Will appear on Seller pages – RECENT SELLER ARTICLES

M&A Glossary: No-Shop Clause

/in , /by Al Statz

Many M&A negotiations include a no-shop clause. This is a period of exclusivity when the seller cannot solicit offers from other parties. The due diligence process is expensive for buyers, so sellers sign these agreements as an act of good faith.

Typically, a no-shop clause has a near-term expiration date and is only in effect for a couple of months (45—90 days). Buyers with a lot of leverage, and those working with inexperienced sellers trying to represent themselves, will work hard to tie you up in exclusivity for as long as possible.

 

If they can get away with it, the no-shop clause won’t have any expiration date at all, allowing the buyer to drag their feet indefinitely. Don’t get caught in that kind of dirty play. 

Scaling for Sale: Growth Strategies that Double as Exit Plans

/in , , /by Al Statz

As a business owner, you’re likely consumed with the daily challenges of building and growing your business. The question of selling might seem like a distant concern—something to worry about years down the road. But the reality is that planning your exit and growing your business are two sides of the same coin.

We’ve been conditioned to think about entrepreneurship in distinct phases: First, you build; then, you grow; finally, you sell or pass it on. It seems logical, doesn’t it? But this linear thinking misses a crucial point: Building scalable value and preparing for an exit are not separate processes—they’re intrinsically linked.

By viewing them as separate endeavors, we put ourselves at a disadvantage. We might inadvertently grow a business that provides a decent income in the here and now but has little value to future buyers. Instead, adopting a seller’s mindset from the outset can transform how you approach your business, driving growth and creating lasting value.

Most Entrepreneurs Exit Empty Handed
Estimates suggest only about 25% of businesses on the M&A market will successfully transition to new owners. Even certified and well-networked M&A advisors report that 50% of their engagements terminate without closing, according to the IBBA and M&A Source Market Pulse Report.

The reasons are myriad from valuation discrepancies, conflicting expectations, and due diligence challenges, to underlying operational issues such as customer concentration, overreliance on key personnel, and static business models.

So while starting a business is challenging, successfully exiting one can be just as difficult. This is where the wisdom of maintaining a “seller’s mindset” comes into play. Business owners who adopt a seller’s mindset aren’t just building for today or tomorrow; they’re crafting a legacy designed for eventual transition.

This approach doesn’t mean these leaders are any less passionate or committed to their ventures. On the contrary, it adds a layer of strategy and foresight that can significantly enhance a business’s long-term value and success.

The Entrepreneur’s Paradox: Less Doing, More Growing
One of the key principles of building a business with a seller’s mindset is focusing on working “on” the business rather than “in” it. This shift in perspective is part of creating a company that can operate independently of its owner.

When you work “in” the business, you’re caught up in day-to-day operations, fighting fires, and personally handling key client relationships. While this hands-on approach is often necessary in the early stages, it can create a business that’s overly dependent on you as the owner.

Working “on” the business, however, involves:

  1. Developing systems and processes that can run without your constant oversight
  2. Building a strong management team that can operate the business in your absence
  3. Creating a strategic plan for long-term growth and sustainability
  4. Investing in technology and infrastructure to improve efficiency and scalability
  5. Focusing on strategic partnerships and market positioning

By adopting this approach, you’re not only creating a more valuable business in the eyes of potential buyers, but you’re also giving yourself more freedom to focus on high-level strategy and personal goals.

From Owner’s Pride to Buyer’s Prize
As you shift from working in your business to working on it, your perspective naturally begins to align more closely to that of a potential buyer. And ultimately, your business is only worth what someone else is willing to pay for it.

So, what exactly makes a business valuable to buyers? The answer might surprise you. While profitability matters, it’s not always the primary driver of value in M&A transactions. Buyers are looking for businesses that offer more than just a healthy bottom line—they want potential for growth, strategic advantages, and operations that can thrive under new ownership.

For example, we sometimes see businesses with 40% or more customer concentration, particularly in the manufacturing space. It happens easily enough—the business has a great relationship with its biggest customer, and the work is steady and profitable. It’s great income now, but it makes this business a risky proposition for a future buyer.

As mentioned above, over-reliance on an owner can also diminish business value. A business that depends heavily on the owner’s personal relationships, expertise, or daily involvement may struggle to maintain performance under new leadership.

Other factors that can negatively impact value include:

  • Failure to innovate or keep up with industry trends
  • Delayed investments in technology or equipment
  • An unstable workforce or high turnover rates
  • Lack of documented processes and procedures
  • Inconsistent financial performance or unclear financial records

Building your business with a seller’s mindset means identifying and developing value drivers while simultaneously driving out risk factors that could reduce buyer confidence or limit their ability to succeed.

The Valuation Report Card
Now that you know a little bit about what buyers value, it’s time to take an honest look at your own business. But how can you objectively assess your company’s worth and identify areas for improvement? Consider getting a regular estimate of value.

Imagine sending your child through 12 years of school, only to discover in their senior year that they’re woefully unprepared for graduation. It would be a shocking and potentially devastating revelation, wouldn’t it? Yet, many business owners unknowingly put themselves in a similar position.

Just like a report card provides feedback on a student’s progress, a business valuation can offer vital insights into your company’s health and market position. A valuation can serve as a comprehensive scorecard, highlighting your business’s strengths and pinpointing areas that need improvement. It provides a clear picture of how the market perceives your company and what factors are driving or diminishing its value.

Without this periodic assessment, you might be operating under false assumptions about your business’s worth. Perhaps you’re overestimating its value, setting yourself up for disappointment when it comes time to sell. Or maybe you’re undervaluing your company, putting your financial security and legacy at risk.

Calculating Your Exit Equation
But knowing your business’s value is only half the equation. The other half? Understanding what that value means for your personal goals. After all, the ultimate purpose of building a valuable business isn’t just to create an attractive asset—it’s to create the financial foundation for the life you want to lead.

Many business owners fall into the trap of waiting for a predetermined age or milestone to sell their company. However, this approach can lead to missed opportunities or, worse, financial shortfalls. Instead, consider aligning your exit strategy with your personal financial goals by understanding your “lifestyle number.”

Your lifestyle number is the amount of capital you need to receive from your business exit to achieve financial freedom and realize your goals or live your ideal lifestyle. When you get clear about your goals—and have an objective opinion on how much your business is worth—you can make better informed decisions about growing (and exiting) your business.

The Exit Roadmap
Finally, it’s time to think about the actual nuts and bolts of preparing for a sale. Many business owners make the mistake of treating their exit as an event rather than a process. For some owners, this means they’re leaving significant money on the table when it’s time to sell.

Depending on the nature of your business, a comprehensive exit plan might address areas like these:

  1. Transferrable contracts: Ensure key contracts can be transferred to a new owner without dispute or disruption.
  2. Management team retention: Consider tying up your management team with stay bonuses or equity to ensure continuity.
  3. Clean financials: Maintain clear, organized accounting records. Consider audits to boost buyer confidence or a sell-side quality of earnings report prior to going to market.
  4. Working capital optimization: Understand how working capital impacts your take-home money after a sale and optimize it in the years leading up to a sale.
  5. Tax planning: Understand the tax implications of different deal scenarios to maximize your after-tax proceeds.
  6. Buyer options: Explore different exit options and the pros and cons of each. Understand how each option might impact your key managers, family members, or real estate strategy.

Some of these strategies can take two or three years to put in place. Plus, some sellers can’t walk away immediately after a transaction. Depending on deal terms, you may need to provide a certain amount of seller financing or stay involved in a consulting role.

Don’t wait to find out you have to trade value for time. Plus, the sooner you plan, the more options you will have and the better prepared you’ll be to exit with leverage, on your own terms.

Seller Strategy = Growth Strategy
At the end of the day, growing your business with a seller’s mindset isn’t about looking for a quick cash-out; it’s about creating something of lasting value that can thrive even as ownership changes hands. By adopting a seller’s mindset, you’re committing to:

  1. Creating systems and processes that allow your business to thrive without your constant involvement
  2. Building a strong, capable team that can drive the business forward
  3. Focusing on sustainable growth and diversification
  4. Maintaining clean, transparent financials
  5. Continually assessing and improving your business’s value

This approach not only prepares you for a successful exit but also creates a stronger, more resilient business in the present. It pushes you to think strategically, to focus on what truly adds value, and to build something that can stand the test of time.

Whether you plan to sell your business next year, pass it on to the next generation, or continue growing it for decades to come, building your business with a seller’s mindset will serve you well. It’s not about whether you’re ready to sell right now; it’s about maximizing the value of what you’ve been building and creating options for your future.

Goodwill hunting: How to build and finance this intangible asset

/in , , /by Al Statz

When it comes to selling a business, the term “goodwill” often arises. But what exactly is goodwill, and how does it impact the mergers and acquisitions (M&A) process?

Goodwill is the value of a business that exceeds its tangible assets. It arises when a company is sold for more than the worth of its physical assets such as equipment, vehicles and inventory.

Most successful companies have some level of goodwill, which is tied to cash flow. For example, consider a company with $2 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) that sells for a 6 multiple, resulting in a $12 million valuation. If the company only has $5 million in physical assets, the remaining $7 million is considered goodwill.

Building goodwill. Goodwill is typically derived from the company’s ability to generate strong and consistent cash flows. Factors such as a loyal customer base, effective management team, a solid market position, and a unique value proposition all contribute to a company’s ability to generate cash flows above and beyond the value of its physical assets.

Goodwill can also be attributed to factors that de-risk the company. A strong brand, a large and diversified customer base, recurring revenue, a reliable supply chain—these are just some of the factors that give a buyer confidence they will be able to replicate performance and drive growth in the future. The more growth opportunities and less risk perceived by the buyer, the higher the multiple, and consequently, the more goodwill.

Financing goodwill. However, goodwill presents challenges when it comes to financing a deal. Goodwill is an intangible asset, which means it lacks the physical substance and clear valuation of tangible assets (again, such as equipment, vehicles, or inventory). Most traditional lenders, such as banks, often prefer to secure their loans with tangible assets that can be easily liquidated in case of default.

Moreover, the value of goodwill can fluctuate based on market conditions, industry trends, and the overall financial health of the company. If a business experiences a downturn or fails to meet its projected cash flows, the value of its goodwill may be impaired, leading to potential write-downs and negative impacts on the company’s balance sheet.

To overcome these challenges, businesses often need to explore alternative financing options or structures when dealing with significant amounts of goodwill. Seller financing or equity rollovers can help provide funding for goodwill, when traditional lenders won’t support it.

For smaller deals under $5 million, the Small Business Administration (SBA) offers loan programs that provide banks with a 75% guarantee, allowing them to take on more goodwill. For larger deals, strategic buyers with strong balance sheets, private equity groups, or family offices are generally better positioned to acquire a business with significant goodwill. These buyers can bring more

equity to the table or may already have alternative acquisition lending in place, such as mezzanine lenders

In the current deal market, most acquisitions above $10 million have a capital stack of 50% equity and 50% debt. Using the example above, that means the buyer would bring $6 million to the table and the senior lender (e.g., the bank) would only have about $1 million in exposure above and beyond the company’s tangible assets. That’s fairly palatable on a $12 million deal.

Allocating goodwill. When a business is sold, the purchase price is typically allocated among the various assets being acquired, including both tangible and intangible assets. However, the allocation of goodwill can have significant (and opposing) tax implications for the buyer and the seller.

In an asset sale, the buyer and seller will typically negotiate the allocation of the purchase price, considering the tax consequences for each party. The buyer generally prefers to allocate more of the purchase price to assets that can be depreciated quickly such as equipment, vehicles or other tangible assets, in order to maximize their tax deductions. The seller typically prefers to allocate more of the purchase price to goodwill, as it is generally taxed at a lower capital gains rate.

An indicator of success. At the end of the day, goodwill is a powerful sign of success. However, this intangible asset can also present challenges when financing an M&A deal. Business owners looking to sell their companies should be prepared to explore creative financing solutions and navigate negotiations around asset allocation. Experienced M&A advisors and tax professionals can help.

Exit Strategies Group Advises Afineol in Sale to ITS

/in , /by Roy Martinez

Exit Strategies Group recently served as financial advisor to the owners of Afineol IT Consulting, a Sacramento area-based managed IT service provider (MSP), on their sale to Intelligent Technical Solutions (ITS), a Tower Arch Capital portfolio company. The acquisition strengthens ITS’ geographic footprint and technical leadership position in the Sacramento region. Terms of the transaction were not disclosed.

Afineol’s founder, Michael Strong, said, “We were looking for a strategic partner to build on Afineol’s decades of technical services leadership, help us capitalize on significant growth opportunities in our market, and allow us to continue to deliver exceptional value to our customers. At the same time, the acquisition by ITS makes Afineol an even better place for our employees to work and develop their careers. “

Margaret Strong, President of Afineol, added, “Exit Strategies Group’s structured sale process attracted the attention of multiple buyer prospects and helped us achieve a win-win deal with a great partner. We couldn’t have made this happen without Exit Strategies.”

Exit Strategies Group acted as exclusive financial advisor to Afineol. This transaction demonstrates Exit Strategies Group’s strong commitment to providing sell-side M&A advisory and business valuation services to North American IT services companies. Since being founded in 2002, Exit Strategies has advised on well over 100 M&A transactions.

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For information about Exit Strategies Group’s M&A advisory or business valuation services, please contact Roy Martinez at 707-781-8583 or jroymartinez@exitstrategiesgroup.com.

From the M&A Glossary: Search Fund 

/in , /by Exit Strategies

A search fund is an investment vehicle through which an entrepreneur raises capital from investors to fund the search for and eventually the acquisition of a privately-held company. 

The search fund model allows the entrepreneur to collect a salary while they search for a suitable target company and negotiate a letter of intent and perform due diligence. Once a target company is acquired, the entrepreneur usually takes an active role in managing and growing the business, with the goal of creating value for all stakeholders involved.  Investors provide the necessary capital and often offer guidance and expertise.  Another term for search fund is “independent sponsor”.

Search funds aren’t our favorite type of buyer, but occasionally they are the right type of buyer for one of our seller clients. Search funders are most likely to prevail in a sale process when all of the following are true:

  1. the seller manages the business and doesn’t have an internal successor,
  2. the business is smaller, say less than $2M EBITDA, and
  3. there are no strategic buyers present, or the seller wants to retain some equity and the strategic buyers can’t accommodate that, or the seller doesn’t like what the strategic buyers plan to do with the company (e.g. relocate, rebrand, or dismantle it).

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.

Equity Rollover Benefits

/in , /by Exit Strategies

An equity rollover occurs when a business owner sells their company but chooses to reinvest, or “roll over,” a portion of the proceeds into the newly acquired business. An equity rollover allows a shareholder to benefit from any future growth and value creation. In a bolt-on acquisition or consolidation, the owner would likely receive equity in a larger, more diverse and less risky business enterprise. 

The benefits of an equity rollover for the shareholder include: 

  1. Continued participation in the company’s growth and potential upside. 
  2. Opportunity to partner with experienced investors or strategic buyers who can help scale the business.
  3. Potential referral of capital gains taxes that would otherwise be due upon a full cash-out.

For the new owners or investors, an equity rollover helps to: 

  1. Retain and incentivize valuable expertise and knowledge within the company.
  2. Align the interests of key stakeholders.
  3. Reduce the upfront cash requirements for the transaction. 

Learn more about the advantages and risks of an equity rollover in these articles on our website:

What is a Recapitalization Exit Strategy

Recapitalization Pros and Cons

What is an equity rollover when selling your business

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.

From the M&A Glossary: Caps and Baskets

/in , /by Exit Strategies

Indemnity caps and baskets are key terms in business purchase agreements that relate to the seller’s indemnification obligations for any breaches of representations and warranties made by the seller.

Cap

The cap is the maximum amount of damages that the seller will be obligated to pay to the buyer for breaches of reps and warranties. For example, if the purchase price is $40 million and the cap is set at 10%, the seller’s maximum indemnification obligation would be $4 million.

Basket

The basket is the minimum amount of damages that must be incurred by the buyer before the seller is obligated to indemnify the buyer. For instance, if the basket (a true basket, not a tipping basket) is set at $300,000, the seller will only be responsible for indemnifying the buyer for damages that exceed that amount. Baskets help to avoid disputes over small claims and ensure that the seller is not liable for minor or immaterial breaches.

Caps and baskets are heavily negotiated terms in M&A transactions, as they directly impact the allocation of risk between the buyer and the seller. However, rep and warranty insurance can help smooth negotiations.

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.

Timing the Sale of Your Founder-Owned Enterprise

/in , /by Exit Strategies

For founder- and family-owned businesses, deciding to sell is much more than a financial decision. Its a pivotal moment that marks the culmination of years, often decades, of dedication and hard work. The timing decision involves personal and market factors that can significantly influence the outcome of a sale. Understanding the right moment to sell requires an appreciation of the market environment, the business’s lifecycle, and the personal readiness of the owners. 

Market Conditions

The broader economic and specific industry conditions play a vital role in determining the optimal time to sell. A robust market with strong buyer demand and healthy valuations offers a favorable backdrop for selling a business. Sellers should look for periods of economic growth, low interest rates, and a competitive M&A landscape, where strategic buyers and private equity firms are actively seeking acquisitions. Timing the sale when your sector is experiencing an upswing in valuations or when there is a surge in demand for businesses like yours can significantly enhance the financial returns from the sale. 

Business Readiness

The ideal time to sell is also closely linked to the business’s operational and financial health. A track record of steady growth, strong profit margins, a diversified customer base, and a solid management team in place all make a business more attractive to potential buyers. Preparing for a sale often involves several years of planning to streamline operations, professionalize management, and resolve any outstanding legal or financial issues. Selling when the business is on an upward trajectory, rather than in decline or during a plateau, can positively impact the valuation. 

Personal Readiness

For many founders and family-owned businesses, personal readiness to sell is just as critical as market and business readiness. The decision to sell often involves emotional, lifestyle, and legacy considerations. Owners must assess their personal goals, retirement plans, and what they envision for their life post-sale. Additionally, the desire to ensure the continued success of the business and care for employees can influence the timing and terms of the sale. Waiting until the owners are mentally and emotionally prepared can lead to a more satisfactory outcome. 

Succession Plans

The absence of a clear succession plan within the family or the business can be a strong indicator that it’s time to consider selling. If the next generation is not interested or ready to take over, or if there is no internal candidate who can lead the company forward, selling to an external buyer who can provide the necessary leadership and investment might be the best option for ensuring the business’s continued growth and success. 

Strategic Fit

Sometimes, the right time to sell is determined by strategic considerations. This could be a shift in industry dynamics, the emergence of new technologies, or changes in consumer behavior that make it advantageous to sell to a larger entity with the resources and capabilities to navigate these changes more effectively. 

Conclusion

Timing the sale of a founder-owned or family-owned business hinges on a range of factors. Sellers must balance market opportunities with personal readiness and the business’s operational health. With careful planning, owners can identify a strategic window that maximizes financial returns and protects their life’s work. 

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.

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.

Exit Strategies Group Advises Custom Ag Formulators in Strategic Sale

/in , /by Al Statz

Exit Strategies Group is pleased to announce that we recently served as financial advisors to the owners of Custom Ag Formulators (CAF), a North American provider of customized agriculture formulations and products for growers, in the sale of CAF to ICL, a leading global specialty minerals company.  

Founded in 1998 in Fresno, California, CAF offers a diverse assortment of liquid adjuvants and enhanced nutrients, as well as various other specialty products. CAF operates two U.S.-based facilities, with one in Fresno and a second in Adel, Georgia. Both sites manufacture liquid and dry formulations, and their strategic locations mean CAF can ship same day to key growing regions on both the East and West Coasts and to the Central U.S. Visit CAF’s website at customagformulators.com.

“Custom Ag Formulators was founded to provide quality products with custom formulations and packaging in a timely and efficient manner,” said Patrick Murray, principal and director of sales for Custom Ag Formulators. “For more than 25 years, our mission has been to consistently lead the industry in customer service, quality and product innovation, and we are excited to move this mission forward with ICL Group.”

The acquisition of Custom Ag Formulators adds to ICL’s products and expands its presence in the

U.S. ICL employs more than 12,000 people worldwide, and its 2023 revenues were approximately $7.5 billion. The company’s shares are dual listed on the New York Stock Exchange and the Tel Aviv Stock Exchange (NYSE and TASE: ICL). For more information, visit ICL’s website at icl-group.com.

Read ICL’s news release about the acquisition HERE.

This transaction reflects demonstrates Exit Strategies Group’s continued commitment to providing quality merger and acquisition advisory and business valuation services to lower middle market agricultural and manufacturing industries.

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For more further information or to discuss a potential M&A or business valuation needs, contact Al Statz or Joe Orlando.