A recent article posted on the Axial Forum entitled “What Do Buyers Look for in the Lower Middle Market?” explains how to make your business valuable to potential buyers and how to find the right buyers for your business. The buyers in the lower middle market are usually strategic buyers, financial buyers, private equity firms, and search fund advisors.

Buyers in this market are generally looking for the following characteristics:

• A strong management team who has incentive and is prevented from competing against the company if their employment is terminated
• Stability and predictability of revenue and cash flow
• Low customer concentration
• Other value drivers such as state-of-the-art operating systems
• High level of preparedness

The article warns about the biggest obstacles for owners. Business owners should consult with experienced deal attorneys and investment bankers before speaking to any buyers. They should also consult with advisors before the company goes on the market to make sure the business is properly prepared for sale. A business owner’s management team may also be subject to rigorous professional assessment and background checks if a private equity or financial buyer is interested.

Currently in the marketplace, buyers are offering amounts higher than the historical norms. This means that along with the higher sale prices, sellers are subject to more scrutiny through due diligence. This is all the more reason for a seller to be prepared and to work with experienced advisors to get their business ready for sale.

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A recent article from the Axial Forum entitled “5 Ways Sell-Side Customer Diligence Can Maximize Sale Prices” explains how third-party sell-side customer diligence has become increasingly more common and why it can help sellers maximize and justify sale prices. Here are the 5 ways this due diligence can help you get the best sale price:

1. Determine if it’s the right time for a sale – Positive customer feedback can help reinforce the decision to sell, and neutral or negative feedback can help improve the company so it will be better prepared for a sale.
2. Attract and persuade buyers – Your confidential information memorandum (CIM) will show how strong customer relationships are, how your market share has grown, how the business has become more competitive, and more. Thorough documentation of the health of customer relationships will also help attract buyers.
3. Control the message – Having the seller contact their customers reduces the risk of anyone being tipped off about the sale and also allows for the seller to provide a better interpretation of the results.
4. Prove there is a clear path for future growth – Pre-sale due diligence can help justify the ways in which the company can grow in the future.
5. Accelerate the timeline – Having customer diligence done ahead of time will speed up the process so the buyer doesn’t have to do it.

Sell-side due diligence gives the buyer a good overall assessment of customer relationships while also allowing the seller to control the process of the findings and substantiate their asking price.

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A recent article from Inc.com entitled “The Art of Finding the Right Buyer for Your Business” gives us three essential items to consider when selling a business.

• Set goals – The first step is to set goals for the future of your business, yourself and your family. You’ll want to consider factors such as how the transaction will affect your employees, if you will continue on as a team member or transition out of the company, and what your overall goals for the company are. This will help you and your advisor customize the sale process.

• Explore options – Be sure to know the difference between a private equity group and a strategic corporate buyer, and find out how they can benefit your business. There are also “family offices,” which are investors who manage the wealth of a family or multiple families, but they hold a business forever.

• Keep an open mind – It’s especially important in the beginning to stay open to both types of buyers and find a good advisor who can help guide you towards the right buyer. Whether they are a financial buyer or a strategic buyer, you don’t know how they are going to handle the future of a company until you get to know them.

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A recent article from the M&A Source entitled “Gold Rush: New Entrepreneurs Seek Search Funds to Finance Takeovers of Baby Boomer Businesses” explains how new entrepreneurs are looking for funding to take over businesses as the baby boomer generation starts to retire. There is currently an entrepreneurial generational gap with far less young entrepreneurs than there are baby boomers looking to sell. Healthy financial trends paired with recent tax reforms have contributed to making ideal conditions for the new generation of small business owners.

This new generation of entrepreneurs is coming from recent MBA graduates who are choosing to acquire a business instead of heading to Wall Street. Most notably, they are doing things differently when it comes to financing by turning to the search fund model which is seeing unprecedented growth as of late. This process known as entrepreneurship through acquisition (ETA) is also becoming increasingly popular in business schools which are now offering ETA programs.

It is believed that this trend is going to continue and that the timing is right. More schools are increasing awareness about it and the model will get easier as more baby boomers retire and sell their businesses. As more big money sources see this model gain popularity, there will be more money to support this growth as well.

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A recent article posted by Divestopedia entitled “Avoiding the Biggest Deal Killer: Time” tells us that the key to a successful deal is preparation and momentum. This means that the seller should be fully ready when the business hits the marketplace, not when the first offer is made.

To keep the momentum going, there are 14 factors to consider:

1. Know when it is a good time to sell your business
2. Know why you want to sell
3. Know the company’s strengths and weaknesses
4. Know what you will do after you sell your business
5. Know the value of your business
6. Have a realistic asking price
7. Be sure you are current on all taxes
8. Make sure operational details are organized and recorded
9. Know that the business can operate without you
10. Know your company’s place in the market
11. Be prepared with accurate financial statements, tax returns, and financial reports
12. Know that your team of trusted advisors is ready
13. Have a growth and marketing plan for your buyer
14. Know what is most important to you so you can stay focused on the key issues and not worry too much over minor details

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Copyright:Business Brokerage Press, Inc.

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The value of the term sheet shouldn’t be overlooked. From buyers and sellers to advisors and intermediaries, the term sheet is often used before the creation of an actual purchase or sale agreement. That stated, it is important that the term sheet is actually explained in detail. Let’s take a closer look at its importance.

What is a Term Sheet?

Even though term sheets are quite important, they are rarely mentioned in books about the M&A process. In the book, Streetwise Selling Your Business by Russ Robb, a term sheet is defined as, “Stating a price range with a basic structure of the deal and whether or not it includes real estate.”

Another way of looking at a term sheet, according to attorney and author Jean Sifleet, is that a term sheet serves to answer to four key questions: Who? What? Where? And How Much?

Creating the Right Environment

A good term sheet can help keep negotiations on target and everyone focused on what is important. Sifleet warns against advisors, accountants and lawyers who rely heavily on boilerplate documents as well as those who adopt extreme positions or employ adversarial tactics. The main goal should be to maintain a “win-win” environment.

At the end of the day, if a buyer and a seller have a verbal agreement on price and terms, then it is important to put that agreement down on payment. Using the information can lead to a more formalized letter of intent. The term sheet functions to help both parties, as well as their respective advisors, begin to shape a deal, taking it from verbal discussions to the next level.

Make Sure Your Term Sheet Has the Right Components

In the end, a term sheet is basically a preliminary proposal containing a variety of key information. The term sheet outlines the price, as well as the terms and any major considerations. Major considerations can include everything from consulting and employment agreements to covenants not to compete.

Term sheets are a valuable tool and when used in a judicious fashion, they can yield impressive results and help to streamline the buying and selling process. Through the proper use of term sheets, an array of misunderstandings can be avoided and this, in turn, can help increase the chances of successfully finalizing a deal.

Copyright: Business Brokerage Press, Inc.

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A recent article posted by The National Law Review entitled “Thinking of Selling? Start Early, Build Your Team” explains the importance of putting together a good team of trusted advisors well in advance of selling your business. Your team should include an attorney, accountant, investment banker, and wealth manager. This team will help you with various aspects of selling your business such as:

• Setting a realistic valuation on the business
• Finding potential buyers
• Handling due diligence and information requests from buyers
• Structuring a transaction for tax & liability protection
• Dealing with the sale proceeds and making sure your goals are met

It is a good idea to put this team together as soon as possible if you’re thinking of selling, so everyone has time to prepare. There are so many aspects to a business sale and it is essential to have an experienced team of professionals to guide you in the process.

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A recent article from The San Angelo Standard-Times entitled “Business tips: Don’t neglect due diligence when buying a business” emphasizes the important of due diligence when buying a business, which consists of looking into and understanding the important aspects and fine details of the business before closing.

The first aspect to consider is if the business is right for you and your personal circumstances. Taking over a new business will require some help from the previous owner who has knowledge of the business and the industry. You will also want to take into account how many hours are needed, if the job will involve a lot of physical work, and if your family supports you in the purchase of this type of business.

Reviewing and analyzing the seller’s numbers and documents is also a huge part of due diligence. Consider using the help of a CPA, consultant or business broker to go over the financials of the business. You will also want to look into things such as if there are any claims on the business or if the business owes back taxes. Doing your due diligence now will ensure that there are no surprises later on in the process.

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A recent article posted by the Smart Business Network entitled “Planning an exit when a succession plan isn’t an option” explains that selling your business should be part of your exit strategy when creating a succession plan is not an option. To prepare a business for sale, the business owner should recognize the strengths of the business which would appeal to potential buyers and should also have a good understanding of the business’ financials.

Business owners may also want to work with a bank that is experienced in exit planning. The bank can assist with providing insight into how buyers will view their business and what obstacles may occur while a buyer is trying to finance the acquisition. Banks will also be able to work with the buyer in assisting them with financing.

It’s important for a business owner to work with experienced professionals who have worked with sales, acquisitions and exit strategies to help them prepare for a business sale.

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A recent article posted by Business.com entitled “Why It’s Prime Time to Buy a Business from a Retiring Baby Boomer” gives several good reasons why it is a good idea to consider purchasing an existing business, as a flood of baby boomers will be looking to sell their businesses and retire over the next decade.

There are many benefits to purchasing an existing business:

1. Minimal upfront costs and you not only purchase the business but also the brand, customer-base, management policies and more.
2. Low risk because the business is already established and has a proven track record.
3. Steady cash flow along with employees and equipment.

With the generation of baby boomers looking to sell, there will be ample opportunities available for buyers. It’s important to stay in the loop and keep an eye out on available businesses by staying connected to your professional network, brushing up on local & industry publications, looking at online marketplaces, and working with a business broker.

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A recent article written by Live Oak Bank entitled “6 Business Acquisition Tips from SBA Loan Experts” outlines six factors that lenders review for loans financing mergers and acquisitions.

1. Stable or Positive Trend – Not only a positive trend but stability in these trends are what lenders look at to make sure that any recent growth or improvement is sustainable. A decrease in revenue is a red flag and a negative trend should be stabilized or reversed.
2. Business Plan – Buyers need to have a business and transition plan for the business they are acquiring so lenders can see they have a good understanding of the business and plans for improvement.
3. Key Employees – Lenders like to see that key employees will stay on with the new owner, which helps lower the risk and make the transition easier.
4. Seller Transition Period – Make sure you have a transition plan in place where the seller is able to help train and assist the new owner.
5. Seller Financing – The seller financing a portion of the deal shows the lender that they are confident in the new owner and lowers the risk factors.
6. Working Capital – M&A lenders will review the financials of the business to see what working capital is needed. The buyer should demonstrate a clear understanding of how much and what type of working capital is needed for the business transition.

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Copyright: Business Brokerage Press, Inc.

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Can two companies in the same industry have very different valuations? In short, the answer is a resounding, yes. Let’s take an example of two companies that both have an EBITDA of $6 million but with two very different values. In fact, Business One is valued at five times EBITDA, which prices it at $30 million whereas Business Two is valued at seven times EBITDA, meaning it has a value of $42 million.

Value Difference Checklist

1. Revenue Size
2. Profitability
3. The Market
4. Growth Rate
5. Regional/Global Distribution
6. Management & Employees
7. Capital Equipment Requirements
8. Systems/Controls
9. Uniqueness/Proprietary
10. Intangibles (Intellectual property/patents/brand, etc.)

There are quite a few variables on the above checklist that stand out, with the top one being that of growth rate. Growth rate is a major value driver when buyers are considering value.

Business Two, for example, with its seven times EBITDA has a growth rate of 50%, whereas Business One, with its five times EBITDA has a growth rate of just 12%.

Discovering the real growth rate story means answering some pretty important questions.

1. Are the company’s projections achievable and believable?
2. Where is the company’s growth coming from?
3. Are there long-term contracts currently in place?
4. Where is the growth originating? In other words, what services or products are driving growth? Will those services or products continue to drive growth in the future?
5. How is the business obtaining its customers for the projected growth?
6. How reliable are the contracts/orders?

Ultimately, finding the difference in value between two businesses, that otherwise appear similar, usually resides in growth rate. This is a factor that should not be overlooked. It is essential to know a company’s growth rate as well as the key questions to ask regarding its growth. If you are going to obtain an accurate valuation as well as understanding the valuation between different companies, this part of the process cannot be overlooked.

Copyright: Business Brokerage Press, Inc.

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A recent article posted on PR Newswire entitled “Business owners’ love of work may hinder succession planning” explains the parallels between the number of business owners with no plans to retire and the lack of succession planning. In a recent poll, over 70% of business owners said they are not planning to retire, don’t know when they will retire, or do not plan to retire for at least 11 years. The survey also reported that 2 out of 3 business owners do not have a succession plan or a clear understanding of the importance of one.

Even if there are no immediate plans for retiring, business owners should have a succession plan in place to protect the business, partners, employees and customers. If something were to suddenly happen to the business owner such as serious illness or an untimely death, a succession plan would help make sure everything goes smooth with the transition of the business.

To get started with creating an exit plan, business owners can take 5 simple steps:

1. Set goals & objectives
2. Determine the value of your business
3. Consider options for the business in the case of disability, retirement or death
4. Develop a plan and documentation with an advisor, attorney and accountant
5. Fund the plan

You never know when something unexpected could occur, so it’s never too early to start creating a succession plan.

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A recent article posted by Forbes entitled “Baby boomers are selling their businesses to millennial entrepreneurs, and it’s a brilliant idea” highlights the fact that many baby boomers will soon be looking to sell their businesses and this creates excellent business opportunities for millennials. Many of these baby boomer businesses are well established having no debt, loyal customers and proven business models which make them a great opportunity for young entrepreneurs to take over instead of letting the businesses close down.

Here are 7 places to start looking for these baby boomer businesses:

1. Local chamber of commerce
2. Local CPAs
3. Local real estate brokers
4. Local community bankers
5. Business brokers
6. Go directly to the business owner
7. Craigslist or eBay

Overall, staying connected with local professionals in your area as well as being proactive in searching out businesses for sale will help you to find a great business opportunity. Once you find a legitimate business, find out if it’s making a profit. If so, ask why the owner wants to sell and if not, find out why.

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A recent article from Forbes entitled “Selling your business in 3 to 5 years? Buy another company now” explains how acquiring another company can significantly increase the value of your business before you decide to sell. The first thing to understand is that the multiple of earnings paid for a company increases at an accelerating rate with size. Larger EBITDA means larger multiples, and larger companies are generally less risky so a buyer is willing to pay more.

Acquiring another business may also amount to cost savings and operational improvements when the companies are integrated. Combine these savings with organic revenue growth and a larger multiplier when the companies are combined, and this can add up to a huge increase in your company’s value. So if you’re thinking of selling within 3-5 years, this could be a good strategy to consider.

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A recent article from the Denver Post entitled “Selling your business? Focus on the key business drivers so buyers pay top dollar” explains how focusing on certain key factors of your business can help you get the highest possible price when selling your business. Although many key business drivers vary among industries, there are four drivers that apply across the board:

1. History of increasing revenues and profits over the past 3-5 years
2. Strategic business plan that shows strong growth, competitive advantage, and products or services that can be sold across multiple industries
3. Future cash flow including expected EBITDA performance, expected working capital investment requirements, and expected fixed-asset investment requirements
4. Strong management team and strong operating systems in place

Business owners should get a detailed business audit and analysis from a business consultant so they can see where their business’s strengths and weaknesses are. This will show the owner what business drivers to focus on improving in order to get the highest price for their business.

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A recent article posted on Divestopedia entitled “What Is Your Company Actually Worth?” explores how buyers and sellers often perceive a company’s worth differently and how business owners misjudge their company’s value. Private company valuation is a complex process and most owners have difficulty staying objective when it comes to a business in which they have put their life’s work into. On the other hand, to a buyer, the company is an asset to be acquired at the lowest possible price, which often leads to a large difference in perception between a buyer and seller.

An experience advisor can help negate these problems and make the sale process better for the owner for the following reasons:

1. The business owner can focus on factors of the business which will increase the valuation such as EBITDA, sales, gross profit margins, customer growth and employee skills.
2. The owner will get an extensive look at the financial health of their business from an advisor along with recommendations for improvement.
3. An advisor will also be an experienced negotiator, helping the owner get the best sale price for the business.

The key to avoiding mistakes in selling a business starts off by getting an accurate valuation of the business and making sure everything is analyzed effectively to prepare for a profitable sale.

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Copyright: Business Brokerage Press, Inc.

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