Will appear on Seller pages – RECENT SELLER ARTICLES

2016 Promises to be a Banner Year for Mergers and Acquisitions

/in /by Al Statz
Deciding how and when to retire is one of the toughest decisions in a business owner’s life. Selling to a strategic buyer, investment group or management team represents the culmination of years of hard work and investment. Going to market when the owner is personally prepared, and the business is ready, and market conditions are conducive offers the best opportunity to maximize results.
M&A activity in 2015 has been strong and 2016 market conditions look promising.  Here’s why:
  • Economy – Expectations are for a continuation of the recovery that began in 2009. Buyers make acquisitions and pay more when they can reliably forecast future earnings growth.
  • Strong public stock market – Public companies with high valuations enjoy a lower cost of capital with which to make acquisitions, and many are on a buying spree.
  • Abundant cash – Corporations have strong balance sheets and private equity groups have cash to deploy. They are competing for acquisitions.
  • Debt financing – Debt is used in most acquisitions. Commercial banks are lending, debt ratios have returned to pre-recession levels, and even though the Fed may raise interest rates this month, rates are should remain attractive.
  • Valuation multiples – Multiple studies and databases confirm that private company earnings multiples are at pre-recession levels.
  • Moderate tax rates – Individual capital gains tax rates are still only 20% compared to 28-35% for most of the past 50 years. Government spending is at all-time highs and a recent budget deal removed the Federal debt limit. Sellers can expect higher taxes in the future.
Businesses offered for sale by Exit Strategies in 2015 received the best response we’ve seen in years, resulting in:
  1. more buyers looking at each deal,
  2. multiple offers per deal,
  3. more offers in the upper valuation range,
  4. higher percentage in cash,
  5. more seller-friendly terms,
  6. shorter time-on-market, and
  7. buyers that did not win these deals hounding us for more opportunities.
How long the good times will last is anyone’s guess. At 78 months, the current economic expansion is already longer than 29 of the 33 expansions in the U.S. economy since 1854.
Al Statz is CEO of Exit Strategies Group, Inc., which provides M&A brokerage and business valuation services to companies in the Western U.S. He can be reached at alstatz@exitstrategiesgroup.com or 707-778-2040.

Defending Your Price

/in /by Don Ross
A critical component in any business transaction, whether it be a simple sale of a used car or a complex transfer of ownership of a business, is usually PRICE. The art of “the deal” is dependent upon the two parties arriving at a price they can both live with.  In both cases, each party must persuasively defend their price.
Market valuations are often based upon a multiple of past and future earnings. Multiples usually fall within a market-tested range for a particular type of business. Many factors influence the multiple and ultimately the price that both parties will accept for a specific business. Here are several common factors:
  1. The nature of the owner’s involvement.  Can the owner easily be replaced or is the business a “one trick pony”?  In cases where the owner IS the business, the indispensability will negatively influence the future performance of business and the fair market price. The same holds true for the staff that may or may not be transferring with the change of ownership.  Are there certain key employees that would be a challenge to replace?
  2. Consistency of Performance.  Does the business have consistent monthly revenue and cost margins or are there seasonal peaks and valleys where negative cash flows obligate the owner to take on large lines of credit?
  3. Processes in Place.  Does the business have a time tested modus operandi that can easily transfer to a new owner and staff?  Intuitive management and loose organization may have served the present owner well but it doesn’t transfer well.
  4. Client and Supplier Concentration.  Limited sources of supply or a small client base can be problematical.  When you have all of your eggs in one or two baskets, you really have to watch those baskets.
  5. Capital Expenditures.  Businesses that generate a lot of revenue and profits with minimal capital assets requirements sell for higher multiples.  Conversely, businesses that have consistently high outlays for new equipment, rolling stock, and other capital assets, sell for lower multiples.  Take a close look at the depreciation schedules to determine the future ‘life expectancy” of the assets and the costs to replace them.
  6. Regulations.  Businesses that require new licensing, background checks, certifications, prior industry experience can present a hurdle to a new owner.
Just as in selling/purchasing a used car, once you have consulted the “Kelly Blue Book” and arrived at a price range, further examination into the drivers of value and risk of the business will serve you well when it comes time to defend your price.

Where’s the Seller Tsunami?

/in , /by Al Statz
The Wall Street Journal published an article this month titled “The Missing Boom in Small-Business Sales — An expected rush in sales of small firms by the baby boomer generation has yet to materialize.”
The article points out that despite predictions that a flood of private businesses would be coming up for sale as baby boomers reach retirement age, many of these owners are holding on longer than expected. We’re seeing the same thing here at Exit Strategies. We’re experiencing steadily rising deal flow, but not the massive seller tsunami that’s been predicted for the past ten years.
The article posits several reasons, all of which we agree with:
  • The recent recession hit retirement asset values hard, causing many owners to invest additional personal funds in their businesses; therefore postponing retirement for those who plan to live off of their assets in retirement
  • People are living longer and enjoy the challenge of working later in life
  • Younger people seem to be less interested in taking over the family business (particularly when good jobs are plentiful)
We are definitely seeing more interest in selling (and stronger demand for) companies valued over $2.0 million dollars. Owners of smaller businesses seem to be holding on longer, perhaps because they also have fewer retirement assets to rely on.
So, the tide of exiting baby boomer owners is rising, but the crest of the wave is still approaching.
Being personally prepared to sell is a key element of a successful business sale. Owners who are personally ready should seriously consider going to market now, while business performance is strong and market conditions are conducive. For help determining if the time is right for you and your company, feel free to contact Al Statz.

The Significance of Disclosure in a Business Transaction

/in , /by Don Ross
Full disclosure by buyer and seller is a vital component in any successful business sale/purchase transaction.  In a small business transaction, buyer and seller disclosure statements are customarily exchanged and reviewed before or during the due diligence process. Hopefully there are no significant surprises at that point and the transaction proceeds smoothly.
When the buyer is an individual, the buyer’s disclosure statement generally focuses on the buyer’s personal, professional, and financial background and reorganization plans.  However, the seller’s disclosure statement is broader and is often organized into these categories:
  1. Business Conditions
  2. Regulations
  3. Other Considerations
  4. General
Business Conditions encompass internal aspects of the business.  Any financially adverse conditions such as prior bankruptcy, undeclared income or expense, client or vendor concentration, future promises to current employees or independent contractors, current or anticipated conflicts with landlord(s), deferred maintenance issues, unpermitted work performed on premises, equipment in need of repair, anticipated increases in worker’s compensation insurance due to recent claims, and existence of hazardous materials must be disclosed and addressed should they exist.
Regulations focuses on required licenses and permits, zoning, tax compliance, and local, county, state or federal law violations or investigations of any kind.
Other Considerations may include union or employment agreements, employee stock ownership plans, underfunded pension liabilities, accrued back wages, vacation pay or sick leave, equipment leases, pending or threatened litigation, unresolved insurance claims, unpaid local, state or federal tax, etc.
The General category raises one all-encompassing question: is the seller aware of any other facts or conditions not disclosed in the three prior categories that may adversely affect the operation of the business, a buyer’s decision to purchase it, or the price that a buyer might pay for it?
Should any of the aforementioned conditions exist, it is critical that they be acknowledged and explained to the buyer before they buy. A significant business weakness or risk revealed early in the discovery phase is usually a manageable hurdle or a point to negotiate around. That same information revealed during due diligence becomes a catalyst for buyers to reexamine other data, lower their price, or walk away. In our experience, appropriately exposing warts early in the M&A process builds trust and credibility with buyers, which is an advantage in negotiations, and helps ensure that sellers avoid disputes and keep all of their proceeds after the sale.
Ultimately, the best advice is: Disclose, Disclose, Disclose.
For further information on disclosures in the business sale process contact Don Ross.

SBA Loans: Capital for Small Business Acquisitions

/in , /by Bob Altieri
So you’re thinking of selling your business and prefer to be cashed out rather than be paid in installments over time. Uncle Sam wants to see your business continue as a job creator, and hence, works with lenders to make attractive loan terms available to business buyers, on loans up to $5 million.
US Small Business Administration (SBA) loans come in two types: business loans – type 7(a), and real estate loans – type 504. According to Bob Porter of Plumas Bank in Auburn, CA, who has been in the SBA lending business for a very long time, the “lending formula is complicated,” but here are typical loan terms:
7(a) Loans [Business]
  • Loan-to-value ratio is typically 70-85% of the business purchase price.
  • Term is typically 10 years.
  • Interest rates are typically Prime rate plus 2.0-2.75%. Prime as of this writing is 3.25%, so interest rates are currently 5.25% to 6%. Interest typically adjusts quarterly.
  • Banks may loan up to $5 million under the 7(a) program.
  • Terms are competitive among banks and vary with perceived business risk and the creditworthiness, outside collateral and business experience of the borrower.
  • Loans over $250,000 (and smaller loans when the business is being transferred between related parties) require a fair market value appraisal by a certified business valuation expert.
  • To help offset risk, banks typically like to see a 4 times debt-equity ratio (80% debt; 20%cash [equity]) to the appraised value of the business, because if the business is priced at fair market value it should have the ability to service the SBA debt payments. If the buyer is paying more than appraised value, the loan amount will be reduced accordingly.
504 Loans [Real Estate]
  • Loan-to-value ratios are typically 90% for general purpose properties like office and warehouse buildings, and 85% for specialized/dedicated properties such as restaurants, bowling alleys and gas stations.
  • Two loans are actually made: a 50% First Trust Deed held by the bank with a term of 20 to 25-years and a fixed or variable interest rate (currently around 5%), and a Second Trust Deed from the SBA with a 20-year term and a fixed rate (currently 4.9%).
  • Although rare, SBA 504 loans can also be used to purchase equipment such as printing presses, tractors, or machining equipment.
In cases where a business is being purchased with real estate, banks may offer the borrower a blended term 7a loan, or break the transaction into both a 7(a) loan for the business purchase and 504 loan for the real estate purchase.
 

Bob Altieri, Certified Business Appraiser (CBA), regularly conducts business valuations for SBA business acquisition loans and serves lenders throughout California. For further information on this topic call or Email Bob Altieri in our Roseville, California office.

Event: Helping Business Owner Clients Achieve More Valuable Exits

/in , , /by Al Statz
When: September 22, 2015
Where: San Rafael, California
Host: CalCPA San Francisco-Marin Discussion Group
As baby boomer owners and shareholders of privately-held businesses reach retirement age and get serious about exiting ownership, they face many new questions and challenges and turn to their professional advisors, often their CPA, for solutions. Based on his experience helping over 100 companies successfully sell or transfer ownership to partners, management or the next generation, Exit Strategies’ founder Al Statz will discuss the following topics in this presentation to CalCPA members and guests:
  • What exit options do owners have?
  • What factors affect the value of a company?
  • Does the preferred exit option have value implications?
  • What is an exit plan comprised of?
  • Marketability and other considerations
  • Services CPA’s can provide to help clients optimize their exits

Why use a professional M&A advisor when selling your business?

/in /by Louis Cionci
Business owners contemplating a sale of their business sometimes wonder why they should use a professional M&A advisor.  Owners may ask themselves: Why do I need an M&A advisor to sell my business? Can’t I just do it myself and save a significant amount of money in fees?
Owners can frame the decision to use a professional M&A advisor in terms of a cost-benefit analysis. What are the benefits to me? What are the costs to me?
The list of benefits of not using a professional advisor is short.  Avoidance of advisory fees. Advisory fees can run from 2% to 10% of the purchase price depending upon the size of the deal. Some owners find this a big hurdle and feel they can do it themselves and avoid the fees.
Representing yourself in the sale of your business carries direct costs and risk. Owners contemplating selling their business themselves should expect to spend approx. 500 – 1,000 hours of dedicated professional time to the sale process over the course of approximately 6-12 months, while still running their business. They will need to master the techniques and processes of the M&A game, while avoiding the traps and pitfalls that can derail a transaction. Professional M&A advisors have experience from many deal transactions, while most business owners do not. Achieving a successful business sale transaction is not an easy process.
One of the roles experienced M&A advisors play in a successful sale process is the buffer or the intermediary role between buyer and seller. During the sale process, and right up through closing, there will be points of contentious negotiations. These contentious episodes can derail a sale. M&A advisors act as a buffer between the buyer and seller, keeping the sale on track during contentious negotiations.
M&A advisors also drive the transaction to close. The majority of professional M&A fees are earned as success fees. M&A advisors are incentivized to keep the transaction on track and take the lead in driving the deal to a close.
So if you are contemplating selling your business, and considering doing it yourself to avoid the professional advisory fees, be aware that there are direct and indirect costs that can far outweigh the M&A advisor’s fees.
For more information contact Louis Cionci in our Sonoma County, California office.

Marketing a Business: The Need for Confidentiality

/in , /by Don Ross
Maintaining confidentiality during the M&A sale process is a critical factor in successful business transactions. 
At the onset, during the marketing phase of a business sale, you are walking a tightrope between those you want to inform and those you don’t.  Confidential information is shared only with qualified buyers who have evidenced professional and financial capacity.   Information is withheld from those, who by virtue of their relationship with the seller’s business, could prove detrimental to the ongoing operations or constituents of the business.  Constituents can include employees, competitors, vendors and lenders.
Buyers want to buy a stable businesses. If employees learn that their employer is for sale, they may seek other employment to protect their income. Customers may begin to favor other sources for the company’s products or services. Key suppliers may begin seeking alternate channels to the market. Any of these events can erode business performance and stability, which translates to reduced value and increased risk for the current and future owner.
Marketing pieces include “blind executive summaries” where company name and location are not disclosed.  Non disclosure agreements help to maintain confidentiality with buyers.
Information of a highly sensitive or competitive nature, such as customer lists and proprietary processes, should not be divulged prematurely.  As the transaction progresses and the parties agree to terms, such information is safeguarded and discretely released to the buyer late in the due diligence process or when the transaction closing is imminent.
Finally, after the transaction closing, details of the transaction remain private.  In 13 years of selling businesses, Exit Strategies has managed to keep the details of every private to private company transaction confidential.
It is the maintenance of confidentiality throughout the transaction that sustains the integrity and comfort of the business for both buyer and seller during the process and going forward.
For further information on maintaining confidentiality in a business sale process contact Don Ross.

What is a Recapitalization Exit Strategy?

/in , /by Al Statz

One of the exit strategies available to company owners is called a recapitalization, or “recap”.

In a recapitalization, an investor (usually a private equity firm) purchases an equity interest in your company using a combination of cash and debt financing. They expect to grow the company and earn an attractive return on their cash investment when they sell the company at a higher price in 3-7 years. Their value creation strategy usually involves initiatives to accelerate growth, increase profit margins, mitigate business risks, and professionalize the business to make it more attractive to future buyers.

Why Recapitalize?

A recapitalization gives an owner significant liquidity now AND gives them a second larger bite of the apple when the PE firm is ready to exit and sells the company to another PE firm or strategic acquirer. A recapitalization can also facilitate:
  1. a buyout of only specific shareholders,
  2. the transfer of partial ownership to the next generation, and
  3. equity participation for remaining management.

When they recapitalize a business, PE firms usually acquire a majority (controlling) interest and don’t play a role in day-to-day management. They bring financial acumen, systems and growth capital, sit on the board, and participate as a strategic advisor.  They prefer to retain the existing management team, which often includes the owner. Owners who recapitalize and stay on can achieve material liquidity and maintain control over day-to-day operations. Alignment with the investor is of course very important.

Exit Strategies Group maintains relationships with Private Equity groups and other types of financial buyers across the country and is experienced in both sourcing potential equity partners and negotiating recapitalization transactions that fit our clients’ goals.

Al Statz is the founder and president of Exit Strategies Group. He is based in Sonoma County California. For more information on selling or recapitalizing your company, or to discuss your strategic exit options, contact Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.

How Well Do You Know Your Exit Options?

/in , /by Exit Strategies

You have built a business that provides a strong income and comfortable lifestyle. However, if you are like most business owners you haven’t made the time to know the range of options you have to successfully exit the business and transfer your wealth. The tax, legal, valuation, deal structure, and insurance considerations are many. Even if you had the time, where do you begin?

Before you can evaluate any of these options, you must first decide what your goals are. Are there other owners to consider? If so, are their goals similar or different than yours? What personal and family issues do you want to consider? Are you strictly looking for the best price? Are you tax sensitive? Have charitable intent? Are you financially prepared? Mentally? The earlier you begin planning, the more options you will have at your disposal.

Once you have determined your goals, you can begin to narrow the list of exit options available to you. Do you intend on doing an internal transfer to a key employee or employees? Family member? Is an ESOP a viable alternative? Is your estate plan designed around your desired exit? Are contingencies planned for and protections in place?

Whether you plan to transfer your interest internally or to a third party, knowing how much your business is worth is a great starting point. Internal and external transfers can imply different valuation standards that can render very different values. You want to know these differences before you make a decision. A business valuation will also give you a good idea if the transfer can be financed.

What is your time horizon? More time is better, especially for external sales. Is the business saleable as is? Aspects of your operations may need improvement before you go to market. How do you select an M&A advisor?

The earlier you begin planning your exit, the more options you will have at your disposal.

Achieving a successful business transfer requires a process. An M&A broker/advisor can lead this process and guide and coordinate the professionals required to help you reach your goals. An owner can attempt to lead this process on their own, but it’s not easy. Your time is probably best spent running your business at peak performance. Still, it’s up to you to appoint a competent adviser to guide the process and ensure that your other professional advisors are on board and up to the task.

For a confidential conversation regarding your exit options, contact one of our senior advisors.