Advisor M&A Tip: Cross-training and Succession Planning
A strong management team has long been one of the hallmarks buyers look for in a business. And now, in the era of COVID-19, buyers will be increasingly interested in issues of cross-training, succession planning, and leadership development. Buyers will be looking at how the business could be impacted if health issues, or quarantine requirements, prevent certain team members from working.
Review your succession plans and cross-training efforts now to alleviate concerns about key talent.
Business Values May Not Decline
A recent survey of business brokers and M&A advisors showed about a third of businesses on the M&A market temporarily closed their doors due to the pandemic.
According to the Q1 2020 Market Pulse Report published by the International Business Brokers Association, M&A Source, and the Pepperdine Private Capital Market Project, advisors reported that of the small and medium businesses currently for sale, about 35% had closed, 40% were operating at partial capacity, 4% had benefited, and 21% remained unaffected by COVID-19.
Not surprisingly, the pandemic caused a delay in business sales. Advisors indicated 46% of lower middle market deals were delayed in Q1 and 11% were cancelled altogether.
For deal cancellations, 25% were attributed to sellers pulling their business off the market. Nearly half of the cancellations (46%) were due to buyers backing out, and 12% were due to changes in bank financing.
Market Pulse Survey – Quarter 1 2020
Presented by IBBA, M&A Source and in Partnership with Pepperdine University
Most Businesses Partly Open
Overall, business brokers and M&A advisors report that many (40%) of the businesses they represent are operating at partial capacity, while 35% have temporarily closed, 4% have benefited, and 21% remain unaffected.
Advisor M&A Tip: SBA Debt Relief Incentivizes Buyers
SBA debt relief efforts are incentivizing buyers to move ahead with business acquisitions. Right now, the SBA will pay six months of principal, interest, and any associated fees that borrowers owe for all current … as well as new 7(a), 504, and microloans disbursed prior to September 27, 2020.
As an added incentive, SBA lenders have the authority to defer loan payments for six months. That means some buyers could acquire a new business and have a full year of payment free operations ahead.
Is COVID-19 the Ultimate Cure for One-More-Year-Itis?
I was talking to a business owner who shared how her teenage kids remember the Great Recession and the impact that had on their household. Now they’re seeing economic upheaval again, at a time when they’re old enough to lose out on their own summer job opportunities.
In good times and lean, money issues have always weighed heavily on her mind. So, she can’t help but wonder how this will impact her children’s financial mindset.
I have similar thoughts, but I’m not thinking about my kids. I’m thinking about our country’s business owners. How will the COVID-19 pandemic affect their psyche?
I believe entrepreneurs tend strongly toward optimism. After all, 19 times out of 20 when I talk to an owner about their projections, business is going to grow. It is not a bad attitude to have, especially when you consider the strength you need to run a business.
But that optimism is also why so many business owners succumb to what I like to call “one-more-year-itis.” That’s the condition that leads owners to delay selling their business, even in an up M&A market, even when the proceeds would more than fund their dream retirement.
Market Pulse Survey – Quarter 1 2020
Presented by IBBA, M&A Source and in Partnership with Pepperdine University
Advisor M&A Tip: Planning for Death or Disability
The Wall Street Journal recently ran an article about CEOs accelerating succession plans and backup management strategies in the wake of COVID-19. It’s a question every owner should be asking (now and always): What happens if you get too sick to run your business?
No one likes to think about all the what-if scenarios in life. Most business owners have no plan for exiting their business at all, much less exiting in the face of conflict or tragedy. Talk to your advisors and have a written plan for your business in the event you’re incapacitated.
That plan should include a current estimate of value, life insurance on behalf of the business, and temporary management appointments.
U
sing M&A in Pandemic not Panic
Business advisors are digging in right now, trying to figure out how COVID-19 will affect their clients. We’ve been talking with business owners, active buyers, and other advisors around the country.
Right now, we know that some M&A deals are getting delayed over routine process points. Certain bank approvals that used to happen in regular in-person review meetings are being held up as discussions take place via email chain instead.
Some businesses with real estate transitions are no longer able to get appraisers or environmental assessors out to their property. That’s a standard part of the process, and if it can’t happen the rest of the transaction must hold.
Of course, some deals are getting pushed out over more than procedural issues. Certain businesses, particularly anyone in travel or hospitality or key vendors to those industries, are getting beat up right now and will want to wait until conditions normalize.
Market Pulse Survey – Quarter 1 2020
Presented by IBBA, M&A Source and in Partnership with Pepperdine University
“Deal activity is always expected to constrict during times of uncertainty. Both sellers and buyers are being conservative right now, taking a wait-and-see approach,” said Scott Bushkie, managing partner, Cornerstone Business Services. “Once we have some clarity on when businesses will be allowed to reopen and in what capacity, some deals will continue to move forward.”
“For many business owners who had already put their businesses on the market, this is a temporary pause,” Bushkie continued. “Owners who were burned out or near retirement will still be looking to exit their business. The nature of that exit will look different now, but once you get so close to the finish line, it can be difficult to envision holding out for much longer.”
Advisor M&A Tip: Earnouts can be a win-win
When selling a business, an earnout is a buyer’s commitment to pay the seller a certain amount of money tied to future performance after a sale. It bridges a valuation gap between what the seller wants out of the business, and what the buyer can safely pay.
Earnouts will probably play a bigger part of deal structure in the months ahead. If business recovers, buyers and sellers both come out winners.
Some people have a negative opinion on earnouts, telling sellers not to expect a dollar of their earnout agreement. In our experience, those fears are unfounded, particularly when agreements are negotiated by an experienced M&A attorney.
Truthfully, buyers would love to pay that earnout because it means their new business is making money. And even if your business is struggling right now, the right buyer will see the potential ahead.
Using 
Downtime to Add Value
As business owners are working to process the impact of COVID-19, we’re looking at how it will affect M&A. In the short term, companies will slow the pace of acquisitions. That’s natural in uncertain times.
But market conditions are different from our last recession. The good news is that many companies and private equity firms have been doing well for years. They have record amounts of “dry powder,” that is undeployed capital ready for investment.
What that means is that the pool of business buyers is not going to dry up. Market competition has been incredibly strong up until now, and many buyers are going to stay active – in fact, some will become more aggressive in order to capitalize on the current climate.
And with the Federal Reserve cutting interest rates to 0%, buyers may decide they simply can’t afford not to push ahead with acquisition plans.
Market Pulse Survey – Quarter 1 2020
Presented by IBBA, M&A Source and in Partnership with Pepperdine University
While many small business owners are struggling to keep their doors open, others are finding they can no longer get out the door. A recent survey of business brokers and M&A advisors reveals that more than half of the small and medium businesses (SMBs) on the market are facing cancellations or delays in selling their businesses.
Business brokers representing small businesses valued at less than $2 million report 46% of their deals have been delayed and another 11% cancelled due to COVID-19. Approximately a third (36%) said their deals remained unaffected, while 7% said they represented a business that had increased in value due to the outbreak.
Similarly, M&A advisors representing businesses valued at $2-$50 million said 48% of their deals had been delayed and another 12% cancelled. Only 4% indicated that a business engagement had increased in value.
Advisor M&A Tip: You’re Not Stuck
Worried about a recession? Burned out? No energy to do this all again? You are not stuck. Businesses do sell in uncertain times.
We’re coming off a period of peak demand in M&A. Buyers lined up for quality opportunities and they stretched their target parameters in order to find something that would fit.
Many of those buyers will still be active. There are buyers out there who will see this pandemic as an opportunity to get out ahead, while their peers wait-and-see. We might be in a temporary hold, but buyers will be back soon.
If you don’t have another recession in you, talk to your advisors. You still have options. Solid businesses that were successful before the pandemic will certainly be successful again.
Begin with the Knowns and Unknowns
The world feels like it’s turned on its head right now. People are anxious, with good right to be. There’s so much we can’t predict about the weeks and months ahead. When planning your response, begin with what you know and what you don’t know.
What we know: We’re in a pandemic, and social distancing can flatten the curve, meaning slow the rate by which the illness spreads. And, at this point, we can probably say this pandemic will be linked to an economic recession.
Start by responding to what we know. If you’re a business owner or in another position of influence, this begins with supporting social distancing efforts and following guidance from the CDC. For many, this means finding creative ways to keep your employees engaged and working so you can keep paying them for as long as possible.
Whether you’re shoring up remote work operations, or innovating your business model, remember your employees are anxious. Many of them are trying to balance work and childcare. Others are alone and will be feeling the isolation more keenly.
Market Pulse Survey – 4th Quarter 2019
Presented by IBBA, M&A Source and in Partnership with Pepperdine University
Advisors indicate that the lending market has been conducive to getting deals done, particularly for businesses with revenue of $5 million or more. Dealmakers are struggling, however, to help buyers secure financing in the smallest Main Street sector.
Advisor M&A Tip: Organize Your Financials
Buyers want to see clear, well-organized financials compiled by a reputable firm. Demonstrate that you use your financials to run a successful business and optimize operations. If your business has more than $10 million in revenue, invest in an audit at least three years prior to selling or have a third party CPA firm complete a quality of earnings report prior to market to maximize value.
The Seven States of Selling Your Business
Ideally, you’ll start preparing for sale early in your business life-cycle. The more you know about what buyers want, and what you can expect from the market, the more options you’ll have to exit your business.
Smart preparation and planning can help you build a business that’s ready to sell when you are. It’s never too early (or too late) to have a conversation about maximizing value in your business. These seven steps give you a breakdown of the M&A process:
1. Status and strategy: The first step is to check in with yourself and your business. Are you ready to sell? Is the timing right in terms of market conditions and business performance? Does the value of your business match your goals? What are your exit options and how might different scenarios affect your readiness?
Market Pulse Survey – 4th Quarter 2019
Presented by IBBA, M&A Source and in Partnership with Pepperdine University
“Small businesses valued at less than $500,000 have become harder
to sell in the last few years. Advisors have consistently singled out that sector as a buyer’s market, with more supply than buyer demand. Financing is also an issue as individual buyers struggle to line up the cash and lending support necessary to complete these deals,” said Barry Berkowitz, principal, Berkowitz Acquisitions.
And while time to close has risen slightly for lower middle market deals, advisors suggest that those timelines have more to do with increased deal flow and due diligence. Businesses valued at $2 million and above are solidly in a seller’s market, with strong competition for the best opportunities.
Advisor M&A Tip: How do you know when it is time to sell?
When you no longer have the fight, get out of the ring.
Burnout is the second leading reason business owners sell, after retirement. Many business owners hold on too long, long after their drive has gone. When that happens, the business stops growing or even starts going backward – and the value of the business declines.
The best time to sell is when you’re energized and motivated by your work. If you see burnout on the horizon, find ways to reduce your burden or start preparing to sell your business.
Selling Your Business to a Family Office
Business owners looking to sell their business, or attract an investment partner, may want to add family offices to their outreach strategy. These private family firms, established by high net worth families to manage their wealth, can offer unique advantages.
While family offices aren’t new, they have become more active in M&A in the last decade. In the past, family offices may have looked to private equity firms as a resource to grow their wealth, but new trends have many family offices investing directly in private businesses.
For a family office, direct investment can offer several benefits such as higher returns, greater control, and the ability to invest in industries that best fit their family expertise. By the same token, family offices can prove attractive to certain business owners and sellers. Here’s why:
Market Pulse Survey – 4th Quarter 2019
Presented by IBBA, M&A Source and in Partnership with Pepperdine University
Final Sale Price Vs. Asking Price / Internal Benchmark
Advisor M&A Tip: Drive Cash to the Bottom Line
We all like to save money on our taxes. But hiding personal expenses in your tax return can do more harm than good. Most businesses are purchased as a multiple of cash flow (EBITDA). If buyers and lenders can’t find your personal expenses in the financials, they’ll be suspicious of our add-backs. It’s in your best interest to drive cash to the bottom line in the last 2-3 years before a sale. Take a hit on your taxes and get a much larger return when you sell your business.
The “Four P’s” of Selling a Business
Marketers will sometimes talk about the four p’s (product, placement, price, promotion) of selling. Known as the “marketing mix,” the emphasis a company puts in each area can have a direct impact on sales and profits.
And while selling a business is not like selling a product, we can use this idea to think about how certain factors impact a company’s value and salability. The right mix will make your company more desirable to buyers and more likely to attract multiple competitive offers.
People: Human resources plays a critical role in your business’s salability. As an owner, you need to be replaceable. Ideally, your business should continue to operate and grow even if you aren’t a part of day-to-day operations.
Market Pulse Survey – 4th Quarter 2019
Presented by IBBA, M&A Source and in Partnership with Pepperdine University
55% of advisors predict the volume of deals (under $50 million) will increase in the next 12 months, but only 7% expect an increase in multiples.
Three Questions to Ask for Growth
This is the time of year when business leaders make resolutions, update strategic plans, and generally take stock of their organization. I’m planning to do a similar assessment, but this year I’m going to look in the mirror.
I’m going to reach out to 15 to 20 people and ask these three questions: What two things should I continue to do? What two things should I start? What two things should I stop?
I’ll put these questions to several of my team members, some close personal friends, and a few referral sources in my professional circle. And I expect I won’t like all the answers. But I’m going to trust that I will get fair and honest feedback.
Blind spotters
One of the tenets I’ve always adhered to in business is that ‘you don’t know what you don’t know.’ My goal with this exercise is to help uncover some of those blind spots. What can’t I see?
Most days it feels like I’m driving down the (proverbial) highway at 90 miles an hour. I know I need a better view of what’s around me, so these three questions are going to be my blind spot detectors. The answers just might help me avoid a few scary near-misses and perhaps, even, a company-killing accident.
Market Pulse Survey – 3rd Quarter 2019
 |
Advisor M&A Tip: When the Kids Don’t Want the Business
Many business owners are surprised to find out their kids don’t want to take over. Maybe the kids never wanted it. Or maybe they changed their mind after working in the business for a while. Either way, some business owners get caught having to make quick decisions about how to transition their company.
Our advice: Talk to an M&A advisor, EVEN IF you plan to sell to your kids. It can take years of planning to position a business for a profitable sale. Working with an advisor gives you options and a backup plan. We can help you create a transition plan that fits your goals…and your kids.
‘No Shop’ Protects Buyer Investment in M&A
A no shop provision is an important part of M&A transactions. Also known as an exclusivity clause, a no shop clause prohibits the seller from sharing information or negotiating with other would-be buyers for a specified timeframe.
Prior to this, the seller is negotiating with several buyers. The goal is to entertain multiple offers and figure out which buyer will ultimately provide the deal that best fits the seller’s wishes.
Once the seller has identified their preferred buyer, both parties sign a letter of intent (LOI). At this point the buyer will begin more comprehensive due diligence to validate their assumptions and make sure the business is everything they believed it to be.
Due diligence is an intense process that could include FBI background checks, equipment appraisals, environmental studies, and more. Some buyer groups conduct industry studies or hire a consultant to call the business’s customers under the guise of a confidential customer satisfaction survey.
Market Pulse Survey – 3rd Quarter 2019
|
Unrealistic Expectations Remains Leading Reason Businesses Don’t Sell
 |
What’s the biggest stumbling block to getting deals done? Advisors say that it’s business owners who think their business is worth more than its realistic market value. Advisors cited “unrealistic value expectations” as the number one reason businesses don’t sell on both Main Street and Lower M&A market. Other key hurdles include downward trends, funding issues, and disagreements over legal terms.
Advisor M&A Tip: Earnouts – Breaking the M&A Deadlock
Earnouts are used to bridge a valuation gap between a buyer and a seller. It’s a compromise, of sorts, to break a purchase-price deadlock when the seller wants more than the buyer is willing (or able) to pay.
In an earnout, a portion of the purchase price is paid out later, based on the company’s financial performance over time. Earnouts typically last from 1 to 3 years, subject to negotiation.
Some earnouts include acceleration provisions, stipulating that payments are due immediately if certain events occur e.g.,:
- Buyer breach of post-closing covenants
- Termination of key employees
- Sale of the company or a substantial reduction in assets
These provisions are designed to protect the seller from changes that would hurt the company/buyer’s ability to meet their earnout targets.
Contact us to learn more about deal structures and how we protect your interests in a sale.
Market Pulse Survey – 2nd Quarter 2019
|
Baby Boomers Are Ready To Transition
 “The Baby Boomers are aging out of their businesses. The Exit Planning Institute estimates there’s more than 4.5 million businesses expected to transition in the next 10 years in the U.S.,” said David Ryan, advisor with Upton Financial Group. “But business owners who don’t plan ahead may not exit on their own terms. They may have to accept a lower price or take on a lot of seller financing or earnouts, if they sell at all.
|
Advisor M&A Tip: What ‘Buy-and-build’ Means For You
Private equity firms have increased their investment in buy-and-build strategies. This involves bolting together several smaller companies into a larger business empire that generally sells at higher multiples. The trend is affecting all sorts of industries, from healthcare clinics to niche business services.
Contact us to learn more about consolidation trends in your market. The uptick in buy-and-build acquisitions could mean more buyers and more competition for your business than you expect.
9 Warning Signs Your Buyer Can’t Close The Deal
The proof is in the pudding. It’s not over ’til it’s over. Don’t count your chickens before they’ve hatched. Pick your cliché. Just because someone makes an offer to buy your business doesn’t mean they have the resources to get it done.
As a seller, you need to look at more than dollar signs on an offer to purchase. Make sure your advisors are researching and asking questions to figure out which buyers are for real, and which ones are just talking a big game.
Sometimes buyers want to rope you in to exclusive negotiations. They throw out a high price, fully intending to negotiate down as they do due diligence and “discover” weaknesses or areas where your businesses aren’t a good fit.
Still other buyer reps make what they believe to be a legitimate offer with all good ethic and intent. But if they’re not the final decision maker-the person controlling the checkbook-their efforts might be scuttled by a higher up, or a lender, who simply doesn’t see the same advantages in the deal.
9 warning signs your buyer can’t follow through:
- Too good to be true.They offer a super high price and a 45-day closing “guarantee no risk” if you’ll sign their exclusivity agreement. Your buyer may have ulterior motives. They’ll get access to your sensitive information and get you off the market (putting you in a weaker position). Later, they’ll try to renegotiate the deal at a sizeable haircut or just walk away when you don’t accept their lowball offer. Either way, they gained meaningful competitive intelligence which could significantly hurt your business or its value going forward.
