After marketing the company we obtained approximately 50 interested buyers of whom 8 submitted written offers for the company.    We brought in all of the 8 buyers who submitted written offers in for management presentations, and 5 of the buyers then submitted Letters of Intent.

The buyer our client selected was a California based manufacturer of exhibits for trade shows, generating approx. 3 times the revenue as our client, backed by a Private Equity Group that has made many acquisitions.

A manufacturer of trade show exhibits acquiring a marketing and education company?  Where’s the fit? 

It turns out that our client was providing technology enabled multimedia solutions which the buyer felt would differentiate its exhibits.

Was this buyer among the “likely buyers” we compiled on our hot list of 60 likely strategic and financial buyers?

No…..we obtained this buyer through the many other strategic and financial buyers we contacted.

Had our client ever heard of this buyer prior to hiring us to market their company?

No.

Did we know that this specific buyer was looking to acquire  a company with compelling multimedia solutions prior to marketing our client?

No, we’re not that smart……thank goodness we don’t know everything!

We ended up obtaining approx.  10 offers for our client and with our client selected 4 of the strongest buyers to attend management meetings.  Among the four buyers,  our client selected a $200 Million manufacturer of pest control products owned by a $1.3 Billion Private Equity Group that has completed over 50 acquisitions.

If you looked at the websites of both companies, buyer and seller, it would have been a stretch to see the fit……manufacturer of pest control products purchasing a  manufacturer of  home and garden decor??  The only fit was that they were both consumer products manufacturers!

So why was the pest control manufacturer interested?  A small but growing piece of their business was manufacturing home and garden decor.

How did we find this buyer?

1) On every engagement we deeply research the industry and put together a hot list of “likely” buyers for the particular company.  Our hot list of “likely” buyers for this particular company totaled approx.  75 strategic buyers.

2) Additionally, as we never like to prejudge the “best buyer” upfront, we also confidentially contact many other  strategic and financial buyers domestically and abroad.

The ultimate buyer was not on our hot list of  75 “likely” buyers, rather we contacted them along with the many other  financial and strategic buyers domestically and abroad.  In this particular case, it was actually our dealmaker in Europe that clued them into this opportunity (ultimate buyer was in the U.S.).

So did we know prior to marketing our client that the $200 Million pest control manufacturer was looking to grow their home decor business through acquisitions?

No, we’re not that smart……it was totally the result of being open minded and  not limiting our marketing to the “most likely buyers.”

The advisor was making some traction implementing marketing and sales activities that were process driven versus driven by the founder’s relationships.   What he was finding, however, was that the founder would not get excited about new business obtained via process driven sales activities; he intellectually understood the importance of growing the business this way, however his excitement and enthusiasm was still correlated with his own direct sale accomplishments.

The advisor told me that the founder seems to be happiest when he is still directly selling: ”When I tell him how this could be a $200 million company he doesn’t seem to get excited about that.”

Most of the companies we sell are owned by their founders, and most often the reason they wish to sell the business is that they have reached a point where they understand that to take the company to the next level requires a different skill from theirs. Often when they come to us, they acknowledge that they are not having as much fun, and they don’t want to hold the business back.  They have rationally come to the decision that in business, if you’re not growing, you’re moving backwards – and before the competition overtakes them, their preference is to cash in their equity through a sale to a third party.   If they no longer enjoy it and do not have the same passion, eventually competition will surpass them and the value they have built will decrease over time.

A business advisor’s natural inclination is to convey to entrepreneurs how to make their companies more scalable businesses, more appealing to a buyer; particularly if they have been hired to do so!  If the entrepreneur sees that as a challenge and gets excited about taking the business to the next level, terrific!  If not, it doesn’t reduce their business accomplishments to date.   Entrepreneurs are a rare breed, and most people cannot start a company from scratch, risk capital, motivate employees, make payroll, etc.   The founders are the ones best suited to understand when their companies are at an inflection point.   If in their gut they feel they don’t want to make the necessary changes to bring their companies to the next level, a good objective advisor will help them understand that it is time for them to sell the company.   Any business can be sold, it’s a question of value, terms and structure.

If I had a nickel for each time I’ve heard this China would owe ME money!  (Chris Rock)

We have closed 14 deals since Lehman Brothers collapsed and in only 2 of the deals did the target company have audited financial statements.   The 14  companies consisted of manufacturers, distributors, service companies and retailers generating anywhere from $1MM to $5.5MM of adjusted ebitda and were located across the U.S.  and China and sold for enterprise values anywhere from $6MM to $36MM.  Most of these businesses were owned by the founders.  A fair number of them did not even have CPA prepared financial statements…..one of these CPA prepared financial statement-less companies sold for a 30% premium from our initial value assessment.   How did this happen?

The company kept performing and growing, we generated competition, did not put a listing price on the company and obtained multiple offers.

The number one reason we do not sell a company, or the transaction gets delayed, is declining  financial performance, not the absence of audited financial statements.  Ironically, we were selling a company a number of years ago that was owned by a CPA and he had audited financial statements prepared by a reputable CPA firm.  We marketed the company, obtained multiple offers, held management meetings, negotiated Letters of Intent and the client executed a Letter of Intent with the buyer of his choosing.  The buyer then went into financial due diligence and discovered fraud……the owner was overstating his inventory in order to obtain financing.

The fact is that buyers will do their own financial due diligence, however what is important is that the company has the ability to produce timely and accurate financial information.   We closed 9 deals in 2010 and several of them were delayed owing to delays obtaining financial information. And don’t get me wrong……audited financial statements prepared by a reputable CPA firm will only help sell a company!  However, it is not the most important aspect of exit planning….the most important aspect is that the company continues to grow revenues and profits, keeps up the sense of urgency and builds a healthy backlog.

The Financial Advisor was asking me about the current M&A market, how are the multiples, values, are deals getting done, etc….Not an uncommon question, most business owners interested in selling ask me about the current M&A market.

Most of the companies we sell generate anywhere between $1 Million and $10 Million of adjusted EBITDA.  The fact is, valuations for companies this size do not fluctuate as dramatically versus larger companies, the ones you read about in the Wall Street Journal.  When owners sell their companies, the cash at closing they receive is typically tied to a multiple of trailing 12 months adjusted EBITDA.  The larger the EBITDA, the larger the multiple…..simply a supply and demand thing – there are fewer larger companies versus smaller companies!   In our market, we typically see multiples expanding once a company generates over $2 Million of adjusted EBITDA, then again at $5 Million of adjusted EBITDA and then again at $10 Million of adjusted EBITDA.

We have closed 13 deals since Lehman Brothers collapsed, and have not really seen a decrease in valuations or cash at closing we are obtaining for our seller clients.  What drove valuations up materially from 2003 – 2007 for the larger companies was easy financing available in the syndicated debt market, accessible primarily for companies generating a minimum of $10 Million of adjusted EBITDA…..companies generating below $10 Million of adjusted EBITDA never really had strong attention from the syndicated debt market.    Senior debt (banks, syndicated loans, finance companies) is the most inexpensive form of financing, so if buyers can obtain more senior debt and use less of their own cash equity (the American way!)  they will pay more for companies.  Furthermore, these loans were underwritten as a factor of cash flow versus collateral…..when a buyer purchases a going concern business generating consistent profits, typically there will not be sufficient tangible assets for the senior lenders to collateralize its entire loan.

The Two Most Important Questions

It is important to understand what is happening in the M&A market, however again, for companies generating below $10MM of adjusted EBITDA there are not dramatic swings in valuations.

So, the two most important questions business owners need to ask themselves if they are thinking of selling are:

1)    How is my business performing and what is the outlook?

The number one reason we do not get a deal done is decreasing financial performance for the company we are selling.

2)   Can I see myself not owning a controlling interest in my company?

It’s a major step to sell a business, for many founders it is more of an emotional versus financial decision….they really need to think this through!

The other part of our philosophy is to stay with our Clients, even if they do not always follow our advice.

We closed a deal recently, a company that continued to grow revenues and profits in a soft economy.  We obtained over 30  offers for the company when we brought it to market. A fair number of the offers were in the value range we quoted the client up-front, prior to being engaged and were from strong, reputable buyers.

Our client decided to pass on the offers…….he felt his business would continue to grow and wanted a higher valuation for his company. We stayed with the client, his numbers did improve, and ultimately negotiated the deal he wanted……I would say he obtained about 95% of what he wanted in the deal; some of his requests we thought were aggressive and could end up killing the deal, nevertheless we always took his side when presenting his requests to the buyer. At the end of the day, our client felt we were on his side versus just trying to get a deal done.

A couple of years ago we sold a manufacturer in the northeast….its business correlated significantly with a commodity product, so as a result revenues and profits varied significantly from year to year. Working closely with the client, we ended up bringing that company to market three times in the course of almost 3 years! (When we bring a company to market there’s a material time and cash cost for us.) Ultimately a strategic buyer in Finland purchased the company. The younger owner stayed with the business and now it is realizing its best years since their inception over 30 years ago. Our philosophy is that as long as our clients continue to have realistic deal expectations and they appear motivated, we keep going until a deal closes.

We closed another deal during this last recession where the owner passed up good cash offers in the low 8 figure range (again, in the value range we quoted up-front) just before the recession hit, only to close a deal with a buyer almost two years later where he walked away with a note from the buyer in the mid 6 figure range, but more importantly was released from his personal guaranty on bank debt in the mid 7 figure range. What happened? The company was tied to the economy and owing to the recession it lost 50% of its volume very quickly……it went from low 7 figure level of profitability to low 7 figure of losses very rapidly. The owner was not a young man, personally guaranteeing the bank mid 7 figures and funding losses……he very much wanted to get out of this situation, and did not have an endless supply of cash to keep funding the company.  So, we stayed with him, understood what his objectives were and got the deal done for him.

What do these 3 situations have in common?

We stayed with the Client……..in some situations they did not follow our advice our guidance, however we stayed with them, did not give up on them. When conveying advice and guidance to Clients, we always couch it with “you (Client) need to be comfortable with this….at the end of the day this is your decision, not ours.”  It’s about the Client….what do they want to do, what is in their best interest. It’s not about the quickest or easiest way to get a deal done so we can obtain our closing fee.

Throughout the process of educating them on the mechanics and process of selling their company, I was impressed with their questions, honesty and decisiveness.

Good Question

They really wanted to understand how much of their time they would need to devote to the process, and at which stage(s) of the process; a really good common sense question that not every business owner asks us….we educate them on the time they will need to allocate to the process and when, however I was impressed with how this couple really drilled down on this point…..time is the one thing you do not get back!

Honesty

They are thinking that at the point we begin having buyer meetings they will be anxious and nervous and with good reason…..they have never been in a position of selling their life’s professional work and largest asset.  I thanked them for being honest about their anxiety; while we work on selling businesses every day, it is always helpful for us to be reminded of the fact that 95% of our clients have not been in this place so it is not unusual for them to be experiencing some strong emotions.

Decisiveness

From the time I first spoke to this couple until the time they engaged my company was approximately three weeks.  Their company was performing very nicely, on an upwards trend so they did not want to miss their window……you will always increase the odds of obtaining maximum interest and value for your company if you sell it when it is trending upwards.

After the couple engaged my company I told them how impressed I was with their honesty, decisiveness and questions and they seemed to be in a really good place about their decision to sell their company and hire a firm to represent and advise them.

I asked them how they went about their decision making:

“Right after we started our business something we heard stuck with us….the most important business decision an entrepreneur makes is when/how to start their company.  The second most important decision an entrepreneur makes is when/how to exit their company.  So, over the years we have tried to educate ourselves on the topic.  We really started seriously planning the timing about two years ago and did a fair amount of detailed financial planning with our Financial Advisor.  We decided to hire a firm to advise and represent us because they sell businesses day in and day out and we haven’t been here before.”

This couple has been in business over 15 years, and their exit has been in the back of their minds since they started their company……their company is now performing at its optimal level so they have timed their sale nicely and seem to be in a good emotional place to exit.

So deciding when and how to exit your company is a major decision……it’s not like deciding what you’re having for lunch that day!

Since I started speaking with the owner 2 years ago, he has toyed with the idea of selling an interest in his company in order to 1) obtain financing and infrastructure to bring his company to the next level and 2) buyout an older partner nearing retirement age and 3) take some of his chips off the table.

He told me that a strategic buyer had been contacting him over the past few years, and that now he was going down the road with them, sharing financial statements and having meetings with the decision makers for a “deeper level of discovery.”  The owner told me he was going down this path in order to see if he could get a deal done by 12/31/10….his concern was increasing capital gains taxes.

The owner did agree with me that if he went down the road with this buyer and ended up selling an interest in his company to them, he would not have a sense of his options from multiple buyers.   Two key considerations for him in selecting a partner into his company were 1) The fit with the buyer or investor…were there compelling synergies?  Did the businesses or professionals complement eachother?  Would the cultures mesh?  2) The amount of cash at closing obtained by him and his partners.

So capital gains taxes were a factor to the extent that they impacted the cash at closing obtained by him and his partners.   The owner’s “intelligence” was leading him to believe that any increase in the federal capital gains tax rate would be to 20% or 25% from the current 15% rate, so his feeling was that the maximum increase would be 10%.     I told the owner that on the last deal we closed we obtained 32 initial offers for our client which got weeded down to 11 Letters of Intent ….after negotiating the offers the final Letters of Intent ranged from $17 Million to $25 Million cash at closing, a variance of $8MM cash at closing between the high and low offers.   Note that the final 11 offers were approx. 25% higher from the initial offers.

Maximum projected increase in capital gains taxes = 10%

Confidential, global marketing of company yields 32 initial offers, 11 meetings and 11 final offers with cash at closing ranging from $17 Million to $25 Million.

After thinking this through the owner chuckled……”I’ve got to stop listening to the media, all of these talking heads and soundbites!”  The other point was that his business was growing, he was feeling confident of generating $2MM of adjusted profit next year and the buyer was not willing to share in that growth.

All in all, he concluded it didn’t make sense to rush to get a deal done…..the range of offers he would obtain from a thorough marketing of the company would outweigh the maximum projected 10% increase in capital gains taxes.  Plus, he projected a stronger year in 2011 which this buyer was not factoring into their equation.  Finally, he acknowledged that selling all or a portion of his company was a major decision and it made sense to obtain multiple offers, not just go down the road with one buyer.

Increasing capital gains and other taxes are on everyone’s mind, however it makes sense for business owners to take a deep breath and crunch all of the numbers based on how their business is performing now and anticipated performance over the next year.  Finally, competition drives price……the only way to know for sure the accurate market value for a company is to thoroughly market the business without a listing price and generate multiple offers.