Exit and Growth Strategies for Middle Market Businesses

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When Will The Buyer Stop Asking All These Annoying Questions?

By Robert St. Germain | Mar 19, 2018

Business sellers often reach the point in the sale process where, in complete exasperation, they start asking the above question of their investment bankers.

The short answer is that questions will be put to the business seller by the impending buyer right up to closing.

Yes, the due diligence phase of the business buy/sell process can be very demanding and very frustrating, especially for the seller. For the first time, they are being asked to share what previously had been closely guarded information with whom are, likely, complete strangers. And that goes against every natural instinct of sellers for whom, theretofore, absolute secrecy was the order of the day to keep any and all info that could possibly be used to their disadvantage from employees, suppliers, customers, and competitors.

On the other hand, the seller must understand that it is the buyer who will be taking on the responsibility for a lot of capital in some combination of debt and equity to make the acquisition. So, the primary reason for all those “annoying” questions is to help the buyer assess the likelihood of replicating or improving historic cash flows to support the debt component of the capital package while generating the necessary return on the equity component.

Those capital components typically will be provided, in part, by the buyer and, in part, by third parties in the form of at least one lender and, perhaps, at least another equity investor. Each supplier of capital to the transaction will have their own set of questions coming from their own unique perspectives. Additionally, each supplier of capital will be assisted by their own set of advisors who will each have their own set of questions to protect the interests of their respective clients.

In aggregate, there will be many questions, some of which the seller very likely will never have asked themselves during their ownership tenure, and some of which will require an extra work effort to answer.

Sellers that engage the services of investment bankers (IB) to lead them through the sale process will be advised in advance of what to expect during DD and how to prepare.  Further and very importantly, the IB will advise the seller both on how to legally protect themselves from compromise in the information exchange and how to stage the release of various types of information only to when it is absolutely necessary to the process.

Where Have All the Baby Boomer Business Owners Gone?

By Robert St. Germain | Nov 17, 2015

Baby BoomerIt has long been predicted that the “baby boomers” (i.e. the population cohort born between the years 1946-1964), who own businesses in the U.S., would begin to exit their businesses en masse as they began reaching the age of 65, starting back in 2011. The related prediction was that this mass exit would represent the greatest private transfer of wealth in the history of the U.S. To put those predictions into perspective, it is estimated that some 8+ million businesses in the U.S. with a total valuation of $10+ trillion are owned by boomers; and, for most of them, the vast majority of their personal net worths are tied up in their businesses.

Have those predictions come true? The answer, like so many other predictions in life, is a resounding no. While some boomers have certainly elected to exit and pursue their personal “bucket lists”, the majority, so far, seem to be hanging on to their companies. So, what is going on, especially in this period of plentiful and low cost capital, an abundance of buyers, and, as a result of the previous two factors, high purchase multiples?

In an effort to answer that question, The Wall Street Journal looked into this phenomenon; and on Oct. 14, 2015 published the related article titled “The Missing Boom in Small-Business Sales” with the sub-title “An expected rush in sales of small firms by the baby boomer generation has yet to materialize”. Their findings, in my words, were very interesting.

First, this is not their fathers’ generation that looked upon age 65 as the automatic start of the last stage of their lives i.e. wearing the stereotypical gold watch while golfing/fishing throughout their golden years. The boomers are a healthier and longer living generation with the energy and interest to continue running their companies. Read more »

Congratulations! You Sold Your Company. So, How Much Money Did You Leave on the Table?

By Robert St. Germain | Nov 05, 2013

Money BlocksIt was certainly flattering when you received that unsolicited call from the CEO of one of the major players in your industry. Maybe he remembered you granting him that one foot “gimme” putt at the trade association golf tournament two years ago. In any case, during the call, he said some very nice things about your company and how teaming up with his would be a “win-win” situation for both of you.

During the discussion, he offered a price that seemed fair; and, in short order, you signed an LOI that took you off the market for 90 days while all the final details got worked out. Sure enough, he kept his word; paid his price on the designated close date; and you are now golfing near full time while regularly granting one foot “gimme” putts in anticipation of more good karma in the future.

So, looking back, have you ever wondered how much money you left on the table by accepting that seemingly “fair” price from that single offer? Actually, you will never know because you fell into the all too common trap of voluntarily binding yourself into a non-competitive process that, by design, was to the clear advantage of the buyer and to the distinct disadvantage of you, the seller. Read more »

Should You Consider a Recap? Part 5

By Robert St. Germain | Apr 03, 2012

Money BlocksIn the last four blog posts I have discussed the different types of middle market business buyers in the market today, how they differ and what they look for when they invest.  Now that we know about the buyers…is there anything the seller can do to make sure the transaction runs smoothly?     

If all the prerequisites have been properly put in place, the seller has at least one more tool to extract the highest price and best terms from the PEG marketplace. That is a well constructed, competitive sale process consistent with the protocols and expectations of the PEGs. As with selling to any third party, competition among potential buyers can help maximize the outcome for the seller. Read more »

Should You Consider a Recap? Part 4

By Robert St. Germain | Mar 29, 2012

Money GraphThis series of posts has examined the different types of buyers of middle market companies, focusing on selling to a third party.  Learning more about how the financial buyer makes investment decisions is important to anyone considering a business sale.

Although, as previously discussed, each Private Equity Group (PEG) has its own specific investment criteria, most of them are attracted to acquisition targets with certain general characteristics that independently and, in aggregate, help reduce the risk of their investment. Therefore, sellers interested in exploring recap opportunities should be aware of these and put as many as possible into place before marketing themselves to the PEG community. Read more »

Should You Consider a Recap? Part 3

By Robert St. Germain | Mar 27, 2012

This series of blog posts examines the exit options of middle market business owners as they contemplate the sale or recapitalization of their companies.  My first two posts in the series described the seven primary ways owners leave their businesses – sales of assets, sale to partners, sale to children, management, employees, to the public and a third party… and the ramifications when the third party is a strategic buyer.  The third party financial buyer is another option that may be worth consideration.

A financial buyer, for this discussion, is a private equity group (PEG). This is a type of investment manager that raises funds specifically to be invested in the private equity of operating companies in accordance with a limited partnership agreement between it and its sources of those funds (e.g. pension plans, universities, insurance companies, foundations, endowments, and high net worth individuals). The funds typically have a ten year life, during the first half of which, capital is invested into companies and, during the second half of which, that capital and any appreciation thereon is harvested back out through the resale or IPO of those companies. Read more »

Should You Consider a Recap? Part 2

By Robert St. Germain | Mar 23, 2012

Business PlanningThis series of blog posts examines the exit options of middle market business owners as they contemplate the sale or recapitalization of their companies.  In my first post we looked at the seven primary ways owners leave their businesses – sales of assets, sale to partners, sale to children, management, employees, to the public and finally to a third party.  We now focus in on the sale to a third party.

If the seller’s primary objective is to maximize price while giving up all ownership (i.e. a complete sale) and continued employment, then “strategic” buyers should be the focus. Read more »

Should You Consider a Recap?

By Robert St. Germain | Mar 21, 2012

Business ChartThere are essentially seven ways to leave your love (i.e. sell your business!). They include sale of assets, sale to partner(s), sale to children, sale to management, sale to employees, sale to the public, and, finally, sale to a third party. Each sale type has its advantages and disadvantages, which I will explore in the following series of blog posts.  We begin by listing the selling options here in order of typically least to most financially rewarding to the business seller.

Sale of assets (i.e. liquidation) will typically yield only pennies on the dollar because the assets are not being sold as part of an ongoing, cash generating business. Sale to partner(s) will likely be guided by a buy-sell agreement which, by design, will be very conservative in its valuation and payout algorithms to preserve cash for the remaining business owner(s). Read more »

Buying a Business the Right Way

By Robert St. Germain | Apr 06, 2011

Doug Nix’s recent article “Pointers on Successful Acquisitions” hits the right chords on the whens and whys of buying a business.  He’s right on target when mentioning that just because something looks like a bargain doesn’t mean it’s a smart acquisition.

If all the prognosticators are correct, 2011 should be a boom year for the M&A markets and many companies will appear on the selling blocks for the first time.  From a buyer’s standpoint, it will be critical to make sure that what you see is really what you get.  Doug’s article is a good read and you can find it in its entirety here.

Posted by Robert St. Germain

Is Your Investment Banker Licensed?

By Robert St. Germain | Mar 08, 2011

You worked long and hard to grow your company and now it is time to exit and reap the rewards. In your case, you decided to sell to a third party because you learned that is typically how business owners maximize their selling price. To that end, you elected to engage the services of a business broker/intermediary/M&A advisor. You heard that they can help you to more effectively recast your financials, create a descriptive memorandum, market your company, screen inquirers, facilitate due diligence, negotiate deal terms, and otherwise professionally manage the detailed, comprehensive, and confidential process of selling a company. All those are burdens you would prefer to leave to someone who specializes in such a process so you can focus on your specialty of operating and growing your business to increase its value.

You found such an advisor and, with everything seemingly in order, you next signed her standard engagement agreement. Included therein, as is typical in such agreements, was the requirement to pay a fee to the advisor contingent upon the successful sale of your company. Now you are looking forward to accepting a great offer that will allow you to move to sunnier climes and pursue full-time all your other life’s passions. What is not to like about that scenario? Read more »