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Capital Ideas for Private Business

Is The Timing Right To Sell My Business?

By Craig Allsopp, Managing Director
Portland Office
Corporate Finance Associates

The first question for retiring business owners is about timing. Is now a good time to sell my business or are better days ahead?

A recent report by GF Data indicates the current market is strong. The report for Q1 2015 shows the average price paid for middle market companies increased to 6.8 times adjusted EBITDA versus 6.4 a year ago.

But not every middle market business sells for 6.8 times earnings. So the next question is what makes one business sell for more?

One answer is size. The GF results show companies at the lower end of the middle market, i.e. $10 million to $25 million in sales, sell for less than middle market companies with sales in the $25 million to $250 million range.

Another answer is relative performance. Irrespective of size, companies that out-performed their peers earned a premium from investors. So the question now becomes: what characteristics lead to the kind of better performance that makes one company more attractive than another?

To answer that, we talked with principals from three different private equity groups.

Sustainability and Differentiation

Stuart Matthews, a partner at Metapoint Partners, considers sustainability the most important attribute when considering an investment.

"Simply put, sustainability enables you to do things over time to improve and grow," says Matthews, whose firm acquires manufacturing companies in the Northeast. "The first thing I consider (when looking at a company) is whether the business has operations or capabilities that can survive in good markets and bad."

Matthews also likes to see clear differentiation in a company's products and services. Businesses that stand out from the crowd will offer something free delivery, or faster service, or better equipment or clever design that others don't.

"Figure out ways to address a customer need that others do not," he counsels. "Pricing alone is not enough of a differentiator. A successful business owner is one who is always looking for an edge and looking ahead."

Profit Margins and Market Share

Companies with strong financials pass the initial review process followed by Boston-based Anvil Capital Partners. Investor Ben Giess also likes companies with a solid base of recurring revenues.

"Our first filter is profit margins," says Giess, who screens approximately 150 deals a year to make one or two investments. "High margin companies (gross margins of 40% or better) are most attractive because they show some special level of positioning."

Giess says market share is another important factor in Anvil's evaluation process. Niche market leaders are much more difficult to displace, especially in the industrial services area the firm prefers.

"Companies that are first or second in their markets are the most attractive acquisition candidates," says Giess. "By far."

Management Team

The "spirit of partnership" is most important to John Willert, a managing director at Capital Partners in Wilton CT. Capital Partners is currently investing $360 million from its latest fund raised last year.

Willert says Capital Partners is a long-term investor with a preference for companies with established leadership and business processes. Over time he says the firm has found management continuity and culture to be key building blocks in company performance.

He considers this true whether a company is a manufacturer, a service provider or a wholesale distributor. "Success comes from companies with great management and attributes like having better products or a more resilient cost structure."

Timing

So what should an owner do to get ready for the current or future sellers' markets?

"One thing is to get your financials in order," says Giess, calling the market "phenomenally good" for owners ready to pull the trigger.

He also stresses the importance of planning. "The more parts of the story that you can present to validate business growth, the better off you will be."

Matthews of Metapoint holds a similar view, while also suggesting owners should get some help before going to market.

"Most owners have never gone through a sale before," he says. "They don't have a frame of reference for what is involved in a transaction. It can be a very time consuming and lonely process."

Summing up

All three investors agree one of the bigger challenges and drags on value - for many middle market companies is customer concentration. The lack of a diversified customer base can cripple a company if a major customer disappears.

The specifics may differ by market sector, but generally businesses that derive more than 10% of revenue from a single customer will not be able to command a premium - even in today's seller's market.

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