Will appear on Seller pages – RECENT SELLER ARTICLES

M&A Advisor Tip: COVID-19 Era Due Diligence, Part 1

/in , , /by Al Statz

M&A buyers are still active in the midst of uncertainty. However, as you would expect, they are mindful of added risks caused by COVID-19.

Talent-related questions that may come up in future due diligence due to COVID-19:

  1. Did layoffs or other cuts impact the business’s ability to retain key employees?
  2. Did the business comply with state and federal laws related to layoffs and furloughs?
  3. How is employee health and well-being managed?
  4. Are policies and practices sufficient to protect employee safety?
  5. Do employees have the ability to work remotely – without frustrating workarounds?
  6. How well does company culture support engagement and accountability in a remote environment?

For further information on business sales, mergers and acquisitions in the midst of coronavirus or to discuss a current need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

Methods of Selling Distressed Businesses

/in , /by Al Statz

As most companies transition from survival to rebuild mode in the second half of this year, some will become financially distressed and the owners will want to move on. Fortunately, for the shareholders and creditors of these companies, there is an active market for distressed business assets. Distressed businesses can be attractive acquisition targets for strategic buyers, and sellers can optimize financial outcomes through a proactive M&A sale process.

Financial distress is a term in corporate finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. If financial distress cannot be relieved, it can lead to bankruptcy. (Source: Wikipedia)

Distressed business sales range from simple out-of-court transfers of a company’s tangible and intangible assets, to highly structured and expensive bankruptcy proceedings.

Four Routes to Selling the Assets of a Financially Distressed Business

  1. Sale of assets (Asset Purchase Agreement), where lenders and certain creditors may be asked to forgive or discount outstanding debts
  2. Secured party short sale under Article 9 of the Uniform Commercial Code
  3. Asset sale in an Assignment for the Benefit of Creditors
  4. Section 363 asset sale in a Chapter 11 or Chapter 7 bankruptcy

Selecting the appropriate method is case-specific and involves a number of considerations, including:  (i) the particular assets involved; (ii) the seller’s runway and the speed of consummating a transaction; (iii) the cost of the process; (iv) privacy concerns; (v) the cooperation of secured creditors and ability or need to sell assets free and clear of liens; (vi) buyer protections afforded; (vii) exposure to subsequent challenges and liability (i.e., fraudulent conveyance or successor liability claims); and (viii) which process will most likely maximize value to shareholders. Choosing the most effective method requires careful analysis of facts and circumstances and understanding of alternatives.

If your company is facing financial distress, the sooner you get help and take action the better. When financial distress is severe and on a path to insolvency, an attorney with specialized expertise in complex workouts, restructurings and bankruptcy must be consulted early on.

Al Statz is President and founder of Exit Strategies Group, a leading California-based M&A advisory firm with decades of experience selling companies in all market conditions. For further information, or if you are interested in exploring the potential sale or acquisition of a distressed business, contact Al Statz at 707-781-8580 to discuss your needs, circumstances and options, confidentially. 

M&A Advisor Tip: M&A in a Virtual Environment

/in /by Exit Strategies

Due to ongoing concerns over coronavirus, virtual meetings will continue to replace most of the in-person meetings typically held between a buyer and a seller at some stage in the business sale/acquisition process.

When selecting an M&A advisor, be sure that they can help you best present your business in a virtual environment and run effective remote team meetings. And ask about their investment in virtual deal room technology. Virtual deal rooms store sensitive information, track user access, and streamline the due diligence process. It’s good protection for you, and it’s valued by experienced buyers who expect to work with efficient, organized, tech-savvy teams.

For further information on technology used in business sales and acquisitions, or to discuss a current need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

 

Business Values May Not Decline

/in , , /by Al Statz

A recent survey of M&A advisors and business brokers showed that of all small and medium businesses on the market at the end of Q1, about 35% had closed (temporarily at least), 40% were operating at partial capacity, 4% had benefited, and 21% remained unaffected by COVID-19. Not surprisingly, advisors indicated that 46% of lower middle market deals were delayed at the end of Q1 and 11% had been cancelled altogether. For deal cancellations, 25% were attributed to sellers pulling out, 46% due to buyers backing out, and 12% due to changes in bank financing.

For business owners, the COVID-19 pandemic was like getting punched between the eyes. It knocked people down. And even when they could stand up again, their head was still spinning. But now, we’re starting to see the cobwebs clear.

Advisors like us saw an instant drop in buy-side activity in March. We had some new buyer conversations in April, but nothing solid. By early June, though, we started to see a resurgence.

Affect on Valuations

The question now, as buyers move forward with acquisition plans, is what will happen with business valuations?

For those businesses that remained fully active, their valuations will likely stay solid. Even businesses that partially closed or were negatively affected may find that valuations remain consistent. Businesses that were essential or able to pivot to an online or contactless model will be attractive to buyers.

And while declining cash flows typically do impact business values, we may see special considerations granted for the pandemic. Most businesses trade on a multiple of “normalized” historical cash flow or EBITDA. Normalizing financials includes making adjustments for one-time and unusual events. As buyers and lenders evaluate your business, they may accept normalization adjustments due to COVID-19, after your business recovers.

Affect on Deal Structures

In terms of deal structures, though, sellers who want to receive full value for their businesses should be prepared to carry more risk. Buyers will be seeking more of the purchase consideration in the form of seller financing, earn outs, or equity rollover.  Here’s what that might look like for sellers:

Seller financing. 

Seller financing can bridge a buyer’s resources with the value they see in your business. Essentially, it’s a loan from you, typically structured with monthly payments over a number of years.

In the past year, seller financing has hovered between 10-15% for Main Street deals, and 6% or less for deals over $5 million, per the Market Pulse Survey. The more perceived risk (e.g., COVID-19 closures and declines), the more seller financing buyers tend to request. So, we expect we’ll see these numbers climb in the year ahead.

Earnouts.

An earnout is a commitment by the buyer to pay you a certain amount of money tied to future business performance after a sale. If the business meets certain benchmarks, you receive additional value.  An earnout is a way of sharing risk.

Equity rollovers.

In an equity rollover, the seller maintains an ownership stake in the business. They roll a portion of their equity into the new capital structure in lieu of cash proceeds.

Rollovers are common with financial buyers, such as private equity groups. These buyers generally acquire businesses with the intention of holding them for five to seven years before reselling at a profit. Financial buyers often want sellers to receive a portion of their consideration as equity. It’s part of their financing model and it demonstrates the seller’s faith in the business.

Rolling over some of your equity gives you get a second bite at the apple when the business sells again. If the new owner successfully grows the business, that minority stake could be worth as much or more than your original sale.

Deal structures will also be driven by lending activity in the months ahead. If lenders pull back, both buyers and sellers will be motivated to reach alternative financing arrangements.

For further information on M&A market conditions or to discuss a current need, contact Al Statz, 707-781-8580.

M&A Advisor Tip: SBA debt relief incentivizes buyers

/in , , /by Exit Strategies

SBA debt relief is is a big incentive for buyers to move ahead with small business acquisitions right now.

The SBA will pay six months of principal, interest, and any associated fees that borrowers owe for all current … as well as new 7(a), 504, and microloans disbursed prior to September 27, 2020.

As an added incentive, SBA lenders have the authority to defer loan payments for six months. That means some buyers could acquire a new business and have almost a full year free of loan payments.

For further information on this topic, or selling a business, or financing a transaction, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

M&A in Pandemic, Not Panic

/in , /by Exit Strategies

Business advisors are digging in right now, trying to figure out how COVID-19 will affect their clients. We’ve been talking with business owners, active buyers, and other advisors around the country.

Right now, we know that some M&A deals are getting delayed over routine process points. Certain bank approvals that used to happen in regular in-person review meetings are being held up as discussions take place via email chain instead.

Some businesses with real estate transitions are no longer able to get appraisers or environmental assessors out to their property. That’s a standard part of the process, and if it can’t happen the rest of the transaction must hold.

Of course, some deals are getting pushed out over more than procedural issues. Certain businesses, particularly anyone in travel or hospitality or key vendors to those industries, are getting beat up right now and will want to wait until conditions normalize.

But other business owners are unaffected, as of yet, and moving forward with plans to sell in 2020. We are still having conversations with potential sellers and prepping businesses for market. The key will be to mutually agree on when it makes sense to take actually “go to market” with each specific client.

Money to Invest

What we know is that many companies and private equity firms have been doing well for years. The private equity industry alone had $1.5 trillion of “dry powder,” that is capital to invest, at the start of the year. They still need to honor their commitments to investors and put that money to work.

What we’re hearing is that some buyers are putting all equity into deals right now. They’ll refinance later when things calm down, rather than wait on bank approvals to get things done.

That’s a sign of the times. The market has been very active up until now, and many buyers aren’t going to let up. In fact, some are getting more aggressive because they think they might find a better deal in the months ahead.

Considering Valuations

Herein lies the real question. Are sellers going to take a reduction in business value?

Imagine your company manufactured sanitizing wipes and was already in active negotiations with a buyer when the pandemic started. Your EBITDA is going through the roof with numbers your business has never seen before. But will the buyer adjust the price up for that extra cash flow, based on a one-time anomaly? My guess is no.

So, will buyers get away with asking sellers to take a haircut over a one-time dip? Perhaps a bit. Most likely we’ll see a shift in deal structures. Buyers will put in less cash at close, with slightly more hinging on earn outs or other contingencies based on future performance.

Still, given the competition in the market just a month or two ago, buyers will need to be cautious about pressing sellers for a bargain. The underlying, long-term value of most companies will remain the same, despite a temporary dip in cash flow. Savvy buyers understand that and will be judicious in their valuations.

What about right now?

If your business has been affected, and you still have slow times ahead, look at this as an opportunity to catch up on all the things you didn’t have time for before. Spring clean, if you’re allowed to be on site.

Document business processes. A business is more saleable, and will typically sell for more money, when there’s less risk involved. And there’s less risk when all systems and procedures are documented on paper instead of secreted away in the owner’s mind.

Think about how you can be training and growing your employees during this time. This might be a good time for online training, or even expanded team conference calls to discuss things like process improvements or strategic planning.

Focus on ways you can grow from the situation. Complete this sentence: The challenges we face today will help our business be __________. (If you can weather the storm and use this time for development, the answer could be: more valuable.)

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.

Market Pulse Survey: Deal Cancellations due to COVID-19

/in , , /by Exit Strategies

M&A advisors saw many of their business sale/acquisition deals delayed, put on hold or cancelled in March 2020 as a result of the COVID-19 Pandemic.  Who was cancelling these deals?  The following chart shows the results of this survey question from the latest Market Pulse Survey.

Presented by IBBA, M&A Source & in partnership with Pepperdine University

“Deal activity is always expected to constrict during times of uncertainty. Both sellers and buyers are being conservative right now, taking a wait-and-see approach,” said Scott Bushkie, managing partner, Cornerstone Business Services. “Once we have some clarity on when businesses will be allowed to reopen and in what capacity, some deals will continue to move forward.”

“For many business owners who had already put their businesses on the market, this is a temporary pause,” Bushkie continued. “Owners who were burned out or near retirement will still be looking to exit their business. The nature of that exit will look different now, but once you get so close to the finish line, it can be difficult to envision holding out for much longer.”

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.

Controlled Private Short Sale using UCC Article 9: a Winning Alternative to Bankruptcy

/in , /by Louis Cionci

Louis Cionci, ABVAs a business sale advisor with Exit Strategies Group, I help business owners obtain the best price and terms available in the market during a sale process.

We sometimes encounter situations where the owner would like to sell the business, but the business is in a distressed position with the following characteristics:

  • the fair market value of a business is less than the outstanding debt on the business,
  • the business cash flow does not support the current debt service
  • the asset value of the business is less than the debt owed on the business.

When a business is in a distressed position, there are few attractive exit options for an owner. Typical options include bankruptcy reorganization or liquidation. However, for a distressed but otherwise viable business, there is another exit option available that often produces a better financial outcome for the seller. That sale option is a UCC Article 9 Controlled Private Party Short Sale.

In this type of a sale, the business is sold to a single purchaser of the business with the intention of continuing to operate the business and the first position creditor agrees to accept the sale proceeds as satisfaction of their debt.

Winning Outcomes for the Exiting Owner

This structured sale process creates several winning outcomes for the exiting owner:

  1. A successful exit option for the owner when there was none
  2. Avoidance of bankruptcy
  3. Avoid taking on additional expensive debt
  4. Preserve the business and employee jobs the owner created
  5. Earn from the new company through an employment agreement
  6. The ability to resolve personal guarantees on subordinated creditor debt
  7. The structured sale process can be completed in 45-60 days

My goal is always to obtain the best exit strategy possible for my business owner clients. For company owners facing financial distress, this type of structured sale may offer the best exit option.

For more information on the Article 9 short sale process, or buying or selling a business, Email Louis Cionci at LCionci@exitstrategiesgroup.com or call 707-781-8582.

Exit Strategies Group Advises Health Concerns on Sale to Life Seasons

/in , /by Louis Cionci

Transaction advisory firm Exit Strategies Group served as exclusive M&A advisor to ADG Concerns, Inc. DBA  Health Concerns on its successful sale to Life Seasons, Inc.

Health Concerns is at the leading edge of research in herbal medicine and is known for bringing the centuries of knowledge amassed in the Chinese herbal tradition to the West. Health Concerns was the first company to manufacture Chinese herbal products in the United States for practitioners. Today Health Concerns continues to research, test, and adapt traditional formulas by applying the science of modern biochemistry. As a result, Health Concerns can offer a variety of formulas for a full range of TCM treatment protocols as well as many products that address the specific conditions of Western patients.

Health Concerns President Andrew Gaeddert said, “We’re pleased to be part of the Life Seasons family. Selling to the right buyer was important to us. Their relationships, systems and financial resources will allow us to expand our technical sales force and systems manufacturing capabilities.”

“Exit Strategies did a tremendous job guiding us through the sale process. Their M&A process and deal-making knowledge really helped us navigate through the ups and downs of the sale process and were essential in achieving a successful outcome”, Mr. Gaeddert observed.

About Life Seasons

Life Seasons Inc., headquartered in Delaware, with operations in Texas, Utah, and Pennsylvania, is premier provider of natural health supplements. Life Seasons is an organization that was formed for the sole purpose of formulating medication for the health issues that arise throughout the different phases of life.

Life Seasons CEO Darren Peterson said “we are very pleased to add Health Concerns products to our product list. This acquisition extends our ability to provide wellness solutions to healthcare providers. We are excited to also have Andrew Gaeddert join our team with his extensive knowledge base and teaching skills.”

Mr. Peterson noted “I was very pleased to work with Louis Cionci at Exit Strategies Group. He helped guide the process with honesty and integrity, and his expertise in the M&A process helped the deal come to fruition.”

About Exit Strategies

Exit Strategies Group is a California-based merger and acquisition advisory and business valuation firm serving lower middle market companies in a variety of industries.  For further information about investment banking and M&A advisory services contact Louis Cionci , 707-781-8582.  Terms of the Health Concerns – Life Seasons deal will not be disclosed.

Can you sell a distressed business?

/in , /by Adam Wiskind

We’ve been getting this question from more business owners over the last few weeks. As with many important questions, the answer is, “it depends”.

Financial distress occurs when a firm can’t generate enough profit to meet its immediate or long-term financial obligations. If your business is consistently accumulating debt, has unseasonable and sustained increase to accounts payable, or is falling behind on payroll taxes, it is likely distressed.

Buyer’s Perspective

The potential to sell a distressed business depends on the ability to attract a buyer that believes that, based on their skills, resources and synergies, they can address the cause of distress and create a profitable future for the business. A strategic investor would look to profitably integrate the target business into their own operations. Strategic investors that can take advantage of synergies are more likely to buy a distressed business than financial buyers. However, there are well-funded “distressed investors” that specialize in acquiring and turning around distressed businesses, in good times and bad.

When assessing an opportunity to acquire a compromised business, savvy buyers will consider many factors including the cause, severity and duration of the distress. The causes of financial distress fall loosely into four categories.

Four Categories of Distress

Often, financial buyer prospects will not be able to address “unmanageable” issues any better than the current business owner. This makes the business inherently difficult to acquire and turn around.

However, even in an extreme event like a world-wide Covid 19 pandemic, there are exceptions. For example, a strategic buyer may be able to redeploy the assets of a whiskey distillery that lost its restaurant and bar customers to manufacture a product in exceptionally high-demand, like hand sanitizer. A good broker or intermediary can help to identify these opportunities and bring buyer prospects that can capitalize on them to the negotiating table.

Manageable causes of distress may be event-driven (like loss of a key customer) which often results in an acute crisis for the business. Or there they may be systematic causes of distress (like poor cost structure) which slowly impairs the business over time, as per the diagram below. Left unresolved severe distress will eventually lead the business to bankruptcy.

Path to Bankruptcy

Generally speaking, the less enduring and less severe the distress, the easier it will be to find a buyer that can turn the business around. Initiating the sale process early enough is critical. Waiting too long is a common mistake.

The likelihood of selling a distressed business depends on the circumstances. If you own a business showing signs of distress and are considering selling, please contact me at awiskind@exitstrategiesgroup.com or (707) 781-8744 for a confidential, no-obligation assessment of your situation.