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From the M&A Glossary: Search Fund 

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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

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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

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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.

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.

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.

Exit Strategies Group Advises Kim Controls in Sale

/in , /by Al Statz

Exit Strategies Group recently served as financial advisor to the owners of Kim Controls, a Minneapolis-based provider of industrial automation solutions, on their sale to Flow Control Group, a KKR portfolio company. Effective July 1, 2024, the acquisition adds talent, technical services, and market coverage to FCG’s industrial automation group. Terms of the transaction were not disclosed.

Founded in 1971, Kim Controls is a regional automation solutions provider, serving manufacturing clients in Minnesota and northwestern Wisconsin. The Company offers UL 508A custom control panel building services, and technologies offered include HMI’s, PLC’s, safety, motion control, machine framing, and test and measurement equipment. The Company operates with a strong customer commitment, providing significant value by working closely with clients’ management, engineering, and R&D teams to design and deliver not just automation products, but complete automation solutions.

Mike McGonigle, President and owner of Kim Controls said, “We were looking for a strategic partner to build on Kim Controls decades of technical services leadership, help us capitalize on significant growth opportunities in our market. Exit Strategies Group’s structured sale process attracted the attention of several strong candidates and helped us obtain a great deal from a great partner. We couldn’t have made this happen without them.  Partnering with FCG, allows us to continue to deliver exceptional value to our customers and suppliers and become an even better place for employees to work and develop their careers.”

Exit Strategies Group initiated this transaction and acted as the exclusive financial advisor to Kim Controls. This deal 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.

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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.

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.