Will appear on Seller pages – RECENT SELLER ARTICLES

M&A Advisor Tip: Employee retention adds business value

/in , /by Al Statz

“To win in the marketplace, you must first win in the workplace.” Those words of Doug Conant, former CEO of Campbell Soup Company, ring particularly true today.

The talent market was tight before the pandemic, but now we’re in a critical state. Finding employees is a challenge for every company. And if you’re selling your business, it might be the buyer’s top concern.

Employee issues buyers care about right now: turnover, training, cross-coverage, salary/wage increases, age/retirement plans, employment agreements, location (working from home, not local?), and leadership potential.

Talk to us about how key employees can impact market value. We can share what we’re seeing in your industry and help you evaluate the ROI of certain retention strategies – such as providing critical staff with minority equity shares or retention bonuses.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

Is it the right time to sell your business?

/in , /by Adam Wiskind

Business owners often ask, “When is the right time to sell my business?” The answer is some version of “A good time to sell is when there is a seller’s market, and the owner and the business are prepared”. Simple enough, but there is a lot to unpack in this response.

Don’t Try to Time the Market

A seller’s market exists when, because of economic conditions, demand for viable businesses is higher than the supply of businesses on the market. There are some universal economic metrics that drive demand for businesses like low interest, tax rates and high corporate cash reserves and earnings rates. When investors are confident about the business environment, they are more likely to pay premiums for their investment targets.

However, local and industry specific factors are often more important to the creation of a seller’s market. A mature industry that begins to consolidate may create an industry-specific seller’s market that doesn’t exist in other industries. The rise of private equity has driven consolidation in many industries. Also, when a regional competitor embarks on an acquisition growth strategy it may create a localized opportunity for owners in the same industry to sell.

It is wise for a business owner to pay close attention to these market signals. However, owners can’t control supply and demand in the marketplace and are generally better off not trying to time the market. In the second quarter of 2020, the market for small businesses came to an abrupt halt, dashing the hopes of many owners that were ready to retire. But by the fourth quarter of the same year the market returned stronger than before. No amount of prognosticating could have anticipated those market changes.

Business Preparation is Key

The preparation of the business is more important to the success of the business sale than the state of the marketplace, and it’s something that the business owner can control. A well-prepared business is more likely to sell in a soft market, than a poorly prepared business in a strong market.

It’s been estimated that 80% of US small business owners don’t have a written transition plan and 50% have no plan at all. A key component of the transition plan is preparing the business for succession. Many books have been written and teams of professionals deployed to help business owners prepare their businesses for sale. Conceptually, the buyer of a business is investing with the confidence that the future earnings and growth potential enjoyed by the seller can be transferred to the buyer. To make the business attractive, the owner must then mitigate the risks in the business and to fortify its opportunities for growth.  The specific measures necessary to prepare the business vary widely.  Some critical areas for consideration are:

-What are the growth prospects of the business? Is there a viable pathway to achieve growth?
-What constitutes the goodwill of the business? Is the goodwill persistent and can it be transferred to a buyer?
-Is the business’ intellectual property sufficiently protected?
-What is the owner’s role in the business? How easily can the owner be replaced?
-Does the remaining management team have the experience and resources necessary to operate the business efficiently?
-Is the business properly staffed for its size and to recognize its growth potential?
-What supplier and customer risks exist? How can they be addressed?
-Do the business assets have deferred maintenance or unfunded capital expenditures?

There are times when a business is clearly not ready to be placed on the market. The business may not be performing because of loss of an important client, vendor, or key employee or because of an acute business issue that the business is facing like a lawsuit or a loss of facility lease. These red flag issues should be resolved by the owner, before trying to sell their business.

The process to identify and address the specific issues faced by a company may take 3-5 years, so it’s important to plan ahead. But the owner of a company that has been properly prepared for sale, may be rewarded with a price premium, while an unprepared business may sell for a discount, or not at all.

The Owner is Motivated, but not Compelled to Sell

Lastly and most importantly, the owner needs to be psychologically ready and financially prepared to exit their business. Most owner’s only own one business in their life and selling it is momentous. For some, the business is tightly intertwined with their personal life and identity. However, there inevitably comes a day when the owner no longer wants to or no longer can be involved in the business.

Owner’s end up selling for a variety of reasons, for some it’s poor health, for some its divorce from their life or business partner. These personal challenges can make the process of selling the business more difficult and may put the owner at a disadvantage during negotiations with a buyer. The best reasons are because the owner realizes that there is something that they would rather be doing with their time or assets like retirement or another venture. Ideally, they are personally motivated, but not compelled to exit.

Even if the owner is determined to sell, they may hesitate to do so if they haven’t determined that the proceeds from the sale are sufficient to support their retirement or pursue other ventures. Professionals can help with this analysis. Business appraisers can help to anticipate the proceeds from selling the business. While a financial planner can help an owner estimate the amount needed to support their retirement.

Ultimately, determining the right time to sell their business requires the owner to plan ahead and prepare the business for the time when market conditions are adequate, and the owner is personally motivated. Exit Strategies Group helps owners to plan for and execute their business exits. If you’d like help in this regard or have any related questions, you can reach Adam Wiskind, Certified Business Intermediary at (707) 781-8744 or awiskind@exitstrategiesgroup.com.

Market Pulse – Quarter 4, 2021

/in , , /by Al Statz

Seller’s Market

Presented by IBBA & M&A Source

A seller’s market occurs when demand exceeds supply. There are more interested, active buyers than there are quality deals on the market. In a seller’s market, buyer’s compete in order to win deals. This typically translates to increased values and more favorable deal terms for the seller.

In Q4 2021, seller market sentiment rebounded, setting a new peak in all but the $5M-$50M sector.

“Business confidence, and competition, is high. It’s amazing how fast we rebounded to record levels,” said Anthony Citrolo, managing partner of The NYBB Group. “This is the strongest upwarad swing we’ve seen in any 12-month period.”

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

Small business values up in 2021

/in , /by Al Statz

Business values increased in 2021, despite ongoing challenges from the pandemic, talent shortages, and supply chain disruption. Deal activity continued at an intense pace, with advisors across the country reporting increases in both incoming deal flow and completed engagements.

More advisors characterized this as a seller’s market than nearly any other time in the last decade, according to the year-end Market Pulse report from IBBA and the M&A Source. Buyer confidence is high, as is competition for quality deals.

Businesses with enterprise value of $5 million to $50 million earned an average multiple of 6.0x EBITDA (a survey peak), realizing an average final sale price at 113% of the internal target benchmark. Multiples remained at or near market peak throughout the Main Street and lower middle market.

Meanwhile, time to close shrank in nearly all market segments. Time to close was likely facilitated by the high rate of buyer competition as well as a push to get deals closed before year-end.

The year end is always a hot time to get deals done as buyers and sellers push to meet self-imposed deadlines. We also know a number of sellers entered the market in early 2021, planning to get ahead of potential increases in capital gains taxes. Many of those deals would have had accepted offers and been in due diligence by the time it became clear tax changes were not yet coming.

Main Street activity

In the Main Street market last year, individual buyers accounted for 71% of business transitions. Of those, 40% were first time buyers and 31% were repeat business owners or what we call “serial entrepreneurs.”

Another 26% of Main Street buyers were existing companies. These are the strategic buyers acquiring other businesses as a way to expand or eliminate competition. A small percentage, just 3%, were private equity acquisitions.

While market definitions vary, businesses are generally considered “Main Street” if they have an enterprise value of less than $2 million. The majority of the transactions that happen in this sector are small, less than $500,000.

In 2021, the most active industries trading hands in the Main Street market were personal services (15%), construction (12%), business services (12%), consumer goods/retail (12%), and restaurants (11%). This represents a small drop-in restaurant activity, likely due to ongoing fallout from the pandemic.

Of those Main Street sellers who went to market in 2021, 53% were preparing for retirement. Another 11% were selling as part of a recapitalization. In a recap, the seller (or sometimes their management team) keeps some level of equity stake in the business while a buyer infuses new capital for growth. Other reasons Main Street sellers went to market included burnout, health issues, relocation, and family issues.

Lower middle market activity

In the lower middle market, where businesses are valued between $2 million and $50 million, the buyer pool shifts. Here individuals accounted for a third (34%) of buyers in 2021, relatively on trend with past years.

The number of individuals buying businesses in 2021 is notable given the highly competitive talent market. It’s likely these buyers (and Main Street buyers, too) could have their choice of employment opportunities. And yet there remains a definite draw to being a business owner. People still want to build something of their own and control their own destiny, even in a job seeker’s market.

Existing companies accounted for 40% of lower middle market transitions in 2021. Generally, these companies have strong balance sheets and are looking to acquisition as a way to grow at a time when organic growth is difficult due to talent shortages.

Private equity continues to remain active in the lower middle market, accounting for 24% of all business transitions. Private equity buyers generate financial returns by acquiring businesses. They typically plan to hold a business for 5 to 7 years, often acquiring similar types of businesses to bolt on, before reselling a larger, more lucrative operation.

These financial buyers tend to focus their efforts on middle market opportunities of $50 million or more. But with competition for those larger deals running hot, we see many firms ticking their attention down to the lower middle market. Here it’s possible to find deals that are large enough to make a difference in their portfolio and yet small enough to go unnoticed by some of their competitors.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

From 60 days to 6 months: Why you need an M&A attorney

/in , /by Al Statz

We had a signed letter of intent in April and were set to close the transaction in June – until the seller’s lawyer got in the way. What should have taken 60 days ballooned into a full six months. Luckily, it still closed.

Why you need an M&A attorney

When selling your business, the M&A attorney looks out for your best interests. They help you understand the risks involved and how to mitigate them. They know how to translate legal jargon into plain language and help you evaluate the pros and cons of various deal structures and terms.

An M&A attorney is part negotiator, part contract lawyer, part educator. They work with your broker or investment advisor to provide input on deal structure and value. They draft and review all pertinent contracts, including deal terms, the transferability of existing client and vendor contracts, real estate contracts, warranty liabilities and more.

Finally, they’re there to advise you on your rights and responsibilities in the transaction. Even if you are selling 100% of the business, you will likely have certain continued liabilities and operational obligations after the transfer.

Why you need a specialist

Its exceedingly difficult for general practice lawyers to have the experience to move a deal forward effectively and efficiently. M&A transactions are increasingly complex agreements, and different deal structures can present challenging legal issues. Has your general practice attorney ever completed an M&A transaction using an F reorganization or 338 election? In today’s world of sophisticated buyers, its likely you will get offers with some of these provisions.

A seasoned M&A attorney has seen it all before. They know the language, the sticking points, and all the ways a deal can go wrong. What’s more, they understand negotiations and how to protect their client’s interests without blowing up the opportunity. The right attorney is a deal maker, not a deal breaker, and will keep a transaction moving forward – as long as it meets your goals.

Why our deal took six months instead of 60 days

In this particular transaction, the client insisted on working with their real estate attorney. The lawyer had handled a few smaller Main Street transactions before, but nothing of this size or complexity.

To complicate matters, our client was a type-A engineer who wanted to take a deep dive into the legal issues and understand them all on his own terms. That process certainly would have been smoother if he’d had an attorney who understood the transaction issues himself.

Instead of drawing on experience to educate the client and make recommendations, the attorney simply laid out the challenges and asked the client to provide direction. He brought more fear than clarity to the process.

To top it off, the attorney was a one-man-show. That meant when he took a vacation or had to spend a week in court, all work stopped. There was no one else in his office who could keep the process moving forward.

All in all, this attorney was learning on the job. But instead of paying for his education, he got to charge his client an extra-large “tuition” bill in the process.

Why faster is better

We were fortunate to be working with a patient buyer who stuck with this deal to the end. This buyer did not offer the highest price (it was the second highest), but it was clear from the outset that they’d be the most lenient and tolerant of the seller’s need for total analysis and control. Having that right fit can be the difference between a deal that gets closed and one that falls apart.

The other saving grace is that the seller had an extremely stable business. The employees were well-tenured and most revenue was under contract.

What’s more typical, though, when negotiations drag on, is that something negative or positive happens (e.g., a key employee leaves, big contract loss/gain) and either party tries to renegotiate the deal. Emotions run high and it gets increasingly likely someone will throw up their hands and walk away.

That adds up to a lot of lost time, money, and momentum on either side of the equation. Once the seller accepts an offer, it’s in everyone’s best interest to keep the deal moving forward – and that means you need specialized legal support who knows how to get that done.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

M&A Advisor Tip: And the economist says…”Sell!”

/in , /by Al Statz

Economist Steven Chiavarone presented at CIA partner’s annual State of M&A conference in February. As he pointed out, there have been 11 rate hike cycles since 1970 of three hikes or more. Of those, nine were followed by a recession. (The other two were followed by a stock market crash and the Mexican peso crisis.)

He had about 50 minutes more of economic analysis for us, but his takeaway advice was this: “If you are a seller, sell.”

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

The Importance of Valuation in Business Sales

/in , /by Al Statz

With decades of expert valuation and real-world business transaction experience, Exit Strategies routinely values companies and positions them for successful sales. At a minimum, buyers should be willing to pay the fair market value of a business.

The initial and perhaps most important step in selling a business is a thorough, objective, and accurate business valuation. Too many sellers and brokers shortcut the valuation phase, not understanding that it is an essential step to accurately predicting selling price and cash proceeds. Both overvaluing and undervaluing a business leads to bad decisions and produces poor results.

The business valuation process involves gathering relevant facts, properly normalizing financial statements, identifying intangible assets, analyzing business value drivers and risks, and developing credible financial projections — all from an investor perspective. And of course, it involves correctly applying accepted valuation methods, without bias.

Many industry rules of thumb are available to estimate value, however, they are often outdated and ambiguous, and are frequently misapplied. Experienced intermediaries know that rules of thumb should not be relied on as a valuation method and are just one of many data points. It takes extra time and expertise to produce a credible and reliable valuation result, which is why many business brokers don’t do it.

There are three main valuation approaches and multiple accepted methods for valuing businesses within each of these approaches. The methods that our team of M&A advisors and valuation analysts use and ultimately rely upon will always depend on the facts and circumstances of each target business.

Once fair market value is understood, Exit Strategies knows what it takes to leverage the synergistic benefits of target strategic buyers to derive a premium price from the market.

Exit Strategies Group (ESG) is a California-based provider of strategic merger and acquisition advice and execution, and business valuation services. Founded in 2002, with offices in San Francisco and Portland, ESG represents private companies on the sell-side and works with private equity, public and private companies and family offices on the buy-side. For more information visit www.exitstrategiesgroup.com

M&A Deal Terms: Average Capital Structure

/in , /by Al Statz

The following chart from GF Data shows the average capital structure over the past 5 years for middle market business acquisitions. Equity contributions have varied only slightly over that time, in the range of 46% to 49%. Overall there was a slight rise during COVID, but nothing major. There are two different stories based on deal size however. In the $10-50 million total enterprise value (TEV) bracket, average equity contribution dropped. However, for deals in the $50 to 250 million TEV range, average equity share remained at or reached the mid-50s, suggesting the room for continued valuation increases is greater on sub-$50 million deals.

GF Data collects and publishes proprietary business valuation, volume, leverage and key deal term data on private equity sponsored merger and acquisition transactions with enterprise values of $10 to 250 million. GF Data gives M&A deal participants and advisors more reliable external information to use in valuing companies and negotiating transactions.

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

 

M&A in 2022: Is this the year to sell?

/in , /by Al Statz

If you’re a business owner, you’ve probably had a rough couple of years – and the challenges aren’t over. While COVID-19 may be weakening its grip, talent shortages, supply chain issues, and inflation are still very much at play.

And yet, the economy is surging. Many of the business owners we talk to have all the work they can handle and strong balance sheets. So on the plus side, performance is good. On the negative, managing the business is really challenging.

If you’re analyzing the pros and cons and wondering if 2022 is the year to sell, here are some things you should know:

Buyers outnumber sellers

The buyer pool is as strong as it’s ever been, and there are significantly more buyers than sellers. Private equity has been driving demand and will continue to do so for the foreseeable future. This group of buyers is exceedingly well capitalized and needs to put their investors’ dollars to work.

Meanwhile, we expect to see corporate buyers ramping up their acquisitions. After a couple of years sitting back and waiting things out, these buyers are feeling a new sense of urgency. With the tight talent market limiting organic growth, companies will be looking to acquisition as a way to expand and evolve.

In terms of making an offer, strategic buyers could offer higher values because of the synergies that can be gained from a merger. And yet, private equity is up against deadlines to place their money in new investments. Pit these active buyer pools against each other and the battle should be pretty good.

Values are at an all-time high

Sellers are realizing record valuations right now. According to GF Data, a company that collects data on privately held M&A transactions, multiples for Q3 2021 hit the highest level they’ve seen in their 16-year history.

Lending is strong

Banks are looking to put their money to work in the same way buyers are. What we’re hearing from lenders is that their traditional clients are flush with cash. So instead of extending lines of credit to their established customer base, they’re out there looking for new loans to make.

Money is cheap. So even though valuations are high, buyers can still meet those prices with a smaller equity stake. According to GF Data, buyers’ total debt as a multiple of EBITDA “surged” by half a percentage point in Q3 2021 – a significant increase by debt standards.

Tax increases are still a danger

We didn’t see an increase in capital gains in 2021, but there’s a sense that it’s still coming. If the Democrats win the mid-term elections, some analysts predict we’ll see an increase in 2023.

The threat of tax increases sent sellers to market in 2021, hoping to get out in time. Now, we’ve basically reset the clock for another year. Business owners who sell today face a 20% tax burden, but if predictions come to pass, we could see capital gains rates increase by an additional 5% or more.

Business inventory will grow

With the uncertainties of the last two years, many sellers have been waiting on the sidelines. That exacerbated supply and demand issues and heightened competition for quality businesses.

But now the economy is going strong, and the market is gaining a new sense of equilibrium as we all learn to live with the lingering specter of COVID-19. As confidence increases, more business owners will enter the market. If you were planning to sell soon, it might be a good idea to act before supply increases.

Deal support teams are stretched

Deal teams are always running full bore in Q4. Between due diligence, financial reports, environmental inspections, contract negotiations, lending, etc., it can take a lot of third-party service providers to move a transition through to closing.

As one buyer’s banker told us, “We’re committed to getting this deal done. But this transaction is twelfth in line.” (And it isn’t a very big bank!) Sellers that don’t move fast enough could run the risk of missing their ‘close-by-year-end’ goals.

Selling your business is likely the largest financial transaction you’ll make in your life, and there are a lot of variables to consider. It’s a good idea to keep tabs on your business value as the market changes. Talk to advisors who can evaluate your unique business and circumstances. Find out what the numbers look like for a sale in 2022. You may have some big decisions ahead.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.

Rep and Warranty Insurance Now Available for Deals Under $10 Million

/in , /by Exit Strategies

By Patrick Stroth

In recent years, Representations and Warranty (R&W) insurance has become available to smaller and smaller deals.

The eligible deal size dropped to under $20M… then under $15M. This is already quite a feat when you consider that the average transaction value (TV) for deals with R&W coverage in place is $500M. And to be honest, most insurers won’t go lower than $100M—Underwriters are already backed up on processing policies and insurance companies don’t always want to take the time to work on smaller deals that won’t generate large amounts of fees.

Now, for the first time ever, this unique type of coverage is available for deals with a TV of $250,000 to $10M. This opens up R&W coverage to a whole new universe of deals.

How did this breakthrough come about? As with many business ideas, someone saw a gap in the market and decided to fill it with what is officially called Transaction Liability Private Enterprise (TLPE) insurance.

According to CFC Underwriting, the London-based insurer that innovated this new insurance product, there were 230,000 deals in which the TV was between $250,000 and $10M. They decided to create a product for this vast unserved market and came up with TLPE insurance as the first to market solution.

Here are the basics on this coverage, which is available worldwide:

  1.  It covers deals with TV from $250,000 to $10M.
  2.  The policies are sell-side only. (In standard R&W insurance there are sell-side and buy-side policies, although the vast majority are buy-side.)
  3.  It offers competitive terms at rates lower than traditional R&W coverage.
  4.  A streamlined underwriting process to ensure both timely execution and sustainability.
  5.  A deal can be insured up to 100% of Enterprise Value (EV).
  6.  Policy period: six years.

Covered industries include professional services, technology service and product businesses, transportation and aviation, and insurance brokers. CFC generally declines deals involving businesses in healthcare, financial services, oil and gas, mining, pharmaceuticals and regulated industries (such as telecommunications).

How It Works

Similar to standard R&W insurance, TLPE covers innocent misrepresentations made by the Seller to the Buyer.

This provides the Sellers peace of mind because they know they won’t have to risk some or all of their proceeds from the deal in the event of a breach. On the other side, Buyers enjoy a feeling of confidence because there is a guaranteed source of funds available to cover their loss.

Unlike the vast majority of R&W policies, TLPE is strictly a sell-side product. The policy is “triggered” only by a claim brought by the Buyer against the Seller for a loss caused by a breach of the Seller’s representations in the Purchase and Sale Agreement.

As part of this coverage, the Seller is entitled to have their legal defense to contest the Buyer’s claim paid for by the insurer. Underwriters have full authority on the selection of the Seller’s defense counsel, which enables them to control claims costs. The insurance company will also cover any damages or settlement amounts.

Something not in a standard Buyer-side R&W policy is the exclusion for Seller fraud.

While no insurance policy will cover known fraudulent acts, TLPE will pay the legal fees to defend the Seller against allegations of fraud. However, they will cease providing defense costs if actual fraud is established in court.

Important: if the Buyer sues the Seller for something not related to a breach, the insurer does not provide legal defense.

Quick and Easy

TLPE offers streamlined and cost-effective underwriting:

  • An application is required, but Underwriters depend on the Seller’s knowledge of their own business. Who knows the business better than an owner/founder?
  • There are no underwriting fees, which saves policyholders $30,000 to $50,000.
  • No underwriting call is required.
  • The turnaround time is just three days after transaction documentation is submitted and responses to any underwriting questions are provided.

This quick and easy process is possible because the Underwriters are not viewing the reps. They’re not looking at the due diligence collected. They are simply underwriting the application that the Seller provided.

TLPE in Action

TrenData is a Dallas-based SaaS company that offers various human resources services. A larger human resources technology firm was planning to acquire them. The TV was about $5M.

What held up the deal was the Buyer insisted that in the event of a breach of the intellectual property (IP) rep, that the target company would be responsible for any legal expenses or loss. At the same time, the Buyer would retain the sole authority for selecting their own legal counsel and determining the legal strategy.

As the target company noted, this is like essentially writing a blank check. The Buyer could easily hire high-priced attorneys and/or drag the case on and on. They would not go for it.

Neither side would budge on this issue, and it seemed like the deal was lost.

However, less than a week later, the Seller reached out to my firm, Rubicon Insurance Services. We discussed TLPE coverage and how it could work in this deal. The Seller contacted the Buyer, and once they found out that the Seller would pay for the policy, that legal costs would be covered in the event of a loss, and that the deal could be insured up to the full $5M in TV…the gap between the two sides was bridged and the deal closed within a week.

What to Do If You’re Interested in Coverage

TLPE seems simple enough. However, there are key conditions and limitations with this new product. So it’s essential you have an insurance broker experienced in M&A handle the process of securing this coverage.

Something to keep in mind: TLPE policies can be placed post-closing, so if you were unable to get protection for a previous deal, it can actually be revisited.

If you’re interested in seeing if TLPE coverage could be a fit for an upcoming – or past – deal, you can contact Patrick Stroth, at pstroth@rubiconins.com.