Monday, August 17, 2020

Is it Still a Good Time to Sell? Depends on Industry

 The first half of 2020 has started with unforeseen events that may have changed the course of your company and your ability to sell it.

Prudent business owners try to plan for nearly every scenario so they can better manage cash flow, staffing levels, production levels, banking relationships, etc. Consumer preferences change and so do market conditions, but I can assure you, no one foresaw a mandated government shutdown. It was a doomsday scenario for some businesses and yet a non-event for others. The good news is that recent events likely haven’t stripped your company from its value, even if you were one of those who were deeply impacted. That’s because (at least for now) business brokers can explain away the second quarter as an “Act of God.” Merger and acquisition expert Alan Austin explains: “When buyers evaluate which businesses to purchase, they always look at historical performance as an indicator of the health of the business and expected future earnings. Sometimes, businesses have catastrophic events that can be damaging in the short term but can quickly bounce back from them. After all, this is why business interruption insurance exists. The disaster could be because of a fire, hurricane, or other Acts of God; such as an unforeseen pandemic. As M&A advisors, we’re making the argument that this “public health crisis” is one of those temporary setbacks that have little effect on long term earnings ability of most businesses.” But what if a temporary interruption becomes not too temporary? Like the 3rd, 4th quarter, and into 2021? “That’s when things get more complicated,” says Austin. “The longer things go, the more difficult it is to make the argument that it’s temporary. Doubt creeps in buyer’s minds and they start to think that this is perhaps the new normal. Therefore, past business performance is no longer as relevant as it once was. Across all industries, I believe you’ll clearly see some winners and some losers in the coming months.” So, is it a good time to sell your business, while so much uncertainty exists? “It depends,” Austin says. At the time of this writing, restaurants are not yet allowed to be at full capacity, cruise lines are not operating, airlines are on a reduced schedule due to demand and are operating at reduced capacity, and hotels are scrambling due to canceled business travel, summer vacations, and events. “Anything travel related is tough. That’s not to say that you can’t sell your business now if you are in the travel industry, it just means that you may not get the sale price you may have in the 4th quarter of 2019. There just aren’t as many buyers out there with the appetite for the risk this industry now has. Even if you do find a buyer, they will be asking for a deep discount.” “However, there is nothing fundamentally wrong with our economy and once the government feels comfortable easing restrictions, I expect we will not only return to previous levels of economic activity but possibly to even stronger levels due to the pent-up demand.” Some industries have been well-positioned and have prospered. People are spending more time at home and are investing in their living spaces. The home services category, which includes landscaping, remodeling, roofing, construction, retail garden centers, and other residential service-related businesses are doing quite well. Furthering the boom is the unexpected free government money. “If you own one of these businesses, it’s really a great time to sell because we can show an upward trend of revenue and profit that gets buyers excited,” Austin adds. What other categories are hot right now? Austin likes healthcare services, technology, and anything construction related, among others. Cost of Money While the Payment Protection Program (PPP) and Economic Injury Disaster Loan (EIDL)are acronyms most business owners have learned about in recent months, there are other lesser-known Small Business Administration (SBA) loan programs that are designed to keep merger and sales activity high. Until September 27th, the SBA will pay the first 6 months of principal and interest on all new 7(a), 504, and Microloans. “That’s a good deal,” Austin assures. Combined with historically low-interest rates, it makes perhaps the lowest cost of money we will see in our lifetimes. It means that buyers can acquire a new business, go through the inevitable learning curve, and not have the looming monthly debt service over their heads for half a year. It removes much of the friction of a business sale, so transactions can continue to happen. The recommendation Austin gives any company owner is: “Know what your business is worth.” It’s sound advice anytime, but especially in this environment. Keeping your eye on your value can help you weigh decisions about your exit. Talking to a qualified business broker like Austin is a good first step. We can show you what comparable businesses have sold for in your area and what we can be learned from those transactions.

Wednesday, June 10, 2020

7 Ways to Tell if it’s Time to Sell Your Business

Every business has both a beginning and an end. While it may be hard to fathom now, there will be a time when you will lock the door and turn off the lights for the last time. It can be a scary thought considering entrepreneurs put so much emotional and physical energy into starting and growing their businesses. Their identity is wrapped up in what they do for a living.  Yet, it doesn’t change the fact that there is a “last day” coming, whether it’s on your terms or not. 

“As with a building or any other physical asset, it needs to be managed as such.” That’s the message from longtime business broker, Alan Austin. He expands on the analogy, “Generally speaking, a building is an appreciating asset that if kept in good condition, will be worth more than when it was built two decades before. However, if the owner neglects maintenance and structural problems appear like a leaky roof or cracked foundation, that building will be worth much less.

The same is true for a business. If the business continues to adapt and expand, the value will continue to grow, if not, the business may develop fundamental flaws that hurt value or even make the business unsellable.”

When is the right time to sell a business? The answer isn’t always clear, but while the business is continuing to grow and prosper, begin to look for these 7 signs.

Sales volume or quality is slipping because the owner is working less
There is nothing wrong with working less, but make sure you have the people and processes in place to handle business in your absence. If the business is overly dependent on its owner, performance will decline and value will erode. Buyers base their offers on actual historical performance, not what the business “could” be doing. 

Loss of motivation to train and mentor new employees
A leader’s job is never done. Inspiring and training new and existing employees is among the highest and best use of owner time. Failing to do this is a disservice to everyone that draws a paycheck from the business. 

Large capital investment is needed to remain competitive
“You’re either growing or dying” says Austin. Investing in new technology or reinvesting in your employees’ product knowledge and skillsets does cost money. But, if you aren’t continuing to invest in the business, it may be time to look for a buyer with deeper pockets. 

Approaching retirement
Father time waits for no one. Liquidating your largest asset can mean a comfortable retirement filled with fun activities and family time. Start planning for the business sale at least 5 years out to extract maximum value. 

You want to get involved in other businesses
Entrepreneurs love the thrill of building and the validation customers provide. If the entrepreneurial drive is strong in the owner, the allure of a new start-up may be more appealing than continuing to manage a mature business. 

There is a looming health issue
As the owner ages, the chances of developing health concerns increases. Cancer, Dementia, Parkinson’s disease, or a host of other ailments should create a sense of urgency to sell the business. Waiting too long runs the risk that the business will become a burden on the family and if the owner is unable to actively participate in the sale process, the business could lose value. 

Nobody to pass the business to
A son, daughter, niece, nephew, or even a key employee are all possible successors of the business owner. Passing a business to the next generation is a wonderful way to ensure a legacy, but if none of those options exist, it may be time to sell the business

 “Timing is everything,” says Austin. “Clearly, it’s good practice to sell the business before it enters a period of decline.” Sometimes getting an outside party like Mt. Vista Capital to take a look at the state of affairs and give an honest assessment of value and salability is exactly what the business owner needs. Someone that is not emotionally invested can make a sound judgment based on the facts.  Please let us know if we can assist this type of assessment.

Tuesday, April 21, 2020

There are Still Buying Opportunities Amid the Pandemic

It might seem counterintuitive to think about buying a company while America is largely shut down, but that’s exactly what you should consider.

With most businesses around the globe are in some form of a holding pattern, it’s wreaking havoc on the bottom lines of companies everywhere. Unlike normal economic down-turns, even recession-resistant businesses are being forced by the government to lock their doors and turn customers away. As a result, thousands of fundamentally-sound businesses that don’t have the cash reserves to weather the short term storm are finding themselves in big trouble. Even if the businesses have managed debt well and have cash on hand, the uncertainty is unsettling and putting the value of their businesses in question. 

The two main reasons businesses are listed for sale are the age (retirement) or the health of the owner and neither of these motivations wait for government-mandated shut-downs to expire. Consequently, thousands of businesses in America are continuing to be listed for sale, pandemic or not.

That’s good news for buyers. 

“Deals are out there to be had,” explains Alan Austin, President of Mount Vista Capital. “During this pandemic crisis, we are seeing some buyers drop out of the market to focus on their own businesses. Fixing gaps in the supply chain, handling employee layoffs, and managing cash flow.  For these companies, acquisitions are on hold,” he says. But for the buyers that are left, it means less competition to bid against.  

For those buyers bullish on the future and willing to look past temporary market conditions, there are still great opportunities out there. 

Uncertainty: Advantage buyer

Austin describes the relationship between uncertainty and sales price. In business terms, risk (or uncertainty) has an inverse relationship to how much a company is worth. The more the uncertainty, the higher the risk, the lower the sales price offered. In volatile times, there is less confidence in future earnings, so the likelihood of negotiating a great deal for the buyer is significantly improved. He who has less fear wins. 

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.- Warren Buffett

Low Cost of Capital
Interest rates have been at record lows and have gone even lower recently.  Banks continue to have capital to lend and are still looking for good loan opportunities.  There is evidence that lenders have tightened their underwriting standards, in light of the economic uncertainty, but they are still making loans.  For strong buyers, there is plenty of capital available and the cost of capital to fund acquisitions is at record low levels.

Government help
In addition to the cheap capital, the government has implemented new programs to help small businesses and stimulate the economy. The Small Business Administration (and supporting banks) have had long-standing loan products that help entrepreneurs buy businesses. However, in March, they announced their best terms in history by paying the principal, interest, and fees on new loans for 6 months if issued before September 27, 2020.

For companies eager to further their geographical footprint, or expand their product line, Austin says it all comes down to how comfortable you are in the unknown. We’re going to see some significant “wins” in the next few months. Those willing to make bold moves may make some of the best acquisitions of their career.

Wednesday, February 19, 2020

7 Pitfalls Business Owners Should Avoid

In the iconic and timeless business book 7 Habits of Highly Effective People, Stephen Covey explains Habit #2: Begin with the end in mind. What that means is that there is a beginning and end to any business. The details in the middle will determine if you have a fulfilling and hugely profitable exit when it’s time to sell, or simply turn around and lock the door for the last time. Resigning to walk away and having nothing to show for it. We’ve identified 7 pitfalls that all business owners should avoid. Doing so will help you sell your business one day for enough money to enjoy the next phase in life, whatever that may be. Customer concentration Total sales volume doesn’t always tell the whole picture. It can provide a false sense of security if you have one or two customers that disproportionately represent too much of your revenue, and therefore, your profit. While it’s good while it lasts, it can cause other problems especially when the customer suddenly decides to cease doing business with you. Buyers will learn about your customer concentration in the due diligence process. If they spot a problem, expect a huge discount to their offer; that is IF they are still interested in moving forward at all. Work hard to diversify your customer mix and revenue streams. Messy financial records Buyers want to see clean books. This means accurately accounting for income and expenses. It can be tempting to blur the lines between a personal and business expense so make clear distinctions between the two. The more profit your company shows, the more a buyer will be willing to pay. Hire the right talent to keep good, accurate records and consider getting your financial statements audited periodically. Management team in place Buyers want the peace of mind to know your business will continue to operate long after the original owner is out of the picture. The only way to do that is to have a capable and loyal management team in place. Usually, it’s also in the best interest of the business owner, to guard against burnout. Work to decentralize decision making and empower others that have your best interests in mind. Buyers pay a premium for a management team that adds value to the business. Volatility of earnings Inconsistencies in quarterly or annual earnings are a value killer. Wild swings in earnings translate to risk and uncertainty in the mind of a buyer. Is the business being mismanaged? Did a key employee leave? Did a large customer go to the competitor? These are all the questions and doubts that come from erratic earnings reports. Pay attention to large orders and fulfillment and do what you can to spread those among multiple months. If peaks and valleys do happen in your business, be ready with a data-driven explanation about the periods in question. Seeing steady, consistent linear growth always brings more confidence to buyers. Having non-business-related expenses Avoid putting non-business-related expenses in your business. A buyer will review your expenses during the business buying process and once they spot an irregularity, they will need an explanation. Then, scrutiny increases and you run the risk of the buyer not trusting the numbers, in general. They will be confused and suspect. Examples could be health insurance for extended family members, vehicles and personal trips. Hiding the bad news Every business owner has had times they are not proud of, whether it was a result of their decision making or not. We advise being transparent about these times and doing it early in the discussion. Control the narrative by explaining the circumstances and your actions. Doing so will earn the buyer’s confidence and establish that your negotiating style is sincere and truthful. Purposely hiding information, only to be discovered by the buyer later, can kill the deal. For the transaction to move forward, both buyer and seller must have confidence in each other. Supplier concentration Similar to customer concentration, supplier concentration is equally important. This means that the sources of the raw materials needed to produce your goods must be diversified to insulate you from market price changes and interruption in the supply chain. Even if it may drive your costs up slightly, consider doing business with multiple competing vendors. However, there is a good chance It will have the opposite effect and help drive costs lower when vendors know you have multiple relationships. Ask yourself how NOT being able to do business tomorrow with XYZ supplier would affect your organization. If the answer scares you, look for solutions BEFORE it happens. These 7 pitfalls are learned through experience working with hundreds of clients over a lifetime of mergers and acquisitions. While there is no official one size fits all playbook for building and running a successful business, avoiding these common mistakes will move you from merely owning a job to owning a business that generates opportunities for yourself and those around you. The conclusion of your business life is always closer than it may seem, so start now to re-begin with the end in mind.
Alan Austin is president of Mt. Vista Capital, Inc., a full-service investment banking firm established in 2006 that provides professional M&A advisory, business valuation, and financial advisory services. He is dedicated to serving the needs of owners, shareholders, and management of privately owned, small-cap and public companies. His middle-market focus on sell-side advisory is designed to provide efficient execution of the clients’ transactions while maximizing value. The financial advisory services arm of the firm assists clients in structuring and sourcing the capital resources needed to fund organic growth or acquisition strategies. Whether in support of M&A activity, buy-sell agreements or estate planning, Mt Vista Capital can provide a fully compliant business valuation report. Mr. Austin has over forty years of broad-based corporate finance experience and has focused exclusively on middle-market investment banking transactions for almost twenty years. He is a Chartered Financial Analyst (CFA) and holds the Series 7 and 63 securities registrations. Securities transactions conducted through StillPoint Capital, Tampa, FL.

Friday, January 10, 2020

How a Management Team Adds Value to Your Business

This article originally appeared on

Most businesses in America start the same way. The expert technician turns business owner and their dreams start to take focus.

However, to create real wealth in your business you’ll have to move beyond being the technician and transition to a true CEO. That means focusing your energy on building a sustainable company that doesn’t rely on you for most decisions and interacting with every customer.  You’ll need capable managers that work for you to accomplish this. They need to be enabled with the power to fix problems and allocate company resources as needed.

Why does infrastructure build company value?

Potential buyers for your company are looking for a proven system of delivering a service or making a product. It doesn’t mean your business has to be perfect, but it does mean you have to demonstrate how you find, fulfill, and replicate customers. If that process is solely or even largely dependent on your personal efforts, you should get a management team in place that can take some of the load off yourself and build value in your company at the same time.

Alan Austin, owner of Mt. Vista Capital, explains “Buyers are looking for a machine that consistently generates cash flow. If the business is overly reliant on the owner’s input to make this happen, the value of the business is severely diminished. It can even make the business unsellable.” He calls it the “Keyman discount”

“The less important you are to the day-to-day operation of your business, the more it’s worth” - Alan Austin

Building a company in this way is certainly a challenge that not all owners will be able to overcome, but Austin suggests starting with a clean sheet of paper and diagram how the ideal management structure should look. The organizational chart should have the business owner at the top followed by management-level positions that would be responsible for making operational decisions. You may or may not have these people in your organization already, but it becomes a good roadmap for the future.

Being able to show buyers how you are structured, or at least the structure you are working on, goes a long way in reducing buyer anxiety and their fear of the risks that comes along with a big business acquisition.

“Building a management team is also good for your mental health” adds Austin. “Most business owners are comfortable working 50+ hours per week in the beginning and making sacrifices, but pushing off family vacations and missing important milestones with your kids takes a toll. Unfortunately, I have seen many business owners ignore the warning signs and continue on the same path until they reach burnout - and that’s not good for anybody.”

Yes, it takes resources of time and money to pay fair management salaries, but doing this also brings you stability, continuity, peace of mind, and family security. To build life-changing wealth, you need to move beyond owning your own job and hire a team, so you will own a business.

A succession plan means options

It’s never too late to establish a succession plan. Part of the services a consulting firm like Mt. Vista Capital provides is helping the owner plan for the day they walk out the door for the last time. “It’s something every business owner at every level should think about - regardless of how long they have been in business.” Austin makes the logical point, “How can we work toward the goal if we don’t know what it is?“ The fact is, every owner will exit their business someday. The only question that remains is, will it be on their terms?”

Having a strong management team in place or grooming key subordinates to fill these roles in the future gives the owner options. And what it really does is mitigate risk for a potential buyer. Whether your buyer is another company or even your employees, a strong management team ensures that the business will continue to operate. Buyers want assurances that the business will thrive like it has in the past and for the foreseeable future. Key business metrics like cash flow and customer retention should be ideally unaffected when the owner sells the business and walks away.

Risk and money

In capital markets, there is an inverse relationship between risk and value. Austin explains that the more perceived risk there is to buying a company, the more conservative the buyer will be with their offer because they are trying to guard against the unknown. Conversely, you can expect a company to sell for top dollar with multiple offers when these factors are present.

  • Company is in a booming industry with a great outlook
  • The management team is servicing a diverse, long term loyal customer base 
  • Multiple vendors mean little chance for business interruption
  • Financial records are clear and accurate
  • Has an absentee owner

Buyers always balance risk and value. And of course, lower risk means higher value.

Alan Austin is president of Mt. Vista Capital, Inc., a full-service investment banking firm established in 2006 that provides professional M&A advisory, business valuation, and financial advisory services. He is dedicated to serving the needs of owners, shareholders, and management of privately owned, small-cap and public companies. His middle-market focus on sell-side advisory is designed to provide efficient execution of the clients’ transactions while maximizing value.

The financial advisory services arm of the firm assists clients in structuring and sourcing the capital resources needed to fund organic growth or acquisition strategies.

Whether in support of M&A activity, buy-sell agreements or estate planning, Mt Vista Capital can provide a fully compliant business valuation report. Mr. Austin has over forty years of broad-based corporate finance experience and has focused exclusively on middle-market investment banking transactions for almost twenty years.

He is a Chartered Financial Analyst (CFA)  and holds the Series 7 and 63 securities registrations.

Securities transactions conducted through StillPoint Capital, Tampa, FL.

Monday, November 4, 2019

Selling Your Company; Investment Banker or Business Broker?

When the time comes for a business owner to consider selling their most valuable asset, it's important to select the right professional to assist in the process. Just like a business has trusted advisors, including an attorney, CPA and business banker, a business broker or investment banker should be added to the team, as much as a year before the sale. Here’s why: An experienced business intermediary will not only help you find a buyer but also help you position the business beforehand to extract maximum value.

While business broker and investment banker are familiar business terms, It’s less clear what each of these specialties actually does. While both find buyers for clients and support the sales transaction, their approach is much different.
So which one do you need?

Business Broker

A business broker typically works with businesses that have up to about 5 million in revenues, however, there is no hard and fast rule here. A business broker can sell a business of any size, but this range is where they are most effective. Larger businesses will need an investment banker who can provide in-depth analysis and marketing preparation and has relationships with institutional buyers.

Typically, the broker provides little support preceding the sale and routinely posts the confidential listing on popular internet sites. Similar to a real estate agent, they wait for the right buyer to present themselves. From there, they work through a process to validate the buyer, confirm financing is in place, and help the seller with final negotiation.

While a business broker provides limited support, it can be a great deal for the seller because the broker is only paid on performance; so they are motivated to get the business sold.

Investment Banker

An investment banker may be a better choice for some businesses that are exceeding 5 million in revenues, have a complicated legal structure, or are just more sophisticated than a typical small business. Just as in the case of a business broker, an investment banker can represent a business of any size but this range compliments the banker’s skills and network.

The approach of an investment banker is different because they will work with the business owner and find where changes in the business model or operations can unlock more value. Expect them to help in such areas:

  • Accounting
    • While it is prudent to operate with a tax shielding strategy, an investment banker (and CPA) will help you move to a profit maximization strategy. This will reflect the business’s true value to the market.
  • Employee management
    • A buyer will want to know what key employees are essential for the business to run efficiently and that this management structure is in place. An investment banker will help you analyze who these people are and more importantly, highlight their roles to the new buyer.
  • Supply Chain
    • An experienced banker will be able to examine how the business buys and sells goods and services. They will be able to identify inefficiencies or being over-leveraged with one supplier or large customer. Diversifying and limiting risk will bring additional value to the business.

In addition to M&A advisory, an investment banker can provide other services such as business financing, formal business valuations and Employee Stock Ownership Plans (ESOP). Because of the considerable up-front preparation, investment bankers typically charge a retainer either paid monthly or in a lump sum when the engagement begins.

Once the business is tuned to command top dollar, the banker will get to work soliciting the business with a more strategic approach than the business broker. The banker will devote considerable effort to identifying strategic buyers who should be interested in the client’s business and will, confidentially present the client’s business to them. Depending on the size of the business, it may be attractive to private equity groups or other institutional buyers. Confidentiality is always protected with a non-disclosure agreement (NDA) between parties. Because transactions of this size may be governed by the Securities and Exchange Commission (SEC), investment bankers must be licensed.

When a buyer is identified, an investment banker will stay with the seller providing all the support necessary with the letter of intent, buyer meetings, final negotiations, and the closing. At that time, the banker will earn a commission as in the case of the business broker.

Whichever professional you choose, it’s universally accepted the business owner should not try and do this complex transaction on their own. In addition to not maximizing the sale price, potential mistakes structuring the transaction can haunt a business seller years down the line and even potentially undo a deal.

Alan D. Austin, CFA

Friday, September 14, 2018

When is the Best Time to Sell my Business?

This will be one of the most difficult questions for business owners to answer.  Since your business is most likely your largest asset it will most likely be the largest transaction you will ever execute.  There are many questions you will need to answer to be comfortable that now is the time.

Has the company outgrown your skill set?  Can you take the company to the next level without incurring massive amounts of debt?  Maybe you don’t want to incur more debt.  Have you gotten to the point where you just don’t want to work 120 hours a week and have all the pressure associated with owning your own business?  Remember the two great American dreams are to own your house and your own business; but in both instances there is a time to downsize. Just a few more questions and then some answers.  Is my business ready to sell? Can I cope with the economic and industry changes on the horizons? Do I sell the company myself or hire an advisor to represent my company? Should I sell the company or leave it to my children?

Determining the best time to sell is the result of a combination of factors.  When you are ready to sell will the market be ready?  The two most important factors in going to market: 1) are you ready to sell and 2) is the market timing good.  You should know your business better than anyone, you know your customers, you know your employees and you know the competition.  You are the best person to know if you and your business are ready.  Market timing is a tricky question.  We are not advocates of trying to time the market.  We believe that determining when you are ready is more important than trying to time the market.  Then it is our job to maximize value through our proprietary sale process given the market conditions at that time.

Having said that, as we write this article we believe the M&A market is very positive.  Although interest rates are on the rise, capital is still relatively cheap.  Corporate coffers are flush with cash reserves and financial buyers (Private Equity Funds) are under pressure to put pledged capital to work.  As a result, buyers are able (and willing) to pay higher multiples in today’s market.  

We said earlier that you know best whether your business is ready to go to market.  The most important factor in how attractive your business will be in the market is your historical trend.  Buyers prefer consistent, steady growth over volatility and more than one tremendously good year.  I will go so far to say that buyers are suspicious of the sustainability of one tremendously good year.  If your trends are positive and your last 3 to 4 years show stable consistent growth, then we would agree, your timing is good.

Should I sell it myself or hire a professional investment banker?  Since we are in the business of selling business we would obviously say hire us to sell it.  Having said that, it is important to recognize how hard it is to run a Sale Process in a confidential manner and continue to run the business.  We add substantial value to the sale process by:
  • performing pre-marketing due-diligence to uncover positive business attributes to be highlighted and negative attributes that we might be able to fix before going to market;
  • preparing a comprehensive marketing document known as a Confidential Business Memorandum;
  • researching and assembling a target list of the most likely buyers for your business.  Identifying the most likely buyers is critical in order to maximize value;
  • controlling the flow of information so we can bring multiple buyers to the table at the same time and create a private auction to drive offers higher.
  • provide guidance on evaluating and selecting the best offer based on both price and structure, relying on our combined decades of experience completing business sale transactions.
  • free you up to continue to run your business and not be distracted by the sale process.  During the sale process is the time to make sure your business is operating at its peak.

These skills and several other factors will allow a professional advisor to get you the best price for your business regardless of market conditions.  We bring our entire team to bear on each and every transaction, including other professional such as the attorney, accountant and frequently an estate planning professional.  It is this team approach that assures that we will close the deal. This is a process that could take 9 to 15 months, or more.  During this time, you need to be running and growing your business.  The most valuable use of your time and skills during this process is to grow the business. 

Should I leave it to family?  That certainly is an option.  As I am sure you know, it depends on the capability and the passion the next generation has for running the business.  Many times, the next generation will be much better off with a liquidity event so they can pursue their own passions.  You should also consider a sale to a financial buyer to provide a liquidity event for the current generation and still allow the next generation to continue to run the company and retain some ownership.  We have completed several transactions like this and consider it a win/win for both generations.

Bill Neely, Senior Partner
Alan D. Austin, CFA

Wednesday, August 8, 2018

Driving the Valuation Multiple Higher

At its core a business’ value is simply the historical cash flow times a MULTPLE.  So, given an historical level of cash flow, how does a business owner increase the multiple that is applicable to his or her business?  First of all, it is important to understand that imbedded in this MULTIPLE are a multitude of factors about the business, the industry the business operates in, and the overall nature of the economic environment that affect the risk profile of a particular business.  Lower risk of ownership equates to higher valuation multiples and vice versa.  So, the key to increasing the multiple applicable to your business is to reduce the risk of ownership. 

Let’s explore what makes some companies worth only 4X cash flow while others are worth 7 – 8X or even more.  The key is to reduce buyer risk.  A more confident buyer is a more generous buyer and a less risky deal is a more highly valued deal.  Here are some of the factors that can reduce risk and increase the valuation multiple.

Quality of earnings is probably the most important factor for any buyer.  A history of consistent, reliable earnings can go a long way in making the potential purchaser comfortable that they can count on the historical level of earning continuing in to the future.  One of the factors that impacts this consistency of earnings analysis is the type of revenue generated by the business.  Revenue generally comes in one of three types; project based revenue, repeat revenue and recurring revenue.  When revenue is project based, each time a project is completed a new customer or project needs to be identified and won in order to continue the revenue stream.  This is the least valuable type of revenue.  Repeat revenues is characterized by a stable set of customers who do place repeat orders but there is no real certainty as to when the next order will be replaced.  The best way to describe this is a business with a loyal customer base.  Obvious examples of recurring revenue models are cable TV companies or home security monitor companies where the customers’ payments repeat periodically (typically monthly) and are frequently on auto-pay.  Ideally customers do not have to make a purchase decision every month.  The purchase is automatic.  To the extent a business can move from project base revenue to repeat or to recurring, they will see an increase in their valuation multiple.

Consistent positive trends will also have a positive impact on the valuation multiple.  Whether this consistency is in revenue growth rate, profitability margins, asset utilization or required annual capital investment, consistent trends reduce risk and increase the multiple.  Any volatility in any of these area increases risk to the potential buyer and reduces the valuation multiple.  I have frequently said that growth rates do not have to be large; but that slow steady growth rates are much more valuable than a large increase in one year followed by drops in the next.  Consistency is critical to value.

An established management team that does not rely heavily on the existing owner is one of the most important things a business owner can do to assure a potential purchaser that the business has a high probability of continuing on without a hiccup after a purchase.  By having a professional management team in place, the buyer has every reason to believe that the critical functions of the business will continue even after his or her purchase. 

Diversification is also critical to reducing risk and increasing the valuation multiple.  When you stop and think about it, we have all been taught to invest in a diversified portfolio to reduce risk.  The same principle applies here when preparing a business for sale.  For business owners, diversification can be a factor in many aspects of their business.  Two of the most common areas where diversification is a focus include the customer base and the supplier base.  Nothing hurts valuation multiples more that large customer concentrations.  The risk of losing one big customer or having one of your critical raw materials controlled by a single vendor can have a huge negative affect on valuation multiples.   

Well documented systems and business processes will also reduce the transition risk for a new owner and will increase valuation multiples.  To the extent that a selling owner can demonstrate they have a well-documented selling system, an established supply chain, well-documented procedures for hiring and on-boarding new hires, that they have key performance indicators (KPIs) that are monitored and drive action, and have up-to-date IT systems, they should be rewarded with a higher valuation multiple. 

Asset quality is also an important factor in increasing valuation multiples.  Companies with high quality accounts receivable (no collection problems), inventory that does not include any stale or obsolete inventory and that consistently invests fixed assets should see higher valuation multiples.  Businesses that have a high degree of deferred capital expenditures will see their valuation multiple depressed.  

Companies that can protect their market position with intellectual property should also benefit from higher valuation multiples.  Buyers are always interested in the barriers to entry that a company can create to keep competitors at bay.  To the extent that a business has patents, trademarks, copyrights or even trade secrets, they will be seen by potential buyers as reducing risk and should result in higher valuation multiples. 

Lastly, size can be a critical factor in reducing risk for potential buyers.  Universally, buyers perceive larger business enterprises as having a better chance of surviving threats from competitors, dependence on single vendors or even the negative affect of economic downturns.  To the extent that a business owner can continue to grow their business, they should be rewarded with higher valuation multiples.

Reducing the risk of acquisition as perceived by the buyer is critical to increasing valuation multiples.   

Alan D. Austin, CFA

Monday, August 21, 2017

Attractive Acquisition Attributes – Part Three, Diversification

As we explained in our series titled “Low Risk is the Key to Valuation,” any business attribute that lowers acquisition risk also increases value.  By definition, this type of attribute is an attractive acquisition attribute for buyers.  In previous posts we have described how consistency and recurring revenue are attractive to buyers and increase the value of your business.  In this post, we will explore why diversification is attractive to buyers.

Diversification can apply to many aspects of a business but the one overriding goal of increasing diversification is to reduce the risk of some sort of disruption to your business.  Whatever the source of “concentration,” the opposite of diversification, it should be evaluated to see if there is a way to create more diversification.

When we discuss diversification with business owners the discussion usually begins with a focus on customers.  Frequently, one of the first questions we get from prospective buyers is whether there is any customer concentration.  This is so common that we always address customer concentration in our offering memorandums when marketing a business.  The level of concentration where buyers begin to get concerned varies from business to business and sometimes industry to industry.  Usually a customer that represents 10% of total revenue is not too big of a concern.  When one customer is more that 20%, buyers begin to get concerned and may discount the price more because of this increased risk.  Customer concentrations above 30% can kill a deal or negatively impact value to the point that a sale is not attractive to the seller.  High customer concentration can also cause the buyer to defer part of the purchase price and tie its future payment to that customer’s retention, over time.  Do whatever you can to decrease your reliance on any one customer.

Supplier concentration is another key area.  Any business that is dependent on one source for any of its raw materials runs the risk of business interruption if that supplier is unable to continue to provide its raw material.  This could be caused by one of several different factors that are outside of your control such as natural disaster, an interruption in their own supply chain, labor strikes, financial problems and many others.  The message here is to establish secondary sources of supply and use them on an on-going basis to keep them interested in your business.  It is always easier to establish a new supplier relationship when things are going well than when you have your back against the wall.   

What are some other ways you could diversify your business? 

  • Different Markets – Are there other industries that you are currently not selling to that would find your product attractive.  For example, a manufacturer of industrial adhesives who sells primarily to the automotive industry may be able to expand in to the aerospace industry.
  • Geographical Diversification – If your current revenue stream is concentrated in one geographical location, explore opportunities to expand your geographical reach.  If your business is reliant on a physical presence in the markets it serves this would involve opening a branch location.  If not, it may be as easy as hiring additional sales representatives to target a specific geographical market.  Expanding overseas is frequently a diversification/expansion strategy that domestic businesses use to diversify their customer base to other parts of the world.  An additional benefit of international diversification is the economic cycle diversification it provides.  World economies seldom expand and contract at the same time so having customers in other parts of the world could soften the effects of a domestic recession.
  • Product Diversification –  Are there ways you can add products or modify your product to broaden your appeal to more customers?  Adding a related product that your current customers would find attractive is a good way to strengthen customer loyalty and get them to buy more from you.  Another strategy is to slightly modify your product to appeal to a different customer group.  For example, if you have a high-end product; develop a less expensive version.  Be careful not to encourage your current customers to move down market but it is a common strategy to have a “professional version” and a “hobbyist version” of the same product, with different benefits, features and price points.
  • Sales Channels – Have you thought about diversifying your sales channels to reach a different audience?  Opening an on-line store, for example, might be a viable strategy.  If you don’t offer your products over the Internet, add an e-commerce element to your website.  If you already sell online, look for strategies to sell online through different channels.  Look at the various “marketplace” programs at major e-tailers like Amazon. Consider opening an eBay store, especially if you have miscellaneous overstock items in your warehouse. Rather than marking them down to next to nothing and undercutting new products, sell them on eBay.
There are many other areas that you should also assess for risk reduction strategies.  Think outside the box.  For example, how important is an uninterrupted electrical power supply to your business?  How expensive would it be if your facility was shut down for a day or even a few hours due to an electrical outage?  Installing a back-up generator would address this risk and is a way to diversify your power source.

These are just a few thoughts on reducing risk and increasing value through diversification.  Every business is different and we would encourage you and your advisor to assess your business for risks created by lack of diversification. 

Alan D. Austin, CFA

How to Position a Company for Sale

As with many questions, the answer to this question is not earth-shattering but implementing the answer in an effective manner can be a challenge.  The answer is to position your company in the best light; present it to the most likely buyers who will see the most value and create a sense of urgency.

Position your company in the best light.  The first thing you should acknowledge when selling a business is that there are no secrets.  Once a letter of intent is accepted by the seller, the buyer will have the opportunity to conduct extensive due-diligence on your business.  Most business owners do not appreciate how detailed, expansive and intrusive this due-diligence process can be.  The seller should also expect that any deficiency in their business, whether they know about it or not, will most likely be uncovered during due-diligence.  So, it is best to acknowledge these deficiencies upfront; fix them if you can and deal with them openly if you can’t fix them.

Selling a business is nothing like selling a house but sometimes a familiar analogy is instructive.  When selling your home, it is normal to clean it from top to bottom, keep it tidy throughout the sale process, take care of any deferred maintenance, spruce up the landscaping, etc.  It is the same with a business.  Clean up the facilities, take care of any deferred maintenance, update your procedure manuals, have job descriptions for key positions, make sure all your business and financial records are accurate and up today.  The list of things to do is extensive and will be the topic of a separate post.

Once you have done what you can internally to address any concerns a prospective buyer may have, your investment banker (M&A Advisor) will prepare a comprehensive offering memorandum.  This is primarily a marketing document but it is also an opportunity for you and your advisor to disclose and address items before they become an issue.  For example, if you have one customer that is 20% of revenue, normally a big negative for most buyers, this must be disclosed.  At the same time, this can be addressed by disclosing that the risk of the loss of this customer is minimal due to a long term “take or pay” agreement with them, if that is the case. 

Positioning your company in the best light is the job of the offering memorandum.  This document must be comprehensive and accurate.  At the same time, it should accentuate the positive attributes of your business while simultaneously mitigating the areas of concern, if possible.  This document is critical to implementing an effective marketing campaign.  Your advisor must be skilled at creating a compelling memorandum in order to effectively position your company for sale.

After preparing your business and the offering memorandum the next step is making sure the opportunity is presented to the most likely buyers.  If the seller's goal is to maximize value then presenting the opportunity to both strategic and financial buyers is critical.  If selling a majority stake so the owner can “take some chips off the table” but continue to own a minority position and continue to run the business, then the target audience would be limited to financial buyers, i.e., private equity funds.  Having an advisor that has the research capabilities to identify active strategic buyers in your industry and that has relationships with an extensive group of private equity funds is critical.  You also need an advisor who is committed to reaching out to these potential buyers to raise the profile of your offering.  There are many competing opportunities out there for these potential buyers and it is your advisor's job to raise the profile of your offering above the rest.

The last step in the process is to create a sense of urgency.  This starts with a coordinated process of presenting your company to all the likely buyers at the same time and then quickly following up with these potential buyers to determine who is interested and who is not.  This coordinated distribution of the memorandum allows you and your advisor the ability to set a limited time for evaluation by these potential buyers and the ability to set a deadline for the submission of offers.  By controlling the deadline for offers, your advisor has created a sense of urgency and an auction process where one offer can be compared against another.  This process will frequently lead to a second round of bidding among the top offers.  Once the best offer is accepted, buyer due-diligence begins and you are moving toward a closing.

In order to have an effective transaction, it is critical to position your company in its best light with a professional offering memorandum; present your company to the most likely set of buyers and create a sense of urgency and an auction process.  Engage an experienced M&A advisor to assist you in positioning your company for the best possible sale.

Alan D. Austin, CFA

Thursday, August 17, 2017

3 Reasons an M&A Advisor is Worth Their Fee

I have to believe that every business owner that is considering the sale of their business goes through the exercise of deciding whether to use an M&A Advisor or trying to sell their business themselves.  I understand the apprehension that comes with hiring an M&A Advisor.  On the front-end, the Advisor's fee looks daunting; so the real question is whether their services added value.  I am in the business so naturally I am convinced we add value in the form of higher valuations and more efficient transactions.  But you don’t have to take my word for it.  Go to this Axial Network article that presents a recent survey of CEOs who had recently sold their business and reported that 100% of the respondents said their M&A Advisor added value. 

The article goes on to discuss three specific ways an M&A Advisor adds value and also highlights the benefits of early preparation when considering a sale. This article is a good start on the value provided by an experienced M&A Advisor but it is certainly not exhaustive.  We will explore more of the areas where we add value in the sale process in future articles.

Alan D. Austin, CFA

Friday, July 14, 2017

2017 is a Seller's Market; If You Want to Sell, Now is the Time

We are frequently asked, "when is the best time to sell my business?"  There are many factors that go in to answering that question but they generally fall in to two broad categories:  Internal Factors and External Factors. 

The internal factors are factors that relate to the specific circumstances of the business and the business owner(s).  Some of these factors include where the business is in its lifecycle, the level of profitability, growth trends, the age and health status of the owner(s) and their need or desire for liquidity and the owner’s desire to reduced business risk.  These are topics we will discuss in a late article.

Today we want to discuss the external factors that are in play today that make 2017 possibly one of the best times to sell a business in last decade.  If you have been thinking about selling, we believe now is the time to pull the trigger.

Why are we so optimistic about the market opportunities today?  It does not happen very often but it seems that the stars are aligned to maximize value for the selling owner.  This is truly a “Seller’s Market.”  Here are some of the factors that lead us to this conclusion:

Business Expansion – We are in the 9th year of the current business expansion.  I would be the first to acknowledge that it has not been the most robust expansion but that slow, steady growth is one of the reasons it has lasted so long.  Most businesses are performing as well now as they have at any point in the last decade.  In addition, most businesses have had a steady continued growth in revenues and profitability; two extremely important factors that increase value in the eyes of the buyers.

Economic Cycle – Synonymous with the business expansion described above are the economic cycles that are inevitable in any economy.  We are clearly still in a growth cycle but it will eventually turn the other direction, it is just a matter of when.  It is always better to sell a business during a growth cycle because at that point in the cycle the outlook for the buyer is better and they perceive less risk in the acquisition.  The perception of less risk for the buyer translates in to a higher price for the seller.  We don’t know how much longer this expansion will last so sooner is better if you are thinking about selling in the next several years.  If your industry is particularly susceptible to economic cycles, like home building or the related lumber and building material distribution business, then this is even more of a concern for your business.

Cost of Capital – Although we are beginning to see interest rates increase slightly they are still at historic lows.  Prime rate is currently 4.25% and 3-month LIBOR is only 1.30% both of which represent relatively cheap funds for business purchasers.  When buyers can access inexpensive capital like this to complete business acquisitions their overall cost of capital is lower.  As you know, a lower cost of capital equals higher value for the seller.  As interest rates continue to rise and the buyer’s cost of capital goes up the same business generating the same level of cash flow will become less valuable to these same buyers.  If the economic down turn is just around the corner, your business may be worth more now than it will be for many years to come.  

Access to Capital – Closely related to the lower cost of capital is the abundance of capital available for acquisitions.  Generally speaking, strategic buyers have benefitted from this long and profitable economic expansion resulting in reduced debt, stronger balance sheets and more cash reserves available for acquisitions.  Similarly, private equity and sub-debt funds continue to have successful fundraising experience and consequently have an abundance of capital available, specifically for business acquisitions.  Thirdly, the bank lending market is still hungry for loans and are anxious to lend for business acquisitions.  Consequently, buyers have access to the equity and low-cost debt-capital to fund desirable business acquisitions.

In summary, the access to abundant and low-cost capital and a continued business expansion makes 2017 a ‘Seller’s Market.”  In addition, avoiding the inevitable cyclical downturn that is certainly in our future makes 2017 the time to go to market.

When selling a business, engaging the right advisors is critical.  Here are just a few reasons why Mt. Vista Capital is the right M&A advisor for your business.
  • A team of senior transaction advisors that handle the transaction from inception to close; no hand-of to junior associates.
  • A broad cross section of industry experience including manufacturing, distribution, business services, technology, etc.
  • A dedicated focus on serving the needs of owners and shareholders of privately owned middle-market companies, small-cap public companies and orphaned divisions of public companies. 
  • A proprietary transaction process designed to bring multiple buyers and maximize value.
  • The ability to provide in-house business valuations.

We are pleased to offer a complimentary business valuation analysis to any business owner that is considering a sale transaction in the next year or two.  Please feel free to contact us to discuss any of your specific valuation or transaction questions.

Alan D. Austin, CFA