M&A Advisor Tip
Perks & Business Value
Business owners take a number of perks from their business, from the standards like auto expenses, memberships, and insurance plans to extras like entertainment, vacations, or an additional family member on the books.
Perks are a way for owners to be further compensated for their hard work. However, they can complicate valuing a business. When preparing your business for sale, your advisors will “normalize” your financials to account for these extras.
Be aware of providing products or services for cash – or perks that can’t be adequately tracked and proven in your books – can diminish the value of your business. When planning to sell, talk to your advisor about the tax benefits / value tradeoff of certain perks and consider where it would be better to drive cash to the bottom line.
Market Pulse Survey – Quarter 4 2021
Presented by IBBA & M&A Source
A seller’s market occurs when demand exceeds supply. There are more interested, active buyers than there are quality deals on the market. In a seller’s market, buyer’s compete in order to win deals. This typically translates to increased values and more favorable deal terms for the seller.
In Q4 2021, seller market sentiment rebounded, setting a new peak in all but the $5M-$50M sector.
“Business confidence and competition is high. It’s amazing how fast we rebounded to record levels,” said Dave Richards, President of Keystone Business Advisors. “This is the strongest upward swing we’ve seen in any 12-month period.”
M&A Feature Article
Small Business Values up in 2021
Business values increased in 2021, despite ongoing challenges from the pandemic, talent shortages, and supply chain disruption. Deal activity continued at an intense pace, with advisors across the country reporting increases in both incoming deal flow and completed engagements.
More advisors characterized this as a seller’s market than nearly any other time in the last decade, according to the year-end Market Pulse report from IBBA and the M&A Source. Buyer confidence is high, as is competition for quality deals.
Businesses with enterprise value of $5 million to $50 million earned an average multiple of 6.0x EBITDA (a survey peak), realizing an average final sale price at 113% of the internal target benchmark. Multiples remained at or near market peak throughout the Main Street and lower middle market.
Meanwhile, time to close shrank in nearly all market segments. Time to close was likely facilitated by the high rate of buyer competition as well as a push to get deals closed before year-end. Here at Keystone, we closed 40% of our transactions in the fourth quarter, and we’ve heard that trend was fairly consistent across the industry.
The year end is always a hot time to get deals done as buyers and sellers push to meet self-imposed deadlines. We also know a number of sellers entered the market in early 2021, planning to get ahead of potential increases in capital gains taxes. Many of those deals would have had accepted offers and been in due diligence by the time it became clear tax changes were not yet coming.
Main Street Activity
In the Main Street market last year, individual buyers accounted for 71% of business transitions. Of those, 40% were first time buyers and 31% were repeat business owners or what we call “serial entrepreneurs.”
Another 26% of Main Street buyers were existing companies. These are the strategic buyers acquiring other businesses as a way to expand or eliminate competition. A small percentage, just 3%, were private equity acquisitions.
While market definitions vary, businesses are generally considered “Main Street” if they have an enterprise value of less than $2 million. The majority of the transactions that happen in this sector are small, less than $500,000.
In 2021, the most active industries trading hands in the Main Street market were personal services (15%), construction (12%), business services (12%), consumer goods/retail (12%), and restaurants (11%). This represents a small drop-in restaurant activity, likely due to ongoing fallout from the pandemic.
Of those Main Street sellers who went to market in 2021, 53% were preparing for retirement. Another 11% were selling as part of a recapitalization. In a recap, the seller (or sometimes their management team) keeps some level of equity stake in the business while a buyer infuses new capital for growth. Other reasons Main Street sellers went to market included burnout, health issues, relocation, and family issues.
Lower Middle Market Activity
In the lower middle market, where businesses are valued between $2 million and $50 million, the buyer pool shifts. Here individuals accounted for a third (34%) of buyers in 2021, relatively on trend with past years.
The number of individuals buying businesses in 2021 is notable given the highly competitive talent market. It’s likely these buyers (and Main Street buyers, too) could have their choice of employment opportunities. And yet there remains a definite draw to being a business owner. People still want to build something of their own and control their own destiny, even in a job seeker’s market.
Existing companies accounted for 40% of lower middle market transitions in 2021. Generally, these companies have strong balance sheets and are looking to acquisition as a way to grow at a time when organic growth is difficult due to talent shortages.
Private equity continues to remain active in the lower middle market, accounting for 24% of all business transitions. Private equity buyers generate financial returns by acquiring businesses. They typically plan to hold a business for 5 to 7 years, often acquiring similar types of businesses to bolt on, before reselling a larger, more lucrative operation.
These financial buyers tend to focus their efforts on middle market opportunities of $50 million or more. But with competition for those larger deals running hot, we see many firms ticking their attention down to the lower middle market. Here it’s possible to find deals that are large enough to make a difference in their portfolio and yet small enough to go unnoticed by some of their competitors.
Preparing To Sell Your Business
Preparing to sell your business can be something you do in a month, or an exit plan can be built into your company from the very start. How to prepare to sell my business is just one of many frequently asked questions we receive. No matter if you are just starting to contemplate the sale of your business or if this has been your desire for a long time, there are a few ways to prepare yourself to sell your business.
1. Prepare Yourself Emotionally To Sell Your Business
A lot of business owners are surprised when they feel emotional about selling their business. Having operated their business logically and knowing it was time for them to leave and retire, it can come as a surprise the amount of emotion behind selling your business. Hiring a business broker to sell your company can help manage the emotions of selling a business. A broker can help manage negotiations as well as the marketing aspects of selling your business. This can remove you and the emotions involved in selling your business.
2. Train Your Employees
If you are planning on selling your business, your employees must be prepared to operate your company without you there. If you have ever gone on vacation and returned after a week or two, you can quickly see the weak areas of your business operations that need to be attended to. Making sure your employees are trained and have the support they need without you there is vital to the survival of your business after you sell it.
3. Get Your Company’s Financial Information Together
Take time to get all of your company’s financial information together and organized. When you are preparing to sell your business, having access to past financial records and information is important for two reasons.
- Financial Transparency: Having financial transparency with a potential buyer will make them more interested in buying your company because they will have a better understanding of your company’s value
- Your Business’s Value: In order to determine your business’s value access to the past 3 years of taxes is needed. This will not only help you display your gross profit but expenses as well as your investments.
4. Get A Business Valuation
One of the first steps to selling your business is getting a business valuation. In order to sell your company, you need to know how much it is worth. At Keystone Business Advisors we will work with you to determine the value of your business and then we will help market your business with that listing price.
5. Increase The Value Of Your Business
If you are planning on selling your company, it is a great idea to take measures to increase the value of your business. Many businesses that are investing in their own growth are already increasing their business’s value, but it is always a great idea to reflect on what your company can do better. Doing this will improve the quality of the business you sell and increase the business’s listing price.
Contact Keystone Business Advisors To Sell Your Business
Learn more about preparing your business to sell and contact Keystone Business Advisors to help you sell your business. Selling your business through us requires no money upfront since there is no fee until your business is sold. Our unique approach is focused on quality business that we sell to qualified buyers. Contact us today.Read More
In a previous blog, we discussed briefly how risk can be shifted between the buyer and seller during negotiations to achieve the desired price. Visualize with me for a moment; every deal has a big bucket of risk and each deal has a different size bucket. That bucket is filled with perceived risk and real risk. At the closing table, the risk is going to be poured out between the buyer and seller. A deal where no risk is poured in the seller’s cup would be an all cash deal. A good example of a deal where very little risk is taken by the buyer might be one that includes a small down payment and the rest being paid out over 10 years. These examples would indicate prices that reach into the far ends of the spectrum.
An all cash offer is the least risky offer to a seller, but the most risky offer to the buyer. As price gets higher a buyer will typically lengthen the time to pay the seller, or make the price contingent on the performance of the business. Keeping the seller involved is another way to lower the risk. The basic rule of thumb is (more…)Read More
There are several reasons why a business owner has an interest in selling their business. We have found it important to work with those clients who are truly motivated to sell their business rather than follow the philosophy “anything is for sell at the right price”. Unfortunately, the right price is often not one which is in line with the market. We are not adding value for our clients or ourselves by marketing a company that is priced well above the market. We do company and industry research, provide an opinion of value for all our clients and have a good understanding of what the market will bear. We are also selective in the sense that if we believe a business is not prepared to go to market in the near term or there is not enough earnings being generated, we will make recommendations for areas of improvement to better prepare the company for sale in the future as well as make introductions to key resources which can help improve business performance.
2. Comprehensive Marketing Program
The KeyStone marketing program is designed to reach the maximum number of potential buyers without compromising your identity.
Confidential Business Review. The marketing program starts us creating an in-depth 10 to 20 page Confidential Business Review (CBR) which is the marketing package we present to prospective buyers after they have been pre-qualified. The CBR provides a thorough overview of the key aspects of your business including; description of the business and the industry it serves, history of your business, description of product and/or services, operational overview, roles and responsibilities of the management team and/or key employees, customer and market overview, summary of financial information and sustainability of earnings. We have found that you only have one time to make a first impression, and an effective marketing package will help do just that.
Maximize Market Exposure. A key value we have been able to add for our clients is our ability to market your business to a broad spectrum of buyers, confidentially. Quite simply, the wider the net, the bigger the fish we can catch. We typically take recommend the following three prong approach for most of our clients which include:
Confidential Online Advertising. We are not unique in marketing your business online as this is a common industry practice. However, we do have strict internet marketing standards which include the following:
- All online advertising is discrete and to maintain confidentiality.
- All marketing copy is tailored for your specific business/industry.
- We pay for premium posting placement to help your business stand out from the rest.
- We advertise on up to 10 different websites depending on the size and type of your business. Sites may differ depending is buyer is a financial, strategic or private equity buyer.
Broad Buyer Database. We have developed a database of thousands of buyers which we categorize by industry and size of business. It is not uncommon for us to introduce your business to someone we have meet with or spoken with over the past 10 years. We have developed relationships with financial, strategic, private equity groups and search funds, all of which we maintain in our proprietary database.
Strategic Buyer Search. One of our key differentiators is that we actively target strategic buyers and not just rely on internet advertising. Our strategic buyer search is tailored for your specific business depending on the type, size and other circumstances for your business. We utilize a third party database which provides us access important information such as annual gross sales, number of employees, contact information for the business owner, all of which we can search by industry segment. We often start by sending prospective buyers a letter which provides a high level overview teaser of your business and follow up with a call directly to the business owner or sometimes the business development representative for our targeted acquisition candidates.
3. Upfront Due Diligence
When keystone was founded in 2004, it was built based on the philosophy that the extra time we spend on the front end to ensure that our clients business is presented honestly and in the best possible manner will ensure a smoother transition process and yield better results for all on the back end. This requires that we conduct upfront interviews with you to better understand your business, its key value drivers as well as its challenges. We conduct industry research and provide an opinion of value report for all our clients to ensure that the business is not over or underpriced. We work with you and/or your advisors to recast the last three years of financial statements to account for all discretionary expenses which could add profit to the bottom line which results in a greater value for your business.
4. Hands On Approach
Starting with our initial face to face meeting, through presale planning, valuation and pricing, creation of marketing package and program, buyer qualification, offer preparation and negotiation, due diligence, transition planning and post-closing follow up, KeyStone offers a hands on approach to keep things moving forward in an orderly manner to ensure that sensitive information is protected, uncertainty is avoided and the best price is achieved.Read More
I have worked with well over 1,000 prospective buyers looking to purchase a business over the past 15 years and I would estimate that probably 80% to 90% do not have a particular business category in mind. I can also say that may who have called my office inquiring about a specific business often end up buying something very different from what they had initially called on. A common question I get is what is a good business to buy? While I do have preferences for specific types of businesses, the better question is what are the key aspects I should evaluate in determining which business to buy? Here would be my top 5 factors a buyer should evaluate to narrow down the options and help determine which business is the best fit for them.
Do I have any related experience I can leverage into this business?
When the economy went south in late 2008, many buyers who had used SBA loans to purchase a business had defaulted on their loans. The SBA evaluated this and determined that one of the key factors why new business owners were not able to successfully operate their business during these difficult times was due to (more…)Read More