So you want to sell your business…

So you want to sell your business.  Retirement or moving on to the next venture is on the horizon and it’s one of the most exciting and nerve-wracking challenges of your career. You’ve probably received calls and or emails from business brokers over the years.  Perhaps your CPA “knows someone” who might be able to help or has offered to do the deal themself (avoid this).  At the end of the day, you’re left researching a sea of marketing material for answers to questions that you absolutely need to get correct.

A need for representation

Let’s start with the obvious, you need representation unless you have a background selling companies.  Even if you do, typically teams of people work on each acquisition handling different tasks such as financial analysis, marketing, due diligence, negotiations, etc.  Confidentiality is also of HUGE importance in these deals.  How are you going to market your business to multiple buyers without a.) lying about who you are or b.) disclosing your name and therefore disclosing your business is for sale. Unless you are the type of person that represents yourself in litigation, sells your house without an agent, and does your corporate taxes without a CPA, avoid trying to sell your own company.

The three types of representatives:

You have three viable options when it comes to an M&A advisor that can sell your company.  Each of them has pros and cons and each is best suited towards a specific type of transaction.  It’s important that you, the business owner, are realistic with your business when picking your advisor because, with the exception of large M&A firms that have a revenue limit, all of them will accept you even if they are not necessarily the best fit.

The Business Broker

Small business owners, particularly with very small companies, typically love to compare selling their business to selling their house.  They want to list their business and pay an agent a commission at the end of the deal to complete it. This is the business broker model.  It’s very similar to a real estate representation in the broker gathers listings, places ads up online, and waits for the buyers to come along and bite. If you own a Mainstreet type business such as a convenience store, restaurant, nail salon, etc. this is likely the best option for you.  Typically, there are no upfront fees or they are minimal.  You pay a commission at the end of the transaction and that is that.  

The Business Intermediary

This is likely “the someone” that your CPA knows and recommended.  A business intermediary typically has come out of an M&A firm, had decades of success at a brokerage, or worked in Private Equity. They are typically knowledgeable in one particular industry and do a deal or two per year.  While they typically come with more professional horsepower than a standard broker, they are also working by themselves or with an assistant.  This makes them a good fit for small non-complex deals or deals where you already have the buyer and need a professional to bring the deal home with favorable terms. Business intermediaries typically charge an upfront fee and commission upon completion of the transaction.  It is not uncommon for some to charge monthly fees.

M&A firms and Investment Banks

This is where business, financial, and legal expertise all meet within the confines of the same office with one purpose.  Getting the deals in their portfolio completed. A good M&A firm will advise you on the outcome of your transaction before taking you to market to understand whether your goals are achievable.  If you move forward, your business will be professionally prepared for the market with necessary information included in a Confidential Information Memorandum.  If there is speculation on the purchase price, your M&A firm might conduct a formal Valuation (if they are licensed) or have you hire a Certified Valuation Analyst outside of their firm. An M&A firm is not always the cheapest option but it almost always the best.  Teams of people work on each transaction with financial analysts preparing documents, marketing people making cold calls, and transaction advisors going to battle for your best interest. M&A firms typically charge an upfront fee to prepare the business for market and a commission upon completion. *** be wary of firms claiming you need to pay tens of thousands of dollars to enter the market.  The commitment a company makes for representation should reflect the size of the transaction.  For instance, a company with $2M in revenue should not pay $20-30k upfront.  For a company with $20M in revenue, this would be more appropriate.

In Closing…

At the end of the day, choosing the right representation can mean the difference of a few thousand to a few million in purchase price, favorable terms or a nightmare transition period, getting your deal done or wasting your time and money. We at Exodus hope to be included in the interview process when you are ready to start looking.

In the small business acquisition market there are 4 primary buyer groups.  Each of them value companies differently and are suited towards particular types of transactions.

• It’s important that you, the business owner, and your representation clearly understand the type of buyers that will likely meet your expectations before entering the market.
• Lifestyle / Individual Buyers:
  Lifestyle or individual buyers are typically looking to purchase a job.  They are best suited towards smaller less complex transactions and often use an SBA loan to buy the company.
• Private Equity:
  PE groups pool capital to purchase businesses then use their expertise to grow the business to new heights before selling again.  Typically PE will require a minimum of $2M in earnings.
• Strategic Buyers:
  Strategic acquisitions occur when a larger company purchases a smaller business that is complimentary to their own.  Oftentimes, a strategic buyer will uncover value not available to the other buyer groups through reduced operating costs, economy of scale, and cross selling opportunities.
• Competitors:
  Competitors are typically the buyer of last resort as they often value companies significantly lower than the other buyer groups.  Further, disclosing information to a competitor can pose a confidentiality risk.

If you’re thinking about selling your business, get in touch with one of our transaction advisors to discuss which type of buyer will most likely meet your unique goals and expectations.

How can we help you?

Contact us at Exodus HQ by submitting a business inquiry

Going into the market with a clear understanding of your company’s value is a key element in preparing an exit strategy.  Would you sell your house without understanding the true value? Most small businesses are valued by either the income approach or the asset approach.  Most commonly with profitable companies, historical trends are used to predict the future earning potential of your offering.

Have a Valuation prepared…

Proper analysis of your company’s value can be a complex undertaking and should be left to professionals with the expertise and credentials necessary.

This small investment will yield significant benefits to the strategic seller:

• Peace of mind:
  Selling a small business comes with a plethora of moving parts.  A formal Valuation relieves any questioning around appropriate value.
• Financial & tax planning:
  Upon completion of the Valuation report, meetings can be held with tax and wealth management professionals to prepare for the transition.
• Higher business values:
  Valuations allow the strategic seller to understand why the value of the company is what it is.  This opens the door to making improvements before entering the market.
• Bank financing options:
  Understand how the bank will view financing for buyers and eliminate questions regarding hold back, seller notes, etc.

How can we help you?

Contact us at Exodus HQ by submitting a business inquiry

If you ask most M&A advisors, CVA’s, or private equity folks what a manufacturing company with under $5m in revenue will trade for, you’ll likely hear ranges of multiples from 2 to 4.

If you then disclose that the company has under $100,000 in total earnings; you’ll likely discuss trading the business based on the balance sheet due to the benefit stream being worth very little in the first place.

So how do you get 20x earnings?

Most of the time, procuring a purchase price equal to 20x EBITDA for a small manufacturing company would be considered impossible.

 But we did it.

Several years ago, a small company manufacturing orthopedic braces for women with carpal tunnel syndrome approached us with the intent to sell.  The owner, let’s call her Debbie for confidentiality purposes, had met with several other M&A firms and brokers only to be turned down by each one.

“The business can’t be sold,” they said.  “You should liquidate and that is not a service we offer” others chimed in.

 Debbie was devastated.

Twenty-five years of her life building out her product line.  Employees that were like family members at this point.  And health issues that would make it impossible to continue operating the business.

Problem thinking…

The problem with these M&A advisors is that they only looked at the company from an earnings standpoint which obviously was not exciting.  They missed the reason Debbie’s earnings were so low; she was always reinvesting in the company – R&D, new channels of distribution, employee compensation, etc.  She was on a mission to grow a reputable and solid brand that would last in the competitive medical marketplace.

They also missed that she was in CVS, Walgreens, Target, and quite a few other big-box retailers.  They missed the fact that consumers who used her product found it incredibly helpful and she had significant brand loyalty.  And finally, they missed the fact that this business could, should, and would be sold for the significant goodwill value that it had built over the decades.

Strategic Advisors

When we met with Debbie and decided to try to help her, we discovered these facts about the business.

Led by our CEO Keith Campbell, our team restructured Debbie’s financials and created an offering memorandum showing the benefit stream not as the EBITDA but as the adjusted gross profit margin.

We understood that this business could never be sold as a standalone operation.

This business needed to be sold and absorbed by a larger company that could move operations and manufacturing into an existing operation; therefore, eliminating fixed overhead expenses incurred with running the business as a standalone operation.

A strategic bolt-on

Follow me here… if a larger company buys a smaller company and moves the operation into its own facilities – what expenses go away? Lease, utilities, insurance, etc.  And which ones are reduced? Office supplies, equipment costs, professional services…

The bottom line is that the real benefit stream the buyer inherited post-closing was not the earnings or EBITDA but the adjusted gross profit margin.

With a team of top-notch financial analysts, we can model what the company looks like inside of the buyer’s operation and come up with a reasonable cost analysis – this is exactly what we did.

Our team did not even bother talking to individuals or buyers seeking to keep the business in place as a standalone.

Instead, we searched for other medical companies manufacturing therapeutic related products that were at least 4x larger than Debbie’s company.

Within 6 months we found just the right buyer.  A growing company manufacturing braces for sports injuries that was seeking access into the big box retailers that Debbie was already in.  The cross-selling opportunity was enormous, and the fit was perfect.

After a short round of negotiations and a brief due diligence period, Debbie sold her company for 20x earnings.

Closing thoughts

When you’re seeking an advisor to represent your life’s work.  Look for the people that see your organization’s true value and are willing to think creatively and act strategically.

How can we help you?

Contact us at Exodus HQ by submitting a business inquiry