production capabilities will deliver even greater value to customers.  The move will give customers single-point machining services for the entire life cycle of their products; from initial R&D, through product launch, production and end-of-life. Culturally the companies share a strong commitment to quality and continuous improvement, and to their clients’ success. This is a smart combination that, combined with disciplined execution of a well thought out integration plan, will accelerate the combined entity’s growth in the Northern California market. Exit Strategies is pleased to have advised on this strategic merger. Terms of the deal will not be disclosed.

This transaction is another example of Exit Strategies’ M&A experience in the California manufacturing sector. We have appraised, sold and merged numerous contract manufacturers representing a broad swath of manufacturing disciplines and vertical markets. If you own a food, wood products, electronics, machining, fabrication, molding, finishing, or manufacturing services business of any kind, and you are looking to sell, merge or acquire a company, we are interested in hearing from you.

Contact ESGI’s president Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Do investment bankers, M&A advisors and business brokers actually add value? If so, how?

/in , /by Al Statz

Financially savvy company owners, such as private equity groups and diversified public companies, clearly see the value that M&A advisors add, since virtually all of them hire one to run a professional sale process when selling a company in their portfolio — even when they know who the buyers are and which one is likely will pay the highest price.

On the other hand, most entrepreneurs only sell their company once. As a first time seller, they haven’t experienced the value that a capable M&A advisor adds, which puts them at a disadvantage. Fortunately a survey of business sellers by Fairfield University professor Dr. Michael McDonald¹ provides credible evidence that intermediaries add value and explains how. I’ve summarized some of the survey’s findings here.

Professor McDonald surveyed 85 business owners located across the U.S. who sold their companies with the help of investment bankers² for between $10 million and $250 million during the 2011 to 2016 period.

All 85 sellers answered YES to the question of whether their investment banker added value.  As to where they added value, McDonald asked the owners to rate the value and relative importance of 8 services that such intermediaries provide:

  1. Identifying and finding the buyer
  2. Managing the M&A process and strategy
  3. Adding credibility to the seller
  4. Enabling management to focus on running the company during the sale process
  5. Educating and coaching the owners
  6. Negotiating the transaction
  7. Preparing the company for sale
  8. Structuring the transaction

All eight of these services added value according to the owners surveyed.  They said the most valuable services were, “managing the M&A process & strategy”, “structuring the transaction”, and “educating and coaching the owner”.

Importantly, the least valuable service was “identifying and finding the buyer”.  Simply introducing a buyer to a seller is not the primary value that intermediaries bring to the table (though clearly that is still a valuable part of the M&A process).

While this survey focused on $10-250 million deals, its findings hold true for smaller companies as well. If anything, the value that an experienced intermediary brings to owners of smaller businesses is even greater. These owners usually have even fewer internal resources to draw upon and are even more consumed with running their companies than their middle-market counterparts. Partnering with a quality business broker makes even more sense.

¹ I’m using the terms investment banker, M&A advisor, business broker, deal maker and transaction intermediary more or less interchangeably here. Firms that handle only $25 million plus deals usually refer to themselves as investment banks. Firms that mostly sell main street businesses for under $2 million usually call themselves business brokers.  Exit Strategies mostly operates in the $2-50 million price range, and we’ve settled on calling ourselves M&A advisors. Some firms like ours prefer the term “boutique investment bank”, particularly if they serve a few niche industries. When hiring an intermediary, regardless of what they call themselves, it is important to have a good understanding of their knowledge and experience, and the level of service they provide.

² Download the full survey results: The_Value_of_Middle_Market_Investment_Bankers

For more information on Exit Strategies’ full-service sell-side M&A services or to discuss a current need, confidentially, you can reach Al Statz in our Sonoma County California office at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Increase Business Value with Recurring Revenue

/in , /by Exit Strategies

Businesses with a higher percentage of recurring revenue generally sell for higher prices. Recurring revenue business models are highly sought after by strategic and private equity buyers because they are perceived as less risky. Future revenue is more predictable and requires less ongoing sales effort and reinvestment.

Companies like Salesforce.com pioneered recurring revenue in the software world, creating the Software as a Service (or SaaS) model. SaaS turned the traditional software licensing model on its head. Not surprisingly, acquirers of software companies reward sellers who’ve built a low-risk subscription model that looks to them like an annuity stream.

Companies in all industries can increase value with a recurring revenue model. Property management companies sell for more than real estate brokerages, for example, because they have long-term management agreements with landlords and leases with tenants that produce steady monthly revenue. Staffing companies, which place temporary workers with employers and produce annuity-like monthly revenue, sell for more than project based recruiting firms. Distributors who sell primarily proprietary products to OEMs sell for higher multiples than distributors who primarily sell commodities to end-users because high switching costs make customer relationships last much longer.

What percentage of your company’s revenue is recurring? 

Almost any business can find at least one recurring revenue opportunity. A license-based software company for example can add an annual support  program. Almost every boutique wineries has a wine club that automatically ships wines to customers on a monthly or quarterly basis. Restaurants can create loyalty programs that encourage customers to return on a regular basis.

Whether you are planning to exit soon or years from now, we encourage you to consider the immediate cash flow and future valuation benefit of recurring revenue.

Contact us for more information on increasing the predictability of your business revenue to increase enterprise value.

Early-Stage Tech Company Exits

/in , /by Exit Strategies

You’ve built a world-class software solution, delivered to customers as a SaaS application or web service.  You’ve recruited a team and created intellectual property. Customer retention is strong and the buzz is growing in your vertical market. Each new customer acquisition represents incremental recurring revenue that falls directly to your bottom line – and the company is closing in on cash flow positive territory.

Could this be the right time to sell the company?

You may be thinking, I’ve barely scratched the surface of the company’s income potential. Why sell at this juncture? The key is that you’ve built the engine for future financial returns. Perhaps a strategic acquirer with more marketing muscle or an existing customer base can turbo charge sales and edge out the competition better than you can on your own.  Or perhaps you’re a serial entrepreneur who’s strength is starting companies, and you’re ready for a new challenge. There could be any number of reasons why selling at this stage makes sense.

When implementing an exit strategy, early stage companies must select the right strategic M&A partner. Start-ups that are short on track record and long on vision and promise represent a unique species in the M&A market. Investment banking firms typically charge hefty fees, and prefer working with larger, later-stage clients.  On the other end of the spectrum, business brokers are generally unaccustomed to working with IP-focused technology clients.  If you’re caught in this under-served market niche, Exit Strategies Group can help. We focus on lower middle market clients, and have the skills and experience to value, package, market, and sell early-stage companies successfully.

One of your first questions will likely be, “what’s my tech start-up worth?”

Factors Affecting Small Tech Company Valuation

  1. Annual revenues and revenue growth rate
  2. How revenues are obtained (licensing fees vs subscription)
  3. Profitability
  4. Customer retention
  5. Strength of management team, and post-acquisition longevity
  6. Growth of the underlying industry
  7. Intellectual property
  8. Technology leadership
  9. Market share
  10. Viral adoption

In 2016, there were several noteworthy deals in the public markets.  While these public company transactions do not reflect how an early-stage privately-held tech company will be valued, it’s interesting to note the relative multiples of these deals:

SellerBuyerRevenuesTransactionRev. Multiple
LinkedInMicrosoft$2B$26.2B13.1
DemandwareSalesforce$2.37M$2.8B11.8
NetSuiteOracle$7.41M$9.3B12.6
Yahoo!Verizon$4.96B$5B1.0

Is it surprising that Yahoo! sold at a 1x revenue multiple while the others sold for at least 11x?  LinkedIn, Demandware, and NetSuite all have growing revenues, defensible IP, in growing market segments. Yahoo! does not.

saasevtorev

Source: Software Equity Group | 2015 Annual Software Industry Financial Report

On average, larger companies (in terms of annual revenue) command higher price/revenue multiples. Price/revenue multiples for small early-stage companies typically range from 1X to 3X (with outliers as low as 0.5X or as high as 10X).

When planning your exit, it’s beneficial to understand the broad range of valuation multiples and influencing factors. The underlying value drivers hold true for all size deals. Consider the valuation factors listed above, and make sure your company is firing on all cylinders.

If you have a $1-50 million revenue early stage software or tech business and you’re planning or considering an exit, please contact one of Exit Strategies’ California-based advisors for a free confidential consultation.

Don’t Forget the Net Investment Income Tax when Selling a Business

/in , /by Al Statz

The Net Investment Income Tax, which our friends at the IRS put into effect in 2013, takes an extra toll on business owners who sell their businesses; and for that matter, on most higher income taxpayers and any moderate income taxpayer whose income increases suddenly in a given tax year.

What is the Net Investment Income Tax?

The Net Investment Income Tax (“NIIT”) is a 3.8 percent federal tax on certain income of individuals, estates and trusts whose modified adjusted gross income or “MAGI” exceeds certain threshold amounts. Common forms of investment income are interest, dividends, capital gains and passive business activities such as rental income or income derived from royalties. Generally, wages and income from an operating business are NOT considered net investment income.

For individuals, the MAGI threshold is $250,000 (married filing jointly) and $200,000 for single filers. Taxpayers with MAGI over the threshold are taxed at a flat rate of 3.8 percent on all net investment income, in addition to other taxes!

When you sell a business of any significant value, NIIT will likely affect your tax liability in the tax year(s) in which you receive payment. Individuals report (and pay) net investment income tax on IRS Form 1040; while estates and trusts use Form 1041.

So, what should business owners do?

If you are considering the sale of a business or business interest, it is important that you fully understand the tax implications of a sale beforehand. There are strategies that you can use to minimize your tax liability if you take action early enough and/or structure the sale in certain ways. Contact your tax advisor to estimate your tax liability and find out what can be done to maximize your after-tax proceeds.

 

Exit Strategies are not tax professionals, and we do not provide tax advice. However, tax issues arise in nearly all of our exit planning, valuation and M&A brokerage engagements, so we are well aware of them. If you are looking for an experienced CPA or tax advisor to analyze the various federal and state tax issues related to a business transaction and recommend appropriate tax minimization strategies, we can recommend one or two. Feel free to Email Al Statz or call him at 707-781-8580 for help.

Selling an Ecommerce Business in the Lower Middle Market

/in , /by Exit Strategies

With continuing growth in consumer online spending and many high-profile public acquisitions this year, it seems like a great time to sell your online retail business. But things are never quite as simple as they appear.

Over the past few months, several impressive acquisitions have been announced in the public markets. Walmart has purchased Jet.com at a jaw dropping $3.3 billion; a move that is presumably Walmart’s effort to narrow Amazon’s ever-increasing dominance. Consumer brands company, Unilever, acquired Dollar Shave Club earlier this year, another massive $1 billion deal. And the Unilever acquisition machine is still hungry, rumored to be purchasing Jessica Alba’s The Honest Company, also for $1 billion.

Other well-known emerging ecommerce companies have raised impressive sums of money, suggesting incredible valuations. Take Ipsy for example, which raised $100 million in 2015 for their subscription-based make up service.

The above examples all have one or more of the following characteristics in common: Strong intellectual property, unique business model, extreme differentiation, and larger than life CEOs.

Most online stores do not have a Hollywood-famous CEO or an R&D budget to reinvent the consumer shopping experience. How do these companies create acquisition value? In the lower middle market, we often explore exit strategies with CEOs of ecommerce companies; in the process, we’ve discovered two differing models that are both attractive to prospective buyers in their own unique ways.

On one hand, there are many niche-oriented “efficient online stores” – where a majority of sales are generated through channels, and where most products are drop-shipped directly to customers. These companies have narrow, unique product lines – simple enough to manage with a basic ecommerce platform. Such an ecommerce business requires few employees, little or no office space, and virtually no inventory. An online business with these characteristics, and $1 – $2 million in revenues, can be attractive to individual and financial buyers.

On the other hand, many “mature ecommerce businesses” reached an inflection point – where it became mandatory to invest heavily in underlying platforms and technologies, to make difficult decisions about sales channels (and related margins), and to bear the overhead of specialized marketing staff and warehousing. When revenues exceed $5 million with consistent growth and profitability, such online retailers can become attractive to strategic buyers.

Online businesses have become far more competitive and challenging in today’s business landscape. Large players like Amazon increasingly sell virtually every product category, breaking through the old fortress walls of niche-based differentiation. Large players are investing billions in technologies – such as Chatbots and drone delivery – simultaneously creating simplicity for consumers and barriers to entry for smaller online retailers.

It’s always important to consider your exit strategy, while focusing on growth and fundamentals. Are you building an efficient online store or a mature ecommerce business? These strategic decisions prepare your company for eventual exit, and create appeal for the right kind of buyer when the time comes.

Recent Trends in the M&A Market

/in , , /by Jim Leonhard

Pepperdine University, of Malibu, California, in conjunction with the International Business Brokers Association and M&A Source, publishes a quarterly Market Pulse Survey of business brokers that provides useful information concerning the market for Main Street ($0-$2M sales price) and lower middle market ($2-$50M sales price) businesses.

Highlights from their most recent report for Q1 2016, include:

  • 50% of all business sell
  • Retirement is still the prime motivating factor for sellers followed by burnout.
  • The strongest growth for new sellers is in the $2M-$5M segment
  • Although the magnitude had declined somewhat, the lower middle market it is still a Sellers’ market.
  • Main Street multiples of SDE have remained relatively stable between 2 and 3x over the past 7 quarters
  • Multiples of EBITDA in the lower middle market have also remained fairly stable at 4x for $2M-$5M sales, but have risen for the $5M-$50 sales to 5.5x in the current quarter.
  • The average Main Street business sold for about 92% of asking price, while lower middle market companies sold for around 94% of the advisors’ and sellers’ expected price.
  • First-time buyers accounted for 43% of <$500K transactions while Private Equity Groups comprise 43% of buyers of $5M-50M businesses
  • It takes an average of 9 months to close a lower middle market deal.

To view the latest Market Pulse report or to discuss a current need in the area of business sales and acquisitions, please contact Jim Leonhard, CVA MBA at 916-800-2716 or jhleonhard@exitstrategiesgroup.com.