Frequently Asked Questions
Call SMAA as soon as you think you might want to sell or recapitalize at some point, regardless of when you think that liquidity event might take place. We can provide advice to position your business in a way to maximize the value of transaction. The more time we have, often the more benefit we can provide to the seller. The biggest mistake we often see business owners make is waiting too long to start this vitally important conversation. So, don’t wait until an unforeseen event takes place in your life or your business before you call us. Don’t wait until you’re tired and burned out before you call us. Call us well in advance of when you see the liquidity event taking place.
Here’s a rule-of-thumb for business owners who will sell their businesses to accomplish the ultimate goal of retirement. To be conservative, you should start the M&A process 3-4 years before you plan to retire. It takes 9-12 months to sell a business, on average, from start to finish. Then, expect to work up to another 2-3 years after the sale to successfully transition the business or accomplish any earn-out or incentive objectives. So, if it takes that long to accomplish the retirement objective, you need to start the conversation with SMAA well in advance of that.
Your company is worth what the market says it’s worth. It’s worth what the top buyer is willing to invest to acquire it. That said, you want to know in advance what the market will say about your business from a valuation standpoint. Before we engage with a client, we conduct what we call a Market Value Study. This report comes at no cost to the business owner and describes in detail what our research tells us a business is worth within a rather tight range. Once our client knows what the market will most likely say about the value of their business, he can make a highly informed decision about whether to engage in the marketing process.
Sometimes during the Market Value Study we identify issues that can severely hurt the value of a transaction. Given time, these issues can be addressed and fixed. We encourage business owners to talk to us early and let us help maximize the value of the business by letting you know how buyers will view your business.
Generally, the value of a business is expressed as a multiple of EBITDA. But what does that mean?
Look at your P&L. Take your Earnings before Taxes, and then add back your Interest Expense, Depreciation, and Amortization. That’s EBITDA. EBITDA is a simple way to assess the operating performance of a given business and a way for business buyers to assess the ability of the business to generate cash flow to the owners.
But for sell-side M&A, we have to take EBITDA one step further and talk about “recast EBITDA”, or “normalized EBITDA”. If EBITDA is a measure of operating performance and cash flow, then the seller will want to be sure that non-continuing expenses are added back to the EBITDA number. Expenses like owner’s health insurance, personal expenses run through the business, nonrecurring or one time expenses, family members on the “payroll”, etc. will normally not continue after a sale, so they must be added back to EBITDA.
The EBITDA multiple is ultimately determined by the buyer and applied against the recast EBITDA to determine the ultimate value of the business in the eyes of that buyer. Different buyers will apply different multiples of EBITDA and therefore come up with different valuations.
Consult SMAA for a no-obligation assessment of the market value of your business.
While the goal of any business seller is to realize maximum value in the form of cash at closing, this structure is the exception rather than the norm. Often, to maximize the dollar value of the business, sellers consider many possible forms of “deal structure” offered by buyers. Typically, higher amounts of deal structure enable the potential for higher amounts of value, but these structures present the seller with additional risk and keep them working in the business for longer amounts of time.
Examples of a deal structure are Earn-Outs, Seller Financing, and Equity Rollovers. Contact SMAA for more detailed information about how deal structures ultimately translate to business value.
When selling a business, strict confidentiality is critical for many reasons. Business owners attempting to sell their businesses without the guidance of a professional M&A advisory firm often struggle to accomplish the goal of confidentiality. When word prematurely leaks out to key employees, customers, or vendors, the business may suffer. SMAA considers confidentiality to be a very high priority throughout the process. To accomplish this goal properly, there must be a carefully orchestrated process from start to finish. Without going into a tremendous amount of detail here about the many ways confidentiality can be maintained throughout the process, we will mention the importance of Non-Disclosure Agreements.
Before providing a potential buyer even with the name of the business for sale, SMAA requires the execution of a strictly worded, legally binding Non-Disclosure Agreement (NDA). A well written NDA protects the seller’s business against piracy of employees, customers, trade secrets, etc. belonging to the seller. The NDA provides a very high level of protection to the business owner for 2 years from the date of signing.
Contact SMAA to discuss how to sell your business in the most confidential, discreet manner possible.
There are many different types of business buyers today. The best buyer for your business will depend upon several different factors, such as the size of your business, whether you want to sell or recapitalize, the prospects your business has for growth, your own goals and objectives, etc. Your best buyer might fall into any one of the categories below:
- Strategic Buyer – a business in the same business and industry as the seller. The strategic buyer might be local, regional, or international.
- Financial Buyer – an investment group primarily interested in the financial return that can be realized from the acquisition. Most financial buyers require the business owner to remain in the business as an operating partner and minority interest owner.
- Independent Sponsor – an individual or company that acquires a company and raises capital on a deal-by-deal basis.
- Search Fund – an investment approach whereby an individual, normally a business operator, raises capital from investors for the purposes of searching for a company to acquire in order to grow and then ultimately exit (though many “searchers” have long-term investment horizons).
- Local Entrepreneurs – individual men and women in the local community that have financial means and borrowing capacity who wish to acquire a company for the long run.
The best way to ultimately determine the best possible buyer for your business is to run a thorough market process. Call SMAA to discuss this strategy in greater detail.
To maximize future value, we at SMAA recommend that you focus on your business value drivers. Value drivers vary by industry and business-type, but there are quite a few value drivers that are common in all businesses. Some of those value drivers are:
- Strength of financial records
- Revenue and cash flow trends
- Depth and strength of management team
- Customer concentration risk
- The uniqueness of a product or service
- Intellectual property
- Barriers to entry
- Asset quality
- Growth opportunities
The best time to sell a business is when the business is healthy and growing. A healthy, growing business is also one that is prepared to withstand the intense scrutiny it will endure through buyer due diligence. If you aren’t sure whether your business is fully prepared, contact SMAA for a no-obligation review of the overall health of your business.
Every business is different, but the following list of “value killers” will serve as a good rule of thumb of business issues to avoid if the goal is to maximize value:
- Lack of financial controls and poor financial recordkeeping
- Customer concentration risk (any individual customer that makes up more than 20% of revenue)
- Overdependence on the business owner and lack of a strong management team
- Poor revenue and profitability trends compared with peers
- Poorly maintained older property and equipment
Your business will have more specific “value killers”. To maximize the likelihood of achieving your liquidity goals, identify your value killers and turn them into value drivers.
Business owners routinely underestimate the amount of time it will take to sell their business. As a rule of thumb, we advise owners to expect the process of selling or recapitalizing to take anywhere from 8-12 months, assuming the business is in good shape and ready for the sale process.
Of course, a business owner can sell his orher business on their own. And many choose to go this route, but most have no idea what they are getting themselves in to. There is a right way to run a process of selling a business, and there are many wrong ways. Most business owners are experts at running their businesses, but not experts in the vitally important aspects of selling a business (see Our Process).
When you hire a sell-side M&A advisor, you should expect, at a minimum, that the advisor will be able to cover their success fee percentage by commanding more market value for your business than they are charging. At SMAA, we believe we bring much more value to our clients than merely covering our success fees.
The result of a strong relationship with you and your M&A advisor will allow you to do what you do best during the sales process – running your business. When you focus on running your business and leave the process of selling your business to us, business value and confidentiality are maximized.
There are many expensive mistakes seller make when selling their businesses. Some include:
- Failing to properly plan for a sale.
- Selling as the result of a business or economic downturn, a health event in the life of the owner or
- his/her family, or as the result of the loss of a key employee or customer.
- Accepting an offer from a single, unsolicited buyer and failing to run a market process.
- Failing to run the business as usual during the sale process.
- Selling without an advisor and losing control of the deal as a result.
You’ve devoted your life to building your business. Finish strong. Call SMAA for a no-obligation consultation.
We don’t expect to convince you to use our firm as the result of reading the information contained on this website. We do, however, hope you are convinced to hire a high-level sell-side M&A advisor.
As a next step, we urge you to contact our office and request a no-obligation consultation. Let us learn about your specific business and corresponding goals and objectives. With that knowledge and insight, we will propose a specific strategic plan to help you meet and exceed your expectations. Only then will you know whether hiring SMAA is the best next step.
You won’t find a sell-side M&A advisor capable of executing a more comprehensive and aggressive process of finding the best possible buyer or growth partner for a client. We are buyer-agnostic and understand that your best buyer or partner could come from the least expected source. We believe that running a process that brings multiple, highly-qualified buyers to our client’s table, all at the same time, enables our client to choose from the very best the market has to offer.
Our ability to deliver exceptional, expectation-exceeding results is a function of our collective 100+ years of experience and the countless hours our team spends researching the market place of potential buyers in advance of a sell-side M&A process. We then market the confidential business profile to this specific market and to domestic and international sources. Depending on the size and appeal of the deal, we have often received more than 100 signed NDAs in exchange for a single CIM (see Our Process).
Working like a funnel, our process begins very broad and filters out the “tire-kickers” and unqualified buyers until the strongest, most credible buyer prospects are clearly identified. In the end, our client is often in a position to choose the best offer from multiple, credible buyers.
Identifying the very best buyer or growth partner is no easy task, but every step of Our Process (underlined and linked) is a very intentional and necessary one on the journey to maximizing business value.
Contact us to discuss what the probable universe of buyers for your business might look like.
As referenced in the “biggest mistakes sellers make” FAQ, accepting the unsolicited offer is frequently the biggest mistake sellers can make. Regarding business value, we are completely convinced that the unsolicited offer is normally NOT the best deal the market has to offer, not even close. In addition to minimizing the return on the investment made in the business for many years, accepting the lone, unsolicited offer has the potential to wreak havoc on the business and cause tremendous distress to the business owner. Since the business is rarely ready when the unsolicited offer is received, savvy buyers will take the opportunity to “trade down” the offer at the end of the process once deficiencies are uncovered during due diligence. When those types of sales go through, the business owner often receives much less than they bargained for. When they don’t close, the business is often battered and bruised – requiring the business owner to redouble his or her efforts to repair damage and regain market share lost while the owner was away chasing a deal that was too good to be true or seemingly strong.
Even if the offer is good and it’s the best buyer for the goals the seller wants to achieve (like keeping the business and jobs in the local community), having a qualified M&A advisor on your side has several other advantages. First, a M&A advisor is a market maker. The buyer will know that the M&A advisor has the ability to find other potential buyers quickly, and will more likely negotiate in good faith. Also, M&A advisors can advise about deal structure. Structuring a transaction not only affects how funds are received, the taxability of the funds, but also what happens after the transaction is complete.
If you receive an unsolicited offer for your business, call Strategic M&A Advisors for a consultation.
The length of time you’ll be expected to remain with the company after the sale is a function of how dependent the company is on you, the business owner. Some business owners are the business. They have the primary customer relationships, they are poor delegators and therefore handle most of the C-suite responsibilities. The business plan for the company is embedded in the owner’s brain, but nowhere else, etc. In situations where the business is heavily dependent upon the owner, he/she should expect to stay onboard for quite a long time as the customers, trade secrets, management, etc. are transitioned over to the new owner. This could take months or years.
On the other hand, the company that has “institutionalized” customers and a strong executive management team in place is a company that hardly notices when the owner is gone for an extended vacation. The buyer of that company might not require the owner to stay around beyond a few weeks.
By the time the Letter of Intent has been signed by the seller and the buyer, the final and most detailed round of due diligence begins. Without proper planning, this phase of the process can be overwhelming and cripple the deal (and deal value) if the business owner isn’t ready. Between LOI and closing, several things take place simultaneously, including:
- A Quality of Earnings Study and other financial scrutiny
- Production of asset schedules
- Examinations of corporate bylaws, board meeting minutes, and other corporate documents
- Environmental assessments
- Legal due diligence (past litigation, current litigation, contracts, employment issues, etc)
- Purchase agreement negotiations, including representations and warranties
- Human resource due diligence and employment agreements
- Verification of customer commitments
- Supplier verifications
For a better sense of what to expect during due diligence, see (link to due diligence request lists).
Given the magnitude of information to be examined and approved during the final due diligence phase, we recommend the business owner expect this phase to take 90-120 days.
Our goal at Strategic M&A Advisors is to align our goals with those of our client. We charge a small, non-refundable retainer fee upfront and then a success fee (usually a percentage of the transaction value) payable upon completion of a successful M&A transaction. We view the retainer as a “skin-in-the-game” gesture on the part of our client, and we then credit the retainer against the success fee at closing. The success fee varies by client based on the size and scope of work. We sit down with the client and together determine a success fee percentage that makes sense.