Will appear on Seller pages – RECENT SELLER ARTICLES

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.

Acquistition Offers Can Vary Widely

/in , /by Al Statz

Beauty is in the eye of the beholder; and when it comes to selling your business, value is in the eye of interested buyers.  

As sell-side M&A advisors, we determine and agree on a probable selling price range with our clients, but we generally don’t set an asking price or discuss our clients’ value expectations with potential acquirers. Lower-middle-market businesses rarely go to market with an asking price. 

Different buyers see different value in your business; so publishing an asking price is like setting a ceiling on what your business is worth.  

Case in point …

We recently represented a company that received 10 indications of interest (IOIs), from a combination of strategic and financial buyers, as shown in the following graphic. An IOI is an initial bid in which interested buyers submit an approximate price and general terms and conditions for completing a deal. At this stage in the process, buyers have signed an NDA and read a thorough prospectus on your company prepared by us, but they haven’t visited your company, met with you and your leadership team in person, or done any significant due diligence.   

Notice the highest offer in this case was double the valuation of the lowest offer. This price range is fairly typical when we run a structured sale process.  

These ten buyers saw exactly the same information; so why the dramatic range in value? In most cases, it comes down to motivation, synergies, perceived risk, and the buyer’s growth strategy.   

At the end of the day, value is relative. When selling, you want acquirers to determine the value of your business to them. The buyer who will pay the most is usually the one who can leverage your business to the greatest extent. That said, predicting who is going to step up and make the strongest offers is way harder than it sounds. 

In this case, after reviewing the ten IOIs with our client, we set up management meetings with four finalist buyers who offered the best combination of price, terms, and strategic and cultural fit. After management meetings, one of the finalists dropped out of the process because they felt they had better acquisition opportunities.  

The other three finalists submitted final bids in the form of letters of intent (LOIs).  An LOI is a more formal and detailed document and is usually exclusive. In the end, we sold the company for over $33 million.   

To obtain the best price and terms available in the market, sellers need a structured sale process that brings all logical, qualified buyers to the table at the same time.  

For further information on the M&A sale process or to discuss a potential business sale, merger or acquisition need, contact Exit Strategies Group’s founder and CEO Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com. 

Exit Strategies Group Advises Amick Brown in Strategic Sale

/in , /by Mark Harter

Amick Brown LLC, a respected and long-established technology staffing and consulting firm in San Ramon, CA, was recently acquired by Zest LLC, an international technology staffing firm. Exit Strategies Group, Inc. advised the seller in the transaction. Terms of the transaction are confidential.

Amick Brown was founded in San Ramon in 2010. The Company provides technology staffing and technology consulting services for government and private sector clients. Customers are located throughout the United States and include many of the world’s largest enterprises. Amick Brown had five active owners. Two were looking to retire; Zest has retained the remaining three partners to continue in their current capacities with Amick Brown under the ownership and direction of Zest.

“Exit Strategies Group guided us through a process that was new to us and positioned us to achieve a very successful outcome,” stated Karen Gildea, Managing Partner of Amick Brown. “We absolutely could not have achieved the same results without their steady support and expert counsel. As result of Exit Strategies Group’s counsel, we were able to substantially increase the purchase price paid at closing.”

Amick Brown was advised by an Exit Strategies Group team led by Mark Harter. Steven Lee of Donahue Fitzgerald LLP provided legal counsel and John Anderson, CPA of the Anderson Company provided tax advice.

This transaction illustrates Exit Strategies Group’s expertise in lower middle market transactions and commitment to providing strategic valuation and M&A advisory services to North American staffing, consulting and professional services firms.

For further information or to discuss a potential M&A or business valuation need, contact Mark Harter.

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.

Exit Strategies Group Advises Leap Solutions Group on their Sale to George Petersen Insurance Agency

/in , /by Roy Martinez

Exit Strategies Group, Inc., a California based mergers and acquisitions (M&A) brokerage and business valuation firm, recently advised the owners of Leap Solutions Group, Inc. of Santa Rosa on the sale of their business to George Petersen Insurance Agency.

Leap Solutions Group is a business management consulting firm specializing in organizational development, human resources, executive search, and recruitment.

Scott Ormerod, Leap Solutions co-owner, said, “Roy Martinez of Exit Strategies was our guide through this process, netting us a great outcome.” Chuck McPherson, Leap Solutions other co-owner added, “We are grateful to you and Exit Strategies for all of your valuation work – it was the foundation of the transaction.”

George Petersen Insurance Agency, headquartered in Santa Rosa, CA, is a trusted leader in the insurance industry with 90 years of dedicated service. Their commitment to excellence and client satisfaction aligns seamlessly with our mission. Together, we are poised to provide integrated solutions that exceed expectations.

Terms of the acquisition were not disclosed.

 

This sale is an example of Exit Strategies’ M&A brokerage experience and valuation expertise in the business-to-business services sector. Exit Strategies has appraised and brokered hundreds of service businesses. If you are looking to sell, merge or acquire, we would be interested in hearing from you. Roy Martinez can be reached at 707-781-8583 or jroymartinez@exitstrategiesgroup.com.

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.

What is an equity rollover when selling your business?

/in , /by Exit Strategies

In M&A, an equity rollover, or recapitalization (recap), occurs when a business owner sells their company but chooses to reinvest, or “roll over,” a portion of their proceeds into the newly acquired business. An equity rollover allows a shareholder to maintain an interest in the business and benefit from future growth and value creation.

How an Equity Rollover Works

When a business owner is selling, a potential buyer may propose a deal structure that includes cash, debt, and equity. Typically the seller’s M&A advisor will signal in advance to buyers whether an equity rollover or recapitalization will be considered, and buyers factor that into their offers.

Equity rollovers are common when the buyer is a private equity firm or family office. These financial buyers are often looking for the seller or their management team to continue running the business for a number of years until the business is sold again. Equity rollover ensures that all parties are aligned, and that sellers have “skin in the game” and are committed to the ongoing success of the business.

Equity Rollovers by the Numbers

Let’s say a private equity firm is acquiring a software company for $20 million. The seller agrees to rollover $2 million of the proceeds back into the company. In simple math, the seller would retain a 10% ownership stake in the post-acquisition company if the buyer paid the other $18 million in cash.

However, most acquisitions are funded with a combination of equity and third party debt. This leverage increases the share value of rollover funds, meaning the seller’s $2 million translates into a larger percentage of the equity in the new entity.

For example, let’s say the software company is acquired with 50% leverage, or $10 million in debt. With total shareholder equity of $10 million, the seller’s $2 million now equals 20% of the equity (vs 10% in the earlier example). So, the seller receives 90% of the transaction value at the time of sale but retains 20% in the future business.

In reality, the calculation also accounts for transaction fees, capital gain taxes and working capital, but the above scenario provides a fair baseline estimation.

Advantages of an Equity Rollover or Recap

There are several reasons why a seller might choose to roll over equity in an M&A transaction:

  • Potential for additional gains:  Sellers who roll over equity have the opportunity to benefit from any increase in the value of the company’s shares.
  • Increased buyer confidence:  When a seller rolls over equity, it sends a positive signal to the buyer. It means the seller has confidence in the company’s future prospects and belief in the buyer’s strategic vision for the business — and may result in a higher initial purchase price.
  • Tax considerations:  In some cases, equity can be rolled over on a tax deferred basis.

For more information, read our previous posts on equity rollover (recapitalizations):

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.