Add-On Acquisitions Continue Popularity

/in , /by Exit Strategies

PE firms are increasingly using strategic “add-on” (aka bolt-on) acquisitions to consolidate fragmented industries, particularly in sectors like healthcare and business services, where operational efficiencies and market share gains are achievable.

This approach to growth allows firms to create more valuable and competitive entities more quickly than organic growth, usually with lower business and financial risk. These transactions often require less capital and can be financed through existing cash flows or smaller debt tranches, thus mitigating the impact of higher borrowing costs.

This trend underscores PE firms’ preference for smaller, complementary acquisitions that can enhance existing portfolio companies through operational synergies and scale without incurring significant new debt.

Share of PE Deal Count by Type

Source: GF Data, Fall 2024

For further information on this subject or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Business Sale Advice: 15 Insights from Past Sellers

/in , /by Al Statz

I recently surveyed a dozen former business owners—many of whom were my sell-side M&A clients and some who were not. I asked them to share the advice they give to business owners who plan to sell someday and the mistakes they should avoid, and several themes emerged.

Here’s what they had to say …

  1. Assess Earlier. Many sellers wished they had commissioned a comprehensive business Assessment a year or two earlier. A proactive pre-sale evaluation by a quality M&A advisor is almost certain to increase a business’s value and sale readiness, and there’s no downside.
  2. Grow and Build. There was a recurring regret among sellers about not building a larger, better company before selling. Sellers acknowledged that stronger, more robust businesses command higher sale prices.
  3. Financial Performance. Some sellers recognized that they became complacent and accepted subpar financial performance and left underlying issues unresolved, which negatively affected their sale outcome. Some wanted a do-over.
  4. Focus on the Right Metrics. A number of sellers said they were unaware of the key performance indicators that were most important to buyers and could have driven market value upward. The Assessment mentioned above identifies these opportunities.
  5. Kill More Sacred Cows. Sellers often wish they had changed outdated business practices, closed underperforming divisions, abandoned pet projects or replaced subpar employees. Eliminating “sacred cows” streamlines operations and increases a business’s value.
  6. Address Concentrations. Significant customer, supplier or employee concentration risks were often overlooked by sellers, which could have been mitigated with earlier attention.
  7. Strengthen the Management Team. One recurring piece of advice was to build a stronger executive team. Sellers often regretted not having a more capable team in place to attract more buyers, command better deal terms, and facilitate a smoother transition.
  8. Needed an Outside Board. A few sellers thought that having external board members would have provided valuable guidance and oversight and would likely have led to better strategy decisions during their ownership.
  9. CPA Firms can be Outgrown. Some sellers did not recognize when their business had outgrown their CPA firm until it was too late, resulting in excess taxes or less effective financial support leading up to and during the sale process.
  10. Respect Due Diligence. Financial and operational due diligence proved to be much more thorough and data-intensive than several sellers anticipated. Properly compiling, organizing and examining relevant data ahead of time is crucial. Unresolved HR, legal and compliance matters complicate and sometimes derail a sale process.
  11. Deal Team is Important. The aggressiveness of the buyer’s deal team caught several sellers off guard, highlighting the need for stronger representation and better preparation. And those few sellers who didn’t hire an M&A advisor/investment banker felt outmaneuvered by the buyer’s deal team.
  12. Listen to Advice. Disregarding sound advice and market feedback led to missed opportunities and suboptimal outcomes for some sellers. Taking an unreasonable negotiating position, against the advice of their seasoned M&A advisors, caused one seller to lose an excellent deal.
  13. Expand the Buyer Pool. Sellers who limited themselves to a single buyer often felt that they missed out on better offers or more suitable partners. Some sellers initially dismissed buyer prospects identified by their M&A advisor who later proved to be excellent candidates that offered favorable terms. These sellers were very happy that their advisor opened their mind.
  14. Date Before You Marry. Several sellers recommended engaging with multiple buyer candidates before selecting a buyer. Asking many questions and thoroughly vetting finalists in a structured sale process helps sellers find the best fit and avoid problematic deals. A good M&A advisor organizes these interactions and helps sellers ask more of the right questions.
  15. Run a Process. Sellers who did not follow a structured sale process often experienced failed deals or felt that they missed opportunities. M&A advisors play a critical role in navigating complexities, getting deals closed, and optimizing results.

Key Takeaways for Business Owners

Start Early:  Begin planning for a sale and preparing well in advance. Waiting too long can limit your options and reduce shareholder value.

Build a Strong Company:  A robust company with a strong management team is more likely to command a higher sale price. While you still have time, focus on growing and improving your business to enhance its attractiveness and value to likely buyers.

Assemble a Great Team: Surround yourself with a capable deal team, including legal, financial and M&A advisors. An experienced sell-side M&A advisor brings an investor’s perspective, helps you navigate the sale process effectively, and greatly influences the outcome of the sale.

Implement this advice and avoid the mistakes of sellers who have gone before you to better position yourself for a successful exit. Remember, you get only one chance to do this right!

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For information about Exit Strategies Group’s M&A advisory or business valuation services, please contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

From the M&A Glossary: Sale Leaseback

/in , /by Exit Strategies

A Sale Leaseback is a financial transaction in which a company sells an asset, usually real estate, to another party and then leases it back from the new owner for a negotiated period and other agreed upon terms.  

This arrangement allows the seller to convert the value of the asset into cash while retaining the right to use the asset through a lease agreement.

Sale leasebacks can be advantageous for companies looking for a source of cash to pay down debt or invest in growth opportunities, while retaining access to critical assets.

For further information on this subject or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Why Business Owners Sell, According to the Data

/in , /by Al Statz

Retirement is the number one reason business owners sell, but 40 to 50% of business owners sell for other reasons. For over a decade, the IBBA and M&A Source Market Pulse survey of M&A advisors and business brokers has been tracking what motivates owners to sell their businesses. And the reasons have been fairly consistent over the years. After retirement, these are the leading reasons according to the survey: 

1. Burnout

The long hours and constant demands of running a business can take their toll, causing some owners to lose interest or energy. This is the second most common reason business owners sell.  

Unfortunately, when you sell at the point of burnout, your business may have already declined in value. When owners get burned out, they start to neglect key leadership responsibilities or overlook growth opportunities. Worse yet, owner burnout can infect employee engagement and customer loyalty.  

The best time to sell a business is when its on a growth trajectory. Buyers pay a premium for businesses with above average financial performance and growth. It can be hard to make the decision to sell under those conditions, but that’s also when buyers are prepared to pay the most.  

2. New Opportunity

Sometimes business owners decide to shift gears and pursue a new business venture. If you have a novel business idea you’re excited about, selling your current company can give you the funds and time to bring a new concept to life. Other business owners sell because they realize ownership wasn’t a good fit for them, and maybe they’ve received a great job offer. 

According to the Market Pulse Report, selling for a “new opportunity” is more common among Main Street business owners (i.e., businesses below $3 million in enterprise value) than those in the lower middle market. Small business owners have less financial investment, which may make it easier for them to unwind or sell. 

3. Unsolicited Offer

If you run a successful business, you may receive unsolicited offers from buyers interested in acquiring your company. Financial buyers, competitors and consolidators may come knocking if they see synergies or opportunity for growth.  

Sometimes an offer is just too good to refuse. But no matter what’s on the table, it’s a good idea to seek professional representation as many unsolicited offers are below market. Before you accept such an offer, have an M&A advisory firm like ours objectively evaluate your business and estimate what it should sell for, and work to protect your best interests.  

4. Family Issues

Life happens. Divorces and family conflicts, illnesses and deaths can prompt an owner to sell. Some owners want to have more family time, or relocate to be near grandkids.

Many family issues are what we call the “Dismal D’s” (divorce, death, disability, or disagreement). No one likes to think about all the what-if scenarios in life, but there are proactive steps you can take to prepare a business to weather these kinds of exits.  

With appropriate life insurance, for example, a surviving business partner can afford to buy out a deceased partner’s heirs. In the event of divorce or partner conflict, recapitalization strategies can help one partner keep the business while compensating the departing party. Getting a regular valuation on the business can help ensure everyone is on the same page about what the business is worth—before any these Dismal D’s occur.  

Plan Ahead

There are a variety of other reasons business owners sell. Maybe they are ready to take some chips off the table, or the industry is consolidating around them, or they just think the business itself would benefit from a new owner with different skills and more energy.  

Even if you don’t know when or why you’ll exit your business one day, there are things you can do to receive the best value for your business when you exit.  Consider an Assessment of value, exit options and sale readiness by an M&A advisory firm. Learn about different tax strategies available.  Incorporate exit planning into your strategic planning process.  

For further information on this subject or to discuss a potential business valuation, sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A Advisor Tip: Don’t Let Your Emotions Get the Best of You

/in , /by Al Statz

What does it feel like when you sell?

“Immense satisfaction tinged with loss.” That’s how one business owner described selling his business.

After putting years of hard work and sacrifice into building a successful company, many owners have a hard time letting go. Emotions run high, and those emotions can lead to flawed and regrettable decisions.

As M&A advisors, part of our role is to bring specialized expertise and objectivity to help you make sound choices when it comes to exiting your business. We can help you sort out your emotions and focus on your goals to find the right buyer to carry on your legacy and maximize value.

Smart preparation and planning make it easier to find the right fit. It doesn’t matter if you’re not ready to let go yet. Let’s start the conversation today.

For further information on this subject or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Exit Strategies Group Advises Dynamic Solutions in Sale

/in , /by Al Statz

Exit Strategies Group has advised the owners of Dynamic Solutions, a California-based provider of industrial automation solutions, on their recent sale to Valin Corporation, a subsidiary of Graybar. Effective May 1, 2024, the acquisition significantly expands and adds technical capabilities to Valin’s automation and robotics group.

Established in 1998, Dynamic Solutions specializes in precision motion control, machine vision, and collaborative robotics. Their team has over 120 years of combined experience in the industry. Dynamic Solutions also provides customers with consultation, application support, and custom positioning stage design.

Valin Corporation is the leading technical solutions provider for the technology, energy, life sciences, natural resources, and transportation industries. For 50 years, Valin has offered personalized order management, on-site field support, comprehensive training, and applied expert engineering services utilizing automation, fluid management, precision measurement, process heating, and filtration products.

“We are pleased to announce the acquisition of Dynamic Solutions,” said Anne Vranicic, President of Valin. “Dynamic Solutions has a strong reputation in the industry and maintains an experienced and accomplished technical staff. We look forward to having them as part of our team.”

“I am incredibly proud of our employees who embody the top-level expertise and exemplary support for which our company is known. Together, we have earned a stellar reputation in the California tech market,” said Greg Roettger, founder and President of Dynamic Solutions. “We are very excited to join the Valin team and look forward to a high powered, synergistic alliance. The enhanced resources and backing as part of Valin will enable us to elevate our ability to provide our customers with unmatched service.”

“Exit Strategies Group’s advocacy, professional guidance and close personal attention throughout the sale process was invaluable. Seeing offers from multiple buyers helped us select the best strategic partner. We couldn’t be happier with the results,” added Roettger.

This transaction demonstrates Exit Strategies Group’s strong commitment to providing sell-side M&A advisory and business valuation services to North American industrial technology companies.  Our automation expertise covers product manufacturing, value-added distribution, custom machine building, control system integration and repair services companies. Since our founding in 2002, we have advised on well over 100 M&A transactions.

For information about Exit Strategies Group’s M&A advisory or business valuation services, please contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com. Deal terms will not be disclosed.

It’s About Deal Structure in M&A

/in , /by Exit Strategies

Sometimes we work on the buy-side, helping strategic buyers and financial sponsors find and execute acquisitions. For one buy-side client, we approached a seller with what we thought was a fair offer, but the seller wanted more. We talked it over with our client and decided we could come close to the seller’s number, provided we got a specific deal structure.

We arranged the deal with about 60 percent cash at close and 20 percent seller financing at a six percent interest rate, amortized over 15 years with a five year balloon payment. Seller financing reduces the amount of cash you have to bring to the closing table and keeps the seller invested in the business. The final 20 percent was structured as an earnout tied to gross profit. This mitigated some of the risks in the deal, which in this case were customer concentration issues and the fact that the owner was the primary relationship manager with a few top accounts.

For the seller to get 100 percent of the earnout, the company has to reach a threshold level of gross profit from existing customers based on the last two years performance. If those customers defect or decline, the effective purchase price declines. The earnout will be earned in the first year, but paid out over the following four years under the same terms as the seller note.

The difference between the buyer and seller’s original numbers was 20 percent. Our client was able to come up 15 percent with the aforementioned change in structure. None of the increase in value went to cash at close; it all went to seller financing and earnout.

The point of this illustration is that sometimes you can pay more if you get the right structure. Structure is almost always more important than price at the end of the day. Too many buyers and sellers get stuck on price and walk away from good opportunities without exploring creative deal structures.

This transaction will be a win-win for both parties. The seller will receive good value and the buyer  feels confident the deal will work for them too. They will have enough cash flow to service debt and reinvest in the business for future growth.

For advice on exit planning or selling a business, contact Al Statz, founder and CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. 

M&A Advisor Tip: Have the Discipline to Diversify

/in , , /by Exit Strategies

As a general rule, no single customer should account for more than 20-25% of your company’s revenue. While having major customers can be great for your bottom line, it represents substantial risk to you and the next owner.

As you build your business, pay attention to what potential buyers will want. They’ll be looking for well-diversified customer base where the loss of one account won’t have a major impact on earnings.  Do the hard work of diversifying, and you’ll increase business value.

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.

Is a Quality of Earnings (QoE) Analysis the Same as an Audit?

/in , , /by Al Statz

Not exactly. A Quality of Earnings (commonly called a “QoE”) analysis used in mergers and acquisitions due diligence and a financial Audit serve distinct purposes. Here’s how they differ in terms of purpose, scope of work, timing and reporting:

  1. Purpose:
    • QoE: The primary purpose of a QoE analysis is to assess the sustainability and reliability of a company’s earnings and cash flows. It aims to identify potential risks and irregularities in a company’s earnings that may affect future performance. This analysis is helps acquirers understand the true financial health of a target company and helps them make informed decisions.
    • Audit: A financial Audit, on the other hand, is primarily conducted for compliance and regulatory purposes. It verifies the accuracy of a company’s financial statements and their compliance with generally accepted accounting principles (GAAP) or other applicable accounting standards. While a financial Audit report will make acquirers comfortable with the accuracy of a target company’s financial statements, its focus is not necessarily on assessing the quality or sustainability of earnings and cash flows.
  2. Scope:
    • QoE: A QoE is an “agreed upon procedures” type of analysis and typically involves a review of a company’s financial performance, including revenue recognition practices, expense management, cash flow analysis, reconciliation with bank statements (proof of cash), and potential non-recurring items. Non-recurring items that may distort earnings, include things such as restructuring charges, asset write-offs, or gains/losses from discontinued operations. A QoE may also delve into management’s projections and assumptions about future performance. A QoE may do a deep dive into customer concentration, vendor concentration, employee turnover, age of the workforce, key employees, employee compensation, age of equipment and potential Capex needs, working capital turnover, and profit margin by customer/product/service.
    • Audit: An independent financial audit primarily focuses on verifying the accuracy of historical financial statements and internal accounting procedures. It includes examining transactions, account balances, disclosures, internal controls, and other relevant financial information to ensure compliance with  Generally Accepted Auditing Standards published by the AICPA. A QoE includes some but not all of the procedures conducted in an Audit, and vice versa.
  3. Timing:
    • QoE: QoE analysis is usually conducted during the due diligence phase of an acquisition, after an LOI is signed and before the deal is finalized. This allows the acquirer to gain insights into the target company’s financial performance and identify any potential red flags or areas of concern. The terms financial due diligence and quality of earnings are used interchangeably in the M&A world and are essentially the same thing!
    • Audit: Financial audits are typically conducted annually or periodically, as required by regulatory authorities or stakeholders. They provide a retrospective view of a company’s financial performance for a specific period.
  4. Reporting:
    • QoE: The findings of a QoE analysis are typically presented in a detailed report to the acquirer, highlighting key areas of concern, potential risks, and recommendations for mitigating those risks. The finished product is often an Excel workbook with 30-50 tabs and is sometimes summarized in a PowerPoint presentation deck if requested by the client.
    • Audit: The results of a financial audit are communicated through an auditor’s report, which includes the audited financial statements and a written opinion on the fairness and accuracy of the financial statements. The report may include recommendations for improving internal controls or accounting practices but is primarily focused on providing assurance to stakeholders regarding the reliability of the financial statements.

Buyers almost always obtain an independent QoE analysis as part of their financial due diligence. As sell-side M&A advisors, we help our seller clients decide whether a pre-sale Quality of Earnings analysis would be advantageous.

QoE analyses are conducted by independent CPA firms with dedicated QoE departments. When a sell-side QoE is appropriate, we help our clients select a provider with relevant transaction experience and the capacity to work quickly at a price you can afford.

In summary, while both a quality of earnings analysis and a financial audit involve scrutinizing a company’s financial performance, their objectives, scope, timing, and reporting differ significantly, particularly in the context of acquisitions. A QoE analysis is more forward-looking and strategic, aiming to assess the sustainability of earnings and identify potential risks, whereas a financial audit is retrospective and focused on ensuring compliance and accuracy in financial reporting.

If you have questions about the use of quality of earnings analyses in mergers and acquisitions or want information on Exit Strategies Group’s M&A advisory services, please contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com. 

What’s behind the door for M&A in 2024?

/in , /by Exit Strategies

We’re coming off a recalibration year for M&A. While 2021 and 2022 saw record activity, the first half of 2023 was marked by significant declines. Inflation, interest rates, increased capital costs, and geopolitical uncertainty all made buyers wary, and the global market held back on deal making.

 

Now we’re anticipating an uptick in 2024. This resurgence will be fueled by the continued presence of cash in the marketplace, corporate growth demands, and Baby Boomer retirements. Let’s unpack the key drivers and potential roadblocks ahead:

 

Record dry powder: Slow activity in the middle market means there’s been a buildup of cash in private equity. Dry powder soared to an unprecedented $2.59 trillion in 2023, an 8% increase over a year ago.  Investors continue to favor private equity funds, resulting in this substantial pool of uninvested capital. Private equity is under pressure to deploy this cash, which should translate to heightened dealmaking.

 

Lower middle market add-ons: The lower middle market (LMM) stayed relatively active in 2023, largely driven by the ease of financing add-on transactions. Compared to larger deals that require hundreds of millions in financing, these smaller investments carry lower price tags, carry smaller amounts of debt, and have the potential to scale faster. These businesses are attractive to buyers seeking to grow their operations.

 

Talent crunch: Organic growth remains challenging due to the difficulty in attracting and retaining skilled workers. This talent squeeze acts as an incentive for companies to consider M&A as a growth strategy. That said, buyers are wary of businesses with looming retirements or retention problems. Business owners considering an exit in the next couple of years should work to resolve any pending talent gaps.

 

Onshoring resurgence: The COVID-19 pandemic exposed vulnerabilities in global supply chains, prompting many companies to re-evaluate their production strategies. Onshoring, bringing manufacturing back to the US, has gained traction as a way to mitigate risks, improve responsiveness, and potentially reduce costs.

 

We expect to see solid interest in manufacturing, particularly in the Midwest, which is known for its skilled workforce. Again, talent issues will play a role. Manufacturers that want to sell in the coming years need to double down on workforce development and recruitment programs that bring younger generations in the door.

 

Overdue exits: An estimated 10,000 to 11,000 Baby Boomers retire every day, and many of them own businesses. Research suggests that people age 55-plus make up 21% of the population, but own a disproportionate 51% of businesses in the U.S. With more businesses entering the market, and not enough younger generations to take them over, we can expect greater industry consolidation. Private equity firms, family offices, and corporate buyers will likely scoop up many of these companies as they become available for sale. We can expect rollups in fragmented sectors, allowing bigger players to realize new economies of scale.

 

ESG interest: We’re seeing increased interest in companies with sustainable operations. Many private equity firms are looking for companies to meet their environmental, social, governance (ESG) mandates, driven by both ethical and financial considerations. Companies with B-Corp certification, Fair Trade Certification, Forest Stewardship Council alignment and other unique sustainability stories will garner attention from the ever-growing pool of buyers with ESG goals.

 

Flight to quality: High interest rates, the upcoming presidential election, and geopolitical uncertainties may present headwinds for the M&A market. When there’s uncertainty in the marketplace, buyers become more selective, prioritizing companies with strong fundamentals, proven track records, and clear growth prospects. These “A” players are still getting strong multiples—and advantageous deal structures—because buyers are willing to pay for quality.

 

Industry outlook: The M&A landscape in 2024 is poised for a resurgence. While some uncertainties remain around interest rates, politics, and broader economic conditions, the fundamental drivers seem strong. Record dry powder in private equity, the need for strategic growth through acquisitions, and a flood of Baby Boomer retirements all point to strong deal flow over the next couple years.

 

Quality companies with strong financials, management teams, and growth stories will remain in high demand. Both buyers and sellers should prepare now to take advantage of the open M&A window in the year ahead.

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.