As a middle market investment banker, I talk with business owners every day who are thinking about selling a company.  They proclaim that they are finally ready to move on to another chapter in their lives and it’s now time to sell the business that they have spent a lifetime building.  Interestingly, many of these business owners have done little or no planning for their business exit and although they may be ready to sell…their business isn’t.  Learn how to.. Read more »

Company value is a function of the buyer’s expectation of future cash flow, factored for the buyer’s perceived risk of not achieving that cash flow.  There are many factors that will affect the buyers’ perceived risk.  These include things like whether the company’s industry has good growth prospects, whether the company’s products are proprietary or commodity, and how capital intensive the business is.  The buyer’s understanding of the effects of these factors is typically negotiated as a higher or lower valuation.

However, there are five factors that are so significant that they don’t affect price: they affect the fundamental ability to sell your company and complete a deal.  For this reason, these are considered Deal Killers.   If a company has one or more of these attributes, it will be difficult to find any buyer.  Any buyer will very likely discount the value to accommodate the risk that these Deal Killers bring.

Over the course of my next five blog posts, I will be discussing the five most significant Deal Killers, along with recommended antidotes to diminish the effect of these situations on the deal.

Deal Killer #1:

NO MANAGEMENT DEPTH.   This Deal Killer is the most common, the easiest to resolve, and the one that sellers resist the most.  Nothing will kill a deal faster than the buyer’s perception that the keys to the company’s success are locked inside one individual. Read more »

If I sell now then I will have to retire or find another job.
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Selling Business Myths – Part 7

You’ve just sold your business.  Congratulations!!!  Now what?  Ok, hopefully you and your Investment Banker have worked something out prior to even taking your company to market.  It’s a big decision and luckily you have many options.  If you determine what YOU want on the front end then it will drive the sales process. Read more »

A sale will have negative effects on my employees.

Selling Business Myths – Part 6

The single most valuable asset to a buyer is the employees.  Imagine the worst case scenario…the buyer purchases a company and the key employees depart.  An empty facility full of equipment that does not produce revenue would be a disastrous investment.  For this reason, buyers are extremely cautious that the employees are properly motivated and happy to stay post-transaction.  Often times, buyers will offer multi-year employment agreements that allow employees to participate in the profits of the company.  The mantra is “let us help our management so they can help us grow the company.”

If your buyer is a Private Equity Group (PEG) there are further reasons to breathe a sigh of relief.  A PEG’s purpose for existence is to build a portfolio of companies that can outperform traditional investments.  The management team of the average PEG spends over 75% of its time seeking new acquisitions to invest in.  They typically do not get involved in the day to day operations of its portfolio companies, unless there is something that the portfolio company seeks assistance and advice with (new financing, introduction to a new customer, guidance on how to implement new software, board level management).  Therefore, PEGs look for opportunities where strong management teams are already in place.

Posted by Gerald Lindsay.

In the best of times it’s still challenging to access growth capital for small and lower middle market sized companies.  Other than bank loans and economic development agencies there are few substantial sources of organized capital available for early and growth stage companies. However, some often overlooked sources of funding are the investment accounts of Self-Directed IRA and 401(K) retirement accounts.

Millions of Americans hold hundreds of billions of dollars in their IRA and 401(K) plan accounts. Many are disappointed in the performance and seek alternatives to try and improve on their results as they continue to fund these accounts with regular periodic contributions.

Under the IRS tax code certain private investment transactions are permitted within the investment guidelines for IRA and 401(K) retirement plan accounts. (See you tax and retirement specialist for details) They include private equity investments, commercial real estate, loans to businesses and much more. Read more »

Overseas Investors See Value in US Middle-Market Businesses

In an earlier blog, I made the suggestion to look beyond our borders for possible acquisition targets, specifically in Brazil, where capital from the US as well as from European and Asian nations had been flowing at increasing rates over the recent years. This time, I would like to call your attention to the opposite phenomenon, one that has already been tagged by some investment bankers as a type of “reverse colonialism”.

While the economies of the developed world are still weak after the 2008 banking crisis in the US and the debt crisis that started in Europe in 2010, the emerging economies have been thriving, blessed with a continuous rise in commodity prices and their surprisingly sound fiscal condition.  This has created an unusual appetite for acquisition in the US and Europe by investors from countries such as Brazil, India, or Mexico among others. In fact, according to the World Bank the US and Britain alone were the destination of over $320 billion in emerging-market acquisitions between 2000 and 2010. Read more »

It’s Always About Access to Capital

Whether you are a start-up entrepreneur, a growth oriented middle market company CEO, or a seasoned company owner seeking an exit sale to ride off into your retirement sunset – access to capital for business is and should be a topic about which business owners will be rewarded for maintaining a regular and up to date awareness.

The struggling start-up entrepreneur is generally forced to cobble together his own personal resources, those from willing friends and family, a helpful angel investor or two,  a few economic development agency grants and Venture Capital funding for those “lucky”  1% or 2% who are deemed worthy. It’s a tough environment, even in the best of situations, and most hope that their success allows them to never look back at raising capital. Read more »

Selling Business Myths – Part 2

Is your business at the top of its game? You have considered selling your business, but are holding out for that “one more” good year? Just recently I had a seller client who received a full price offer on his business…more than he had ever expected. You know what he did? Turned it down and waited one more year! This decision pained me. Not because I wanted to just get the deal done, but because I have seen this logic too often go wrong. In the seller’s mind he thinks that next year he will get back out there with double the earnings and bring in an even bigger offer. But, more likely, that big fish that was just released won’t come back.

This is what we know for certain: there is no certainty! The risk/reward with privately held companies goes both ways. Why gamble your nest-egg on the next 12 months of potential profits? Who is to say the next year won’t have average or decreasing revenues? So, what is the real question here? Not if you can get more tomorrow, but are you ready for the next steps? Here are some signs that it’s really time to sell your business:

• You no longer want to make the financial commitments necessary to grow the business.

• You no longer want the burden of having all your capital tied into a business.

• You are ready to pull your chips off the table.

• You have had your business plans in place, but don’t have the energy or time to do the next steps.

• The thought of expansion is exhausting. • You have grown your business past the point of where you comfortably want to run it alone.

• You don’t get into the office like you used to. You would rather be out playing golf or enjoying free time.

• You have effectively managed your staff where you are no longer needed in the office every day. The business could run successfully without you.

• You have gotten your financials in order. You have reviewed or audited statements from your CPA for at least three years.

Posted by Gerald Lindsay.

Request your copy of  The 7 Step Guide to Business Exit Planning.

I hear from many people and have experienced clients saying “Why did the buyer reduce the EBITDA multiple after we signed the LOI?” In many cases, the perceived fall in the multiple has led to the seller withdrawing from the process at worst and bad feelings at best. In many transactions, the multiple offered falls during due diligence as the buyer learns more about the company, but this can managed if the company is prepared for sale. There have been many things written about preparing a company for sale including a good piece by my colleague Eduardo Berdegué.  But one of the items that doesn’t get much discussion is quality of the financial statements.

Many privately owned companies only ever prepare tax returns and in some cases even keep their books on a cash basis. When a buyer makes an offer, they base their multiple on audited GAAP prepared financials. Without going into many of the details, GAAP financials impose stricter requirements for revenue recognition, bad debt right-offs, receivables, payables and inventory. When preparing financials under GAAP many of the earnings numbers tend to go down, which tends to reduce the level of EBITDA from that calculated by the company when preparing its tax return.

When sellers look at the final offer they believe the buyer has reduced the EBITDA multiple, when in reality it is the level of their earnings. In order be more prepared for what the real offer will be and stop disappointment or a lost transaction, potential sellers should have an audit done prior to going to market.

Posted by Marc Borrelli.

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I just returned from CFA’s Summer Conference in Chicago. One of the highlights of the event was a panel of Private Equity experts talking truths about the state of the middle market M&A industry from their perspective….that of the financial buyer.  In cutting to the chase…if you own a successful middle market business and you have a need to sell all or part of your business…now may just be the perfect time to go to market. Read more »