Will appear on Buy-Side pages – RECENT BUYER ARTICLES

M&A Advisor Tip – Know Your Priorities

/in , /by Al Statz

The market is still strong, and sellers are receiving multiple offers, but the buyers they choose aren’t always the ones with the biggest checks.

Would you take a lower price to ensure that the buyer’s culture fits yours? How about a million-dollar price cut if it meant getting all cash at close and avoiding years of seller financing? Or trading $100,000 in salary to for an extra $1 million in sale price?

Sellers face these kinds of choices all the time. Potential deal structures should be carefully considered and explored, long before you reach the negotiating table. Whether or not you realize it, you’re positioning and negotiating from day one of a sale process. If you don’t have your priorities figured out, you might give a buyer the wrong impression … and that can spoil a deal.

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 Deal Terms: Fall 2021

/in , /by Al Statz

You may have heard – it’s a bifurcated market.

Declining caps on general indemnification against breaches of representations & warranties [1] had been a feature of the seller’s market for lower middle market businesses, going back well before the pandemic. Average caps have remained in the range of 15-16% of Total Enterprise Value (TEV) since the fall of 2020, according to GF Data’s semi-annual report on key deal terms, covering transactions by 243 active private equity data contributors completed through June 30, 2021.

However, a drilldown shows the same kind of market delineation we have seen in valuation.   Selling businesses featuring neither above-average financial characteristics (EBITDA margin and revenue growth) nor rep and warranty insurance (RWI) completed deals with an average cap of 23 % of TEV. For businesses offering above-average financials, RWI or both, cap averages were in the low to mid-teens.

The indemnity survival period [2] in the first six months of this year across all industries was 20.3 months, up slightly from the 2016-to-present average of 19.2 months.

The chart below makes clear that businesses with above-average financials and the ability to use RWI are rewarded in valuation. Businesses lacking both are subject to higher caps, in addition to dampened pricing.

In the first half of 2021, utilization of rep & warranty insurance bounced back to 59.1% of all deals. RWI usage anomalously declined in 2020, averaging 53.0% for the year. This reflected a temporary icing of the insurance market following the onset of the pandemic.

GF Data collects and publishes proprietary business valuation, volume, leverage and key deal term data on private equity sponsored merger and acquisition transactions with enterprise values of $10 to 250 million. GF Data gives M&A deal participants and advisors more reliable external information to use in valuing companies and negotiating transactions.

[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.

M&A Advisor Tip: Expand the moat, reshape the hourglass

/in /by Al Statz

Acquisitions work best when they accomplish one of two goals: expand the moat or reshape the hourglass.

Expanding the moat means leveraging your core advantage. The more you can strengthen that advantage, the wider the moat around your company, protecting it from competitive forces.

As for the hourglass, its narrowest point is your company’s primary weakness or limiting factor. If you can find a company that does that thing well, and acquire and integrate it into your business, you reshape the glass so business flows through with ease.

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.

How to Buy a Small Tech Company

/in /by Exit Strategies

There are thousands of small tech companies for sale at any time they are often websites that take 1 or 2 people to run. There are listed for sale on bizbuysell.com, Flippa.com and similar sites. They can be run from home. Sometimes they require a particular expertise but other times they can be managed by the owner and technical or time-consuming work can be done by contractors, often offshore.

Some examples are Amazon reseller businesses, or other ecommerce sites. There are many ways to make money, such as affiliate marketing to refer traffic to a bigger site, pay per click to bring in traffic, or adsense to get people to click on ads. Converting traffic to customers is key. SEO is one thing that impacts this-also things like site speed and content are important. Also flipping the business or providing premium content are other ways to monetize the site.

If you have a desire to own a small tech business and don’t want to start it from scratch, buying one is often a great solution.

Regardless of intention and how you ended up with the new business, there are several considerations to plan for, especially on the tech side.

    1. Have the previous owner stay on after the sale. The owner can serve as an advisor or consultant for a predetermined period of time. This can add some much-needed stability during the transitional period.
    2. Start with minor changes. Customers may react unfavorably to sweeping changes. Therefore, at the beginning, less is more. Make minor changes and pay attention to your customers’ initial reactions. It’s important to maintain site traffic. If you change hosting, site appearance, plugins or social media ensure you do in a test environment first and plan for/minimize interruptions.
    3. Ask lots of questions and take notes. Let the previous owner and the staff teach you how to run the business. You can implement new procedures, but before doing so, make sure you know how things are currently done. Only then can you make informed decisions on changing business processes.
    4. Maintain current record keeping-procedures. Do your best to ensure that records and to-do items remain on schedule through the transition.
    5. Review customer service policies. Customers are used to having issues handled in a certain manner. Review the policies and maintain them for the first few months. After the transition is complete, amend them as necessary.
    6. Familiarize yourself with your new technology. While meeting the people behind the business and learning the procedures is important, you must also learn as much as you can about the technology that supports the business. You need to familiarize yourself with software programs and learn about their shortcomings. Learn what has gone wrong and in the past and what shouldn’t be ‘messed with’.
    7. Do something nice for customers. Make sure any site conversions or feature changes don’t turn off loyal customers. Offer something free to make up for this.
    8. Reward Employees. Hiring new employees is almost always more expensive than retaining existing ones and losing technical talent can be even more expensive and destroy value. Employees in tech startups tend to be younger, require more autonomy which means adhering to strict scheduling might not work for them.
    9. Plan your M&A Integration Strategy. “Fail to prepare, prepare to fail,” as the old adage goes. And it very much applies to M&A technology integrations. If you wait until Day 1 post-merger to start the groundwork, then you’re already behind. Soon after an acquisition, IT leaders are under pressure to deliver on expectations to produce cost savings and enable synergies, and it’s ten times harder if they haven’t devised a clear strategy for M&A IT integration beforehand. Start planning the overall M&A technology integration strategy while the paperwork is being finalized so the team can get ready to hit the ground running.

Thousands of mergers and acquisitions have problems during transition each year and the only way to avoid this situation is to plan ahead and pay close attention to the details.

Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting, ownership transfer, strategic and other purposes. If you’d like help in this regard or have any related questions, contact alstatz@exitstrategiesgroup.com.

M&A Financing During the Pandemic

/in , , /by Al Statz

The pandemic has put lower middle market business sales and acquisitions on somewhat of a roller coaster ride. Deal volume declined sharply in Q2-Q3 and came back strong in Q4. Valuations have remained strong throughout the pandemic, at least for COVID-resistant businesses. Though there was a slight Covid-effect in Q2-3.

In terms of M&A financing, capital structures shifted to slightly more less debt during 2020, before edging back up to pre-pandemic levels in Q4. To compensate, the capital stack was being filled in with more buyer equity and more rollover equity.

Interest rates are still low and banks keep lending, but they have pulled back slightly. Lower middle market deals have typically had senior debt of around 3x EBITDA. According to GF Data, that ratio dipped to 2.7-2.8 in Q2-3 (the lowest level in 5 years) and returned to 3.2 in Q4 2020.

GF Data reported an uptick in buyer equity from 2019 to 2020, from 46.1% to 49.1%. We are still seeing buyers bring more equity to the table than pre-pandemic, and showing more interest in seller rollover equity.

Rollover equity is when a business owner retains a minority stake in the enterprise. For businesses valued between $10 million and $25 million, rollover equity accounted for 13.9% of deal funding in 2020.

At the start of the pandemic most of us were expecting to see more earnouts (contingent consideration) in transactions, but that hasn’t materialize. Because demand for acquisitions remained high during the pandemic, most sellers have been able to avoid earnouts.

If risk and uncertainty subside and interest rates remain low, we should see a return to more typical M&A funding levels in 2021.

For further information on M&A financing, or to discuss a current business sale, acquisition or valuation need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

 

Market Pulse Survey: Still a Seller’s Market

/in , , /by Al Statz

Despite the effects of the pandemic, we continued to experience a seller’s market in the fourth quarter of 2020, for businesses with enterprise values over $2 million.

Presented by IBBA & M&A Source

For further information on M&A market conditions, or to discuss a current business sale, acquisition or valuation need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A ADVISOR TIP: Cybersecurity is a Buyer Priority

/in , , /by Al Statz

New research from Datasite reveals that cybersecurity is the #1 cause of buyers withdrawing from a merger or acquisition during due diligence.

Deal makers said about 1 in 10 deals fell through during due diligence. Cybersecurity issues was the cause in 36% of these failed deals, followed by financial weakness, excessive valuation, financial irregularities, and leadership issues.

To ensure that your data security practices will not be a concern for prospective buyers of your company, Exit Strategies Group recommends that you talk to your technology team about potential issues, and consider obtaining a cybersecurity audit from an independent third-party firm. Ask your M&A advisor or CPA for a referral.

Exit Strategies Group is a partner of Cornerstone International Alliance.

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

/in , , /by Al Statz

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.

 

Due Diligence: Essential Step in Every Successful Business Acquisition

/in /by Exit Strategies

When purchasing a business the due diligence stage allows the buyer to verify  information pertaining to the business in order to determine whether to proceed with the purchase. The due diligence period also permits the buyer to determine if there are any barriers or risks associated with the transaction. Accordingly, the transaction closing is usually conditioned upon the due diligence stage being completed successfully.

While there are many operational, legal and financial components of due diligence, some less talked about ones are: the seller’s due diligence of the buyer, the buyer’s due diligence of the seller, including the reason for sale.

Some M&A advisors claim the reason for sale is immaterial-my colleague recently saw a sale listing citing ‘their mother’s ailing health’ as a reason for sale. He quipped that the reason for sale didn’t need to be examined as much as that the business needed to be analyzed. Was the multiple justified? Was it a good fit for the buyer? But just like anything else for sale, if the business is so good or profitable, why doesn’t the seller just keep it? Are they retiring? Could they gift it to a relative, if there is someone in their family who would be a good operator?

It may be good for a buyer to understand who the seller is. What is their background? Have they operated or sold other businesses successfully? What has happened with the other sales-were the new owners able to get a good deal? Is the seller a serial entrepreneur or can they not execute? Did the numbers add up? Did the financial projections/trends continue or was there some element of exaggeration or fraud? Some businesses are dependent on the seller’s special skill or knowledge. In the hands of a new buyer they may not be as successful. Then the buyer has wasted his money.

Most due diligence investigations are performed by the buyer, but in certain circumstances the seller will also conduct searches and other due diligence on the buyer. For instance, if there will be seller financing or seller will be receiving shares as part of the purchase price the seller may wish to conduct their own due diligence. Whatever consideration isn’t received at closing is worth less-like the old saying ‘a bird in hand is worth two in the bush’.

The due diligence stage also provides the buyer with information to assist with the negotiation of the main agreement. The results of the due diligence may cause the buyer to request that specific representations and warranties be set out in the definitive agreement, or that certain additional indemnities be given by the seller, or even that the purchase price be adjusted.

If you are purchasing a business, it critical to ensure that the due diligence associated with the purchase is conducted in a complete and thorough manner. The due diligence stage, if conducted properly, should provide the buyer with a complete understanding of what he or she is buying and an analysis of any risks associated with what is being purchased, so that the transaction may be completed without any unpleasant surprises.

Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting, ownership transfer, strategic and other purposes. If you’d like help in this regard or have any related questions, contact Al at alstatz@exitstrategiesgroup.com.

Key Deal Terms – Fall 2020

/in , /by Al Statz

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 months, up slightly from the 2015-to-present average of 18.8 months.

  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.