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Multiple Owners, One Company: Don’t Let Internal Conflicts Wreck a Business Sale

Fri, 14 Nov 2025 17:53:56 GMT

For an owner group looking to sell, the owners’ transparency, internal communication, and alignment are keys to avoiding conflicts and achieving a successful closing.

Gary Papay and Tim Atwell
Managing Partners, IBG Business

Even in the best and simplest of scenarios, the sale of a successful mid-market business is a complex proposition. But when the business has multiple owners, their personal situations and priorities, their goals in selling, or whether the business should sell at all, can pose conflicts before the company goes on the market or, far worse, while a deal is pending.

This article, which features a conversation between two of our IBG Business colleagues, Gary Papay (Eastern/Mid-Atlantic) and Tim Atwell (Mountain States/Pacific Northwest), explores some of the conflicts that can threaten a successful sale and how co-owners might address them in the interests of getting on the same page.

Through our decades of experience and more than 1,200 successful deals, our IBG M&A advisors have learned at least one universal truth for co-owners: The earlier you anticipate your differences, agree on a process for resolving them, and communicate your objectives in selling the business, the greater the likelihood of a successful sale.

Starting on the Right Foot

Gary Papay: It’s always a challenge when you have more than one owner. When we meet with co-owners about the possible sale of their business, we try to uncover any areas of conflict right up front, to make sure everybody’s on the same page and in agreement on whether to sell. If they are, we ask all the owners to sign our engagement agreement, so that there’s written commitment across the board.

Tim Atwell: At that in-person meeting, we walk them through the process – the good, the bad, and the ugly – and by involving all of the owners, all parties feel they have all the facts, are participating, and have input in the company’s decisions.

Gary: That’s a good point. And by having all the owners there, we can focus on each one and learn, first-hand, whether they’re all on board or maybe this one’s a little disgruntled.

I’m frequently amazed by how little communication goes on between owners in some companies. They might talk about business issues, but when it comes to what they want personally, they keep that to themselves. We had a situation recently where, at our first meeting with all of the stakeholders, one of the owners told us, “We all want to retire,” and right away one of the others contradicted him. “I don’t want to retire,” he said. “I’d like to stay here and reinvest some of my money back into the business and watch it grow.”

Tim: Getting started on the right foot is critical. We try our best to anticipate conflict, and if we cannot confirm that the stakeholders are in alignment to sell, we generally will not take on the engagement.

Gary: We always ask co-owners if they have a buy-sell agreement. These agreements often specify whether, for example, the majority rules or if one individual has the authority to speak and act for the group. If they don’t have a buy-sell, or if they have one but don’t agree on what it means, we’ll recommend that they meet with their attorney, or we will refer them to an M&A attorney, to get any conflicts ironed out in advance.

Tim: Gary, I’m glad you brought up the use of an attorney. We are not the only professional advisors involved in this process. Our clients’ other advisors – legal, tax, consulting – also help the owners navigate questions and concerns to ensure there is alignment.

Family Feuds

Gary Papay: In a family business, where the co-owners are siblings – some involved in the business, others not – how each perceives their rights, contributions, and obligations can raise major conflicts.

When I started out as an M&A advisor, one of the senior leaders in our firm told me, “I’m going to give you some advice. You’re going to run into a lot of family feuds. When you do, tell them this: ‘You can never split up the business, but you can always split up the money.’” It’s true and usually goes a long way toward solving family squabbles.

Then there’s the parent-and-kid situation. One example is where the child believes they are the heir apparent, but Mom and Dad say, “Hey, we want to cash out here, we want to retire. We don’t want to transfer ownership to you because, number one, you don’t have any money. Number two, for you to buy me out, I have to finance it, so I have to worry about how you’re going to run it.”

Eleventh-Hour Conflicts

Gary Papay: One issue that can come up late in the process is when the buyer asks the owners and even their family members to sign non-compete agreements. Even though Junior is not an owner, the buyer might require him to sign a non-compete because the buyer wants him to stay with the company and work for the buyer.

In one of our recent deals, Dad pushed back and said, “He’s not an owner, he shouldn’t have to sign a non-compete,” and the buyer said, “I’m not buying the business unless Junior signs one.” So, I had to have a talk with Dad and say, “Hey, for $25 million you’d better get Junior to sign – do something for him, like give him more of the proceeds.” In the end, Junior signed a non-compete and Dad put him in his own mechanical business after the sale, which was OK with the buyer.

Tim Atwell: Another issue is simply the strain of selling a business while you are still running it. It is a stressful and time-intensive process, especially in the due diligence phase. Sellers are, essentially, taking on a second full-time job.

Gary: A lot of times when there’s more than one owner, there’s one who works their tail off – or thinks they do – and another who comes in at 10:00 every day and goes home at 3:00.

Tim: Gary’s right – the contributions of each owner, to the business and to the sales process, may not be equal … and, even if they are, it may not feel that way to one or more parties. In most cases, we are able to delegate responsibilities and distribute the workload based on expertise and each owner’s role in the business, but it is human nature for people to feel like they are carrying more of the weight. It is not uncommon for resentment and frustration to set in during the process.

Another common late-stage issue is owner disagreement over price, or they might agree on the price but disagree on the terms. Individual owners can be drawn to certain aspects of an offer but object to others, and it usually depends on their personal situation and their objectives and goals post-sale. For some sellers, the amount of cash at close is item #1 on their list, while another might be focused on a second bite at the apple through an earnout or rollover equity.

The best way to avoid that is to provide owners with offers from multiple qualified parties. When you have conflicting owner objectives and only one offer, the buyer has all of the leverage. You may not be able to check every box for each owner, but having multiple candidates, and offers, increases the likelihood you can satisfy the ones at the top of the list for your clients.

Conflict Resolution

Tim Atwell: We often take on the role of mediator to work out owner differences. We make sure they understand the pros and cons of each issue that divides them, whether it is an aspect of the offer or some concern about the buyer. As we mentioned earlier, including their attorneys and their tax and accounting professionals in these conversations is always valuable.

Gary Papay: Another thing we might do is go to them and say, “OK, you’re not going to do this deal. Here’s what we’ve learned about your transaction from the buyers and from our decades of experience and 1,200 successful deals. If you want more money, better terms, here’s how to improve your business and make it more attractive.”

We try to leave them on a positive note, in the hopes that when they are truly ready to sell – maybe after they’ve worked out their conflicting issues – and improved their business, they’ll come back to us.

Tim: We lean on education, we lean on facts, and we lean on what the market is telling us. In our role, transparency is crucial, and we often need to tell our clients things that they do not want to hear. We have had clients prepared to walk away from offers, and valuations, that they will never see again. As Gary noted, others need to be told to press “pause” to improve the business before they can expect the type of offers they are seeking. It is our job to ensure they understand this and, even if they do not agree, can at least make informed decisions.

Gary: Sometimes we will suggest a radical solution that wasn’t an option while the first deal was pending. For example, “Why don’t you buy out your brother and sister, and then you can come to us when it’s just you and you’re ready to sell.”

Tim: That sounds radical, but it can be a real solution. We are currently working on a project where there was so much disagreement among the owners that they parked the sale, completed a buyout, and have come back to IBG with one owner fully committed to the sale. That’s not how we would have drawn it up, but it was the best solution for that particular ownership team.

Takeaway

Tim Atwell: If I had one unifying piece of advice for an owner group that is thinking of selling, it would be to strive for transparency and alignment. The sale of a multi-owner business will not achieve top dollar – if it occurs at all – without motivated and committed sellers, across the board. Selling a business is hard work, and the owners must want it, individually and collectively.

Is your business truly “sellable”? Overcoming three major stumbling blocks

Tue, 14 Oct 2025 20:42:40 GMT

What if the reason your business won’t sell has nothing to do with the market and has everything to do with how you’ve built it?

In a recent episode of The Story in Your Head , podcast hosts Ron Macklin and Deb Dendy invited IBG Fox & Fin’s managing partner, Bob Latham , to identify and address three common obstacles to a successful business sale:

extreme customer concentration;
poor financial records; and
over-dependence on the owner.

This article is an abridged version of the full interview, “Why Most Businesses Fail to Sell,” which you can hear in full at the MacklinConnection website .

*****

Host: Welcome to “The Story in Your Head.” We are joined by Bob Latham to uncover the hidden factors that turn a thriving business into an unsellable one. Bob, what makes a business unsellable? What happens when it’s time to sell and no one wants to buy it. What’s the first red flag you see?

Bob Latham: One of the biggest red flags is extreme customer concentration. If 50 to 60 percent of a company’s business comes from one customer, and that customer leaves, the company’s going to have a very hard time surviving, much less growing out of that.

You really want to drive that concentration down to where, if a particular customer leaves, ouch, but you can get over it. It’s a stubbing-your-knee versus breaking-a-leg kind of thing. You don’t want your biggest customer to account for more than about 15% of your sales – 20% absolute maximum. To have a well-balanced customer base, you’d really like it to be 10 to 15%.

What else can harm the marketability of a profitable business?

Another common problem is poor books and records. The financials are not in order, and the seller can’t produce a given report in a timely fashion and in keeping with accounting standards. Surprisingly, even large businesses can have really bad books and records, and it’s shocking that they got where they are with the records that we sometimes see.

From the buyer’s standpoint, that makes it very hard to verify the company’s financial performance. If they can’t trust what the earnings are, how do they value the company?

As a practical matter, most buyers understand that a business with less than, say, $20 million in sales is probably doing some things that are expedient. But if the financials are relatively clean, accurate, understandable, repeatable, and well documented, that kind of bookkeeping will probably be okay. However, in many cases, that’s not the case.

So, get your books and records in order; make sure that an accountant has looked at them and you know they’re consistent and accurate.

What is it about a business’s culture or leadership or their style that can raise a red flag or affect the value of the company?

That depends on who the buyer is and what they plan to do with the company.

If the company is big enough to serve as a platform for a private equity group, cultural issues probably won’t be very important. As long as the company can keep cranking out earnings, the buyer will be happy.

Culture is much more important for a strategic buyer, someone that’s already in that business in one form or fashion. Maybe they want to acquire the company because it covers a geographic area where the buyer wants to expand. Or because the company has product lines or services that mesh well with the buyer’s and can be funneled to the buyer’s existing customer base, or vice versa. In those cases, there will be a lot of interaction between the entities, and it’s important that the cultures fit.

In the near term, there’s really not much a buyer can do to change the culture of the acquired business. Even if the culture is good, it just might not mesh with the buyer. So that’s something the buyer has to evaluate.

How does the owner’s leadership style come into play?

In most cases, the owner’s role in the business is much more important than cultural issues. Leadership style directly affects the company’s value – and in some cases – its viability in the owner’s absence.

If the owner can step out, go on vacation for a week or two, and the wheels don’t fall off the wagon – he’s mainly driving the direction of the business, setting policies, setting goals – that’s okay.

But if the owner has to have his fingers in everything – he’s the key contact with the primary customers, or he’s doing everything on the operations side – his importance to the company will kill its value.

For most businesses, it’s absolutely crucial that they have a solid management team that is used to having and exercising power and decision-making ability, being held accountable, and are free to operate without the owner looking over their shoulder at all times.

The presence of a proven, retainable management team gives the buyer more confidence that the company will continue to operate profitably in the owner’s absence.

If it doesn’t appear that a company is sellable, what do you do to really make it valuable to a buyer?

Before I get into that, I want to mention that it’s not uncommon for us to get involved with a potential seller three or four years in advance of when they think they’re going to sell. We like that timeframe because we can help them shape the company into one that’s ready to sell when they themselves are ready.

As my IBG Business colleague Gary Papay (Eastern/Mid-Atlantic) puts it so well, “We help business owners exit their businesses at the appropriate time for maximum value.”

For a successful sale, three things have to be right:

The seller has to be ready.
The business has to be ready.
The market has to be ready.

Seller readiness can be the most important of the three. Many times, their business is their baby, it’s their identity. They’ve been building and running it for maybe decades, and they need to come to grips with, and be at peace with, what life will be like after they’re no longer a business owner.

Then we can get the business ready. One of the things we at IBG Business provide that’s a little bit different from a lot of our competitors is our “marketability assessment.” We dig in reasonably deep on a company, especially in their financials, and we really try to understand their market and how a buyer is going to view their business. Then we report back to the seller – “You look good over here, but you’re a little weak here” – and we will suggest a game plan. We’re not implementers, we’re not consultants, but we can tell them where their weak spots are, where they need to improve, and what their goals ought to be.

Then, when the market’s ready, when those three things come together, that’s a good time to sell.

In a nutshell, we don’t want to go to market with a company that’s not ready to sell. For the seller and for us, it’s a very demanding process, to gather all the information that we need to prepare things properly, and no one wants to go through that if the three readiness factors aren’t in place and we don’t really believe we can find the best-fit buyer at the company’s best value.

Bob Latham is the managing partner of IBG Fox & Fin and IBG Business ’s Texas/Gulf Coast office. He offers extensive M&A experience in the purchase and sale of businesses in several major sectors – manufacturing, construction, maintenance, and distribution – and in logistics and other B2B services. Bob has over 30 years of hands-on experience and a broad range of skills that benefit both buyers and sellers with which he has worked.

In the driver's seat: Tips for intentional business planning

Fri, 05 Sep 2025 17:58:42 GMT

A change in your business that increases its profitability should also increase its market value – and vice versa.

BY BOB LATHAM , M&AMI, CBI
PRINCIPAL, MANAGING PARTNER

Do you run your business, or does your business run you?

It’s a rare business owner who doesn’t occasionally lament the latter, and it doesn’t have to be that way. You are the leader of your company, and leading means rising above merely putting out fires and letting your circumstances dictate your direction.

To regain control, be as intentional and disciplined now in your business planning as you were when you were starting up. As this article is written, the fourth quarter is right around the corner, and that’s as good a time as any to:

review performance and key metrics from the past year,
recognize what caused your successes and setbacks,
set goals for next year,
create a plan that will help you seize new opportunities in the next year and beyond, and
prepare for a top-dollar sale.

If intentional business planning is a skill that you haven’t exercised recently, you might have a few questions.

DO WE HAVE TO DO IT IN THE FOURTH QUARTER? No. My IBG Business colleague Matt Frye (Oklahoma) estimates that “70 to 80 percent of businesses don’t do any meaningful planning,” so scheduling a planning event at any time of the year puts you ahead of the field.

The important thing is to get it on the calendar, commit to the date, begin making a list of issues you want to cover, and decide who should be in the meeting.

WHAT SHOULD BE ON THE AGENDA? That depends on what you want to accomplish. If a 600-pound gorilla needs to be tamed, consider limiting your agenda to that one issue.

Or you can choose from a long menu of issues that can boost your profitability and market value. For example:

What went right this year, and how can we build on it?
What went wrong? How can we avoid a repeat?
For which issues would significant improvement yield the greatest results?
What opportunities and challenges do we anticipate in the next __ months, and what are we going to do about them?
What are our goals, and whom will we hold accountable for each?

WHO SHOULD BE IN THE MEETING? Depending on what’s on the agenda, consider some combination of:

Just you. Pick a day and go somewhere – e.g., a resort, golf course, lake, mountains, museum, art gallery – that allows you to think, create, problem-solve, and focus. Commit to an all-day experience, but don’t be surprised if you need only a few hours.
You and your tax advisor and/or business attorney. For this option and those that follow, pick a suitable meeting environment – away from your office.
You and your management team (e.g., operations, finance, sales, HR, IT).
You and an M&A professional. Why? Read on.

SHOULD I THINK ABOUT SELLING? Always – the only question is when.

An IBG M&A professional can help you identify the correct time to consider a sale and how you can use your planning process to sell for top dollar to the best buyer.

“One of the first things we ask about is the ‘why’ and the ‘what,’” says Matt Frye. “If the owner wants to sell now, what is the motivator? Do they want to retire? Are there health issues? Also, what do they want to do post-sale? Travel? Volunteer? Spend more time with family? Buy another business?”

We can help you identify business-improvement priorities and action items that (a) align with solid business practices, (b) you can fold into your business planning, and (c) won’t tip your hand to your key employees, customers, and suppliers. Examples include:

1. Improve cash flows. A prospective buyer wants to see the “true cash flow.” Try to drive all income to the bottom line.

2. Broaden your customer and vendor bases. No customer or client should account for more than 10% of sales, and try not to be overly reliant on any supplier.

3. Upgrade your management team. Develop a capable leadership team that reduces the company’s reliance on you. By improving the skill levels of your key people, or replacing them, create a true “C-suite” comprised of all the “chiefs,” e.g., CEO, CFO, COO, CIO, CHRO, etc.

4. Clean up your financials. We will “recast” your financials, but “cleaning up” your financials is something only you can do:

Make sure your inventory and asset records align with what is physically there.
Remove from the books any unsellable inventory, or property or equipment with no value.
Document your non-business expenses so they can be justified in the recasting process.
Strengthen your ratios: working capital, debt-to-equity, “quick,” price-to-earnings, return on equity, etc.

5. Upgrade your professional advisors. If your business has outgrown your attorney or accounting/tax professional, we can advise you on the most important criteria and provide introductions if helpful.

6. Document what you do. Written records and plans give a buyer greater comfort that they will be able to emulate your successful growth.

7. And a few more:

Resolve any pending litigation and other legal issues.
Refresh and spruce up your facilities.
Order appraisals for your real estate and equipment.

IBG FOX & FIN CAN HELP. “Plan to succeed, or plan to fail.” Being deliberate about improving your company’s income statement, balance sheet, and market value can deliver substantial benefits, whether you’re planning to sell next year or farther down the road.

We can help you identify opportunities to achieve top dollar in a sale. IBG Business has advised on over 1,200 successful transactions, and our 86% closing rate is more than three times the national average. To start the planning process for your business growth and ultimate sale, contact an IBG Fox & Fin team member .

Finishing touch: Post-closing priorities in a business sale

Mon, 11 Aug 2025 20:13:46 GMT

Anticipating issues likely to arise after the deal closes requires experience and intuition from the M&A advisor.

By John Zayac , CBI

No two business sales are alike. However, as wide-ranging as IBG’s 1,200-plus successful closings have been, they typically follow six key steps :

Assess the business and its market.
Package and prepare the business for sale.
Market the business to top buyer candidates.
Maximize value through a controlled auction process.
Close the transaction.
Provide post-closing assistance to our client.

While steps 1 through 5 predictably generate most of the excitement, in many deals it is the “boring” one – post-closing assistance – that provides another opportunity for IBG’s advisors to differentiate themselves from the competition.

A major part of our job is to anticipate, before the sale closes, issues that might arise after closing, to ensure that (a) they are clearly spelled out in the purchase agreement and (b) their post-closing impact is minimal or can be avoided altogether.

In general, post-closing tasks encompass a broad range of action items – financial adjustments, legal and administrative cleanup, and addressing residual conflicts – to achieve a clean deal, promote business continuity, enhance the success of the new owner, and ensure that the deal fulfills the seller’s major objectives.

KEY POST-CLOSING ISSUES

In our experience, within that broad range of issues, a handful of high-priority post-closing matters consistently surface:

working capital reconciliation;
escrowed proceeds;
earnouts;
ensuring that the parties have capable professional advisors;
transaction bonuses; and
transition service agreements.

For the purposes of this article, I asked two of my IBG colleagues, managing partners Tim Atwell (Colorado) and Matt Frye (Oklahoma), to add their perspectives on some of the most common post-closing issues.

Working Capital. In negotiating price in a business sale, the buyer and seller typically agree on a net working capital target (or peg) that serves as a historical benchmark for determining the amount of net working capital (NWC) that will be transferred from a seller to a buyer at the closing. An estimated NWC amount is agreed to at closing, but a reconciliation, or “true-up,” between the estimated and actual totals , must be performed post-closing.

To the extent there is a gap between the estimated and actual amounts, the purchase price will be adjusted, up or down, to ensure that the purchase price reflects the true financial position of the business at the time of sale.

“A working capital reconciliation occurs in nearly every deal, generally about three to six months after the close,” notes Matt Frye. “While the term ‘net working capital’ suggests a combination of cash on hand and current receivables and payables, for some types of businesses it also includes inventory. One of our recent deals involved a post-closing inventory audit, and we helped the seller through that process.”

Our role in this step normally begins in the early stages of the deal, when we help the seller negotiate a realistic NWC “target” with the buyer. That process can involve many variables and questions; for example, exactly what will be the formula for calculating actual working capital, and how will we define current assets, current liabilities, and inventory quality?

Our involvement continues after the closing, when we help facilitate the true-up process. If the reconciliation leads to a dispute between the parties, we are prepared to work with our client’s accounting and legal advisors (or facilitate introductions to advisors if needed) to protect our client.

Escrowed Proceeds. Placing in escrow a portion of the purchase price is another method by which the parties can address uncertain or changing conditions.

“In nearly every IBG transaction, a percentage of the price is held back in escrow to ensure that the conditions of the purchase agreement are met,” says Tim Atwell. “Then, as benchmarks are reached, seller representations and warranties are confirmed, or debt balances become more certain, the retained funds are released at the appropriate time.

“One such scenario might involve capital projects that either were completed during the pendency of the sale, or were incomplete on the closing date. Before and after the sale, we may need to help the parties agree on how they will allocate overhead, labor, materials, value, etc., based on the percentage of completion.

“In all cases,” Tim emphasized, “we work hard to minimize the size of the escrowed amount and to make the hold-back period as certain and short as possible.”

Earnouts. Post-closing issues can also arise when the seller agrees to take a portion of the purchase price in the form of an “earnout.”

As my IBG colleague Gary Papay (Pennsylvania/North Carolina) explains in his article, “ Earnouts: Bridging the Gap in Price Negotiation ,” an earnout involves a “certain future dollar amount that the buyer agrees to pay to the seller based on the performance of the business after the transaction is completed.”

An earnout requires careful planning (pre-close) and post-closing tracking of the agreed-upon financial benchmarks to protect the seller’s interests.

Professional Advisors. Success for buyer and seller in each of the three above categories – working capital adjustments, escrowed proceeds, and earnouts – requires having a solid team of professional advisors across accounting, tax, and legal. Adding payroll, HR, sales tax, and technology – including software integration – to the list of potential post-closing issues, one can quickly see why IBG advises all clients to have an experienced and cohesive team of professional advisors (across a variety of disciplines) ready to hit the ground running before and after the closing date.

With thousands of successful business sales and post-closing transitions across the country, we maintain an active database of professionals that have shown their ability to function effectively in the crucible of a major deal and preserve its value.

Transaction Bonuses. Another post-closing item that should be addressed pre-close is planning for any “transaction bonuses” that a seller (or in some cases, the buyer) intends to pay to key employees as part of closing, to motivate them to stay with the company and maximize its value.

Such bonuses are normally paid at the time the deal closes, and they can be structured as a percentage of the sale and/or a fixed amount, paid in a lump sum and/or in installments.

In many deals, these bonuses are spelled out up front, and both parties are aware of it; in others, the seller wants to keep that arrangement private. We encourage our clients who plan to pay transaction bonuses to make the buyer aware of the arrangement early, as a matter of transparency, and to ensure that the buyer is aware of any terms and conditions that might affect these employee relationships.

Transition Service Agreements. Under a transition service agreement (TSA), the seller agrees to provide the buyer with specified services for a defined period of time after the close, affording the buyer time to integrate the business and achieve a smooth transition.

“A request for a TSA usually originates from the buyer,” Tim Atwell observed. “It offers a layer of protection that the acquired company’s business systems and operations will continue as normal, and the buyer will be able to utilize the company’s existing infrastructure, during the initial integration period. Many of the buyer’s systems may not be up and running on day one, so a TSA helps to bridge this gap period and support a successful transition for both the business and the team.”

OWNERSHIP TRANSITION: OUR ROLE

Many M&A firms place a high emphasis on easing the ownership transition by introducing the new owner to employees, customers, and suppliers. At IBG, we typically get involved in that process only if invited.

“Most of our buyers are experienced in that process, and they have their own approach,” said Matt Frye. “If we have a role at all, it is to accurately portray the seller and the buyer as the heroes of the transaction, to help them communicate to the employees and managers that, under the new owner, the sale will be a really good growth opportunity for them professionally and financially.”

Matt’s comment includes a very important word: opportunity . At IBG, creating opportunities is our unifying purpose – opportunities for sellers to take their newly achieved liquidity and pursue something new and exciting; opportunities for buyers to take a good company and make it (or the buyer) stronger; and opportunities for the company’s employees to grow and prosper under the new ownership.

Over our long history, IBG’s 1,200-plus transactions have an 86% closing rate – more than three times the national average for our profession – backed by our tenacity in seeing successful deals through to their ultimate conclusion. To explore how we can help you pursue new opportunities for the next chapter in your business career or personal life, contact an IBG Fox & Fin M&A professional .

John Zayac is a co-founder of IBG Business and managing partner of IBG’s Mountain States / Pacific Northwest region.

The system is the star: how the IBG process brings top dollar in a business sale

Thu, 05 Jun 2025 21:27:41 GMT

Maximizing value in the sale of a private company is enhanced by resisting shortcuts and adhering to a proven process.

By Jim Afinowich and Jim Kuykendall

When Barty decided to sell his company several years ago, he interviewed four M&A brokers before he chose IBG Business. Months later, during a lull in the final hours of our very successful deal, the conversation around the table turned to why he decided to go with us.

“The three other firms basically said, ‘Here’s our agreement, sign it, let’s get going,’” Barty recalled. “But you said to me, ‘You’re not ready to sell. Put off selling for a year, and let us tell you what you need to do in the meantime to maximize your value.’ Everybody else was ‘sell now.’ You told me to wait, and that was the best thing to do.”

Advising Barty to wait was not a random recommendation. It was the result of the intentional, painstaking, first step – assessing the company and the market – in a comprehensive sales process from which we rarely deviate.

In this article, we will discuss two deals that illustrate how IBG’s company-wide fidelity to our proven process consistently helps our clients sell their business at the right time , to the right buyer , for the right price . From among the several crucial steps in our process, we will focus on three key objectives:

ensuring that the company is market-ready;
creating competition among multiple “best fit” buyers; and
forcing all buyers to conform to our process and schedule.

The unifying theme of this article: When you skip steps or deviate from our tested and proven process, you will almost always leave money on the table.

Over our long history, IBG Business’s 1,200-plus deals have an 86% closing rate – more than three times the national average for our profession. To start the process of preparing your business for a successful transaction, backed by IBG’s unshakeable commitment to its sale process, contact a member of the IBG Fox & Fin M&A team .

Lance Meilech earns national M&A recognition

Fri, 23 May 2025 22:05:55 GMT

IBG Fox & Fin managing director Lance Meilech has been named to the M&A Source ® Platinum Club.

Avoiding confidentiality breaches in a business sale

Mon, 05 May 2025 22:17:32 GMT

Guarding your sensitive business information is just as important in selling your company as it was in building it.

John C. Johnson , CBI, M&AMI

Safeguarding confidentiality is a critical concern in a business sale or acquisition. Extending far beyond the formulation of a well-crafted agreement, keeping confidential matters confidential is a comprehensive commitment through the entire acquisition process.

Nevertheless, many business owners rely on unfounded assumptions or informal understandings that confidentiality will be maintained, or they enter into inadequately crafted – and unenforceable – agreements. These oversights often stem from misinformation or from penny-wise, pound-foolish attempts to minimize costs. Whatever the underlying reasons, the consequences of not protecting sensitive information can be catastrophic.

A Business Sale Gone Awry

To appreciate the importance of confidentiality protection in a business sale, consider this true-to-life experience involving a large conglomerate’s spin-off sales of two subsidiaries.

The parent corporation engaged an M&A broker to manage the two sales. The successful sale of the first subsidiary set a positive precedent, but, during efforts to sell the second, a smaller competitor’s owner approached the parent company’s CEO directly. The seller told the buyer prospect his price, and the buyer said that it was fair. The buyer expressed a strong aversion to a lot of paperwork and to working with intermediaries and insisted on a direct CEO-to-CEO negotiation. The seller should have seen the red flag when the buyer refused to sign a confidentiality agreement, deeming it excessively restrictive.

The seller committed to honoring the broker fee agreement; nevertheless, the M&A broker gave strong counsel against proceeding with that buyer. The seller disregarded his advice and pursued the sale. The seller then gave the buyer all of the sensitive business information that would be needed to complete the sale. After the buyer dug into all aspects of the business, he abruptly withdrew, claiming lack of interest and rejecting the seller’s asking price.

The seller began observing with dismay the subsidiary’s stark decline in business, as the former buyer prospect:

hired away the seller’s key sales personnel and targeted the seller’s customer base, and
misled customers by claiming, “They are for sale. We looked into purchasing them. We found lots of serious issues, and they may not survive much longer. Consider buying from us instead.”

As this case study painfully illustrates, it is imperative to protect sensitive information regarding a business at every interaction and stage of the sale – marketing, negotiation, and due diligence.

A strong confidentiality contract is an essential qualifier. A buyer’s objection to such a contract is a clear warning sign that major problems will surface at every step of the deal – including, as in the above scenario, feigning interest as a ploy to gain sensitive information to use to their own advantage.

How Confidentiality Protection Benefits the Business Owner

Attracting top-tier buyers and maximizing value necessitate a skillful approach to information dissemination. Uninformed owners may inadvertently compromise their own sale by sharing with a buyer too much information, or sharing it prematurely.
Disclosure that an owner is contemplating a sale can severely undermine the business. Such knowledge may threaten relationships with customers, employees, vendors, and lenders. Continuity of those relationships is vital for transferable value, which directly impacts sale value.
Confidentiality may be required under privacy, anti-trust, labor, and other regulatory requirements.
Disruptions arising from premature or unintentional disclosure can erode trust and morale at the business and divert management’s focus from profit-generating activities.
If a business merger or acquisition is known by many to have been rejected, the overall value may suffer as buyers may suspect underlying issues.
Similarly, buyers’ expectations regarding future business value may be lowered.

The Value of M&A Professionalism

With respect to confidentiality, a key value of using a skilled M&A professional lies in:

striking a delicate balance in information exchanges;
disclosing appropriate information to appropriate parties at the appropriate time; and
ensuring that binding nondisclosure agreements cause prospective buyers to honor the seller’s confidentiality requirements.

Experienced intermediaries possess the skills necessary to meticulously safeguard confidentiality while maximizing transaction value. This requires solid agreements and a comprehensive process that is thoughtfully designed, controlled, and executed, to discreetly share information while nurturing buyer interest at every stage, from initial contact to closing.

Beneficial and ethical principles in a business sale are upheld when it is managed by an experienced M&A intermediary that employs a disciplined, professional process. An intermediary’s fundamental functions include protecting the seller’s business position and value – a mission that is supported by:

safeguarding confidentiality;
reducing management distractions and other risks;
enhancing operational efficiency, effectiveness, and momentum; and
accessing comprehensive market knowledge and buyer relationships.

IBG Business is a nationwide business transaction advisory firm with decades of experience assisting business owners with discreetly handling the most private aspects of their businesses. Our knowledgeable and experienced team of advisors have performed business valuations as well as taken businesses to market to sell and implement business purchases, mergers and divestitures. These activities offer unique insight into key confidentiality issues that business owners may face.

To learn more and get started on the right track for the successful sale of your business, contact any member of the IBG Fox & Fin M&A team .

John Johnson is a co-founder of IBG Business and managing partner of IBG’s Central States Region.

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MORE ARTICLES ON CONFIDENTIALITY IN A BUSINESS SALE:

“Hot” industries in M&A – and a potential Trump factor in U.S. business sales

Tue, 08 Apr 2025 23:41:40 GMT

While industry appeal can be short-lived and misread, a profitable company in a tried-and-true sector will aways be in style.

In a typical week, each of the 15 M&A professionals at IBG Business receives 25 to 50 emails from private equity groups and other financial buyers looking to acquire businesses. While their acquisition criteria vary from buyer to buyer, inquiries usually include at least two predictable elements: (1) their desired EBITDA threshold and (2) their targeted industries.

The steady flow of inquiries offers us a rolling survey of the types of companies buyers want and, with regard to the second criterion above, can provide useful clues as to which industries are particularly attractive, at least in the short term.

In this article, we will take a look at a few industries that appear to be in relatively high demand at this time. But before we move into our list of “hot” industries, I want to offer two observations intended to put that list in perspective.

First, an industry may genuinely be in high demand because of current and anticipated market conditions. Or, its apparent appeal might be something of a mirage, if a lot of buyers for that industry are simultaneously in the market mainly because they have surplus cash on hand and need to put it to use to generate returns for their investors.

Second, business value is not a zero-sum game – i.e., the values of businesses in unrelated sectors rise and fall independently of each other. Just because one industry makes the “hot” list does not mean that another industry must experience a corresponding decline in its market value. It absolutely should not deter owners of profitable companies in any industry from executing their well-conceived plans to sell.

High-Demand Sectors. In his March 2025 client letter, Reece Adnams , CEO of our international affiliate Eaton Square , offered his findings from an informal survey of private equity groups.

First, the numbers:

Price range (or “enterprise value”): $10 million-$200 million
Investment range: $10 million-$100 million
Ownership: open to control positions 51% to 100% or significant minority positions 30% to 50%

Reece’s findings closely align with what we at IBG are seeing, with the exceptions that (a) among the buyers with which we interact, we see relatively little interest in purchasing a minority stake, and (b) private equity groups that already own businesses in a given industry are more likely to look at smaller businesses in that industry.

Second, he reports a buyer trend that is a “step back from investing in technology (except cyber) and greater interest in [profitable] ‘old school’ businesses … like distribution and onshore advanced manufacturing.”

His examples of “hot demand” industries include:

electrical infrastructure sector maintenance suppliers involved in the transformation of the electricity grid;
infrastructure maintenance companies with long-term contracts for repair and maintenance of large infrastructure assets, such as highways, bridges, dams, other water infrastructure, oil and gas, electricity;
field services companies (e.g., HVAC, fire and safety systems, elevators, and commercial landscaping and maintenance) with long-term contracts and stable customers;
pharmaceutical distribution and supply chain companies engaged in moving and storing pharmaceuticals and ancillary products, serving customers that have sophisticated storage and transportation requirements;
food packing and distribution companies, with a focus on processing, packing, storing, refrigeration, and distribution; and
professional services firms that serve other companies in such areas as IT (including cybersecurity) and program management.

We generally concur with this list and, based on recent inquiries and our listings and closed deals, would add:

precision metals manufacturing;
environmental remediation companies;
oil/gas/energy;
logistics/trucking firms; and
civil engineering.

“Private equity’s interest in these areas,” Reece continued, “reflects a strategic focus on industries with stable, long-term growth potential and essential services that protect downside risk. Businesses operating within these sectors that meet the investment criteria are well-positioned for growth and expansion with PE funding.”

This, too, is consistent with our recent experiences with private equity buyers. From a risk perspective, private equity groups have historically looked with favor on steady, tried-and-true industries that are going to be there no matter what, and whose goods and services will always be in demand.

As my IBG colleague Troy Stapley (Arizona) noted in his February 2025 article , investors are increasingly looking at companies that “aren’t in the sexy, high-tech, high-growth industries. Today, [financial buyers] are more interested than before in steady, blue-collar, easier-to-understand types of companies.”

A Trump Factor in Business Value?

In another Reece Adnams article, “ Observations on Trump’s Impact on Global M&A ,” he introduces a business-value effect that transcends industry considerations.

He predicts that the trends that are stemming from the Trump administration’s economic and trade policies will impact M&A strategy in the U.S., “forcing companies to rethink domestic consolidation, foreign expansion, and cross-border transactions.”

“At Eaton Square, we are seeing U.S. corporations and PE prioritizing acquisitions at home over expansion abroad. The Trump administration’s policies are explicitly favoring companies that invest within U.S. borders … and this will take capital away from overseas investments.”

If that assessment proves to be prophetic, U.S. business owners might see more interest from foreign buyers. Even a small spike in interested buyers, whether foreign or domestic, would increase the competition for, and market value of, American businesses.

At IBG, for certain types of listings we have always marketed internationally, and that is starting to come into the picture even more today. As examples, we recently sold a machine distributor to a German buyer and currently have a purchase proposal for a manufacturer from an Italian firm, and I have a current listing for a $40 million trucking company for which international buyers may very well fit the “best-fit buyer” profile.

IBG: An M&A Firm for All Major Sectors

Notwithstanding how “hot” an industry is perceived to be at a given moment, the more important fact is that, for profitable companies in any sector, there are financial buyers that are flush with cash and seek good businesses that will maximize the return for their investors.

IBG Business’s 1,200-plus deals, with a closing rate more than three times the national average, cover the spectrum of mid-market industries , including:

aviation
business services
construction
food products
health and medical
manufacturing
oil/gas/energy
retail
technology
transportation and trucking
wholesale distribution.

We know these industries, and we know the buyers who do business there. To explore the demand and market value for your private company, contact any member of the IBG Fox & Fin M&A team or contact an IBG Business M&A professional in a regional office near you .

Timing is everything: Successful business owners know when to hold, when to sell

Wed, 19 Mar 2025 21:08:19 GMT

The old adage that “timing is everything” is never truer than when it comes to selling – or not selling – a business.

As respected mergers and acquisitions advisor (and my Arizona IBG Business colleague) Bob Latham notes, “Owners rarely sell too soon, but too often hold on too long.” He observes that the fundamental strategic decision for selling a business is: “Hold and grow, or sell and go.”

Examples abound of owners who held too long and lost. All too often, the onset of a debilitating disease, such as dementia, leads to misery as families and employees suffer both the progressive decline of the owner’s health and the protracted demise of great businesses. At the age of 67, one robust owner expected to build his beloved business for another decade. Overnight, illness put him in ICU for months prior to an untimely demise. His vibrant company lost its rudder, and its value to his heirs fell precipitously.

No company is immune from unexpected and uncontrollable market fluctuations. One needs to look no further than a major oil-price bust to see the catastrophic effects that outside factors can inflict on once-solid businesses. Also, scores of businesses have become “unsaleable at any price” in cycles when new loan-underwriting mandates are imposed or acquisition loans dry up almost overnight. Under the wrong conditions, the value of a great business can tumble rapidly, inflicting a terrible impact on the owner’s net worth and estate.

A key entrepreneurial skill is recognizing when to build the owner’s estate by holding on to the business, as opposed to capturing higher value by selling. While the right time to hold tight or to divest is rarely obvious, wise business owners can help optimize value and avoid worst-case scenarios by proactively doing two things: checking their health and scanning the horizon .

Health Check

Prudent owners keep a close eye on their health. They know that, at some point, every business inevitably changes hands, so they weigh their personal situation as a key consideration on the right time to sell their business.

Advancing age, health problems, fading energy, the need to secure a liquid estate, and reserving time to enjoy life after business are key factors. Early recognition and seeking expert input from professionals who manage business sales and transitions is wise. For many reasons, of all the succession options, selling a business while it and the owner are healthy is most often the best choice for maximizing the owner’s net worth and estate value.

The time for major business decisions is not after waiting too long. It is amazing how many otherwise great business owners make that big mistake.

Horizon Scan

Even a healthy and growing business is subject to losing much or all of its value due to changing outside factors. Those other variables – often unexpected and unpredictable – make it essential to logically consider what might cause values to rise or drop. A good owner manages growth and profitability, but unanticipated market changes can easily trump great management and crush the value of the business. Strategically scanning the business horizon helps a smart owner avoid being blindsided in considering the best time to sell.

As with health screenings, attention to a handful of variables is key. Interest rates, for example, can have a huge impact on business value. Declining interest rates increase business value; conversely, increasing interest rates drive value down. Inflation rates and money supply are also critical factors. With plentiful purchase money available, as today, values may remain high. Conversely, if interest rates or inflation were to continue to complicate acquisition decisions, or if equity funds should return to more normal levels, business values could be driven much lower.

The “Business Value Drivers” table below identifies some of the main factors that can either increase or decrease business values.

BUSINESS VALUE DRIVERS

Factors that drive business values up:

Steadily growing profits
Steady or growing markets and sales
Recurring revenue streams
Low concentrations of customers
Strong non-owner management teams
Stable ownership / management
Improved health: focus, stamina, energy
Interest rates go down
Income or capital gains tax rates decline
Inflation moves lower
Larger pools of aggressive buyers
More money supply
Economic strength and increased confidence
No litigation or regulatory issues

Factors that drive business values down:

“Down years” with declining or unsteady sales or profits
Cycles: crashes/recessions, competitive change
Concentration of customers
Low recurring sales
Non-owner management is lacking
Owner/management instability
Mortality: age, illness, death, probate, dissention
Interest rates go up
Income or capital gains tax rates increase
Inflation moves higher
Diminishing pool of aggressive buyers
Lowering money supply
Weakening economy or reduced confidence
Litigation or regulatory issues

Good News

Many owners are surprisingly uncomfortable looking beyond their company’s shell to seriously evaluate a strategic sale option. Staying within this comfort zone is a serious omission and can create major unintended consequences.

We cannot accurately guess the timing of changes in the key drivers on business values. Nevertheless, to get maximum value from owning a business and for its owner’s estate, it is essential to know the impacts on values that are certain to follow from forces of change that will push business values up or down. Failing to weigh these drivers undermines an owner’s ability to choose wisely when trying to maximize their net worth and estate.

Fortunately, there is much good news to share. For any business owner contemplating a sale, expert help is available. Professional M&A brokers and advisors know how to assess value and the owner’s options, and they will have closed scores of successful transactions. Based on experience with the market dynamics, top M&A professionals can help virtually any owner overcome their discomfort to make sound business sale decisions. A refined M&A sale process confidentially creates competition among buyers and delivers top values to owners at the lowest levels of risk, stress, and distraction.

Today’s mid-market business valuations generally favor sellers: Consistent with the factors noted in the above table, there is currently abundant acquisition money, high economic confidence, and moderating inflation. There is also strong competition among well-funded buyers of quality companies. Buyers know they will have to pay to play.

At the time of this writing, all of these variables enhance the current seller-friendly environment, prompting many owners who have been inclined to wait to look closely at selling their business while the strong sellers’ market lasts.

Favorable conditions today are not assured to last beyond tomorrow, as market values of businesses cycle up and down. “This too shall pass” applies to today’s high business valuations. It is known that scores of Baby Boomers and other long-time owners will be exiting their businesses as they “age out” of their prime ownership years, and this trend will swell going forward. As these large numbers of businesses come to market, we expect a shift from today’s sellers’ market to tomorrow’s buyers’ market. Timing is everything.

Smart owners recognize the situation. They do their homework, visualize coming change, and seek the help of an expert M&A professional in deciding when and how to sell their business.

Over our long history, IBG Business’s 1,200-plus well-timed deals have a closing rate more than three times the national average for our profession. To start the process of preparing your business for a successful sale, contact a member of the IBG Fox & Fin team or an IBG Business M&A professional in your region

Ranking Arizona 2025: IBG Fox & Fin is #1 for the 24th straight year

Wed, 05 Mar 2025 16:20:18 GMT

Vote for IBG Fox & Fin in the next edition of Ranking Arizona

Selling a partial interest in your company: benefits and cautions

Tue, 11 Feb 2025 17:24:49 GMT

Depending on how you view your business’s unrealized potential, and where you are in your career and life, the benefits of bringing on a well-vetted investor can be substantial.

Business sales are not limited to the aggregate sale – lock, stock, and barrel – of a company. Over the last several years, we have seen a consistent increase in sales of partial interests – minority and majority shares – that can greatly benefit both owners and investors.

For a business owner whose company might be attractive to partial-interest investors, this article addresses two important questions:

Why would I want to sell part of my business to an investor?
What should I look out for?

But first, let’s define our terms.

While partial-interest transactions can take on many forms – e.g., divestitures, spin-offs, joint ventures – this article will focus on the most common situation, in which a business owner sells a minority or majority interest in their company to an investor, in exchange for capital and other considerations, while retaining an agreed measure of ownership and control.

As we have noted in other articles, 70% of the buyers in overall deals facilitated by IBG Business are “financial” buyers – i.e., private equity groups and family offices – looking for businesses that will generate high returns for their investors. In sales of partial interests, that percentage is substantially greater, bringing to a potential purchase a higher degree of sophistication and predictability.

“Why would I want to sell a share of my business?”

Depending on what you want and where you are in your career and life, the potential benefits of bringing on an investor can be substantial:

The infusion of investor capital can help your business reach the “next level” by seizing growth opportunities (e.g., product development and expansion into new markets and verticals), replacing debt, pursuing strategic acquisitions, and seizing other opportunities to fulfill its profit and potential market value.
Partnering with an investor that knows your industry and type of business allows your company to tap into their financial and business connections, operational know-how, technological resources, economies of scale, and strategic insight, and expose your business to new opportunities that would otherwise have eluded you.
In addition to professionalizing your operations, your best-fit investor can lighten your administrative burden and free you to focus on production, sales, and growth.
Sharing the risks of business ownership with a vetted investor reduces your legal and financial exposure.
Bringing on an investor can be your first step in a profitable exit strategy that starts with you continuing in your position of control and concludes with a negotiated buy-out of your interest, a smooth ownership transition, and, potentially, a continuing strategic role – all as a reflection of your overall desires and priorities.
If your investor is adept at achieving industry roll-ups , selling a partial interest to them now will offer you a second bite at the apple when your business is ultimately “rolled up” in a multi-company sale.
The sale of a partial interest can create a path to equity, and an incentive to stay on, for your current management team.

Successful Deal. Our recent sale of a majority stake in a storm infrastructure maintenance business illustrates the common benefits of partial-interest transactions.

The energetic, passionate owner was looking for the best-fit buyer to help him grow the company, strengthen its mid-level management, and bring in a board of directors for strategic guidance. IBG Fox & Fin’s Troy Stapley, who facilitated the transaction, recalls the progression of events.

“When the company was just getting off the ground, I told the owner, ‘When you hit half a million in EBITDA, let’s talk.’ Before long, he had more than doubled that amount and was totally overwhelmed with running the business. It was time to bring in that best-fit investor.

“We found a group that had purchased a company just like his,” said Stapley. “They had scaled it, sold it, and made a ton of money and were looking to do it again. They knew the industry, they knew the ins and outs of how to help grow his business, he and they hit it off, and it’s been a huge success story. Today they’re looking to exit out of it, way ahead of schedule.”

“What should I look out for?”

As with a conventional business sale, a partial-interest sale is most likely to reach a successful closing and maximize the benefits to the owner if the owner relies on an experienced M&A advisor.

In addition to identifying best-fit investor candidates, scrutinizing their experience and success histories, and evaluating owner/investor compatibility and philosophical alignment, the M&A professionals at IBG Business can help you analyze the potential impact on your control and decision-making power within the company, and identify and help negotiate the issues that are peculiar to the sale of a minority or majority interest.

Those issues, which must be thoroughly addressed in the purchase-and-sale agreement, include the following:

the percentage of ownership being sold;
the value of the ownership interest being conveyed (see “valuation discounts” below);
governance structure (allocation of decision-making powers between the board of directors and the owner);
voting rights of each party;
operational control (even if you retain a majority stake, your decision-making power may be diluted);
strategic control;
profit distribution (how much, how often, etc.);
restrictions on selling shares (by both parties);
liquidity requirements;
scope of fiduciary duty;
confidentiality, post-closing (restrictions on what information can be shared by either party, with whom it can be shared, and under what circumstances);
conflicts of interest (could an investor in your company also be an investor in a competitor?); and
procedures for dispute resolution.

Valuation Discounts. If your business is valued at, for example, $10 million, and you and the investor agree to the sale of a 40% stake, be prepared to receive less than the expected $4 million.

The culprit: DLOM, or “discounts for lack of marketability.” As Investopedia describes , DLOM refers to a business valuation method by which the value of a partial ownership interest is discounted – sometimes substantially – because, as in the above example, the stake represents less than 50% ownership (presumably with little control), can be sold only if restrictions are satisfied, and is subject to liquidity conditions.

If an owner is willing to sell a majority stake, that will help reduce, but probably not eliminate, the DLOM impact.

Why DLOM Might Not Matter. DLOM would be a major issue in deals where the investor says, “We want to buy X percent of your company, under the following terms, and we’re willing pay Y dollars for it.”

But in our experience, the negotiations almost never begin that way. Instead, we facilitate a discussion between the owner and potential investor to determine:

the business’s potential value if certain improvements are achieved;
how much investment capital the business will need to achieve those improvements; and
what ownership percentage the investor requires in order to justify that level of investment.

Once those variables are nailed down, the informed investor will come in with an offer. “We think that we can increase the value of your business to X dollars. That will require us to invest Y dollars, and in return we will need to own Z percent of the company.”

What We Bring to the Table

As Troy Stapley notes, “Part of our job as M&A intermediaries is to find the right-fit buyer – someone that might provide more operational experience, maybe bring in their own team. Maybe it’s less that and more of just financial resources. Maybe it’s a combination of the two. At the same time, we work hard to honor the owner’s goals and needs, so that in the end everyone – the business, the investor, and the owner – comes out ahead.”

Over our long history, IBG Business’s 1,200-plus deals – including a sizeable number of successful partial-interest sales – have an 86% closing rate, more than three times the national average for our profession. To start the process of preparing your business for a successful sale, contact any member of the IBG Fox & Fin team of dealmakers .

AzBusiness magazine names IBG Fox & Fin an "AZ Big 100" company

Wed, 22 Jan 2025 17:29:14 GMT

15 ways to increase the value multiple in the sale of your business

Wed, 04 Dec 2024 17:19:23 GMT

The multiple that a buyer applies to your revenues is directly related to their confidence that the purchase of your company will generate the expected return.

While many factors can influence a company’s market value, in most business sales the purchase price is largely based on some multiple of the subject company’s adjusted earning capacity or, less often, net revenues.

Granted, “some multiple” sounds a little vague. What multiple, you immediately ask, and what can I do to boost it?

Those are good questions, and we recommend that, as you and your M&A professional prepare your business for sale, you focus not on the ultimate selling price, but on how you can maximize that elusive multiple.

For many buyers (especially private equity groups, which are the buyers in 70% of our deals) the value multiple is a function of risk – i.e., the greater their confidence that the acquisition will generate the expected return, the higher the multiple they may be willing to apply to your revenues and other variables.

Following are 15 factors that, to varying degrees, are within your control and, by the time your business is ready to sell, can help raise your best-fit buyer’s confidence in its future success under their ownership.

1. Clean up your financials. While “recasting” your financials is a task we perform for you, “cleaning up” your financials is something that only you can do. As examples:

Make sure your inventory and asset records align with what is physically there.
Strengthen your ratios: working capital, debt-to-equity, “quick,” price-to-earnings, return on equity, etc. (This will not be accomplished overnight; if you need to improve the quality of your financial advisors, this is a good time to break them in.)
Rid your income statement of non-business expenses. Dubious moves designed to lower your tax bill can come back to haunt you when it’s time to sell.

2. Build a team. Buyers generally aren’t interested in paying top dollar if the business is overly reliant on the owner for its success. Assemble a capable leadership team spanning all areas of operation and administration. Delegate responsibility to key employees, and involve your senior staff members in the decision-making process.

Top management should have non-compete and/or confidentiality agreements, and solid benefit plans should be in place for all employees. If a key person is nearing retirement age or otherwise perceived as being a short-term asset, recruit and groom a successor who can step in when needed. It is also beneficial to create a board of directors that has at least two outside members.

Professionalization of management and strategic oversight can remove the stigma of the “one-man band” and communicate to potential buyers that your company has viability, value and desirability apart from your involvement.

3. Broaden your customer base. Many smaller companies reduce their market value by becoming too dependent on a handful of customers. Ideally, no customer or client should represent more than 10% of sales.

If you are overly reliant on a one or two suppliers or customers, try to diversify your supplier and customer accounts. Be intentional about expanding to new markets, introducing new products, and finding new customers that align with your company’s core business.

4. Grow in size. While some corporate buyers and private equity firms see the advantages of purchasing smaller businesses, companies with less than $5 million in sales and an EBITDA of less than $1 million may require expending too many resources in the acquisition or post-sale management to justify the purchase effort. As a consequence, many buyers may perceive smaller companies as too small for acquisition or undervalue them.

5. Document what you do. Job descriptions, operation processes, and strategic plans should be well documented. Written records and plans give a buyer greater comfort that they will be able to emulate your successful growth and will help your buyer obtain financing. Also, be sure to keep business records – e.g., sales and expense reports, internal income statements and balance sheets, and tax returns – clean and well-organized.

6. Grow in scope. Some smaller companies are kept small to maximize the owner’s benefits. However, if building value is the goal, it may be important to develop new products or services, build market share, and expand markets or open new ones. Achieving strong, quantifiable growth builds transferable value that justifies your investment of time and energy.

7. Demonstrate your agility. Small companies can be very adept at pivoting, i.e., changing course and implementing change. You can add value to your business by recognizing and quickly seizing opportunities to reach new markets, fill voids in existing markets, and add or change products or services.

8. Strong track record? Show it off. A demonstrable and consistent track record can both achieve a value multiple that meets your expectations and convey to buyers an attractive risk/return profile.

9. Stay on top of your market. The value of a company can be contingent on its industry, its place in that industry, and the direction of the industry itself. Be prepared to educate a buyer, to help them appreciate the added value.

How big is the industry?
Is it headed up or down?
Who is the competition?
How big is the company’s market share?
What is (or could be) your niche?
Do you have a solid position in an industry that has high barriers to competitive entry?
Is it time to change direction or diversify?

10. Make a name for yourself. Name recognition, customer awareness, institutional relationships, and your reputation are all part of your business value.

You don’t have to manufacture Kleenex, Band-Aids or Coca-Cola to have a strong brand identity. While the value of becoming a household name probably wouldn’t justify the cost to your company, you should pursue positive name recognition within your industry. Through targeted advertising, trade association involvement, giving back to the community, and other strategies, your company’s name can become recognized as a leader in your industry vertical, enhancing its perceived market value to potential buyers.

11. Put your plans on paper. Business plans, financial plans, and personnel plans should all be in writing and kept current. Contracts should be reviewed and maintained on a current basis. Terms of employment agreements should be spelled out and in writing. Business planning, company objectives, etc., should also be in writing, visually communicated, and reviewed periodically. Be prepared to articulate the steps that you envision to scale the growth of your business to the next level and beyond. Every member of your leadership team should know and be able to communicate the company’s major objectives.

12. Recognize hidden assets. Patents, brand names, copyrights, alliances, and joint ventures are all examples of potentially valuable assets. So are innovative business practices, systems, procedures, and leveraged capacity.

13. Be lean and mean. Many companies lease their real estate needs, outsource their payroll, have their manufacturing done offshore, or have UPS handle their logistical needs. If all non-core functions are performed by someone else, your company can focus its efforts on what it does best, and a buyer can see that they are free to replace one vendor with another.

14. Improve cash flows. A prospective buyer wants to see the “true cash flow.” And, of course, in the business world, cash is king. Try to drive all income to the bottom line.

15. Clean up your room. Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any “business” assets that are primarily for your personal use. And make your property look nice; a well-maintained facility, whether owned or leased, can help fetch the best price.

GET STARTED

The best time to plant an orange tree is ten years ago. If that’s not an option, plant it today.

Preparing to sell a business for top dollar – i.e., at the highest achievable multiple of earnings – is a process that might take two years or more. The sooner you begin implementing the major steps described above, the sooner your business will be ready to present to a buyer who will recognize its future value and reward you for your efforts.

We can help you with that. Over our long history, IBG Business’s 1,200-plus deals have an 86% closing rate – more than three times the national average for our profession. To start the process of preparing your business for a successful sale, contact a member of the IBG Fox & Fin team of M&A professionals .

7 key considerations in selling a low-margin business

Tue, 05 Nov 2024 22:12:05 GMT

When marketed to the right type of buyer, a low-margin business that is consistently profitable and offers a broad customer base should bring top dollar.

Likely Buyers. A recent IBG article describes three main types of business buyers: individual buyers, strategic buyers, and financial buyers . While seven out of 10 deals handled by IBG involve financial or “professional” buyers, that ratio shifts significantly when the subject business is in a low-margin industry, as financial buyers tend to prefer businesses with EBITDA profit margins of 20% or more.

For a low-margin business, the most likely prospect is a strategic buyer – an established company that is actively engaged in the same industry (i.e., a competitor) or a related industry (perhaps a supplier) and sees the acquisition as a way to achieve a strategic or synergistic objective.

Strategic buyers might be attracted to complementary companies where there is little overlap, that offer one or more product lines that the buyer can sell to its existing customers, and, vice versa, that have customers to which the buyer can market their current lines.

Equally important, many buyers of low-margin businesses are, themselves, low-margin businesses. They know the industry, understand that low margins are typical of the industry (and not a company weakness), live with those margins on a regular basis, and appreciate the value of a company that grosses, for example, $20 million a year and consistently makes $1.5 million to $2 million. Also, strategic buyers are less likely to approach an acquisition with a high degree of leverage, which can mean more cash to the seller when the deal closes.

Buyers that fit that profile can be identified and vetted, allowing us to target-market the subject business to pre-qualified prospects that would benefit from a strategic acquisition.

DISTINGUISHING QUALITIES

Here are some common – and valuable – traits of low-margin businesses:

1. High-Volume Sales. To compensate for their slim margins, low-margin businesses typically strive for high-volume, high-frequency sales to recurring customers. This strategy can lead to substantial revenue and market share. Retail giants like Walmart and Amazon exemplify this approach, using their scale to attract a broad customer base, and they provide a model for owners of private low-margin businesses.

2. Customer Diversification. Potential buyers will be alert to signs of customer-concentration risk. In general, high-volume, low-margin businesses tend to have large, diverse customer bases, with no single customer accounting for more than 15% to 20% concentration – often much less. Because this quality will be especially important to a strategic buyer, sellers should be ready to provide a detailed customer list and purchase data, going back five years or more.

3. Operational Efficiency. To maintain profitability, low-margin businesses often prioritize operational efficiency. This focus leads to streamlined processes, reduced waste, and optimized supply chains. Over time, these efficiencies can result in cost savings and improved financial performance.

4. Innovation and Adaptability. To survive and thrive, low-margin businesses must continuously innovate and adapt. This necessity drives a culture of creativity and the development of new products, services, and business models. The focus on innovation can lead to long-term growth and sustainability.

5. Scalability. Low-margin models are often highly scalable. Once a business has established its operations and optimized its processes, it can replicate its model across different locations or markets with relative ease, driving growth and expansion.

6. Competition Repellent. The laws of economics being what they are, competitors can sniff out fat margins being made and are attracted to that market. Over time, often a fairly short period, competition will drive down prices to a low margin anyway, so why not keep them at bay?

7. Cash Flow Velocity. Related to operational efficiency, a key performance figure is the rate at which cash flows through a company. When a given dollar of profit flows through the business in less time, that improves the return on invested capital, and ultimately that’s what investors seek to maximize.

WE UNDERSTAND YOUR BUSINESS

With a track record of more than 1,100 successful closings, at an 86% closing rate (three times the M&A industry average), IBG Business is well-equipped to help you be fully prepared for the successful sale of your profitable business, regardless of where it resides on the EBITDA profit margin scale.

To start the process of marketing your company to a best-fit buyer who appreciates its value, contact any member of the IBG Fox & Fin M&A team .

In a business sale, be prepared to show your financial information

Wed, 04 Sep 2024 18:05:10 GMT

This article describes the financial information that buyers are likely to request and how you can be ready to provide it.

In most business sales, the purchase price is largely based on some multiple of the subject company’s net revenues and adjusted earning capacity. It should come as no surprise, then, that a major focus of most buyers is on the company’s income statement and related financial information.

That is especially true when the buyer is a private equity group or other type of “financial” buyer, which is the case in seven out of 10 deals that we have closed over the last several years. As we discuss in a related article (“ Selling Your Business? Recognize the Three Types of Business Buyers ”), financial buyers’ scrutiny of your financial information stems from the importance they place on EBITDA – earnings before interest, taxes, depreciation and amortization – as an indicator of market value.

Your preparedness in providing financial statements and related reports will generally come into play at two key stages: first, before your business goes on the market, when we draft the “confidential information memo” (CIM); and, second, after you have signed a buyer’s letter of intent and entered the due diligence phase. At that point, the financial information that your buyer requests will quickly exceed the scope of the summary totals contained in the CIM.

Responding quickly and fully is crucial in moving your sale toward a successful close, and helping you anticipate and respond to your buyer’s requests is a valuable part of our facilitation of your sale.

Checklist

While the types of information that a buyer may request vary with the type and size of the business and the specifics of the transaction, here is a general list of statements and reports that you should be ready to deliver during the negotiation and due-diligence phase:

Income statements, actual and recast (discussed below)
Cash flow statements (a detailed record of all cash received and spent by your business)
Statements of financial condition (“balance sheets”), actual and recast
Financial projections
Verification of all assets and liabilities (debt disclosures)
Sales data
Loan balances
Accounts receivable aging
Accounts payable aging
Bank statements (3-12 months)
Bad debts
Inventory
Income tax returns
Payroll records and reports (1099s, W-2s, etc.)

Recasting Your Financials

From the buyer’s point of view, your business’s market value is greatly influenced by their profit expectations under their ownership.

To show your company’s true earnings and book value, we will faithfully recast your financial statements, with an emphasis on removing personal and other non-business expenses that a buyer would not incur.

The emphasis here is on profit “add-backs” – i.e., discretionary or peculiar expenditures that can be added back to the profits of the business. Add-backs increase EBITDA, show what the company’s cash flow would be with a generic owner at the helm, and enhance market value.

While our recasting of your financials can help present your business’s financial health in its most favorable light, that effort will be greatly enhanced if you stop incurring those expenses as you start preparing your business for sale.

Cleaning Up Your Financials

While recasting your financials is task we perform, “cleaning up” your financials is something that only you can do. As examples:

Make sure your inventory and asset records align with what is physically there.
Strengthen your ratios: working capital, debt-to-equity, “quick,” price-to-earnings, return on equity, etc. (This will not be accomplished overnight; if you need to improve the quality of your financial advisors, this is a good time to break them in.)
Rid your income statement of non-business expenses. Dubious moves designed to lower your tax bill can come back to haunt you when it’s time to sell.
Sell or dispose of unproductive assets or unsalable inventory.
Buy off any assets that are primarily for your personal use.

To that last point, as soon as you start thinking about selling, stop running personal or nonessential purchases through your business. This might require you to make a behavioral adjustment; for as long as you’ve owned the business, you might have used those non-business expenditures to reduced its taxable income. But now you’re in sell mode, and if your business is likely to sell for a multiple of four times earnings, each of those non-business dollars spent is going to cost you four dollars in selling price.

The sooner you clean up your non-business spending, the less we will have to recast in preparing to introduce your company to buyers.

Producing the CIM

Our recasting of your financial information is completed before the business goes on the market. The recast numbers are summarized in the “Financial Highlights” section of the confidential information memorandum (CIM), which describes your business and suggests its true market value.

To help preserve confidentiality, we provide your CIM to a prospective buyer only after they sign a confidentiality agreement and pass our screening process.

As a simple example, here is how an IBG Fox & Fin M&A professional categorized the recast financials in the recent sale of a law firm:

P&L SUMMARY (four years)

Total revenues: $____
Gross profit: $_____
Adjusted expenses: $_____
Operating income: $_____
Other income/expenses: $_____
EBITDA: $_____

ADJUSTMENTS

Owner’s salary reduced to replacement attorney salary: $_____
Owner’s retirement contributions added back: $_____
Owner’s insurance added back (life, health, long term care, personal liabilities): $_____
Interest, depreciation, and amortization added back: $_____
Added-back expenses not associated with normal operations: $_____
Adjusted to market rate: owner’s building rental expense charged to company: $_____

HISTORICAL REVENUES (10 years)

BALANCE SHEET SUMMARY (accrual/cash basis, based on recast financials)

Assets
Total current assets: $_____
Total fixed assets: $_____
Total other assets: $_____
Liabilities and Shareholder Equity
Total current liabilities: $_____
Total long-term liabilities: $_____
Total other liabilities: $_____
Total Shareholder Equity: $_____

FURNITURE, FIXTURES AND EQUIPMENT

Value of owned equipment, by category, by location
Cost of leased equipment, by category, by location

The underlying detail for the summarized figures referenced above were included in the reports provided during the due-diligence phase.

Contact Us. With a track record of more than 1,100 successful closings, at an 86% closing rate (three times the M&A industry average), IBG Fox & Fin and our IBG Business affiliates are well-equipped to help you be fully prepared for the successful sale of your mid-market business.

To start the process of assembling your financial information and selling your company for top dollar, to the best-fit buyer, contact a member of IBG Fox & Fin's team of M&A professionals .

Taxes and terms in a business sale: It's not all about price

Fri, 09 Aug 2024 18:17:59 GMT

A wise business seller understands that price is just one of multiple factors that determine, after the dust has settled, the actual value of their deal.

In most business sales, it’s natural for the seller to focus on the price as the defining measure of their company’s market value and their satisfaction with the sale.

However, obsession with the selling price can obscure other important considerations – the terms and structure of the deal, the resulting tax liability, and the net cash received.

“Terms are as important as price,” says Jim Afinowich , managing partner in IBG Business’s Arizona office. “It’s not how much you sell the business for; it’s how much you end up with after tax. And there can be a tremendous difference in tax consequences and how you structure the sale.”

A major role of an M&A advisor is to help the seller keep their eye on that bigger picture, adds IBG managing partner John Johnson (Oklahoma).

“We are always alert to the tax aspects and, during the sale and negotiating process, will work to negotiate a structure that favors the seller. Deal structure can help whittle down the actual taxes through buyer-seller negotiations and cooperation.”

This article offers a very general overview of how understanding the taxes and terms of a business sale can help a seller discern the true value of an offer and, in a competitive bidding scenario , recognize which offer constitutes the best deal.

As you read on, bear in mind that the factors that shape the value of a business sale are deal-specific. Because of the nearly infinite number of variables – the seller and their issues; the buyer and their issues; the company and its issues; and the type, timing, and terms of the transaction – our best objective here is to help you anticipate, from 30,000 feet, some of the factors that can shape a deal’s ultimate value.

PRE-SALE MANEUVERS

At least three tax-related issues should be addressed and resolved before your business is presented to potential buyers.

Estate Taxes. You should ask your estate planning attorney to analyze how selling your business might affect your estate tax liability. This is especially important if your business’s current market value (we can help you with a reliable projection) is considerably higher than it was when you last updated your estate plan.

This is a timely concern. If Congress does not act before the end of 2025, the estate tax exemption will drop from the current $13.6 million per person to just $6.2 million (i.e., $5 million adjusted for inflation since 2017). As a consequence, your seemingly modest estate, which up to this point has not warranted estate tax planning, could become subject to taxation after your death, due to a combination of a lower estate tax exemption and an unexpectedly high selling price for your business.

Gray Dollars. One of our key functions in preparing your business to go on the market is to recast its financial statements to show its true earnings and book value, in a way that buyers expect.

In recasting your financials, we will cleanse them of what Jim Afinowich calls “gray dollars”: personal expenses, or expenses of a dubious business nature (think “condo in Vail”), that you have been running through the company.

“In years past, those gray dollars served a useful purpose by reducing your taxable income,” Jim noted in a recent podcast. “But now you’re in sell mode, and it’s time to pay the piper. If your business is likely to sell for a multiple of four times earnings, each of those gray dollars is going to cost you four dollars in selling price.”

That’s why recasting your financials is so important, and it needs to be completed before the first potential buyer looks at your company.

Double Taxation. If your business is a C corporation, check with your tax professional about the pros and cons of – and your C corp’s eligibility for – electing to be taxed as an S corporation.

An S corp election might allow you to avoid double taxation on the proceeds of an asset sale. However, this strategy requires long-range planning, as gains recognized within five years after the election may be subject to built-in gains (BIG) taxes that would defeat your purpose.

KEY QUESTIONS

After the preliminaries are out of the way, your business is on the market, and you are receiving inquiries and letters of intent from potential buyers, major variables that shape the value of your deal will come into play.

Will the deal be a stock sale or an asset sale?
Is it a cash deal, or is the buyer asking you to carry a portion of the purchase price?
Are you free to move on after the deal closes, or does the buyer want you to remain involved for a while?
Is any part of the sale price contingent on how the company performs under the new ownership?
How can you reduce your deal-related tax liability?

STOCK SALE VS. ASSET SALE

Business sales generally fall into one of two categories:

a stock sale, where the buyer purchases the seller’s interest in, and takes possession of, the legal entity, or
an asset sale, in which the buyer is purchasing specified assets from that entity.

IBG’s John Johson observes that “small deals are most often asset sales, while larger deals more often involve the sale of equity.”

Each type of sale impacts negotiations, terms, price, and tax consequences.

Asset Sale. As a general rule, buyers prefer to purchase assets (not stock) to avoid unanticipated liabilities of the seller’s entity and, more important, to achieve significant tax advantages.

In an asset sale, each individual asset is assigned a value. The process of purchase price allocation, and the ability to start depreciating each asset in the year of the purchase, holds significant future tax value for the buyer.

“We often see buyers paying more in asset deals,” says IBG’s John Johnson, “due to the value of the step-up in basis for depreciation.”

Stock Sale. While buyers like to buy assets, sellers tend to prefer a stock sale. This is especially true in the case of C corporations, which, as we mentioned above, face the problem of double taxation. If a C corp sells its assets, with the seller retaining the stock, the proceeds will be taxed twice: first when the corporation files its tax return(s), and again when the shareholders file theirs.

In contrast, in a stock sale, the proceeds go directly to the shareholders, who report the gain only on their individual tax returns.

The conflicting objectives of buyer and seller make asset allocation an important part of negotiations, with the result that a buyer might give a little on price or terms in order to get a more favorable allocation, while the seller might give on the latter to enhance the former.

ALL CASH VS. SELLER FINANCING

As we mention in a related article , most business sales involve some form of seller financing. The higher the selling price, the greater the likelihood of a seller carryback, with the financed amount paid in installments.

In an installment sale, the buyer takes immediate ownership, but payments are made over multiple years. The good news for the seller: Your tax payments are spread out over the installment period.

Your willingness to offer seller financing can result in a higher price, to (a) reward you for waiting for some of your money and (b) reduce your loss in the event the buyer fails to make all of their payments.

Put another way, in any transaction that’s not all cash, you should discount the expected value of any non-cash consideration.

STAYING ON AFTER THE SALE

The buyer may want you to remain on board for an agreed period, to facilitate the ownership transition, shorten the buyer’s learning curve, and transition key relationships with suppliers and customers.

This arrangement can be beneficial to you, as well:

Your willingness to stick around can justify a higher selling price.
While consideration for transitional consulting/employment for a reasonable period post-sale is often baked into the purchase price, longer-term employment can warrant additional compensation.
You might want to continue your involvement in the business if you are carrying back a portion of the selling price and you want to protect your investment, or if a portion of the selling price is contingent on future profits. (See our discussion of “earnouts,” next.)

POST-CLOSING PERFORMANCE

One of the roadblocks that commonly arises in structuring a business sale stems from differing viewpoints of value. As we discuss in another article , when an impasse occurs, an “earnout” can bridge the value gap between buyer and seller. Earnouts involve a certain future dollar amount that the buyer agrees to pay to the seller based on the business’s performance after the transaction is completed.

Earnouts can be structured in a number of ways and based on a variety of financial benchmarks, such as revenues, gross profits, or net income. An earnout agreement also has tax questions that need to be answered, mainly: Will the money that the earnout generates for the seller be treated as part of the purchase price or as ordinary income?

Using a conditional seller note can keep the value as a capital gain for the seller, whereas calling it an “earnout” will typically turn those payments into ordinary income and allow the buyer to deduct the payment as a current expense.

TAX-PLANNING THE SALE

To recap, how your sale will be taxed depends on a combination of the structure of your business, what is being sold, and the terms of the sale. We will wrap up this article with a primer on the taxing of a sale and how some types of sellers can reduce their tax bill.

Capital Gains Basics. A business sale usually triggers a long-term capital gain for the seller. An oversimplified example: You started your business seven years ago with a $200,000 investment. You sell it now for $15.2 million, producing a long-term capital gain of $15 million that will be taxed (as the proceeds are received) at the federal capital gains rate of 20%, or $3 million.

As straightforward as that appears, things can get complicated when the aforementioned issues of double taxation arise. That’s not a threat if the seller is an LLC, S corp, or other pass-through entity, but, again, it’s a major threat if the seller is a C corp.

The effective attribution of personal goodwill can provide some welcome relief.

Personal Goodwill. The cost of double taxation can be reduced by how the terms of the deal address the company’s intangible assets or “goodwill.” What is good for the seller is usually bad for the buyer, and vice versa, but not always, and the treatment of personal goodwill is one of the exceptions.

Let’s tweak our $15.2 million sale example to add two facts:

The seller is a C corporation.
The parties agree that the company’s tangible assets are worth $9 million, leaving the remaining $6.2 million to be classified as personal goodwill.

If that goodwill had been attributed to the corporation along with all of the other assets, it would be taxed at 20% to the corporation and then, as we mentioned earlier, taxed again to the shareholders after they receive their shares of the proceeds.

But because the buyer and seller agreed that the seller’s reputation, expertise, relationships, and other items of personal goodwill would be segregated from the corporation’s assets and attributed to the seller personally, the $6.2 million in personal goodwill is paid directly to the seller, bypassing the corporation and avoiding double taxation on that portion of the price. (See our popular article, “ Martin Ice Cream and the Sale of Personal Goodwill .”)

With a track record of more than 1,100 successful closings, at an 86% closing rate (three times the M&A industry average), IBG Business is well-equipped to help you explore the successful sale of your mid-market business.

To start the process of selling your company for top dollar, to the best-fit buyer, contact any member of the IBG Fox & Fin team of M&A professionals .

Confessions of a do-it-yourself business seller

Tue, 02 Jul 2024 20:57:55 GMT

How selling his company by himself stole some of this business owner’s joy – and financial gain – from what should have been his crowning achievement.

My name is Dave, and I sold my business without using an M&A advisor.

[Unison response] Hi, Dave .

When I was in my 30s, I started an HVAC contracting company from scratch and built it to $25 million in sales and 100 employees.

Two years ago I received a call from a guy who said his company was interested in buying my business. I hadn’t planned to sell, but he threw out a big number that got my attention. We spoke a few more times and, long story short, he sent me a letter of intent to buy my company. It looked good – a clean, all-cash deal with a 90-day close. I had our attorney review it, and I signed it and sent it back.

While the attorneys worked on the contract, the buyer’s people and my people started on the due diligence. The initial list of requests for information and documents was pretty long, and getting everything to them took several weeks.

Then came another request for documents, and another one, and we were scrambling to pull everything together on schedule, while I developed a bad attitude toward our buyer and their motives.

In the middle of that, one of our best long-term customers called. “I hear you’re selling,” he said. “We think you guys are great, but we’re a little nervous about the change of ownership, so we’re going to shop around.”

Similar calls came from other customers, plus a major supplier, and our bank. And, as the grapevine spread, two of our top project managers left us for a major competitor, and other employees starting jumping ship.

Meanwhile, I learned that running a business while you’re trying to sell it is hard. I was so preoccupied with the sale and dealing with the buyer that my management time and attention suffered. Things were getting missed, and customers were complaining. This was especially harmful in our case, because I was a hands-on owner who managed most of our customer relationships and was never very good at delegating important responsibilities or developing upper management.

Also, over the years I had run quite a few personal expenses through the business, and the buyer and their financial people were frustrated in trying to get a true picture of our financial condition.

So I shouldn’t have been surprised when the terms of the deal, which looked so clean in the letter of intent, got muddy. With the deal in the home stretch and most of the leverage on their side, the buyer:

reduced their offer by 20%, citing “concerns” over the loss of major customers and key employees and the reliability of our financial information;
insisted on my carrying back 40% of the adjusted purchase price over five years; and
made the deal conditional on my staying on as CEO for two years, to transition my customer relationships and give the buyer time to assemble a professional management team.

At this late stage, the buyer had me over a barrel, and they knew it. I resisted their changes to the deal, but, for business and personal reasons, felt like there was no turning back – and it wasn’t like I had another buyer waiting in the wings. I did negotiate a higher CEO salary than they initially offered, and I was able to go part-time after six months, but beyond that they held most of the cards, and we went through with a deal that seemed to go mostly their way.

And I have only myself to blame. I was undone by my pride – thinking I could achieve a successful deal on my own – and my greed-driven refusal to pay a professional to help me sell my business.

If I had known then what I know now, I would have done things differently:

I would have engaged an M&A advisor before I signed the letter of intent.
If the deal had gone through, things would have gone more smoothly, and I would have walked away with more money.
If the deal had gone south, I could have taken a breath and started doing the hard work, with my M&A advisor’s guidance, of truly readying my business and myself to pursue a better deal with the right buyer.

*****************

This fact-based account of a good deal gone bad illustrates many of the benefits to business owners who entrust the sale of their company to M&A advisors in general, and to IBG Fox & Fin in particular.

Confidentiality. The nightmare experienced by “Dave” when news of his pending sale hit the streets could have been avoided.

When IBG markets a business, we never identify the company or where it is (our description would be limited to, e.g., an “HVAC contractor in the western U.S.”). When a prospective buyer responds to our general or blind profile, they sign a confidentiality agreement and go through a screening process. Only then do they receive our confidential information memorandum (CIM) that describes your business and suggests its true market value.

Buyer Competition. At IBG, one of our cardinal rules is “one buyer is no buyer.” If a potential buyer is the only horse in the race, that gives them power and leverage over you.

In Dave’s deal, he put himself behind the 8-ball the moment he returned the buyer’s letter of intent. From that point forward, the buyer was in the driver’s seat.

To level the playing field, IBG’s M&A professionals work very hard to create competition for the business. People want to buy what's hard to get; if they know they're competing with someone else for the business, they're liable to pay a lot more than they – or you – ever expected.

Readiness for Sale. Dave’s business wasn’t ready to be sold for maximum value. If he had engaged IBG, we would have, among other preparatory steps:

recast the company’s financials, segregating Dave’s personal expenses and purchases, to show its true earnings and market value, in a format that a sophisticated buyer would recognize;
helped him assemble and/or structure a management team that could have profitably run the company with less involvement by Dave; and
helped him transition his customer and supplier relationships to the appropriate members of his management team.

Market Value . We don’t know what Dave’s buyer offered for his company, but we can be certain that they didn’t offer a penny more – and probably substantially less – than they thought it was worth.

One of our first steps at IBG is providing guidance on the anticipated market value through our proprietary models and databases of comparable sales. While this helps establish a basis for future measurement, no one knows what a private company is worth until we have received multiple offers from qualified buyers. At IBG, we consistently attract top dollar for our subject businesses by following 11 essential steps for achieving maximum value .

Due Diligence . First-time sellers often assume that the main value of their M&A advisor is in attracting potential buyers. But after successfully navigating the due-diligence phase, you will have a broader appreciation for what your IBG intermediary helped you achieve as an intermediary and emotional buffer with your buyer.

Your IBG professional will help you prepare for, understand, tolerate, and navigate the due diligence process – successfully and with minimum disruption.

Deal Terms. Unless a business owner has been involved in multiple transactions over the course of his career, it is impossible for him to know what terms and conditions are both reasonable and standard. Escrows, indemnifications, and purchase price allocations all have serious risk and financial implications that warrant guidance.

Maintaining Profitable Operations . A common problem for business owners who are trying to sell their company directly is that they get so focused on the sale that their business starts to suffer.

Your IBG M&A professionals will coordinate the sale of your business while you focus on what you do best: running your business, making a profit, and growing the company’s market value.

THE VALUE OF IBG: AN OVERVIEW

In choosing IBG Business to manage the marketing and sale of your company, you can expect to achieve major benefits that distinguish us from (a) business brokers and other M&A advisors and (b) the outcome that you would likely achieve through your own efforts:

thorough preparation of your business for a successful sale
the best timing for going to market
multiple qualified buyers – nationally and internationally sourced
buyer competition
the freedom to manage your business while we manage your sale process
the “best fit” buyer for your company
an experienced and dedicated advocate for your interests
smoother negotiations and less stress
successful completion of the due diligence phase
realization of your true market value
higher likelihood of a successful closing (our 86% deal closing rate is more than three times the M&A industry average)
a smooth post-closing transition of ownership

In the sale of a multi-owner business, a buy-sell agreement can save the deal

Thu, 30 May 2024 21:28:40 GMT

Preparing your co-owned business for sale should include provisions for how to respond to unexpected events in an owner’s life.

The $55 million sale of I.W. Savage Crushing LLC* was three days from closing. The due diligence phase was over; the buyer’s down payment was in escrow; the lawyers were making final tweaks to the purchase agreement and promissory note; and the Savage brothers – Doug, Blake, and Curt* – looked forward to the next chapters in their lives.

Then, suddenly, three days before the closing, Doug died.

And, almost as suddenly, the sale of the company was in legal limbo:

Doug’s interest in the LLC was owned by him individually – i.e., not by him and his wife, and not by their revocable trust.
Doug’s LLC interest was personal property, subject to probate.
Doug’s wife stood to inherit his interest, but the ownership transfer would not occur in three days.
The LLC’s governing documents made no provisions for the death of a member or for keeping a departed member’s ownership interest in-house.

The buyers were willing to be patient – to a point. But after the closing date was moved back for the third time, they backed out to pursue another acquisition.

This sad story could have had a less tragic ending. If the Savage brothers had devoted to their company’s governance just a fraction of the time and energy that went into maximizing its market value, the sale could have moved forward within an acceptable margin of delay.

BUY-SELL AGREEMENT – IN GENERAL

For any type of entity (LLC, partnership, or closely held corporation) that has multiple owners, the financial and emotional pain that can occur in response to one of these “killer D’s” – death, disability, divorce, default, departure, or disagreement – can be avoided by a well-conceived buy-sell agreement.

“Of the more than 1,100 successful business sales that IBG Business has handled, we’ve seen more than a few situations where an eleventh-hour crisis involving one of the owners threatened the deal,” said Jim Afinowich , founding principal of IBG Fox & Fin and a managing partner of IBG Business. “Fortunately, in most cases the owners had made some provision, such as a buy-sell agreement or buying key-person life insurance, that covered the crisis and allowed the closing to occur, more or less on schedule.”

As Investopedia explains, a buy-sell agreement is a “legally binding contract that stipulates how a partner's share of a business may be reassigned if that partner dies or otherwise leaves the business. Most often, the … agreement stipulates that the available share be sold to the remaining partners or to the partnership.”

With a buy-sell agreement, the owners can agree, in advance:

how an ownership interest would be transitioned in case an owner dies, gets a divorce, wants to retire, etc.;
under what “triggering events” an owner would be bought out;
how the interest of a departing owner would be valued;
how the entity would fund the buy-out of an owner’s interest;
what the process would be for removing an owner; and
how to preserve, in a variety of circumstances, continuity of business operations.

Benefits. A buy-sell agreement offers at least four major benefits, as described in this Wolters Kluwer article :

Business continuity: In the event of death, retirement, or incapacity, you can ensure the seamless continuation of your business.
Compensation: Any survivor or designated successor will be properly compensated for the deceased owner’s interest.
Assurance: Remaining owners can be sure that the deceased’s business share is not passed onto someone deemed unsuitable.
Asset protection: If a triggering event occurs, the agreement creates a source of funding and liquidity and mitigates the need to sell assets.

To this list we would add “preservation of a business sale.”

Forms of agreement. A buy-sell usually takes one of three forms:

A cross-purchase agreement allows the other owners to purchase the interest of an owner who dies, is disabled, or retires.
An entity-purchase or redemption agreement calls for the business entity itself – not the other owners personally – to purchase an owner’s interest.
A hybrid of the first two types gives the entity first right of refusal to purchase the departing owner’s interest before that opportunity is presented to the individual owners.

Shotgun clause. “We have seen cases where, while a deal was in process, a disagreement between two co-sellers threatened the closing,” recalls IBG managing partner Robert Latham (Texas). “With time running short and the deal on the line, they invoked the ‘shotgun clause’ in their buy-sell.”

A shotgun clause is something of a nuclear option, in which owner #1 offers to buy out, at a specified price, the interest of owner #2, who can either accept the offer or buy out owner #1 at that price.

Where a sale is pending, that leaves one owner to bargain with the buyer.

Valuation. As was mentioned above, a buy-sell agreement can specify how an owner’s interests are to be valued for purchase. A few of the more common valuation methods include:

pre-determined fixed price;
valuation using a formula based on earnings or book value; or
third-party valuation performed by a credentialed business valuation professional.

Funding the purchase. After an owner’s interest is valued, the purchase of that interest can proceed. The buy-sell agreement should specify how the purchase is to be funded. Common funding methods include these and may vary with the nature of the triggering event:

Cash buyout
Installment payments
Percentage-of-earnings payments
Life insurance
Disability insurance

DO IT NOW

Would a buy-sell agreement have saved the sale of Doug Savage’s company? Probably. The closing might have been held up, but the sellers would have been in a better position to show the buyers a path to a closing with manageable, relatively minor delays.

In all likelihood, in leading the Savages through the buy-sell agreement process, their business attorney or accountant would have recommended at least the following:

estate-planning changes in how the brothers held their ownership shares;
including in the company’s governing documents a provision for how, in response to various triggering events, one owner’s interest would be transferred to the entity or the other owners; and
a funding mechanism (e.g., life insurance) for buying out the interest of a deceased owner.

Attributed as an old Chinese proverb is this bit of wisdom: “The best time to plant a tree was thirty years ago. The second-best time is today.”

To have value, a buy-sell agreement must be adopted as early as possible, while relationships among the owners are relatively positive, and before a triggering event has occurred, so that preparatory steps can be accomplished in a timely fashion.

Your business attorney can lead you through the process of identifying issues and making good decisions. Initiate that process now, before a death, divorce, or other disaster can threaten the sale of your business.

For deal-tested experience and insight in preparing your business for sale, contact a member of the IBG Fox & Fin team of M&A professionals .

*The names of the subject business and owners mentioned in this article are fictitious.

Jim Afinowich inducted into IBBA Hall of Fame

Tue, 14 May 2024 21:08:05 GMT

IBG Fox & Fin co-founder Jim Afinowich is an inaugural inductee in the International Business Brokers Association (IBBA) Hall of Fame.

Jim was one of 17 M&A industry leaders inducted on May 12 at the IBBA 2024 Annual Conference in Louisville.

A past president of the IBBA, Jim has more than a quarter century of successful experience in the M&A industry and has managed and supervised more than 500 transactions. He is a Certified Business Intermediary (IBBA), a Merger & Acquisition Master Intermediary (M&AMI), and president of the Business Intermediary Education Foundation. He is a member of the M&A Source “Platinum Club” and was that organization’s 2021 “Advisor of the Year.”

Podcast: Jim Afinowich reveals secrets for exit strategies and maximizing business value

Thu, 09 May 2024 17:54:46 GMT

IBG Fox & Fin’s Jim Afinowich appeared in the May 6, 2024, edition of “ MAC & Bleu: Building the Future ,” a weekly podcast on business, entrepreneurship, economic development, and emerging technology.

Jim’s one-hour interview, “Elevating Exit Strategy and Maximizing Business Value ,” offered a deep dive into the essential steps in preparing a business – and its owner – for sale and achieving top dollar.

“Jim Afinowich is a distinguished figure in the realm of business brokerage,” notes the podcast promo. “With a wealth of experience and expertise in the [M&A] field, Afinowich has earned a reputation for his exceptional leadership and strategic acumen.

“Afinowich has played a pivotal role in facilitating successful transactions and guiding clients through complex business deals. His dedication to providing personalized and innovative solutions has earned him the trust and admiration of clients and colleagues alike. Afinowich's extensive network and deep understanding of market dynamics position him as a trusted advisor for businesses seeking strategic growth and exit planning.”

Time to sell? Sales of privately held businesses trending upward

Fri, 12 Apr 2024 21:21:46 GMT

After a disappointing 2023 in middle-market M&A, both the U.S. economy and the market for closely held companies are off to good starts in 2024.

Fueled by robust economic data, expectations for lower interest rates, and a more positive lending environment, optimism for middle-market M&A is generally on the rise, according to the “ US Private Capital Report ” released by Eaton Square and highlighted below.

Eaton Square is an international M&A and capital service provider whose network encompasses Europe, North America, Australia/New Zealand, and the Pacific Rim. Our strategic partnership with Eaton Square increases our exposure to buyers and sellers internationally and offers greater access to capital and expertise in key verticals.

The report delivers encouraging news for potential business sellers and provides a positive contrast with last year’s M&A activity, which was hamstrung by inflation, high interest rates, and, for most of the year, lack of consensus about the health of the U.S. economy.

“The market seems to have a newfound interest in getting deals done,” observes IBG Business co-founder John Johnson (Oklahoma). “The combination of pent-up demand, banks getting back in the lending game, and general confidence in the market is sparking a surge in deal activity.”

The current outlook is a welcome contrast to 2023. Last year, according to the Eaton Square report, private business sales “dropped precipitously … totaling only $1,389 billion (down from $2,325 billion in 2022), while leveraged loan refinancing continued to decline year-over-year since its peak in 2021.”

The final 2023 U.S. GDP growth of 3.1% arrived too late in the year to spark the number of closed deals, but, as the report notes, it set the stage for a rebound in 2024, “on the heels of both tighter pricing indications and increased leverage tolerance indications for January, [leaving] little doubt that macroeconomic conditions have improved appreciably over the course of the last quarter.”

Looking ahead to 2024 M&A activity, the report describes a “definitive transition, from a ‘risk-off’ lending environment to a decidedly more aggressive and bullish lending ecosystem, epitomized by classic supply and demand market influences … a dearth of deal flow, and an overabundance of institutional liquidity.”

The report anticipates an M&A market “where not only premium assets (i.e., well capitalized, sponsor-supported, and reasonable leverage) can achieve superior pricing and terms, but where all [sellers] will find a more hospitable lending community.”

IBG’s Take on 2024

The conditions that depressed the sale of private companies in 2023 seem to have remedied themselves as we move into the second quarter of 2024.

“Plain and simple, there’s money in the market,” said IBG Fox & Fin’s Jim Afinowich . “Banks are lending, private equity and individual buyers are sitting on cash, and market concerns have waned.”

Throughout the IBG network – in Arizona, Colorado, Nevada, New Mexico, North Carolina, Oklahoma, Pennsylvania, and Texas – our seller inquiries, new offerings, and deal activity support Eaton Square’s optimistic outlook for growth and M&A opportunity and a period of “enhanced collaboration and prosperity.”

For sellers and buyers alike, now is an opportune time to seize the moment and capitalize on the evolving market dynamics. Visit our M&A team page .

Seller representations and warranties in a business sale

Thu, 14 Mar 2024 21:34:37 GMT

The wording of representations and warranties in a purchase agreement is critical, and ensuring their integrity is a vital role of the parties’ attorneys and, for the seller, their M&A advisor.

In virtually every business sale, the purchase agreement contains a section in which the seller makes certain “representations and warranties” (R&Ws) regarding the state of their company. Some R&W provisions are boilerplate, while others are negotiated and carefully tailored to the deal, the nature of the company, its operations and financial condition, and how the seller has described them.

In reducing the seller’s R&Ws to writing, both parties seek to establish the buyer’s recourse and remedies in the event that information provided by the seller undermines the company’s value after the closing.

“The representations and warranties section of the purchase agreement is very important,” said Gary Papay , an M&A advisor and managing partner in the Pennsylvania office of IBG Business. “The R&W provisions confirm what the seller has told the buyer about the company, and they define the allocation of risk between the seller and buyer.

“Looking out for the seller’s interests in hammering out those provisions is a critical role for the seller’s attorney and M&A professional.”

Papay notes that R&W provisions typically have an expiration date, ranging from short-term (e.g., six months) to long-term, perhaps as long as four years.

In addition, negotiating the content and shelf life of the provisions often results in a holdback by the buyer, frequently in the range of 5% to 10% of the purchase price, to cover the buyer’s risk.

This article provides an overview of six common categories of seller representations and warranties:

undisclosed liabilities;
legal compliance;
full disclosure;
“no other representations” and “non-reliance” clauses;
accuracy of representations; and
indemnification.

No Undisclosed Liabilities. This representation is very common. In its survey, “2021 M&A Deal Terms Study,” SRS Acquion, Inc., found that 98% of surveyed deals contained representations by the seller that there were “no undisclosed liabilities,” with the appropriate acronym NUL.

A NUL warranty is important to both parties. A Bloomberg Law article notes that it “can significantly impact the relative risk allocation as between the parties for undisclosed – or otherwise unknown – liabilities of the [company].”

In a typical NUL representation, the seller certifies that there are no liabilities that aren’t disclosed elsewhere in the purchase agreement. The wording will reflect a negotiated compromise between two conflicting objectives: The buyer will want an “unqualified” NUL statement, with few exceptions and a maximum scope, while the seller will want to limit the scope of liabilities and try to work in as many exceptions and allowances as possible.

Compliance with Laws. This type of representation is nearly as common as an NUL provision, with 93% of deals in the aforementioned survey including representations regarding past and present legal compliance.

While the provision might be as simple as this – “To the Seller’s knowledge, the Business has been and is being conducted in compliance with all applicable laws” – the seller’s advocates will frequently seek to include various limitations intended to narrow the scope of the compliance representation.

Full Disclosure. It is common for the buyer to ask the seller to affirm in writing that it did not make any false statements or omit material facts regarding the company.

The widely accepted standard for full disclosure is contained in Rule 10b-5 of the Securities Exchange Act of 1934. Thus, sellers should not be surprised when a mention of a “10-b5 representation” enters the conversation.

Because “full disclosure” can have a broad scope, and reining it in can be elusive, many deals feature a buy-side “representations and warranties insurance” (RWI) policy to protect the buyer against losses stemming from less-than-full disclosure.

This type of insurance was discussed in the report of Harvard Law School’s 2017 Forum on Corporate Governance :

“Under a buy-side [RWI] policy, the buyer … recovers directly from an insurer for losses arising from certain breaches of the seller’s representations and warranties in the acquisition agreement. By shifting the risk of such losses from the seller to an insurer, the buyer and seller can limit or even eliminate the seller’s liability for certain rep breaches, all without materially diminishing the buyer’s coverage.”

“RWI policies are becoming more commonplace today,” notes M&A advisor John Zayac , the managing partner in IBG Business’s Colorado office. “As compared to the demands and economics of escrows, insurance stands as a viable alternative.”

Whether and how the policy premium will be split between buyer and seller is a matter for negotiation.

“No Other Representations” and “Non-Reliance” Clauses. These two types of provisions are sufficiently related that they can be discussed in tandem.

A no other representations or warranties clause might look like this: “Buyer acknowledges that Seller has not made and is not making any representations or warranties regarding the subject matter of this Agreement, except as provided in …”

This provision is good for the seller, as it provides an acknowledgement by the buyer that the seller’s representations and warranties are specified in, and limited by, the purchase agreement.

Similarly, a non-reliance clause – e.g., “Buyer is not relying and has not relied on any representations or warranties regarding the subject matter of this Agreement, except for the representations and warranties provided in …” – prevents both the buyer and the seller from relying on any representations that are not spelled out in the purchase agreement.

As with 10b-5 full-disclosure representations, the purchase of a buy-side RWI policy can offer comfort to the buyer and help them accept the above clauses.

Accuracy. The purchase agreement will likely express the parties’ understanding regarding the (a) effective date and (b) standard for accuracy of the representations and warranties.

In our experience, four out of five purchase agreements state that all representations are accurate at both the signing date and the closing date.

Also, the agreement will likely specify a standard of accuracy for the representations. Only if a representation is shown to fall short of the selected standard would it give rise to an actionable breach.

Again in our experience, roughly half of our deals have specified the “material adverse effect” (MAE) standard, which is the most forgiving of the three most common standards. A close second, and more stringent, is the requirement that a representation be accurate “in all material respects.” The third and most draconian standard, applicable in perhaps one in 20 deals, requires a representation to be accurate “in all respects.”

Indemnification. Your purchase agreement might include an indemnification clause, which calls for one party to make the other party “financially whole” in case the indemnified party experiences an economic loss due to specified acts on the part of the indemnifying party.

In most cases, an indemnification clause is party-neutral, as either the buyer or the seller might anticipate events that could cause them to seek indemnification by the other party.

Conclusion. In contrast to the relatively surprising eleventh-hour issues that we describe in our article on settlement adjustments , representations and warranties are predictable: Either they evolve from the due diligence process (see article) and are negotiated against the backdrop of the overall deal, or they are on someone’s radar screen from the outset.

Nevertheless, the wording of representations and warranties is very important, and ensuring that one party does not make promises on which they cannot deliver is, as we noted at the beginning of this article, a vital responsibility of the parties’ attorneys and, for the seller, their M&A advisor.

See our knowledge base of Tips for Sellers .

"Where’s my money?” Preparing for settlement adjustments in closing a business sale

Tue, 06 Feb 2024 23:17:59 GMT

Helping the seller anticipate and negotiate issues that can cause deviations from the expected sale proceeds can add unexpected value to involving an experienced M&A intermediary.

In a business sale, forewarned is forearmed. An informed seller understands, and can be prepared for, the likelihood that the net value of their business at sale will be impacted by normal costs of a transaction and a wide variety of contractual adjustments.

Through our many decades of facilitating the purchase and sale of private companies, IBG Business’s M&A intermediaries have encountered nearly every conceivable adjustment, holdback, offset, and settlement issue in a complex business sale. This article is offered with the hope that it will help you:

anticipate and prepare for changes in, or delayed realization of, your final price;
understand that not all final proceeds erosions and delays are inevitable; and
appreciate the M&A advisor’s role in influencing the deal’s outcomes to benefit the seller by reducing risks, erosions, and delays while gaining a best overall value result, price and terms.

“The surprise to a lot of sellers is all of the different things that are either fees or adjustments to closing or escrow amounts,” says Bob Latham , managing partner in IBG’s Texas office. “They don’t fully understand where the funds went. They hear the offer price, and they expect that to be the check amount at closing.”

IBG co-founder John Johnson (Oklahoma) provides this perspective.

“From the outset, price is front and center in the negotiations. For both parties, thinking of deal price needs to be tempered by deal terms, which together determine the deal value. Informed expectations and being prepared to help manage the factors through closing go a long way in ultimately preserving the seller’s joy in completing what is often the biggest financial transaction of their life.”

Potential value adjustments can start with the buyer’s letter of intent (LOI) . Experienced buyers know precisely what they want to achieve in an acquisition. Their LOI will outline various conditions that may trigger terms adjustments, withholdings, and escrows – each of which has its place in a fair and equitable deal, with the devil in the details.

“In preparing for offers and subsequent negotiations,” John Johnson continues, “the M&A advisor should help the seller anticipate and negotiate the conditions, but their ultimate impact may evolve and become clearer throughout the sale process. Staying in front of these in preparing, mitigating, and negotiating these is vital to preserving your best value. Too often a member of a seller’s deal team may accidently cede value by failing to see the entire landscape of the deal and an experienced M&A intermediary can help keep this from occurring.”

MAJOR FACTORS

Factors that impact the final purchase price and the cash you receive at closing generally fall under one of five categories:

professional fees and taxes,
third-party transfer costs,
holdbacks,
deferred payments, and
settlement issues.

Professional Fees and Taxes. “Accounting, legal, M&A broker commissions, escrow, and other professional fees are factors to be expected,” says Matt Frye , managing partner in IBG’s Oklahoma office, “along with fees paid to a tax accountant for calculating the sales and transfer taxes on the transaction. That’s where I hear a lot of gulps and gasps.”

The payment of taxes is another factor in this category. Payment of deal-related sales or transfer taxes can substantially impact deal value. Although personal income taxes are not a settlement adjustment, they are important in a seller’s net value. Managing deal structure can have a very big impact on the amount of taxes that will result. Again, an M&A intermediary’s experience can be very valuable in anticipating how to help minimize this bite.

Third-Party Transfer Costs. Other common fees may include costs going to third parties to conclude the sale transaction.

For example, if lessor approval is required for transferring leased equipment or property, some compensation may need to be made to enable the transfer, especially if the lease has a below-market rate. Alternatively, if the lease rate is increased in a transfer, this may reduce the post-sale profitability to the buyer and a deal price concession may be in order.

Also, if you are selling distribution rights, there may be fees associated with that transfer as well.

Holdbacks. Holdbacks are common elements of a business sale. Key attributes are how much, for how long, and to cover what .

“Buyers can require money to be held in escrow to cover potential liabilities that were either not disclosed or not known at the time of closing,” says IBG’s Jim Afinowich (Arizona). “Indemnification holdbacks and working capital holdbacks can be 5% to 10% or more of the purchase price, depending on the buyer’s interpretation of risk.”

Bob Latham notes that, in his experience, a working capital holdback might be of relatively short duration – 60 to 90 days – while “the indemnification or risk mitigation holdback is often 12 to 18 months, or even 24 months on the very high side. For these types of holdbacks, sellers will eventually get most of their money, but it may take a while.

“Also, net working capital is going to be calculated as of a certain date, typically the closing date, but because of bookkeeping, it may take 30, 60, or 90 days to figure out what that actual number is. In the meantime, you will have an escrow holdback of the net working capital until you reach the settle-up date, where that is cleared out after the bookkeeping is done.”

Normally a deal requires the seller or the buyer to pay the debts of the business as of closing. Another type of holdback, of a more permanent nature, uses cash from the sale to pay off the seller’s debt or other obligations.

“The seller may want to have all of his equipment loans paid out of closing proceeds,” Jim Afinowich said, “because the buyer is usually buying the business on a cash-free, debt-free basis. If there are equipment loans, bank credit lines, most any kind of financing on the company, there will be money taken out of escrow to pay for all of those debts.”

Deferred Payments. Deferred payments often take the form of seller financing or an earnout, both of which are fully negotiated and, if executed as agreed, should pose little risk of surprise at closing.

As we discuss in our article, “ Seller Financing a Key to Attracting More Buyers, Maximizing Your Sale Price ,” the great majority of business sales involve some form of seller financing, with the higher the selling price the greater the likelihood of a seller carryback.

The seller might be the only lender in the deal, receiving a down payment (typically 30% to 90% of the purchase price) and carrying back the unpaid balance for five to seven years.

An earnout ( see related article ) is a contingent payment arrangement that is often used to bridge a valuation gap.

As Jim Afinowich explains, “A buyer says, ‘I want to pay you X amount of money,’ and the seller says, ‘the business is worth a lot more than that because of its growing earnings. I want the extra that you’re not valuing enough.’ The buyer counters, ‘Well, I don’t mind paying what you’re saying it’s worth if the company increases in revenue and profits. So if the numbers actually improve, as you’re saying, I will pay you this, but if they only increase half as much as you say, then I’ll pay you half of the extra.’”

Settlement Issues. Our fifth category includes issues that the parties identify during the negotiation and due diligence processes and that will be charged or credited at close.

Common settlement issues deal with prorated costs. As a simple example, if the closing date for the business sale is in the middle of the month, and you have paid the rent and your equipment leases for the full month, you would be entitled to receive a prorated credit.

Other issues might include employee-related accruals – such as vacation pay and sick pay – that have been accrued by the seller and may be negotiated to transfer to the buyer.

“What I’ve seen as a settlement issue at close is who’s responsible for what,” says Matt Frye. “For example, if the buyer learns that one of the employees has a deal with the seller, where she’s been able to accrue vacation for three years because she wants to go to Europe for six weeks, that’s a liability that the buyer will want to resolve before closing.”

Conceptually, as of the closing or proration date, everything prior to it – all the income and expense – is that of the seller, and everything that follows is attributed to the buyer, so it will be important to establish a clean cutoff for the settlement issues. Some issues may not be known on the closing date and will need to be adjusted by the parties after the close.

Some industries, such as manufacturing and construction, are prone to adjustments and settlement issues involving billing timing or work-in-process considerations. At the closing or proration date, the company may have units that are only partially completed, and the seller will want to be credited for their investment of labor and materials and receive an equitable share of the ultimate profit as well. In such cases, the parties will likely calculate the percentage of completion for each unit or apply an agreed percentage across the board.

CONCLUSION

In this article we have identified five major categories of factors that can change the value of a business sale as it progresses from letter of intent to closing. As noted, some adjustments may be permanent, while others merely delay payment until the post-closing issues are resolved and accurate calculations and adjustments can be made.

In most deals, especially where an experienced M&A broker is involved, the seller will be made aware of the issues before they arise and are negotiated.

Nevertheless, until the actual numbers appear in print, the cash due at and after closing will likely be a moving target. Reducing the surprise to the seller and managing potential adjustments require the involvement of an experienced M&A intermediary to protect the seller’s interests and facilitate communication throughout the process, both before and after the deal closes.

To learn how the M&A professionals at IBG Fox & Fin add value in the sale of a private company, visit the Your Team page.

Defeating the "E-Myth" in maximizing business value

Mon, 11 Dec 2023 15:49:16 GMT

If the value of your company would suffer in your absence, the biggest threat to its marketability might be you.

“Buyers generally aren’t interested in paying top dollar if the business is overly reliant on the owner for its success.”

That excerpt from a long-ago IBG Business article recently came to mind when one of our M&A advisors discovered and began quoting from Michael Gerber’s 1988 best-seller, The E-Myth: Why Most Businesses Don’t Work and What to Do About It.

In case you have forgotten or are too young to know, the “E-Myth” (or “entrepreneurial myth”) is that most businesses are started by people with tangible business skills.

That, Gerber argues, is simply not the case.

Instead, most start-ups are born out of what he calls an “entrepreneurial seizure” that occurs when an individual with a marketable skill decides they would be better off performing it on their own than for someone else.

The entrepreneurial seizure quickly arcs to what Gerber terms the “fatal assumption” – the flawed belief that “if you understand the technical work of a business, you understand a business that does that technical work.”

Consequently, as a Tyler DeVries book summary puts it, the skilled tradesman who thinks he is starting a business may simply “take the work he loves to do and turn it into a job.”

Hemmed in from the start by the founder’s fatal assumption, many businesses, even some that grow and achieve financial success, never reach their full value because the owner spends more time and energy working in their business – i.e., doing the skilled work that they love – than working on their business.

Troubling Traits. Mature E-Myth businesses of all sizes tend to exhibit certain tell-tale signs:

The owner – let’s call him “Dennis” – is nearly always present.
Dennis devotes more hours than most of his employees to doing the business’s core work.
He makes all of the major (and many of the minor) decisions.
There is a substantial gap between Dennis and his next level of management.
The company has outgrown its operational and management structure.
Dennis has the primary relationships with major customers and suppliers.
If Dennis is absent for more than 10 days, things start to go wrong.
If asked to describe the company’s future, Dennis is more likely to speak in operational terms than in strategic or visionary terms.
If asked to describe his personal future, Dennis might struggle to distinguish himself from his business.

To be clear, a technician/founder can eventually become a better owner, and he can grow his creation into a business that, on the surface, looks like an attractive acquisition target.

But a potential buyer’s glimpse under the covers might quickly reveal a core problem: The owner loves doing the work of his company to the point that he is omniscient, omnipresent, and overbearing. In his absence, the company isn’t totally viable, and, unless the buyer needs for the owner to stay on after the sale (see our article on industry rollups ), the company may be worth its book value and little more.

Solutions in Print. While Gerber does a masterful job of describing the problem, the real value of The E-Myth and its progeny is that they provide therapeutic steps that can help an entangled business owner execute a pivot, breaking free of their comfort zone and morphing into a more valuable leadership role, maximizing business viability and value separate from their incessant presence and hands-on involvement.

In addition, Gerber’s 1995 sequel, The E-Myth Revisited, provides a business development process that serves as a framework for developing turn-key systems throughout an organization to produce predictable results and grow in a sustainable way.

Guidance in Person. It should go without saying that we think the E-Myth series is a valuable read for business owners who, looking to sell some day, have decided to get serious about preparing their business to stand on its own two feet.

And that’s where IBG often enters the story. For us, the business is the product. To help shape a good company into an attractive acquisition target, we often start our preparatory work two years before the company is ready to go on the market, focusing on such priorities as:

cleaning up and recasting financial information;
improving cash flows;
selling off or disposing of unproductive assets, product/service lines, and inventory;
diversifying client and vendor concentrations
attracting and developing key employees and fostering an effective management team on which a new owner can rely;
identifying and protecting intellectual property and other intangible assets (trademarks, patents, copyrights, and any other proprietary information) that set your company apart from competitors;
documenting key processes; and
identifying and building on the business’s competitive advantages and attractiveness to the best-fit buyer.

In the process, we invariably invest time and energy in the owner, helping them prepare mentally and emotionally for the rigors of the sale experience, and identifying roles in the company’s management and operations that the owner should no longer fill if the business is to achieve optimum value.

As a business owner, it’s important to recognize that the value of your company lies not just in its assets and profits, but in its ability to exist independently of its owner. This means taking steps to establish a structure, management environment, and culture that can thrive with or, ultimately, without you.

That’s a tall order, one that you don’t need to tackle on your own. To find out how we might help, contact an IBG Fox & Fin M&A professional .

AzBusiness magazine names IBG Fox & Fin an "AZ Big 100" company

Tue, 05 Dec 2023 16:23:38 GMT

This section features the 50 people and 50 companies that will help shape Arizona’s business landscape in 2024.

Industry rollups provide unique opportunities for business sellers

Thu, 02 Nov 2023 19:00:55 GMT

Profiting twice from the sale of their business is a common benefit for sellers who participate in a multi-company, industry-specific merger.

From among the three major categories of business buyers , private equity groups (PEGs) are currently the most active purchasers of mid-market companies, and the majority of PEG acquisitions are part of what is commonly known as an “industry roll-up” – a merger of multiple companies in the same market or vertical.

The growth in industry roll-ups is an established trend that is certain to continue, says M&A broker Matt Frye , managing partner in the Oklahoma office of IBG Business. “For just about every vertical one can think of, it’s a safe bet that there’s a roll-up strategy being executed or on the drawing board.”

As an example, Frye points to his recent sale of a tree maintenance company to a New York private equity firm. “They buy arborists, and that’s all they do – 10 to 12 a year, all over the country.”

Given the prominence of industry roll-ups and the apparent reality that few industries are exempt from being targeted, the owner of a closely held company in any vertical should understand:

the industry roll-up concept,
why industry roll-ups are growing in popularity,
the significant opportunities that roll-ups present to business sellers, and
the importance of seller scrutiny of the roll-up effort.

What Is an Industry Roll-Up? In an industry roll-up, a buyer – usually a private equity group or other financial buyer – acquires multiple companies in a certain industry, particularly one that is starting to mature. The acquired companies are then combined or “rolled up” into one master company.

“Private equity firms use roll-up mergers to rationalize competition in crowded and/or fragmented markets,” notes Investopedia , “and to combine companies with complementary capabilities into a full-service business.”

Why Industry Roll-Ups Are Popular. An industry roll-up allows the buyer to achieve significant and rapid growth, potentially profitable expansion across markets, and the creation of a larger market presence in a relatively short time.

Also, by consolidating the back-office functions of the acquired companies, the roll-up can achieve economies of scale, growing the aggregate revenue stream without a corresponding increase in overhead.

The frequent result, says IBG’s Jim Afinowich (Arizona), is an extraordinary return on investment.

“Most businesses sell for a multiple of earnings,” notes Afinowich. “If a company is making a million dollars a year, it might sell for a multiple of four, or $4 million.”

“A private equity group will go out and buy 10 companies like that, in the same industry, for a total price of $40 million, and combine them into one company. Let’s say that, after achieving some synergies and economies of scale, centralizing and upgrading management, etc., the new rolled-up company turns a $12 million profit, not $10 million, and is worth a multiple of six.

“The companies that the PEG acquired for $40 million are now worth $72 million as a single company. Just by effectively combining the 10 companies, the PEG has increased the value of its investment by 80%.”

How Industry Roll-Ups Can Be Good for a Seller. In a roll-up, a seller can realize benefits that may not be present in a more traditional sale.

First, two or more PEGs might try to roll-up companies in the same industry at the same time. That can create buyer competition for a target company, which usually results in a higher selling price. The greater the number of interested buyers, the greater the leverage for the seller. (Conversely, “ one buyer is no buyer .”)

Second, and more important, selling your business in an industry roll-up provides a second option to profit from the sale, provided you are willing to “roll equity.”

In an industry roll-up, the sellers of the individual companies typically receive cash and shares in the holding company in exchange for their ownership stakes. The acquired companies are then transferred to the holding company in which each seller owns an interest.

Afinowich offers an example.

“Let’s say that, instead of selling your company for 100% cash, you elect to receive 75% of the value in cash, and then roll 25% of the value in the roll-up,” he explains. “Five years later, after it has added more companies in the roll-up, the combined company sells for a lot of money, like in the example we discussed earlier, and the individual sellers cash out.

“We’ve done deals where the seller sold for 75% to begin with, but the 25% that they received in the exit from the roll-up turned out to be worth more than the 75% they received in the initial sale.”

Why Sellers Need to Be Careful. In a conventional sale, much of the due diligence is initiated by the buyer , with the seller responding to the buyer’s inquiries.

That’s not the case when a seller elects to participate in an industry roll-up, where due diligence must be a two-way street: Certainly, the buyer has all of the usual concerns about the subject company’s worth and the veracity of your representations, but in this setting you need to take a critical look at the buyer’s ability to execute a successful series of acquisitions and achieve post-purchase earnings growth.

Plenty can go wrong in a roll-up. It can be rushed, not executed properly, and fail to acquire top-quality companies. Or it can drag on, occurring too slowly and losing momentum.

“Your second bite at the apple depends on whether the buyer can deliver,” Afinowich points out. “If you’re carrying a note, you’re rolling equity, you’ve got some kind deferred payment, you want them to convince you that this roll-up is going to be successful.”

You should be comfortable with the buyer’s answers to key questions, such as:

What is your experience with my industry?
Before this one, how many roll-ups have you completed? What is your process? What kind of value have you created for your company and for your sellers?
Where are you in this roll-up? How many companies have you purchased? What are their numbers? How many more companies will you purchase? Who is on your radar? How do you qualify a potential acquisition target?
What is your business plan for the new company? How will it be managed? Who will be in charge? What is their track record?
How will you integrate my company with the others? How will it be bigger than the sum of its parts?
What is my continuing role with my business? How much autonomy will I have? What resources will you provide to make it bigger, better, and more profitable?

The sale of any desirable mid-market company warrants the involvement and insight of a proven M&A broker. The peculiar opportunities and risks associated with an industry roll-up magnify the wisdom of choosing the right professional to lead you through the process.

Our team of M&A professionals offers extensive experience in dealing with private equity groups in industry roll-up scenarios and can help you evaluate a buyer and their business plan.

Martin Ice Cream and the sale of personal goodwill

Thu, 05 Oct 2023 18:44:09 GMT

If the deal is structured properly, the seller of personal goodwill receives significant benefits ... with no adverse tax consequences to the buyer.

This article is updated from the previous version published June 30, 2020.

One of the roadblocks that commonly arises in structuring a business sale has to do with the competing tax consequences for the buyer and seller. From a tax standpoint, what is good for the seller is often bad for the buyer, and vice versa.

However, one important tax strategy for sellers generally has no impact on buyers: the allocation of company assets as “personal goodwill” of the company’s owner or executives. In this strategy, the individual’s personal reputation, expertise and relationships are segregated from the assets of the company being sold. The goodwill that otherwise would be attributed to the company is shifted to the owner/executive.

“The presence of personal goodwill can provide tax-efficient opportunities in merger-and-acquisition transactions by lowering corporate-level tax upon a sale or transfer of goodwill,” notes a Tax Adviser article, Personal Goodwill: Alive and Well Indeed . “Further, the gain on a sale of personal goodwill is generally considered capital gain and receives a preferential capital gains tax rate (assuming the goodwill has been held by the taxpayer for more than 12 months), as opposed to the higher ordinary income tax rate for the receipt of compensation.”

What Is "Goodwill"?

“Goodwill” is a form of (and is often used as a catch-all term for) “intangible assets” that represent the excess market value of a business beyond that of its tangible assets.

Under IRC § 197, the buyer of a business is entitled to deduct the amount paid in connection with goodwill (whether it is personal or corporate) over 15 years. The tax treatment to the buyer would be the same if the buyer purchased corporate or personal goodwill or if the buyer made covenant-not-to-compete payments to the seller in connection with the acquisition of a trade or business. Each such asset is considered a “Section 197 intangible.”

Section 197 intangibles also include going concern value, workforce in place, information-based intangibles (including customer-related information such as customer lists and patient or client files), expertise, customer-based intangibles, supplier-based intangibles, licenses, permits, covenants not to compete, franchises, trademarks and trade names.

Personal Goodwill vs. Enterprise Goodwill

It is important to note that not all goodwill is personal goodwill. There are valid situations in which the goodwill has a stronger connection to the company itself than to the owner, and it is important for the parties to recognize that distinction.

Lynton Kotzin, CPA , a business valuation partner at J.S. Held in Phoenix, notes that personal goodwill “attaches to a particular individual rather than to the business that the individual owns, while enterprise goodwill is derived from characteristics specific to a particular business, regardless of who owns or operates it.”

Where both types of goodwill are present, they should be allocated by agreement between the buyer and seller.

“There will be evidence of various elements of both personal and enterprise goodwill,” Kotzin continues. “A valuation analyst can consider many objective factors in making the allocation.”

The two types of goodwill are also differentiated by the way in which they are transferred, notes B.J. Kang, J.D., CPA .

“While corporate goodwill can be transferred through a typical asset transfer, a holder of personal goodwill must sign some form of a covenant not to compete,” Kang writes. “These restrictive covenants can take the form of a traditional covenant not to compete or even employment agreements, but must clearly transfer the intangible assets of the individual to either their employer or any potential buyer. Absent any such agreement, the personal goodwill of an individual remains the property of the individual, and can be used or disposed of however that individual sees fit.”

The Tax Value of Personal Goodwill

As was noted above, the determination of goodwill as “personal” or “enterprise” can have significant tax impacts on the seller. Consider the following example.

The subject company is being sold for $10 million. If the tangible assets are worth $8 million, the remaining $2 million would normally be classified as goodwill. If that goodwill is assigned to a C corporation, it generally will be taxed at the 21% rate and then taxed again when the proceeds are distributed to the shareholders.

If, on the other hand, it can be shown that the goodwill is attributable not to the corporation but to the owner/executive personally, then the $2 million would be paid directly to him and taxed as long-term capital gain (not as ordinary income). That keeps the proceeds out of reach of the subject company’s creditors if there are any. Finally, as was mentioned above, the tax treatment to the buyer is the same regardless of whether the owner/executive recognizes long-term capital gain from the sale of personal goodwill or ordinary income for a non-compete payment.

Also, for some taxpayers, creating personal goodwill helps minimize corporate income tax when the corporation liquidates, i.e., converts to an LLC that is taxable either as a partnership or as a disregarded single-member entity. The use of this technique can also minimize potential future built-in gain taxes if the corporation desires to make a subchapter S election.

The Martin Ice Cream Decision

The purposeful creation of personal good will first gained notoriety a decade ago in what has become a famous U.S. Tax Court case, Martin Ice Cream Co. v. Commissioner , 110 T.C. 189 (1998). In that decision, the Tax Court reaffirmed that, when a corporation has no employment contract with an employee (in this case, the owner), the employee’s personal relationships are not corporate assets.

Here are the particulars:

Arnold Strassberg and his son, Martin, owned all of the stock of Martin Ice Cream Co., an ice cream distributor. Before going into business with his son, Arnold had worked for more than a decade in his own wholesale ice cream distribution business, where he developed strong business relationships with the managers and owners of a number of supermarket chains. Shortly after launching Martin Ice Cream, Arnold was approached by the founder of Häagen-Dazs, who wanted Arnold to introduce that company’s ice cream to supermarkets. On a handshake agreement (which was never reduced to writing), Arnold quickly established distribution relationships with four chains.

In the mid-1980s, Pillsbury acquired Häagen-Dazs and approached Arnold about acquiring his relationships with the supermarkets so that Pillsbury could sell Häagen-Dazs products to them directly. Pillsbury was willing to pay for Arnold's connections but had no interest in a relationship with Martin Ice Cream or in acquiring any of its physical assets.

Ultimately, Arnold decided to sell his relationships to Pillsbury. Then:

Arnold created a new corporation, Strassberg Ice Cream Distributors, as a subsidiary of Martin Ice Cream.
All of the supermarket relationships of Martin Ice Cream Co. were transferred to Strassberg Ice Cream Distributors and held as the subsidiary’s only assets.
Martin Ice Cream conveyed all of the subsidiary’s stock to Arnold in exchange for his interest in Martin Ice Cream.
Strassberg Ice Cream Distributors then sold the relationship assets to Pillsbury for $1.4 million.
As part of the sale, Arnold signed a bill of sale and an assignment of rights, and both Arnold and Martin signed non-compete agreements with Pillsbury.

Disagreement between the Strassbergs and the IRS over how the proceeds of the sale should be taxed ultimately led the parties to court. In its ruling in the Martin Ice Cream case, the Tax Court attributed the $1.4 million purchase value primarily to two assets:

Arnold’s personal relationship with the supermarkets, and
Arnold’s handshake agreement with the founder of Häagen-Dazs.

The court determined that these assets could not be attributed to Martin Ice Cream Co. or its subsidiary because Arnold never had a covenant not to compete or any employment agreement with such entities.

Creating and Transferring Personal Goodwill

It is recognized in Martin Ice Cream that personal goodwill may be unique and is present only if supported by particular facts. For example, the seller should not be subject to a contractual non-compete provision in favor of his former company. Further, the seller should not be subject to any non-solicitation provision that prohibits him from contacting and trying to sell to his former company’s customers, suppliers or service providers.

As was noted above and is discussed in greater detail by Thomas O. Wells and Daniel Lampert in a Florida Bar Journal article, Sale of Personal Goodwill: The Executive’s Parachute , personal goodwill should be transferred pursuant to an asset purchase agreement executed by the buyer and seller. The agreement should describe the personal goodwill being transferred and include representations by the selling individual as to ownership of such assets and that such assets do not exist separate and distinct for the selling corporation. The agreement should also include exhibits such as a bill of sale and an assignment of rights (as suggested in Martin Ice Cream). The buyer may want to include any non-compete provision within the asset purchase agreement to obtain a lengthier presumption of reasonability for the restrictive time period. The parties may then allocate the purchase price between assets comprising the personal goodwill and the covenant not to compete.

Benefits. As was stated earlier, the proceeds received by the seller from the sale of personal goodwill are subject to long-term capital gain treatment rather than as ordinary income. (The maximum federal income tax rate for long-term capital gains is 15%, versus 35% for ordinary income.) In addition, long-term capital gains can be offset by capital losses, whereas only $3,000 of capital losses may offset ordinary income each year.

In Martin Ice Cream, the seller signed a non-compete agreement; the existence of this non-compete agreement did not cause the seller’s sale of personal goodwill to be subject to taxation as ordinary income. The non-compete agreement was seen by the Tax Court as necessary by the buyer to protect its purchase of the seller’s personal goodwill.

Conclusion

A seller who has unique skills, a strong relationship with customers and an excellent industry reputation and is not bound by a covenant not-to-compete should consider structuring a transaction as a sale of personal goodwill. This structure provides a seller with a beneficial parachute because the payments are treated as long-term capital gain, not subject to equitable distribution and not subject to the claims of the employer’s creditors. This structure can also be used during the conversion of a corporation to an LLC or limited partnership taxable, respectively, as a disregarded entity or partnership for federal income tax purposes.

If structured properly, the seller receives significant benefits with no adverse tax consequences to the buyer.

6 ways that your company's market value could increase in a recession

Wed, 23 Aug 2023 15:59:24 GMT

The stubbornly resilient U.S. economy continues to confound predictions of a recession. If a recession does occur, don’t rule out the possibility of benefiting from it in a sale of your business.

Superior Overhead Door sells to private investor

Mon, 14 Aug 2023 14:55:22 GMT

Superior Overhead Door has been purchased by an individual buyer in a brokered sale that closed August 8, 2023.

Based in Broken Arrow, Oklahoma, Superior Overhead Door is a licensed contractor specializing in the design, installation, and maintenance of commercial and residential overhead garage doors.

IBG Business facilitated the sale, for which terms are not disclosed at the parties’ requests.

Earnouts: bridging the gap in price negotiation

Tue, 01 Aug 2023 22:17:43 GMT

A powerful tool in negotiating a business’s purchase price, an earnout can bridge the gap between the amount that a buyer is willing to pay and the seller is willing to accept.

One of the roadblocks that commonly arise in structuring a business sale stems from differing viewpoints of value. Most sellers see maximum profit potential, while most buyers see risk and past earnings. Sellers will typically focus on their company’s recent performance, while buyers will average the company’s performance from previous years. This can make it difficult for the buyer to gain comfort and protection and the seller to achieve the desired profit.

THE EARNOUT CONCEPT

When an impasse occurs, an earnout can bridge the value gap between buyer and seller. Earnouts involve a certain future dollar amount that the buyer agrees to pay to the seller based on the performance of the business after the transaction is completed.

Put another way, Investopedia defines an earnout as “a contractual provision stating that the seller of a business is to obtain additional compensation in the future if the business achieves certain financial goals, which are usually stated as a percentage of gross sales or earnings.”

In everyday terms, in the negotiations for the purchase of a business, the buyer’s half of the dialogue might go something like this:

“OK, Mr. Seller, you think your business is worth $50 million. You might be right, but we’re not so sure. We think that, today, it’s worth $40 million. How about we give you that now, and the other $10 million will be paid out of earnings over the next three years if we achieve EBITDA of (fill in the blank).”

Needless to say, an actual earnout agreement will be more detailed than that, but you get the concept. Earnouts can be structured in a number of ways and can be based on a variety of financial benchmarks, such as a revenues, gross profits, or net income. (See “Terms” below.)

BENEFITS

In a successful earnout, the potential benefits to both parties are significant.

A deal gets done, and the business sells.
The earnout provides potentially maximum value to the seller without increasing risk for the buyer.
The buyer gets the business now at a lower price, and the seller has a chance to recoup the difference down the road.
If the sale occurs in a high-interest-rate environment, an earnout can help narrow the gap created by debt coverage.
If the seller is willing and able to stay on in a meaningful capacity, their continuing presence (and knowledge, skill, reputation, customer retention, and profit motive) should help the seller achieve his earnout goals while delivering additional profit and value enhancement for the buyer.

Other benefits are more buyer focused. For example, if the business has customer concentration issues, an earnout can help protect the buyer by tying sales price to client retention. Similarly, if the subject company is a professional practice, the buyer might be unwilling to pay top dollar without assurance that the seller’s clients or patients will stay. Utilizing an earnout ensures that the buyer pays only for retained clients/patients and gives the seller incentives to pass all relationships on to the buyer.

TERMS

The language and structure of the earnout should be clearly established when the business is sold. The earnout agreement should address the following:

Duration . In our experience, the typical duration runs from two to five years and often sets a performance average. For example, Year 1 may fall below expectations, but, if Year 2 exceeds expectations by a considerable margin, the earnout is applied evenly.
Cap/Floor . Because the earnout depends on the company’s performance, it is advisable that a minimum payment be set in order to protect the seller, while a maximum might be set to protect the buyer.
Payout Schedule. While some earnout agreements call for the seller to wait until the completion of the earnout period to receive their additional revenue or selling price, others allow for the seller to receive interim or periodic payments based on performance achieved during specified periods or upon reaching certain milestones.
Payout Basis . In many cases, the buyer will try to base the earnout on a percentage of the company’s net profit or EBITDA , while the seller might want to base it on gross sales. Negotiations often result in a compromise, such as gross profit.
Alternative Targets. A helpful Hartford article, “ Earnouts and Contingent Payments ,” notes that some earnouts are based on achievement levels or events aside from revenue or profits. Instead, a “specific event, such as the signing of particular contracts,” might satisfy the buyer’s expectations.
Tax Treatment. Will the money that the earnout generates for the seller be treated as part of the purchase price or as ordinary income? Using a conditional seller note can keep the value as a capital gain for the seller, whereas calling it an “earnout” will typically allow the buyer to deduct the payment as a current expense against income.
Provisions in Case of Litigation. Sellers should have provisions for security and default, and both parties should want language governing how disputes will be resolved (e.g., whether the earnout was actually earned and, if not, whether the buyer is to blame).
Seller Involvement. Since earnouts are based on the company’s future performance, they often work best when the seller remains in control for the duration of the earnout period. This allows the seller to try to maximize performance, and it avoids potential disagreements and blame that might arise if the earnout fails to meet expectations under the buyer’s sole management.
Maintaining the Status Quo. Because earnouts are largely based on the seller’s expectations regarding revenue, the earnout agreement might restrict the buyer from making major structural or operational changes in the business without the seller’s concurrence.
Other Terms. Key contractual considerations might also include specifying (a) who will receive the earnout proceeds, (b) what accounting methods/principles and financial metrics are to be used, (c) whose accountant will be keeping score, and (d) how either party may audit the scorekeeper.

SELLER CONSIDERATIONS

If you are reading this article as a potential seller, from your perspective the success of the earnout will depend on your ability to achieve the expected results. If you are staying on to run the company, you should carefully consider the following:

Operational Control. How much autonomy and control will you actually have? Will you have the freedom to make the decisions necessary to achieve your expected results?
Budgetary Control. Having control of the operating budget and an agreement regarding the capital budget enables you to allocate resources and make certain purchases on which the earnout’s success will depend.
Your Team. Keeping the band together may be critical to the success of your earnout, and your agreement with the buyer should address your authority to retain, dismiss and manage key employees and hire new ones.

In a June 2021 Forbes article, “ Understanding Earnouts in Mergers and Acquisitions, ” the author raises some additional questions that warrant seller deliberation:

Is the amount of the potential earnout payments significant enough to delay the seller getting all cash up front?
Are the earnout milestone targets reasonably achievable in a reasonable time period?
How can the seller make sure the buyer doesn’t operate the business in a way that minimizes or eliminates the earnout payments? (See “Operational Control,” above.)
What commitments will the buyer give to support the business and optimize the likelihood that the maximum earnout will be earned?
How can the seller protect itself from the buyer manipulating the financial metrics of the business in a way that adversely affects the earnout payments?

The Forbes article also notes that a seller might include in the earnout agreement a provision that “under certain circumstances, the maximum amount of the earnout should be accelerated and paid out early” in response to certain circumstances or events occurring during the earnout period (e.g., a total or partial sale of the business, a substantial change in the business, a breach of contract by the buyer, termination of key people, or – on the bright side – early achievement of the earnout’s milestones or objectives.

CONCLUSION

Earnouts are not a new concept. They have long constituted a powerful and, until recently, underutilized tool that can expand a deal’s potential and extend the risk and reward between buyer and seller.

Much of the underutilization of earnouts has stemmed from two sources:

Complexity . There is little question that adding an earnout provision to your sale agreement can further muddy an already-complicated deal. However, both parties should weigh an earnout’s short-term complexity against its potential benefits and pursue the course that is likely to yield the best outcome in the long run.
Risk . Well-meaning risk-averse attorneys, CPAs, and even some M&A professionals may advise against earnouts because of the risk that something could go wrong. Granted, excluding an earnout eliminates the earnout collection risk, but it also deprives the parties of the earnout’s upside potential. For the seller, an $11 million sale with no earnout carries less risk, but an initial $10 million with an earnout that could yield an additional $2 million might make the risk worth taking.

Far from being something for which use should be discouraged, the earnout should be seen for what it is: A powerful enabler affording both the buyer and seller maximum profitability, business value, and deal satisfaction.

Seller financing a key to attracting more buyers, maximizing your sale price

Thu, 29 Jun 2023 17:34:12 GMT

Your willingness to carry back a portion of your sale price expands the pool of potential buyers and can drive up your price, level the field in due diligence, and turn your sale into a good investment.

In many business sales, the seller’s excitement at receiving a letter of intent from a prospective buyer can give way to disappointment, when they see that the proposed terms of the deal require the seller to finance a substantial portion of the purchase price.

Clinging to their expectation for a clean break with no post-closing entanglements, more than one seller has been tempted to reject such an offer and wait for a “stronger” buyer who will pay top dollar in cash.

However, as most M&A brokers and experienced sellers know, the great majority of business sales involve some form of seller financing, with the higher the selling price the greater the likelihood of a seller carryback.

The seller might be the only lender in the deal, receiving a down payment (typically 30% to 90% of the purchase price) and carrying back the unpaid balance for five to seven years. Or, less appealing, the seller might be asked to subordinate their carryback to the buyer’s bank loan or other form of leveraging.

Part of the M&A professional’s role from the outset and throughout the sale process is to:

manage the seller’s expectations so that they are not surprised when an offer calls for a carryback;

help the seller understand why a good buyer – even a presumably cash-rich multi-national corporation – would require seller financing;

help the seller appreciate the real benefits (and risks) that stem from their willingness to finance a deal; and

guide the seller through the heightened importance of the due diligence phase, to ensure the buyer’s creditworthiness and business acumen.

WHY A BUYER MAY REQUIRE SELLER FINANCING

A buyer that can’t or won’t pay cash for your business is not necessarily a weak buyer – far from it. You should expect that prospects from anywhere on the desirability and profile spectrum – individual buyers, strategic buyers, and financial buyers – are likely to call for a seller carryback.

Here are some very legitimate reasons:

They want to buy your company for $X million but don’t have that kind of cash sitting around.

They do have access to that much cash, but if they give it all to you, that would prevent them from putting that money to work elsewhere or buying other businesses.

They want to invest some of their liquidity into expanding and improving the business that you are selling to them.

Their purchase of your business involves you making certain warranties and representations or carrying through on one or more post-closing commitments, and the promissory note for the unpaid purchase price gives them a source of offset in case you don’t deliver.

SELLER FINANCING PROS AND CONS

Consider the “Cons.” You probably have already started a mental list of reasons not to carryback part of the sale price, most of which start with “risk of”:

Risk of Default on Your Loan. If the buyer defaults on their payments, you face taking back the company and enduring the associated legal hassles and costs. Then you have to find a new buyer for a business that probably isn’t worth as much as the one you sold. (That is why you should negotiate a relatively high down payment – e.g., 30% to 40%.)

Risk of Default on the Loan that’s Ahead of Yours . If the buyer defaults on the acquisition loan, the proceeds of which made up all or part of your down payment, you have to cure that default before you can get back your former company. If you don’t, the primary lender will flip the business or liquidate the collateral, leaving you with little left to recover.

Risk of Waiting to Get Paid. If there is a lender ahead of you, they may require you to go on “standby,” delaying receiving the payments on your note (two years is common) until the buyer has established a reliable loan payment record with the primary lender.

Risk of Lower Rate of Return. Interest rates on seller carrybacks are usually below market, meaning that your rate of return might be less than if you had sold your business for cash and put the money to better use.

No Clean Break. Your vision of simply walking away from your company on closing day with a big bank deposit is a mirage.

Those are legitimate concerns, and carrying back a portion of the sale price might not suit you or your situation.

The “Pros” Are Huge. But before you conclude that seller financing isn’t for you, consider the potential enormity of the benefits:

More Prospective Buyers. By keeping an open mind on seller financing, you expand the pool of potential buyers – including buyers at the upper echelons of the market – by a factor of three or more. Demand cash only, and you eliminate 60 to 80 percent of your potential buyers.

Higher Selling Price, Part 1. Expanding your buyer pool increases your prospects for creating a competitive bidding situation. The resulting “auction environment” helps drive up the demand and price for your business.

Higher Selling Price, Part 2. Just as a cash buyer (of nearly anything) expects to pay less, a realistic “credit” buyer should expect to pay more. By offering seller financing, you elevate the price ceiling on your company, and the higher selling price helps you make up for losses of liquidity or rate of return that can accompany deferred payments. At the very least, even in a cash deal, your expressed willingness to carry back part of the sale price gives you a negotiating tool.

Higher Selling Price, Part 3. By deferring some of the purchase price, a buyer can afford to pay more for the business.

Higher Selling Price, Part 4. A seller who is willing to invest and assume risks in the sale of their business is sending a strong message to potential buyers: I believe in my company, and I am confident you will have success in owning it. That in turn gives buyers and their lenders confidence that their purchase (remember, it’s a risk for them, too) will pay off.

Higher Selling Price, Part 5. By our rule of thumb, the seller in an IBG deal can expect the aggregate benefits of parts 1 through 4 to yield a selling price 15 to 30 percent higher than in a cash-only sale of the same business. Consider the possibility that, by demanding cash, you may lose the opportunity to receive just as much cash at closing from a better buyer plus the value of the note you carry.

Less Complexity, Part 1. Financing the sale of your company spares the buyer from jumping through the multitude of hoops and costs that are inherent in getting a bank loan (SBA guaranteed or not) and that can delay or threaten your deal.

Less Complexity, Part 2. Keeping the terms of the sale between you and the buyer eliminates the meddling of third-party lenders and allows the parties to retain more control over the deal.

Leverage in Due Diligence. Seller financing can help level the playing field during the due-diligence phase, where in many cases the buyer is calling the shots. That is somewhat less true if the buyer knows that, while you are trying to satisfy their requests for information, they also have to demonstrate their creditworthiness, financial strength, industry knowledge, business track record, and business growth planning skills to you, their new “banker.”

A Good Investment. While you might fear that tying up part of your sale price will hurt your investment yield (see “cons” above), that fear might be unfounded. The promissory note you take from your buyer constitutes an investment in its own right – one that, favorably structured, might provide a return equivalent to the stock market or other investment options.

Tax Benefits. Spreading out your sale price and capital gains in an installment sale should allow you to defer your tax liability and manage it to your advantage.

THE BIG PICTURE

There’s no question that negotiating the terms of the promissory note, filing UCC-1s, negotiating the tax treatment of the deal, etc., are inconveniences that add a layer of nuisance that doesn’t generally apply to a cash deal.

And, yes, things can go wrong. But you have been staring risk in the eye – and prevailing – for as long as you have owned a business, and now is not the time to become unduly cautious.

In the end, your willingness to finance the sale of your business will attract more buyers, drive up your ultimate selling price, and maximize the benefits of what is likely the most important business transaction that you will ever encounter.

The M&A professionals at IBG Fox & Fin and our nationwide IBG Business partner firms can help you do it right. You can take comfort and confidence in our decades of business transaction experience, more than 1,100 successful closings, and our nearly 90% deal closing rate – three times the industry average – involving private mid-market companies of all sizes and complexities.

Young Energy Products purchases Skinner Brothers Company

Wed, 28 Jun 2023 17:14:57 GMT

Young Energy Products , a Tulsa-based oilfield fittings manufacturer and distributor, has purchased Skinner Brothers Company in a strategic acquisition that expands Young’s offerings of products and support for the petroleum industry.

Jim Afinowich receives M&A industry award

Fri, 26 May 2023 19:39:53 GMT

Jim’s award marked his second M&A Source award in three years. He was named “ Advisor of the Year ” in 2021.

The awards event also highlighted IBG Business partner Gary Papay (Pennsylvania/North Carolina), who was named to the Executive Club (2022 closed deals totaling more than $5 million), and IBG partners John Johnson (Oklahoma) and John Zayac (Colorado), who were Champion Award recipients for their “substantial and sustained service” to the M&A industry.

Selling your business? Recognize the three types of business buyers

Tue, 23 May 2023 22:41:01 GMT

Understanding the traits common to each buyer category can help sellers level the playing field in a business sale of any size.

In middle-market business sales, the value of the deal and the path to a successful closing are shaped in large part by a factor that many sellers underestimate: the type of buyer that is evaluating your company.

Looking at the more than 1,100 business sales that IBG Business’s M&A professionals have closed dating back to the 1980s, the lion’s share of buyers can be slotted into one of three major categories:

individual buyers, consisting of experienced entrepreneurs, former corporate executives or corporate staffers yearning to work for themselves, and high net worth individuals who seek an opportunity to create wealth;

strategic buyers, which often use business acquisitions to achieve synergistic goals (e.g., increase market share, achieve geographic growth, or reduce competition); and

financial or “professional” buyers, which are constantly in the market for business acquisitions that will achieve high returns for themselves and/or their investors.

As you prepare your business for sale and embark on one of the most important transactions of your life, being aware of each type of buyer can help you anticipate what a prospect will look for in a deal and how you can respond throughout the sale process.

Following is a profile of each type of buyer and a look at some of their distinguishing characteristics.

INDIVIDUAL BUYERS

Their Traits. Individual buyers are in it for their personal benefit. They may be serial entrepreneurs, retirees from the corporate world, a first-time owner who has had enough of working for someone else (i.e., they are looking for income and freedom), or a recent seller who is looking for his next challenge.

In most cases, individual buyers target smaller, relatively affordable, well-run, low-risk businesses where they can have hands-on ownership. That often makes them welcome prospects for sellers who not only want to sell their company but also want a buyer who is looking for a turn-key operation, will preserve the company’s reputation, grow it into something bigger and better, and take good care of your employees.

Risk – that is, the lack of it – can be a major consideration for individual buyers, because they are either new to business ownership, lacking in capital, or in the second half of their life and don’t want to take unnecessary chances.

Risk can be a consideration for sellers as well, if the buyer is unable or unwilling to pay cash for the business and wants you to carry a portion of the purchase price.

Because they have a personal stake and involvement in the deal, they are the least likely of the three types of buyers to treat the purchase as “just business”; consequently, they are often the least predictable, and they will often require the most attention due to their lack of transaction experience.

Professional Help. In what we would characterize as a “Main Street” deal (as opposed to a deal at higher rungs of the value ladder), you will attract prospective buyers from the full spectrum of sophistication and integrity. An IBG Fox & Fin M&A professional can help you separate the wheat from the chaff.

On the front end, we will also help you prepare your business for sale, market it to a defined field of prospects, preserve confidentiality, and evaluate buyers and their offers. As the deal progresses, we will serve as a valuable buffer between you and the buyer and guide you through the negotiation and due diligences phases to a successful closing.

STRATEGIC BUYERS

Traits . In contrast to an individual buyer, a strategic buyer is usually an established company that is actively engaged in your industry or a related industry and sees the acquisition of your business as a way to achieve a strategic or synergistic objective.

As two common examples, a strategic buyer might pursue:

a competitor , to acquire its customers, market share, or product line, or to use the acquisition to accelerate the company’s entry into a new geographic market; or

a supplier , to reduce material costs, assure sources of supply, and gain an edge over competitors who buy from that supplier.

Good News. Interestingly, strategic acquisitions can present instances in which the subject business’s profitability and financial details are not the most important considerations. We have represented sellers in strategic-buyer situations where the main draw was some combination of a desirable product or service line, location, intellectual property, customer base (with long-term commitments), employee base, vendor relationships, or how well the two companies aligned with each other.

Because a strategic purchase may be based on factors other than multiples of earnings or EBITDA, a strategic buyer might be willing to pay more for your business than would a financial buyer, despite the latter’s presumably deeper pockets. Therefore, developing in advance one or more unique, inimitable qualities that will attract a strategic buyer, and your ability to communicate your business’s points of value to the strategic buyer – probably with the assistance of an experienced M&A professional – will maximize your ultimate selling price.

Not So Good. Selling to a strategic buyer can have its downsides. For example:

Break-up and Sell-off. After the sale, the business you sold may bear little resemblance to the business you built. Its brand, reputation, employee base, and other qualities that were such a great source of pride and satisfaction to you may mean little to your buyer. Within a few years under its new ownership, there may be little public evidence that your business ever existed.

Buyer Advantage. For many strategic buyers, the purchase of your business is not their first rodeo. Your buyer might have more experience in business purchases than you have in business sales, and that can give them an advantage in the negotiation and due diligence phases of the deal. Trying to keep up with them can take great effort, possibly at the expense of maintaining your focus on business profitability, growth, and sale value.

The Word on the Street. Confidentiality is a major issue in any business sale, especially when selling to a buyer in your industry, where the inevitable grapevine gossip and speculation can threaten customer loyalty, employee retention, and even lender and supplier ties.

These last two concerns – an experience gap and potential breaches of confidentiality – are two valuable benefits of being represented by a tested and proven M&A professional. (See several more concerns at “ Selling a Business? How M&A Advisors Add Value .”)

Leveling the Field. At IBG Business, we tackle the experience gap by creating a competitive field of motivated, thoroughly vetted buyers – strategic or otherwise. In deal after deal, we have found that creating buyer competition, with the emotion and frenzy of an auction-like environment, makes it hard for any single buyer to stay in the driver’s seat for long.

Generating multiple buyers is vital in sales not just to strategic buyers, but to “financial” buyers as well. Read on.

FINANCIAL BUYERS

In the current environment (and in our experience), 70% of buyers for mid-market businesses are “financial buyers” – a broad category that includes:

ultra-high net worth individuals and the “family offices” (private wealth management firms) that serve them;
search funds (a team of investors that is backing an individual whom they trust to operate an acquired business)
institutional investors,
venture capital firms, and, most prominently,
private equity groups.

Private equity groups (PEGs) are essentially groups of investors that have combined their collective resources, business experience, and management skills to form an acquisition entity capable of raising and investing significant sums of money. They are consistently in the market for business acquisitions.

Traits . Financial buyers are professionals, and buying businesses that will generate a return for themselves or their investors is what they do for a living. Their profile generally includes some combination of the following qualities:

They tend to focus on small and mid-sized businesses.
They have financial strength and liquidity.
They might buy your business in its entirety.
They also might buy a partial interest so that, with the investment, your business can reach its next level of profitability and growth, with you maintaining some level of control (discussed further below).
They are buyers, not operators. Therefore …
They value businesses that have a strong, credentialed, long-standing management team that will stay on (maybe with you, maybe without) after the purchase and continue to run the company.

Selling to a Private Equity Group. From the point of view of a seller, deals involving PEGs typically offer benefits (such as professionalism and flexibility) and challenges (stemming from their sophistication and deal experience) that are not as common among the types of buyers described earlier.

Professionalism . Unlike other types of buyers that might be first-time or exploratory investors, PEGs are professional investors focused specifically on making money and closing deals. They don’t require special financing; can be relied upon for a consistent, professional approach; and typically bring extensive expertise to the table. These factors can significantly increase the speed at which deals close and can help to minimize unexpected costs.

Flexibility . Depending on the subject business and the PEG’s investment focus, a PEG may execute recapitalization investments; outright purchases; majority share acquisitions, in which the PEG takes over management; or minority investments, where the PEG invests but looks to the seller to continue to run the business.

Sophistication . Their experience and requirements can pose difficult and unexpected challenges to unprepared sellers, who can immediately find themselves at a troubling disadvantage in trying to go toe-to-toe with their buyer. The number of PEGs has grown substantially in recent years due to the abundance of capital in the market. As a result, the competition for high-quality target companies has increased, leading to escalated efforts to discover hidden gems. Without appropriate representation, sellers can be at a significant disadvantage when reacting to a solitary proposition .

Fortunately, the financial buyers that we regularly encounter are usually willing to surrender some of their advantage by encouraging the seller to use an M&A broker whom they know and trust, who knows the process, can guide the seller through it, and can package and communicate their required information as they want to see it.

Preparation . If you anticipate selling to a financial buyer, focus your preparation primarily on two key objectives: (1) maximizing EBITDA and (2) assembling and retaining a solid management team.

Your sales prep should also acknowledge a few more traits of this buyer category:

They tend to be relatively risk-adverse and will value a company that demonstrates consistent growth and offers a low risk-to-reward ratio.
Their purchase offer is usually based on a multiple of your company’s current and historical EBITDA (earnings before interest, taxes, depreciation and amortization). Therefore …
They are likely to obsess over your financial statements (e.g., cash flow statements, income statements, balance sheets, accounts receivable aging, and accounts payable), go through them with a fine-tooth comb, and persist in requiring seemingly endless information from you until they are satisfied that your numbers are locked down.

THE VALUE OF AN M&A PROFESSIONAL

As varied as the three types of buyers are, they have this quality in common: Selling to them will almost always go more smoothly, and with a better result, for the seller who is represented by an M&A professional.

Whatever the buyer’s size, purpose and objectives, you should expect to benefit from the services of an experienced business broker or M&A advisor in the following ways:

You will be well educated in the sale process.
You will know whether you should sell now or wait.
Before it goes on the market, your business will be prepared for sale in the way that will bring top dollar.
Your financial statements will be appropriately and accurately recast to show the business’s true earnings and book value.
Every precaution will be taken to preserve confidentiality.
When it goes on the market, your business will be presented in its best light, only to vetted and pre-qualified prospective buyers.
You will be freed from the hands-on management of your sale, allowing you to maintain your focus on managing your business.
You should receive offers from multiple buyers, giving you options with respect to price, terms, and your ultimate selection of the “best fit” buyer.
You will have an assessment of each buyer’s integrity, background, and financial health.
You will have an experienced buffer between you and your buyer.
You will have a loyal, steadfast guide and advocate throughout the offer/acceptance, negotiation, due diligence, closing, and post-closing transition phases.
When the deal is done and the commission is paid, you will emerge from the deal with substantially more money than you would have received if you had run the deal on your own.

The sale of your business, regardless of its size, warrants a high degree of professionalism that will put you on a level playing field, regardless of the type of buyer.

Caysa Collective purchases Home Elevator businesses

Tue, 16 May 2023 16:15:08 GMT

Austin-based Caysa Collective has purchased residential elevator installers Home Elevator of Houston and Home Elevators of Austin.

Health Management Associates acquires Crestline Advisors

Fri, 07 Apr 2023 18:08:43 GMT

Crestline Advisors, a Phoenix-based healthcare consulting firm, has been purchased by Health Management Associates (Lansing, Michigan).

The letter of intent in a business sale: 7 seller FAQs

Mon, 03 Apr 2023 21:07:01 GMT

In a business sale, the letter of intent is a vital document, and sellers need to thoroughly understand its purpose and scope.

While his trucking company was always his first love, Howard had a variety of business interests, including farms in Missouri, a heavy equipment dealership in Kansas, and a gypsum mine in Utah. As is true of many entrepreneurs, he was a big-picture guy who knew how to build up and turn around a business but had little tolerance for details.

Howard’s aversion to the minutiae of business ownership reared its head after he decided to sell his mining operation. After letting a few people know that it might be available, he took a call from a potential buyer in California. Their conversation was brief, and Howard didn’t give it much more thought.

A few days later, Howard got a call from his son, who was Howard’s CFO at their office in Colorado Springs.

“Pop, we just got what looks like a letter of intent from a guy in Fresno who wants to buy the mine for $19 million cash. The tail goes with the hide” – mimicking his dad’s favorite term for a clean business sale – “and he wants to close in 90 days. I’m going to fax this to you and Larry” (their corporate attorney).

“Keep the damn lawyers out of it,” Howard grumbled. “Sign it and send it back to him, and I’ll look at it in a few days. Oh, and you’ll need to start putting together some financial information and a list of assets. Leave out the condo and King Air.”

A week later, Howard received a call from another potential buyer, who said over the phone that he would pay $22 million. Howard called his son and told him they had a better deal and to break it off with the Fresno buyer, who promptly sued to enforce the letter of intent and to bar any sale to another buyer.

After six months, lots of attorneys’ fees, and the loss of the sale to the second buyer, the judge dismissed the first buyer’s lawsuit, ruling that, despite the fact that the letter of intent stated that it was legally binding (an important detail), it left out some of the contractual elements that would have been part of the ultimate sales agreement, and thus Howard was not bound by it.

He dodged a bullet. Had the language of the letter of intent been just a little different, or if the lawsuit had caught a different judge, Howard could have been stuck with the lower price.

That he eventually sold his mine to a third buyer, for a good price, with the help of IBG Business, is not the point of this tale. The moral is this: In a business sale, the letter of intent is a very important document, and both parties need to understand its purpose and scope and take it seriously.

About Letters of Intent

As we discuss in our article, “ How Long Does It Take to Sell a Business? ”, receiving a letter of intent typically occurs in the fourth of six stages of an IBG-managed sale:

Information Gathering
Marketing
Management Meetings
Letters of Intent and Negotiation
Due Diligence
Closing

The preceding steps include our preparation of the Confidential Information Memorandum (CIM), marketing the business, and fielding inquiries from potential buyers concerning the nature of the business and its revenue, assets, earnings, etc., without the buyers being able to identify the company.

If a buyer is truly interested and survives our vetting, we execute a non-disclosure agreement that allows them to receive the seller’s CIM and, for the first time, see detailed information about the business. The next step is for the buyer to present the seller with a letter of intent.

(Everything up to this point fits within our “running the process,” described in our article, “ Selling Your Business, a ‘Trip to Tahiti,’ and the Perils of a One-Buyer Deal .” In the sale process, we sometimes call for at least an indication of interest, which is effectively a non-binding LOI that further qualifies the buyer and allows for more vetting on both sides. In some cases, active and informed buyers are willing to jump directly into a partially binding LOI.)

FAQs

Here are seven common questions about a letter of intent and its place in an M&A deal.

1. What is a “letter of intent”? In a business sale, a letter of intent (LOI) is a buyer-originated document through which the buyer expresses its intent to buy the subject business. When signed by the buyer and seller, it should provide:

a written expression of the parties’ intent to enter into a deal;
an outline of an agreement in principle for the buyer to purchase the seller’s business at an offered price or range and under certain terms;
confidentiality protection for the seller;
an outline of the buyer’s financing;
a timeline for due diligence and closing; and, in most cases,
the buyer’s exclusive right to purchase the company during a specified time period.

2. What is an LOI’s purpose? In the M&A context, the LOI’s fundamental purpose is to formally acknowledge the parties’ (a) intent to enter into a business purchase or merger and (b) good-faith desire to proceed in negotiations.

It bridges the temporary gap between a verbal expression of interest and a definitive purchase agreement. It can be viewed as a roadmap and a timeline for the parties to follow through the due-diligence process to the final closing.

While the LOI provides the basic terms and conditions of the eventual contract, it should acknowledge that negotiations are still in progress. In most cases, some of the contractual elements are omitted (a) to prevent the document from becoming a binding legal document (more below), and (b) because of the impracticality of including every detail in a preliminary document.

3. Why is an LOI important? Negotiating the purchase and sale of a business is expensive and time-consuming for both parties, and an LOI can give both parties some assurance that the associated costs and risks are justifiable.

An experienced buyer will not commit time and money to due diligence, analysis, and legal, tax and accounting services unless they believe they have an earnest seller and will have an exclusive right, expressed by a “no shop” clause, to buy the company.

Meanwhile, a prudent seller will not subject its business to the disruption and exposure of the due-diligence process unless the buyer is committed to the deal.

The simplicity and structure of an LOI allow the parties to move forward with an agreed understanding of what they are trying to accomplish, within certain guidelines.

As North Carolina attorney Amy E. Risseeuw explains in her article, " The Basics of an M&A Letter of Intent ," an LOI:

“allows the parties to determine very early in the process whether there is a basic agreement on key terms and confirm that there are no ‘deal-breaker’ issues before either party has devoted substantial time and resources. In addition, an LOI helps to facilitate the preparation and negotiation of the definitive documents for the transaction by serving as an outline of the key provisions.”

4. Is it legally binding? By its language and content, an LOI can be either binding or non-binding. Given the uncertainty of how a deal will progress, in most cases neither buyer nor seller wants to be ultimately bound by the LOI and will state in the LOI that it is non-binding. In that circumstance, either party should be able to walk away from the deal without legal liability.

However, courts have ruled that an LOI is a binding contract and can be enforced by the party that wants to move forward, if it contains all the material terms of an agreement and, as one judge wrote, “is complete, clear and unambiguous on its face.”

Also, while the majority of LOI’s have some provisions that are non-binding (e.g., the buyer must buy the company), other provisions are binding, such as the exclusivity period, confidentiality protection, etc.

5. What should a seller look (and look out) for? Be on the lookout for “poison pills” that some buyers might try to sneak past an unwary seller. Language stating that the parties have agreed to anything should raise a red flag. Also, sellers should be alert to unintended presumptions or default events, such as, “Unless we hear from you to the contrary …”

In addition to vigilance against unwanted language, sellers should expect to see provisions that are common to most well-structured LOIs. In addition to identifying the company or assets to be purchased, the parties and their contact information, and the deal’s price and terms, an LOI might address such issues as:

whether it is legally binding or non-binding (discussed above)
the structure of the transaction
confidentiality and non-disclosure protection
exclusivity
indemnification
guidelines for negotiations
scope and guidelines for due diligence
timelines for due diligence and closing
conditions for closing
governing law

6. What if I want to make changes before I sign it? An LOI is not a one-way proposition to be dictated by the buyer and is subject to negotiation.

Matt Frye , a partner in the Oklahoma office of IBG Business, points out that “the LOI is an agreement between the buyer and seller. It is intended to protect both parties, and the seller has the right to negotiate its terms.”

“An experienced M&A broker can help facilitate this process,” Frye continued, “through their knowledge of standard provisions and terms. More important, we always request that our client have all documents vetted, if not drafted, by their legal counsel.”

7. What happens after the letter of intent is signed? The signing of an LOI typically triggers the due-diligence period, during which negotiations occur, the purchase agreement is drafted, and the buyer’s requests for company information are satisfied (see our article, “ Preparing for Due Diligence in a Business Sale .”

Also, a signed LOI usually marks the start of material expenditures by both sides, which could include a quality of earnings review, equipment valuations, inventory assessments, site surveys, etc.

“Once the parties reach the point where the buyer feels comfortable and the seller has portrayed the business and assets as advertised, the parties will then initiate the bulk of the definitive documents via legal counsel,” said Bob Latham , IBG’s Texas partner. “Prior to that point, only the major topics have been outlined and discussed. The ‘papering’ phase includes a significant amount of negotiation on the finer details, such as seller transition or employment agreements, facility lease terms, purchase price allocations and, importantly, working capital pegs, just to name a few.”

Keeping It Simple

In contrast to the final purchase agreement, which, even without addendums, can easily expand to hundreds of pages, a letter of intent should be relatively brief, focusing mostly on the major issues that will help the buyer and seller reach common ground and justify the risk and expense of pursuing the deal.

In her aforementioned article, attorney Amy Risseeuw writes, “While it is important to include [in an LOI] the key terms proposed for the potential transaction, the details and finer drafting should be deferred until the definitive deal documents are prepared. Including non-material issues at the LOI stage can unnecessarily lengthen the time to complete this first step, potentially causing lost deal momentum, frustration, and a longer overall transaction timeline.”

IBG Fox & Fin announces sale of Superior Stone & Cabinet

Fri, 24 Mar 2023 14:59:08 GMT

Superior Stone & Cabinet, Inc., a Phoenix home remodeling superstore, has been acquired by Antonio R. Santiago of Seattle.

Selling your business, a “trip to Tahiti,” and the perils of a one-buyer deal

Tue, 14 Mar 2023 15:57:11 GMT

If you have a successful company that would be attractive to potential buyers, you owe it to yourself to be prepared for the day when the call comes, to know how to respond, and to truly understand how to maximize the market value of your company.

Now we understood the Tahiti analogy. For the last six months, the seller had been mentally sitting on the beach, with a nice breeze, in a comfortable chair, with his feet up, a Corona on the side table, and $60 million in the bank. But after six months in his imaginary Tahiti, he was forced to make a choice: to take substantially less money so that he could really be at the beach in two weeks, or start all over with no guarantee of a better deal.

“Running a deal” versus “running a process.” That story illustrates just one of the perils of running a deal, with a single buyer that is the only game in town, and a seller who, in trying to run the deal on their own, finds their options severely limited.

Running a deal, without first “running a process,” is a shortcut that deprives the seller of choices and precious leverage. It limits the seller to running a deal with one buyer and two choices:

do the deal with the only buyer in the picture, on their terms, or
don’t do the deal.

That is the reality underlying an IBG mantra: One buyer is no buyer.

In contrast, running a process (described below) involves about 1,000 hours of professional preparatory work (performed largely by your M&A advisor and their team) that generally must be completed before you can effectively run the deal. The main value of the process is its ability to generate interest from multiple, vetted prospects. If you skip the up-front work, if you don’t attract multiple buyers, you forfeit many of the advantages that should accrue to the seller.

If you run a process, you can anticipate having multiple buyers, which affords you important choices in price and terms and in deciding which buyer will carry on your legacy. That discernment with respect to your buyer is especially important if the terms of the deal include your staying on for a time after closing or your ultimate proceeds depend on earnouts or future profits. Those relationships are a bit like a marriage, as compatibility and trust are paramount.

The IBG Sale Process generally consists of six key steps listed below. The first five are cumulatively crafted to attract competitive offers, maximize market value, identify the “best fit” buyer, avoid due-diligence surprises and maneuvering, and achieve a successful closing.

Assess your company and the market.
Package your business.
Market your business
Maximize the offer.
Close the deal.
Provide transition assistance.

By the time you’ve completed step 4, you have a signed letter of intent, and both parties are ready to start their due diligence. At that point you are ready to actually run a deal.

Taking the call. Now that you have a better understanding of what goes into a successful deal and what distinguishes “running a deal” from “running a process,” let’s return to the Tahiti scenario and examine how many business sales start: with an unsolicited call from a prospective buyer to an owner who hasn’t put his business on the market.

First, determine whether the purported buyer is (a) really a buyer and not a business competitor engaging in corporate espionage and (b) credible. In our experience, one out of 10 cold calls is from someone who checks both of those boxes; the other nine are fishing expeditions.

Second, protect your confidentiality . This is extremely important; we frequently encounter situations where the owner is so intrigued by a buyer’s offer that, when asked for “all your financials,” they provide it, with no confidentiality protection and no vetting of the buyer.

Third, if you’re interested in starting a dialogue, be appropriately evasive:

Let me get your name and number, and I will get back in touch with you.

My company is not for sale right now, but I’ve been considering some changes. I’ve thought about buying another company, or merging, or selling off one of our divisions.

I’ve got some professionals helping me, and one of us will get back to you to see if there’s a potential for more discussion.

In situations where IBG is under contract and representing the seller, we give them similar advice, plus this punch line:

Yes, we’re exploring all these options. As a matter of fact, I’ve hired an M&A firm to help me with this assessment. I’m going to give your information to IBG Business, and they will contact you.

Don’t be afraid that revealing your connection with IBG will scare off the prospective buyer. In our experience, the more serious and desirable the buyer, the greater the likelihood that they will find value in our representing you. We have over 3,500 private equity groups in our buyer database, and a lot of them have told us they prefer buying companies through an intermediary because the owner and the business are more prepared.

War story. We started this article with a story, and we will end it with one – a story that illustrates the value of “running a process” and avoiding the trap of falling victim to a solitary buyer.

One afternoon I received a call from a business owner.

“My lawyer gave me your name and said I should talk to you,” he explained. “I have a letter of intent sitting in front of me for someone to buy my business for $6 million. We’ve been negotiating for the last eight months, we finally got the letter of intent, and I’m ready to sign. But my lawyer told me to run it by you first.”

He came to our office the next morning and showed me the deal. My response, which undoubtedly included the admonition that one buyer is no buyer, went something like this:

“Here’s what I want you to do. Go back to the buyer, tell them that this is the biggest transaction of your life, you want to be professionally represented, and you’ve hired IBG to represent you. I will give them a call in about two weeks, after I have my arms around the deal.”

“But they won’t wait two weeks,” he exclaimed. “We’ve been doing this for eight months, and the letter of intent expires on Monday.”

I told him not to worry, that after eight months of negotiation they will go a little bit longer. He reluctantly agreed, left my office, and called his buyer, whose response was predictable.

“Oh, no, don’t get some damn broker in the middle of this,” the buyer reportedly said. “They just screw things up, and they take forever to do it. Please – we’ve got our deal – please don’t do this.”

But the seller stuck by his guns.

The next morning the buyer called the seller to see if he had come to his senses.

“Are you getting rid of the broker?”

“No, I’m not.”

“Listen, if you get rid of that broker, change the deal to $8 million. I’ll do the deal today at $8 million if you don’t get a broker involved.”

He got me involved, and we ended up selling the company.

For $10 million.

To a different buyer.

One buyer is no buyer.

Postscript . You may think that this article doesn’t apply to you because you don’t have any intention of selling your business. Or maybe you’re several years away from putting it on the market.

That may be the case. But if you have a successful company that would be attractive to potential buyers, you owe it to yourself to be prepared for the day when the call comes, to know how to respond, and to truly understand how to maximize the market value of your company.

At IBG, we like to talk with business owners years in advance of a sale that’s not yet on their radar, to answer their questions, help them recognize the possibilities, and build relationships and trust that, through effectively “running a process,” will ultimately deliver top dollar in perhaps the biggest transaction of their life.

Button Oil & Propane purchases Matthews Fuel Service

Thu, 02 Mar 2023 17:11:48 GMT

Button Oil & Propane has purchased Matthews Fuel Service, Inc., a Nescopeck, Pennsylvania, petroleum, propane and bottled water distributor.

Preparing for due diligence in a business sale

Tue, 31 Jan 2023 18:28:25 GMT

For many sellers, withstanding the challenges of the due diligence phase depends on keeping their emotions in check and anticipating the buyer’s requests for information.

If you have been through a business purchase or sale, you have likely experienced the unique tension and strife common to that phase of the deal known as “due diligence.”

For first-time sellers who have just received a signed letter of intent, due diligence may seem like an interminable period during which the buyer mutates from a celebrated connoisseur nonpareil of business desirability and value to an insatiable hoarder of data and documents, whose capacity for annoying demands for minutiae and innuendos about the status of non-existent records is, in the mind of the seller, tantamount to calling his company an ugly child.

In reality, though, due diligence is simply a normal part of the business ownership transition, and most apprehensions leading into it stem from fear of the unknown.

The Value of an Intermediary. While due diligence may feel bewildering at first, part of what a top M&A advisor does is help their client prepare for, understand, and navigate the process – successfully and with the least possible disruption.

First-time sellers often assume that the main value of their M&A professional is in attracting potential buyers. After successfully navigating the due-diligence phase, they tend to have a broader appreciation for what their intermediary helped them achieve – especially in leveling the playing field with the buyer.

“In due diligence, the buyer and seller usually are not on equal footing,” says IBG partner Jim Afinowich (Arizona). “A professional buyer has been through the process before, probably multiple times, and has a checklist of due-diligence items. The professional buyer is also better equipped to make the deal ‘just business,’ and that’s an advantage over a first-time seller who built the company from nothing into something great and feels like they are giving up their first-born.”

Afinowich noted that a successful closing often hinges on whether the seller can adjust, sometimes in major ways, to the atmosphere of the deal.

“Many business owners are by nature self-sufficient and unaccustomed to relying too much on others. For some, the biggest adjustment they make during due diligence is to surrender control of the deal and start trusting their M&A professional to anticipate and respond to b uyer requests and serve as a communication filter and emotional buffer between the parties.”

“When things get tense, our mission is to get the parties back on the same page, and we’re pretty good at it,” Afinowich concluded. “It isn’t always pretty, but when the parties are telling each other to go to hell at the same time, we know that they’re finally starting to think alike.”

Due Diligence Defined. In its simplest terms, due diligence is the process of ensuring that, before a deal is finalized, things actually are as they appear to be. While it takes work, due diligence helps squeeze risk out of a sale, protecting the buyer and the seller. It protects the buyer from buying something different than has been represented, and it helps the seller be thorough in material disclosures and avoid having a buyer assert that things were undisclosed as a claim for damages.

For someone considering a merger or the purchase of a business, document review and the answers to due-diligence questions are critical. It is a complex, time-consuming process, but with so much on the line with any merger or acquisition, neither buyer nor seller wants to make a major decision without a solid foundation of accurate information.

“A key goal of the due diligence process is to find potential problems, such as liabilities and contractual issues,” notes IBG partner Gary Papay (Pennsylvania and North Carolina). “The end result should be that the selling price of the business is justified and both parties walk away satisfied. It is very common for problems and issues to pop up during due diligence, so it’s important to stay proactive and be open to negotiation until the deal is finalized.”

While the types of information that a buyer (or seller) may request varies with the type and size of the business and the specifics of the transaction, here is a general list of issues and information requests that are likely to arise during due diligence.

In-depth review of financials

Income statements (actual and recast)
Balance sheets (actual and recast)
Quality of earnings review – mo re below
Verification of all assets and liabilities
Sales data
Loan balances
Accounts receivable aging
Bad debts

Legal issues

All legal documents (entity documents, operating agreements, contracts, licenses, leases, employment contracts, obligations, etc.)
Pending litigation
Pre-litigation disputes
Entity structure

Government compliance

Tax returns
Payroll records and reports (1099s, W-2s, etc.)
Company- and industry-specific issues (federal, state, local)
Regulatory compliance (e.g., environmental reports)

Customer lists

Supplier lists and agreements

Marketing materials

Data security

Intellectual property

Trademarks, copyrights, patents
Proprietary processes
Operational and procedural manuals

Product and service lines

Insurance policies

Inspection of capital equipment

Age
Condition
Value

Employees

Organizational structure
Employee census, including position, hire date, DOB, wages/salaries, benefits, pending retirement
Can the buyer expect a turn-key transition? Will key employees stay? Are there employment agreements?
Employee manuals and personnel policies
Benefit plans
Retirement plans, pension plans and funding condition

For an even longer list, see a 2019 Forbes article, “ A Comprehensive Guide To Due Diligence Issues In Mergers And Acquisitions .”

“One of the things you have to do as the seller of a company is put together a mountain of information for the buyer,” recalls Doug Padgett, an IBG client who recently sold his company, Pendergraph Systems. “This is stuff that you've accumulated, in my case, over 25 years. IBG’s help in that effort was immense; we couldn't have done it without them.”

While the scope of information required by the buyer is typically very broad, in most deals the central focus is on the subject company’s financials. That should come as no surprise; because the purchase price is largely based on some multiple of the company’s net revenues and adjusted earning capacity, the buyer wants to know that he’s getting what he’s paying for. But the financials also serve as a roadmap to the subject company’s operations, which will lead to questions. The answers will spark more questions, and that back-and-forth, rooted in the financial records, is a major contributor to the length of the due-diligence phase.

With the help of their M&A advisor, sellers can prepare themselves for that process, both emotionally and in gathering the information sought by the buyer.

Financial Scrutiny. In recent years, the financial focus of buyers has risen to new heights by the growing use of a “quality of earnings” (QofE) review, which we referenced above. Such reports are increasingly common in larger transactions, especially where the buyer is a private equity firm.

“A quality of earnings report is a deep dive on the seller’s financials,” said Matt Frye , a partner in IBG Business’s Oklahoma office. “It shows a buyer the business’s true profitability by adjusting EBITDA to reflect any non-recurring revenues and expenses. Likewise, a QofE identifies liabilities and how they might be factored into the working capital calculations.”

Investopedia puts it less delicately, noting that a QofE report reveals a clearer picture of earnings “by dismissing any anomalies, accounting tricks, or one-time events that may skew the real bottom-line numbers.”

When the “real bottom line” deviates too much from the financials offered up by the seller, the QofE report can drive a wedge between the parties, injecting new challenges to due diligence and putting the deal at risk.

As threatening as that may seem to a seller, IBG’s M&A professionals view a QofE review as consistent with one of their standard practices in packaging a business for sale.

“We routinely recast the business’s financial statements to show its true earnings in a form that buyers expect,” said Frye. “While it doesn’t rise to the level of a QoE review, our in-depth recasting, before the company goes on the market, can strengthen the package we present to buyers and possibly lessen the need for the buyer to initiate its own review.”

Frye’s IBG colleague, John Johnson , adds: “We pave the way and anticipate issues. A top M&A intermediary will have prepared the client to sail through the QoE part of due diligence. Much of the advance process is routinely handled by the client’s M&A advisor, whose analysis minimizes the ‘surprises or difficulties’ arising from the buyer’s subsequent QoE work in due diligence.”

In some deals, a recasting will not meet the buyer’s needs, and the buyer might commission its own QofE review, absorbing all of the cost or asking the seller to share in it. If the seller and their M&A advisor anticipate that the buyer will require a review, there are instances in which it’s in the seller’s interest to have it done in advance. That can make a good impression on the buyer, reduce buyer requests for financial information, and shorten the due-diligence phase.

The benefits to the seller may not end there, Frye noted. He cited a white paper by Whitley Penn that contends that “every nickel spent on a QofE turns into a dollar”:

“A sell-side Quality of Earnings often results in a higher sales price for the company. Because M&A transactions are valued as a multiple of earnings, the higher the earnings the higher the value. The sell-side QofE team will likely uncover certain expense adjustments that would be considered addbacks to EBITDA to increase profitability which will then be multiplied by a market-based multiplier to calculate the transaction value.”

“Because QofE reviews are more the rule than the exception in the upper echelons of deals,” said Johnson, “we expect them to become more commonplace in mid-market transactions as well. Sellers need to be prepared for buyers to initiate the review, which can extend the due diligence phase.

“Under certain circumstances, sellers might consider the possible benefits of commissioning a review on their own, but the reality in most deals is that neither the buyer nor its bankers and investors are likely to accept seller-commissioned work commissioned as a substitute for their own review.”

AZ Big 100: IBG Fox & Fin included in "50 Arizona Businesses to Watch"

Tue, 24 Jan 2023 19:20:09 GMT

IBG Fox & Fin is the only M&A intermediary on the 50-company list, which includes the Arizona Diamondbacks, Intel, National Bank of Arizona, Petsmart and Salt River Project.

Baymark Partners purchases Collins Communications

Wed, 04 Jan 2023 16:40:05 GMT

Private equity firm Baymark Partners has purchased Collins Communications, Inc., a Gillette, Wyoming, communications technology and internet services provider.

Congress eases securities registration requirement for M&A brokers

Tue, 03 Jan 2023 18:11:07 GMT

A new federal exemption that Congress passed during its December 2022 lame-duck session provided a welcome holiday surprise for M&A brokers and other business sale professionals. The 2023 Consolidated Appropriation Act includes Section 501: “Registration Exemption for Merger and Acquisition Brokers.”

The exemption provides relief – two decades in the making – from the U.S. Supreme Court’s 1985 Landreth Timber decision , which gave rise to the need for merger and acquisition advisors or business brokers and others, regardless of the size or substance of a business sale, to weigh the costs, benefits, and risks of not becoming registered with a broker dealer if (a) the sale might be transacted as a partial or complete stock transaction or (b) might include terms which could also be argued to be securities.

Under very specific circumstances, the exemption relieves many transactional activities that previously might have required accepting substantial bureaucratic, time, expense and regulatory burdens of registration or accepting professional risks for not doing so. The Registration Exemption for Merger and Acquisition Brokers is by no means a blanket exemption from compliance with securities law. Rather it is an exemption from requirements to register under a limited set of conditions. If the conditions of the exceptions are not met, then the exemption cannot be relied upon.

M&A brokers and others who work on business sales must have a thorough understanding of the new law, which goes into effect at the end of March 2023. For business sale or acquisition services extending beyond terms of the new exemption, brokers will need to continue to carefully weigh the need to be registered.

Some examples of activities that are not allowed without registration under the exemption for merger and acquisitions brokers are:

capital raising,
providing financing in a transaction,
dealing in shell companies under certain circumstances,
assisting in the formation of the buyer group, and
taking custody of funds or securities.

While the new exemption is generous in the activities that are now allowed without registering under federal securities law, advisors and brokers must also be aware of how state securities schemes comport with the new law or prior federal law. About twenty states already have taken steps to align to some degree with the new exemptions, but many others may still have requirements that are based on the old law. Practitioners must know the appropriate state requirements before relying on the exemption. In states that have not caught up, local professionals in business sales should consider activities to help their states effect changes to align with the new Section 501 requirements.

Background. The Supreme Court's Landreth Timber decision struck down the long-standing Sale of Business Doctrine, which generally held that:

selling the stock of a business was not necessarily considered a securities sale, and

a sale of management and control of a business could mean that the transfer of a majority of stock of a closely held corporation would not be a securities transaction.

In reaching its decision, the court relied on the basic definition of “security” in the securities law:

The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement . . .

What attributes are commonly parts of business sale structures that might have arguably triggered registration requirements before the new exemption for merger and acquisition brokers becomes effective? Examples include:

owner-carried notes,
assisting in obtaining acquisition funding
earnouts,
recapitalizations,
retained equity/rollover, or
sale of stock – part or all.

The Landreth Timber ruling gave rise to ambiguities as to the need for M&A advisors or business brokers to be registered with broker dealers if the sale might be transacted as a partial or complete stock transaction or might include terms which could also be argued to be securities and, hence, might require an advisor or broker to be registered under an SEC/FINRA broker dealer.

Failure to register arguably could lead to a transaction having post-closing risks for years, including possibilities of rescission of the transaction with major financial repercussions for the broker or the seller. This was especially complicated for sale engagements that were undertaken as a sale of assets and the going concern, but eventually morphed into a sale that included securities type terms.

Victory in a 20-Year Battle. Observing the evolution leading to this change in federal law has been frustrating and interesting. It was started two decades ago in various ways by the professional associations, a group of attorneys, and visionary leaders in the profession. Along with many others, strong advocates from the outset included U.S. Representatives Bill Huizenga of Michigan and Frank Lucas of Oklahoma, securities attorneys Shane Hansen and Hugh Makens, intermediaries Mike Ertel, Mike Adhikari, Linda Purcell, and Todd Cushing, with decades of leadership from the Business Intermediary Education Foundation (BIEF), IBBA, and the M&A Source, with support from the AM&AA and numerous business associations.

Support also came through state actions and securities administrators including the North American Securities Administrators Association (NASAA) which provided a model exemption recommendation for states. The SEC was also supportive through its small business regulatory forums and no-action letters issued to numerous attorneys early in the process.

The U.S. House of Representatives passed similar versions many times, either overwhelmingly or unanimously, with strong bipartisan support before the Senate bothered to give it meaningful consideration. Senator John Kennedy of Louisiana was key in moving the legislation forward from the House Resolution into the recent 2023 Consolidated Appropriation Act.

It has been said this is a “rice bowl” issue in the relatively small M&A broker profession. Truly, this success has had many fathers, and special thanks to founding partners in IBG Business – including John Zayac , Jim Afinowich and Gary Papay – for their substantial contributions and long-term support.

Jim Afinowich listed in "Az Business Leaders" for the 6th straight year

Tue, 13 Dec 2022 15:07:11 GMT

IBG Fox & Fin founding principal Jim Afinowich has been listed in "AzBusiness Leaders 2023" by AZ Big Media. He was recognized for the sixth straight year, in the publication's "Business Brokers" category.

Selling a business? How M&A advisors add value

Thu, 08 Dec 2022 19:41:48 GMT

“There were several times when I wanted to do things that would have detracted from the value of the sale. The advice I got [from IBG] was very, very helpful in putting a stop to that, to ensure that we were continuing to proceed with a very professional negotiation to make the most of the value of the acquisition.” - Scott Hastings, Select Engineering (Client, IBG Business)

For many business owners, their company is a personal vault of bounties earned from years of sharp focus, wise choices, maximum effort, and often painful sacrifices.

It is little wonder, then, that selling their business is often the single largest and most important decision of an owner’s life.

Once an owner works through the emotional and identity issues of business ownership, they begin to recognize that selling is their key to seizing new control over time, attention, and energy, perhaps en route to new opportunities and a life of fulfillment that is free of the consuming constraints of ownership.

Motivated by that shift in focus, wise business owners invest carefully in producing a sale that maximizes the value of both the company they built and the next chapter in their life.

For most successful sellers, that investment includes the wise use of a merger and acquisition (M&A) broker or advisor.

M&A advisors are business experts who focus on selling middle-market companies in private transactions. They bring the key essentials for driving the best outcomes and values for clients in business sales transactions. Following are descriptions of how.

Why Use an M&A Broker? An experienced M&A advisor is the owner’s most valuable ally in managing a purchase or sale. They are consistently found to be important to buyers and sellers, whose experiences were chronicled through a research study by SmithBucklin Association Management.

From the sellers of middle market businesses:

Three out of four found their M&A guide to be very helpful.
Nine of 10 said using an M&A advisor better protected their confidentiality.
The vast majority believed that the M&A advisor’s confidential information memorandum (CIM) effectively portrayed the maximum value of their company.
Stress was much lower with a professional intermediary at the helm.

Value received was enhanced. Nearly all respondents reported that their M&A professional added to the business sale price they received:

33% noted a 10% increase;
40% enjoyed 30%-40% price improvements; and
15% reported 40%-100% higher sale values.

Buyers’ feedback was also instructive. A vast majority expressed a preference for a professional M&A advisor running their deal, even knowing that they may have to pay a higher price for the company. They know that represented sellers are:

well educated on the sale process;
better prepared to conclude a sale;
less likely to be a source of stress; and
more likely to be sincerely motivated.

In addition, buyers reported that:

information is well prepared and more easily analyzed;
there is less waste of time;
negotiations are smoother; and
acquisitions close more quickly.

Succinctly, there is a higher probability of a successful closing.

See also: " Good Buyers Like Having an M&A Professionals on the Seller's Side "

From the input of sellers and buyers, it is clear that process matters – a lot. The biggest distinction among top M&A advisors in adding value often comes from their ingrained personal abilities and attributes.

At the same time, M&A advisors mix scores of ingredients into their “secret sauce” to bring value for their clients. Some of the makings are drawn from know-how, while others are plucked from their “tool kit.”

What Is in the M&A Broker’s Tool Kit? An M&A advisor’s tool kit is filled with specialized resources to make possible the research and analysis needed to achieve two critical steps:

present the business in its best light, and
identify the best prospective buyers.

These resources might include databases of buyer information, industry contacts and their characteristics, prospects’ investment parameters, and knowledge of who owns what, with which partners. The tool kit can include in-depth industry reports, and data on price and terms on comparable sales.

Analysis tools and techniques are essential for best preparing a firm to present to suitors. Appropriate confidentiality, marketing, and sale documents have been refined and tested by fire through scores of deals. Secure data rooms are in place and have been confirmed for effective and efficient data presentation.

What Are an M&A Broker’s Essential Skills? As with any profession, having the right know-how is central to producing the best outcomes.

An M&A advisor’s ability to maximize business value comes in part from the expert use of their skill set, including their:

effort and insight;
knowledge and discipline in planning and implementing a refined M&A process that yields top value;
expertise and “people smarts” to effectively communicate among disparate parties to bring forth results that best serve the client;
developing and executing a marketing strategy to find the best buyer prospects, confidentially generate interest, and make presentations; and
knowing when – and when not – to push forward.

It is remarkable that we have progressed this far in our discussion without acknowledging the undeniable importance of negotiation skill.

Negotiating effectively arises in part from in-depth understanding of the business, legal, and tax opportunities, and constraints, for a business sale. Those issues generate many moving parts to be skillfully managed to produce the best sale at the highest net value and lowest risk.

How Does the Process Work? Basic steps in a successful business sale process are well documented:

Identify sale objectives.
Value the business.
Assess the market.
Go forward or hold back.
Draft the Confidential Information Memorandum.
Develop a winning marketing strategy.
Manage and nurture interest.
Negotiate and maximize value.
Facilitate the process of due diligence.
Close the deal.
Manage the transition.

This list is deceptively simple. It is built on many sub-steps with complex interactions and simultaneously moving and evolving parts. An M&A “quarterback’s” expertise produces added value and mitigates risks at every step when planning, preparing, and implementing a sale process. This is key for a successful transaction.

Where Are the Differentiators? As you carefully choose your M&A advisor, scores of people might raise their hand to handle your business sale.

Only full-time M&A practitioners – who are experienced, trained and committed to the profession – are truly equipped to deliver the best outcome and maximize the net proceeds for you.

There are outward signs to help you in your selection, and important personal attributes should be sought.

The Outward Signs. Indicators you can consider when looking to distinguish those who can be expected to best excel for you include:

substantial experience and tenure in the M&A profession;
a proven track record of successful transactions;
positive, credible client feedback;
professional awards;
industry leadership; and
third-party credentials and certifications.

A wise business owner looks to these first-cut qualifiers when selecting a strong leader for their successful company sale.

Coup D’oeil: A Field Commander’s Vision. The phrase coup d’oeil, meaning “a stroke of the eye,” is commonly associated with war, as stated in On War by Carl von Clausewitz:

“When all is said and done, it really is the commander’s coup d’œil, his ability to see things simply, to identify the whole business of war completely with himself, that is the essence of good generalship. Only if the mind works in this comprehensive fashion can it achieve the freedom it needs to dominate events and not be dominated by them.”

I remember an older businessman who succeeded in deal after deal. People who knew him said, “Ted could smell a great deal and intuitively knew how to make it happen.” Coup d’oeil.

This Zen “way of knowledge” is a rare mental gift. It is honed by training, knowledge, and experience. It can be observed in chess masters, top quarterbacks, and field generals – and in outstanding M&A advisors.

Coup d’oeil is often the catalyst that moves a business sale from “no deal” to a “done deal,” or from a “fair deal” to a “great deal.” It is an important way through which your “Zen M&A advisor” adds great value to your transaction.

Business owners should seek an M&A advisor to bring this extra level of talent to their business sale. In addition to track record and other bona fides, the key to discerning the best is to look to the third-party comments and testimonials describing clients’ experiences in working with their trusted M&A professional.

Inflation, interest rates, and planning for the sale of your business

Wed, 16 Nov 2022 17:55:44 GMT

For potential sellers, focusing on the future, knowing your objectives in selling, and understanding what motivates buyers can reveal the best time to put your business on the market.

If owning a business were easy, everybody would do it – and no one gets that better than you.

You understand that business success involves ambition, effective decision-making and risk-taking, a keen sense of timing, and the ability to acknowledge conventional wisdom without cowing to it.

Those qualities have served you well in building your business, and you can trust them when it’s time to sell it.

Is now that time? Conventional wisdom might cause you to say no. With interest rates on the rise, inflation squeezing profit margins, and the President invoking the R-word, there is more than the usual uncertainty in the market.

But should conventional wisdom dictate the timing of perhaps the biggest decision of your life?

No.

“Certainly, the fears of the unknown are there,” says Bob Latham , managing partner of IBG Business’s San Antonio office, “but buyers continue to look for good companies, many seeing it as a chance to buy ahead of the inevitable recovery.”

Matt Frye , IBG’s managing partner in Tulsa, concurs.

“There continues to be a strong market for well-managed, profitable companies. I have heard stories of lenders or buyers withdrawing post-due diligence, but those situations can occur in any environment.”

In short, things are not ideal (they rarely are), but despite the looming threats, valuations remain high, debt is still relatively inexpensive, and by no means is the sky falling.

What Buyers Are Thinking. Specific to the current climate, you might gain some useful perspective by stepping out of your ownership role and looking at the M&A world through the eyes of a sophisticated buyer who, like you, is keenly aware of rising inflation and interest rates.

First, it helps to understand how a professional buyer structures a purchase.

PEGs are attractive destinations for investor capital, as putting money into a PEG with professional operators will return 20%-30% on their money.

“That’s two to three times better than the stock market has historically delivered, even in a bull market,” Afinowich noted, “but a PEG can generate those high rates of return only if they put their investors’ money to use in buying good companies.”

One might assume that high inflation and interest rates tend to depress business values and benefit buyers, and in theory that would be correct. However, in reality, that assumption does not account for the importance of “certainty” in how a business is likely to perform in the future.

“In our experience,” said Afinowich, “professional buyers would rather pay a higher price for a business that projects certainty of value and future income than pay a lower price and have less certainty over how the acquisition is going to pay out. If buyers see a company with a predictable rate of return, they are going to be interested, and that’s true in any economy.

“In uncertain times, businesses that are perceived to offer relative certainty are going to stand out and may be more valuable than before.”

Top Prospects. What kind of companies appeal to buyers today? Generally speaking, in a high-inflation and/or high-interest environment, businesses in certain industries may be more attractive than normal to a buyer:

real estate (either engaged directly in the real estate industry or having significant real property holdings)
energy
financial services (banking, insurance, investments, etc.)
healthcare
consumer staples
information technology
telecommunications
SAAS ("software as a service")
growing industries in general.

Regardless of industry, businesses that possess certain traits are likely to be attractive to buyers regardless of the economy:

good management
well-defined business plans
low capital expenditure requirements
low debt loads
steady cash flows
solid, growing customer base
located in a business-friendly state
located in an area of population growth or business relocation.

Level Playing Field. While what buyers want and are willing to do is certainly important, they do not hold all of the cards. Sellers should be emboldened in knowing that, despite uncertain economic conditions, a good selling price is within their reach, for at least two reasons.

First, a good company is a good company. Properly marketed, it should attract multiple buyers, competing offers, and a higher-than-expected price.

Second, professional buyers that have a lot of dry powder are motivated to put their uncommitted cash to work, regardless of the economic climate.

That’s not to say that the economy is a non-factor. To the extent that the buyer’s offer is affected by their expectations for future earnings, they are going to try to adjust their offer for uncertainty. That might discourage a seller, but it also creates a quandary for the buyer.

“In that case,” says Afinowich, “a buyer has to work through two competing concerns. If I underestimate my adjustment for uncertainty, I won’t get the return I want. And if I overestimate my adjustment for uncertainty, I may lose out to another buyer.

“In a competitive situation, that second risk helps keep buyers honest and their offers at a reasonable level.”

That’s not to say that, even in the purchase of a very attractive company, things won’t be more complicated.

“Sellers should expect the due diligence phase to be more onerous and take longer,” says IBG’s Matt Frye, “as professional buyers dig deeper than usual. And sellers should brace themselves for more complex terms – such as seller-carried notes, earnouts, etc. – that reduce the cash up front and increase the deferred payment.”

Window of Opportunity. If you are just now starting to think seriously about selling your business but are bothered by what’s going on in the economy, your timing might be just right.

We anticipate that, as 2023 progresses, inflation will head down and interest rates will stabilize. Both factors will help restore certainty and business value.

Buyers understand that, also. Professional buyers are all about the future, both with regard to the state of the economy and how a potential acquisition is likely to perform.

So, as a potential seller, think like a buyer, and focus on the future.

Preparing a business for sale (and to bring top dollar) takes time – perhaps a year or two. If you decide that now is not the time to sell but agree that things will start looking up next year or the year after, the present time offers you a valuable window for getting your house in order (see our September 2022 article, “ Thinking About Selling Your Business? Focus on Value, Not Price ”).

Use this time to strengthen your business in ways that should project certainty to a buyer:

solidify your management team and key employees;
identify opportunities for growth (e.g., market area, product or service offerings, etc.);
find ways to appeal to new customer groups; and
in your product or service mix, focus on essentials for which demand is relatively immune to economic fluctuations and for which you can maintain your margins.

Enduring Truth. If you were looking for an ironclad recommendation as to the timing of your business sale, we are sorry to disappoint, but we are mere M&A advisors, not oracles.

What is ironclad is this enduring truth: The best time to sell is determined by the nature of your company and your objectives in selling.

Inflation and interest rates are factors to be considered, along with many others. An important part of our job is to help you fully examine those factors and focus on what you truly want to accomplish in selling your business, so that you can call the right play.

If you would like to start that process, contact an IBG Business M&A professional near you .

Fi-Foil purchases Kennedy Insulation Group

Wed, 02 Nov 2022 17:28:13 GMT

Fi-Foil Company, Inc., a Florida-based provider of high-performance insulation systems, has purchased Kennedy Insulation Group.

Established in Carthage, Missouri, in 2008 by Rick and Chris Kennedy, Kennedy Insulation Group is known nationally for its exclusive VerSolaTM multi-layer reflective bubble insulation product, which FiFoil CEO Bill Lippy hailed as “highly complementary to the existing Fi-Foil product line.”

Business sales in the oil-and-gas industry: Insights from M&A specialist Gary Papay

Wed, 12 Oct 2022 17:30:56 GMT

While some aspects of a business sale are nearly universal, every industry has distinctive qualities that affect the spectrum of factors, from market value to likely buyers. The oil-and-gas industry is certainly no exception.

“After that, only certain segments are really attractive at this time. We see a lot of consolidation in the C-store and gas station area, and the same is true in the lubricant sector. At the same time,” he continued, “heating oil is in the mature stage of its life-cycle and is showing signs of dwindling down. National buyers are showing relatively little interest. When heating oil companies go to market, the potential buyers appear to be mostly local or regional players.”

“To zero in on the more attractive segments within the industry, I would include – in addition to propane operations, lubricant producers and C-stores – sectors such as fuel distributors, pipeline terminals, and trucking.”

Noting that trucking might seem like an outlier when discussing the oil-and-gas industry, Gary noted that he and his IBG colleagues consistently leverage their industry knowledge and influence to serve sellers in related industries – such as trucking.

“Many of the petroleum and propane distributors we work with are also in the trucking business,” he noted. “A lot of them are common carriers that supply their own needs and supply other marketers at the wholesale level or just by holding their products for them. Everybody seems to like trucks in this industry – you go to a trade show, and about half the floor is covered by vehicles.”

Returning his attention to the oil-and-gas industry in general, Gary said, “We see quite a bit of caution out there, just based on the current administration and its war on fossil fuels. There’s concern about that, I think you’re seeing that more so in the production end – from exploration and drilling on down to the companies that service the wells and pipelines.

“The oil-and-gas industry is getting hammered by politicians who just don’t seem to get it. You can’t phase-out fossil fuels overnight just because you or your supporters or the environmental lobby doesn’t like them. The fact is, until further notice, our country runs on fossil fuel, and there’s just no replacement for it at this time. We should all strive for a cleaner planet and an ‘all of the above’ energy policy.”

Who’s Buying? One of the distinctive qualities of oil-and-gas business sales is the buyer profile. In many sectors, companies are being acquired by private equity groups and other “professional buyers.” Not so, in oil and gas, says Gary.

“Most of the oil-and-gas companies we sell are acquired by strategic buyers – that is, a buyer who is already in the business – as opposed to a private equity group. A strategic buyer can take a company and realize significant savings, eliminating a lot of overhead and folding it right in to their business.”

Industry Roots. Gary knows what he’s talking about, having been in the propane and petroleum industry for 46 years, both in the corporate world and as an intermediary in a long string of successful mergers and acquisitions. His first-hand knowledge of the industry dates back to 1976.

“When I got out of college, I went to work for a large northeastern petroleum company owned by Agway, Inc. Two weeks after I started there, the district manager asked me to help him with a propane acquisition. We were growing like crazy, and over the years I gained a lot of experience in petroleum and propane company acquisitions.”

Gary worked his way up the ladder – plant manager, corporate propane operations manager, district manager, division operations manager – and played a key role in the company’s acquisitions and divestitures and business valuations. After 18 years in corporate management, he decided to move on to pursue new opportunities and a new role in the industry.

“I left to join CK Business Consultants, an M&A business transactions firm that specialized in oil-and-gas-related companies. I bought the company in 1999 and expanded the scope of our deals into the manufacturing and distribution sectors, but oil-and-gas has always been a major focus – propane, heating oil, gas stations, convenience stores, lubricants, wholesale fuel distribution.”

Early in his M&A career, Gary gained an appreciation for the importance of being perceived as an industry insider, and over nearly a quarter-century of handling the sales of propane and other businesses, he has paid his dues, along with his colleagues John Johnson and Matt Frye at IBG Business’s Tulsa office.

“We’re involved in a number of petroleum and propane associations around the country. For example, I’m a past member of the National Propane Gas Association board of directors, and I continue to be involved with that organization.”

IBG’s industry background is a major advantage for Gary, John and Matt, and it is a tangible benefit to their oil-and-gas clients.

“Being known and recognized at trade shows, maintaining strong relationships with industry leaders and trade association executives, really makes us effective in marketing a business and finding the best-fit buyer,” Gary emphasized. “It helps us speak the language, know what’s going on in the business, know the buyers, and know where to go with a company that’s on the market.”

“We have a very extensive database,” he continued, “built up over 40-plus years, of people in the industry who we can contact right off the bat with a particular transaction. With our industry experience and visibility, when we put a company on the market, we pretty much know what the buyers are looking for. That helps us create our marketing materials and structure our CIMs (confidential information memorandum).”

Preparing for Sale. The IBG website has extensive content devoted to the process of preparing a business for sale. If the owner of an oil-and-gas company is looking to put his company on the market, there are specific preparatory steps that they should take to maximize their ultimate value.

“As with companies in general, market value in the oil-and-gas sector is shaped by expectations for future profitability. An owner can help those expectations by cleaning up the company’s books – pulling out the vacation home in Florida, the golf club memberships, the grandkids’ tuition, and so on – as part of accurately recasting the financial information. Also, having top management in place, retaining a loyal, long-time employee group, is always a plus."

To help sellers maximize their market value, several years ago Gary made a short list of 10 top value drivers of a petroleum and propane business:

Profitability : 3-5 years of consistent profits and healthy gross profits per gallon
High propane tank ownership , which assures stable and loyal customers
Annual gallons : a steady increase in annual gallons sold
Quality customer base – i.e., high-margin residential customers, auto delivery, budgets, committed commercial and wholesale customers, and branded distributors
Adequate bulk storage capacity , which mitigates supply disruptions and allocations
Quality assets : well-maintained trucks and freshly painted tanks and facilities
Safety : compliance with all regulatory requirements and training
Great customer service : something to be proud of
Exceptional employees : experienced, well trained, loyal, professional
Good records and systems : modern accounting and software systems, proof of propane tank ownership, solid environmental controls, and efficient dispatch and billing procedures

"Adhering to those value drivers,” said Gary, “has helped a lot of my clients attract multiple buyers, shorten the time to close, and avoid leaving money on the table.”

War Story. Successfully working with hundreds of business owners during his 46-plus years in the M&A profession has left Gary with a lot of good memories – including one deal in particular that ranks at the top of his list of war stories.

“We were marketing a propane company up in New York. The principal was an older gentleman – a World War II vet, very colorful guy – who was very involved in the propane industry. He and his wife owned the company, but several years earlier the underlying real estate had been conveyed to their children.

“We had the deal pretty well put together, but when it came to having the kids sign off on the real estate piece, things got complicated. One of the daughters had passed away, and we had a challenge in getting her estate to go along with the deal. We accomplished that, but in the meantime, we could not find the owners’ son. We finally learned that he was in Switzerland, on a skiing trip somewhere in the Alps, and we ended up hiring a courier to find the son, get his signature in all the required places, and return the documents to the U.S. in time for the closing.

“Just when we thought we were ready to close, the title company informed us that they could not deliver a clean title to the real property. A bank had a lien that secured a loan from years earlier that everyone thought had been paid off, and the bank had been sold a couple of times since then, and the title company could not find a release.

“In those days, when a deal was in the closing stage, everyone sat around a table in the attorney’s conference room, sometimes for a day or more, until the deal closed. Luckily, our seller had a very good accountant who was at the table. He called his office and had his people go back to the physical archives at their warehouse, where they found a bank statement that showed the loan with a zero balance. They faxed it over, and the title company said, ‘Okay, we’ll go along with that.’

“And that’s how we got the closing done.”

Thinking about selling your business? Focus on value, not price

Tue, 27 Sep 2022 17:56:15 GMT

Much of our value as M&A advisors is found in redirecting your focus, from what your business is worth today, to what it could be worth when it is ultimately ready to sell.

When business owners decide to put their company on the market, it’s natural for them to wonder What is my business worth? and What should be my asking price?

Those are fair questions – but consider the possibility that the first is premature, and the second is irrelevant.

If that sounds like heresy, let’s try to put both responses in perspective.

The Danger of an Asking Price. Tackling the second question first, it’s important to understand that, at IBG Business, our normal approach is to go to market without a price – and it’s almost never failed us.

That strategy recognizes two important realities: We don’t know who your potential buyers are, and we don’t know their motives.

Your buyer may be:

a similar business for which your company satisfies a strategic objective;
a local or distant competitor seeking to gain your customers, expand their market share, or enter your region;
a private investor looking to purchase a project as an income generator for themselves; or
a private equity group.

For your company, its perceived value and ultimate selling price can vary dramatically depending on the nature of the buyer and what that buyer seeks to achieve by acquiring your business. And it’s important to recognize that your company might be worth even more to that one stand-out buyer than it is to you. Therefore, don’t fixate on setting a price that inadvertently places a cap on how much your business will bring.

The Evolution of Market Value. As for speculating as to what your business is worth, much of our value as M&A advisors is in redirecting your focus – from what your business might be worth today, to what it can be worth when it is ready to sell – and to helping you implement changes in your company that will help it arrive at peak value by the time it goes on the market.

Achieving that objective can take time, which is why the optimum sale period for a business – including the building-value phase – can be as much as two years.

During the preparation time, while we are doing our part – i.e., assessing your company and the market, recasting your financials, identifying potential buyers, and preparing to package and market the company – there are vital steps that only you as the owner can take.

Those steps are often company-specific, and we will customize our recommendations to your situation. However, on a more generic level, here are 12 proven approaches to:

increasing the market value of your business and
enhancing its ultimate selling price.

1. Build a solid management team. A business with sales of $5 million and up needs a complete and solid lineup of officers and directors. Such a team might include a chief operating officer (COO), chief financial officer (CFO), sales manager and, if the nature of the business calls for it, chief technology officer or IT director.

It is also beneficial to create a board of directors that has at least two outside members. This professionalization of management can remove the stigma of the “one-man band” and communicate to potential buyers that your company has viability, value and desirability apart from your involvement.

2. Retain loyal employees. A company’s greatest asset is its employees and perhaps its biggest value-increaser, and happy and loyal employees make for a strong company. Top management should have non-compete and/or confidentiality agreements, and solid benefit plans should be in place for all employees.

3. Grow in scope. Some smaller companies are kept small to maximize the owner’s benefits – the proverbial “cash cows.” However, if building value is the goal, it may be important to develop new products or services, build market share, and expand markets or open new ones. Achieving strong, quantifiable growth builds value that justifies your investment of time and energy.

4. Grow in size. While some corporate buyers and private equity firms see the advantages of purchasing smaller businesses, companies with less than $5 million in sales and an EBITDA of less than $1 million may be more dependent on continuing outside financing and lack the critical mass for both buying and selling power. As a consequence, many buyers may perceive smaller companies as too small for acquisition or undervalue them.

5. Stay on top of your market. The value of a company may be contingent on its industry, its place in the industry, and the direction of the industry itself.

How big is the industry?
Is it headed up or down?
Who is the competition?
How big is the company’s market share?
Is it time to change direction or diversify?

6. Demonstrate your agility. Small companies can be very adept at pivoting, i.e., changing course and implementing change. You can add value to your business by recognizing and quickly seizing opportunities to reach new markets, fill voids in existing markets, and add or change products or services.

See: “ Drink Makers Dump Juices, Water That Have Diluted Profits ,” The Wall Street Journal, August 4, 2021

7. Raise your name and brand identity. You don’t have to manufacture Kleenex, Band-Aids or Coca-Cola to have a strong brand identity. While the value of becoming a household name probably wouldn’t justify the cost to your company, you can and should pursue strong, positive name recognition within your industry. Through targeted advertising, trade association involvement, giving back to the community, and other strategies, your company’s name can become recognized as a leader in your industry vertical, and that can enhance its perceived market value to potential buyers.

8. Put your plans on paper (or screen). Business plans, financial plans and personnel plans should all be in writing and kept current. Terms of employment agreements should be spelled out and in writing. Business planning and company objectives, etc., should also be in writing, visually communicated, and reviewed periodically. Contracts should be reviewed and maintained on a current basis.

9. Broaden your customer base. Many smaller companies reduce their market value by becoming too dependent on a handful of customers or clients. Ideally, no customer or client should represent more than 10% of sales. Be intentional about expanding to new markets, introducing new products, and finding new customers that align with your company’s core business.

10. Take advantage of proprietary and other assets. Patents, brand names, copyrights, alliances, and joint ventures are all examples of potentially valuable assets. So are innovative business practices, systems, procedures, and leveraged capacity. For instance, a commercial landscaping company turned a “down” time of year – winter – into a profitable season by installing snow plows on their trucks, utilizing their rolling stock and existing workforce to become a snow-removal resource that expanded their value to existing landscaping customers and broadened their customer base.

11. Be “lean and mean.” Many companies lease their real estate needs, outsource their payroll, have their manufacturing done offshore, or have UPS handle their logistical needs. Since all non-core requirements are done by someone else, the company can focus its efforts on what it does best.

12. Start the process. While creating business value is critical to the long-term success, many business owners are held back by believing that “I don’t have time now; I’ll do it tomorrow” or “I’m too busy putting out fires.” Consequently, valuable opportunities to build the business and grow its value get sidetracked or put off indefinitely.

Preparing your business for sale is an important part of the "six key steps" that comprise The IBG Fox & Fin Process ™ - a time-proven discipline for business sales that has contributed to IBG's closing rate of profitable business sales that is more than three times the M&A industry average.

All in the family: One business, multiple kids, parent's dilemma

Wed, 20 Jul 2022 18:49:40 GMT

Selling or transferring your company to your kids is a potential minefield for which careful planning and thoughtful anticipation are prerequisites.

If you own a business and have children, you may have already begun weighing your options regarding your company’s future ownership. Will you sell it to a third party, or do you want it to remain a family business?

For the purpose of this article, we will assume that:

you want to keep your business in the family;
you have multiple children; and
at least one of them is a good candidate to succeed you in running the business.

If that describes your situation, read on. We will examine a number of important questions and challenges that, effectively addressed, can either provide a roadmap for your successful transition of ownership to the next generation, or show you a different destination altogether.

Planning Steps

“Successfully transferring business ownership to your children takes more than a little thought and planning,” notes a long-ago America Express Kabbage article. “Done right, it can ensure income, security and a chance to make a difference for the next generation. Done wrong, it can lose both the business and good relationships between your kids.”

Here are some fundamental components of planning for your intrafamily transition:

Estimate the amount of assets or income you and your spouse need to secure your financial independence after you no longer own the company.
Determine whether and how the company can generate enough revenue to support your needs and the needs of your successor(s).
Pick an exit date – even a tentative target – for planning purposes.
As soon as you see the need, consult with a professional advisor; the right attorney, accountant, or financial advisors can inject insight and objectivity into your planning process.
Determine a realistic business value. If you are going to sell the business to your kids, offering a discount is fine – as long as you have a reliable and (for tax purposes) defendable starting value.
When the time is right (sooner than later), include your kids in the discussion.
Determine the best way to transfer the business to your kids (see a helpful Merrill article, Smart Ways to Transfer the Family Business , for potential options)
Know which of your children should own your business and which should run your business.

Confronting those last considerations – ownership, management and, inevitably, money – is where many intra-family transfers come off of the rails, and it is on that issue that we will focus the remainder of this article.

Austin’s Conundrum

Consider the example of Austin, whose trucking company, in a typical year, generates net income of about $3 million. Austin and his wife have three adult children: Kevin, a video game developer; Jennifer, a college professor; and Mike, who went to work for his dad right out of college, has performed well for 15 years at every level, and is Austin’s heir apparent.

Thoughts of slowing down and ultimately retiring caused Austin to begin planning for the company’s transition. With the best of intentions, he convened a family meeting and laid out his plan for transferring to his three kids the company that comprises the lion’s share of his substantial estate (and their inheritance).

Austin’s plan: The kids would form and own equal interests in an LLC, of which Mike would be the managing member. Austin would convey to the kids’ LLC his ownership in the trucking company, in exchange for a $7 million note that would be paid over 10 years in equal monthly payments. Annual profits would be divided equally among the three kids. Mike would run the company.

The kids’ response: At first, crickets. Then …

Mike: How much am I going to be paid?
Kevin: How do we know that $7 million is a fair price?
Jennifer: What if the company can’t make the payments? Are you going to foreclose on us?
Mike: I’ve worked hard for the company for 15 years. Doesn’t sweat equity entitle me to more than a third ownership?
Kevin: Mike’s going to want the company to keep as much of the profits as possible. How are we going to get our share?
Mike: Do I have to take orders from Kevin and Jennifer?
Jennifer: This is our inheritance. When are we going to get our money? Can I find a buyer for my share of the company? What’s my share going to be worth?

… and so on.

Strategic Questions

A Forbes article, Business Transition Planning: How To Leave Your Company To Your Children , poses a number of questions intended to head off unintended consequences such as those encountered by Austin, including:

To which kids and in what percentages do I want to transfer my interests?
How much of the business do I want to transfer now?
Do I transfer it to all of my kids, or just to the ones who are actively working in the business?
If not all of the kids are to receive a share, are the non-participating children somehow "made whole" with some other gifts or arrangements?
If the parent wants to benefit all children but not all are involved in the business, should some distinction between voting and non-voting shares be considered, or some different classes of shares?
If ownership is going to be vested equally among the children, how will the involved child be compensated (through income and appreciation) to keep him or her motivated to run the business?

How do you handle multiple children’s money needs and expectations? The business may be profitable enough to support your family, but can it also support the families of all of your kids? How do you fairly distribute profits while taking care of the child who is running the company and actually generating those profits?

If the makeup of your estate allows such flexibility, the best plan may be to transfer the business only to the child who takes over leadership, and equitably leave non-business assets to the other children.

Whatever your approach, the complexities noted in this article should at least help you recognize the challenges for which you need to be prepared. It should also help you discern whether keeping the business in the family is truly a viable option, or selling it to a third party is the more realistic course.

IBG expands to San Antonio, welcomes M&A advisor Bob Latham

Tue, 19 Jul 2022 18:11:45 GMT

The addition of its Texas office increases IBG Business's footprint to eight states.

Speedie and Associates acquired by Universal Engineering Sciences

Thu, 07 Jul 2022 17:50:30 GMT

Universal Engineering Sciences has acquired Speedie and Associates, LLC, a major Phoenix geotechnical engineering, environmental services, and materials testing firm.

Havasupai Tribe purchases Grand Canyon Caverns

Mon, 06 Jun 2022 18:27:24 GMT

The Havasupai Tribe has acquired Grand Canyon Caverns, a northern Arizona tourist attraction and inn.

“This transaction and M&A process posed an exciting challenge,” Troy Stapley commented, “not only because of the unique nature of the business being purchased, but also due to the deal’s complex financial and legal aspects.”

He went on to describe as “truly a collaborative effort” the interaction among IBG Fox & Fin, the parties’ attorneys, and Sonoran Capital Advisors , which acted as receiver and represented the seller in the successful transaction.

“I can't wait to see what the new owner, the Havasupai Tribe, can do with this great addition,” said Bryan Perkinson, Sonoran Capital’s founder and managing director.

Grand Canyon Caverns is a landmark property and business located southwest of Grand Canyon National Park on historic Route 66. It includes a motel, campsite, full-service restaurant and bar, and almost 1,000 acres of land with hiking and biking trails.

Sonja Wood heads up the opening of our Albuquerque office

Mon, 25 Apr 2022 21:29:16 GMT

IBG Fox & Fin's expansion to the Land of Enchantment positions us to maximize opportunities for buyers and sellers throughout the Southwest.

Time to sell? Last year’s upturn in middle market M&A activity is likely to continue through 2022

Fri, 18 Mar 2022 19:35:03 GMT

Total U.S. middle market deals increased by 22% over 2020, with aggregate deal value up 42%, setting the table for a robust 2022.

Domestic M&A activity for middle market companies continued its sharp rebound in 2021, according to Eaton Square ’s U.S. M&A Middle Market Update, released in March.

Eaton Square is an international M&A and capital service firm with 26 offices in 11 countries, including IBG Business’s six U.S. offices.

Included in the Eaton Square report are the seeds of optimism for would-be business sellers:

Middle market U.S. M&A activity – i.e., sales of companies with equity value (EV) below $250 million – saw a 22% increase in reported deal count in 2021, with associated transactional dollar value increasing by 42%, year over year.
All U.S. M&A valuations below $1 billion in EV for 2021 averaged 8.88x EBITDA, versus 8.97x for in 2020.
Not surprisingly, transaction growth was highest (67%) among companies with EV above $1 billion.

“The M&A marketplace remains highly liquid,” the Eaton Square report noted, “with well over $800 billion of dry powder in equity funds in US PE Sponsors, coupled with almost $2 trillion of cash on non-financial corporate balance sheets in the US.”

The 2021 trend is expected to continue through 2022, the report predicts, if “for no other reason than the sheer amount of liquidity in the market.”

2022 Outlook

The deal growth reported by Eaton Square is reflected in rosy predictions across the board for 2022.

“Expect another strong year for deal-making,” predicts Morgan Stanley, “as all the elements that drove 2021’s record activity remain in place." (See “ 2022 M&A Outlook: Continued Strength After a Record Year .”)

An Ernst & Young report concurs, projecting that more than 60% of U.S. companies plan to pursue M&A acquisitions this year. Ditto at KPMG, where the 2021 year-end M&A report suggests no signs of a slowing deal market.

“M&A is poised to climb higher in the year ahead,” wrote KPMG’s Philip Isom, citing “easy access to capital, low interest rates, and a recovering global economy.”

Sales of Closely Held Businesses

While those sentiments focus on larger companies, M&A activity should also be robust for private middle-market companies.

“Growth in 2022 should be fueled in part by what we see as a growing number of larger family and closely held companies coming to market,” predicts John Zayac , managing partner of IBG Business’s Denver office. “More than ever, business sales will serve as liquidity events for Baby Boomers hitting retirement age.”

To maximize a private company’s market value, John notes the timeless importance of fundamental preparatory steps:

Don’t be indispensable to your business. Build a strong middle management team, and have written employment agreements with your key people.
Have written policies and procedures: Buyers will pay more for companies that are professionally organized and documented and perceived as low risk.
Perform a Phase One environmental site assessment before you put your company on the market.
Remember that buyers buy the future. Recast your historic financial data to project what your company can do.
Look at the sale of your company from a buyer’s point of view. Sell the future, not the past.
Identify and document your intangible (“phantom”) assets, and keep their valuations current.
Begin creating a “confidential business report” that will educate potential buyers.

See John Zayac’s white paper, “ Building Your Company’s True Value: How to Sell Your Business for More Than It’s Worth .”

Timing

If the solid 2022 predictions for M&A growth suggest that now is the time to sell, now is also the time to start the preparation process.

John Zayac’s checklist can rarely be completed overnight – but you can start on it today.

IBG Business’s M&A professionals can lead you through the process and, in many cases, shorten it and ease the burden on you, so that you can continue to grow your company and build its value while your company is being made ready for sale.

Silver Peak Partners purchases majority stake in StormWater Pros

Fri, 04 Mar 2022 19:18:53 GMT

Private equity firm Silver Peak Partners has acquired a majority interest in StormWater Pros, LLC , Arizona’s market leader in drywell installations and storm infrastructure maintenance.

StormWater Pros is retaining its management and staff and will continue to operate at its corporate location in Mesa, Arizona.

“We are very excited to team up with Silver Peak Partners,” said StormWater Pros founder Brig Christensen. “We spent a significant amount of time with our advisors researching and talking to potential suitors. Silver Peak Partners caught our attention due to their level of professionalism and the obvious synergy that existed between our two companies.

“The knowledge and experience that they add will accelerate StormWater Pros as a regional powerhouse in the storm water management industry for years to come.”

Based in Denver, Silver Peak Partners seeks to partner with current company owners and managers to build investment value through operational improvements, strategic acquisitions, and pursuit of new growth opportunities.

“Our firm is built around a team of professionals that understands small company dynamics and shares the values typical of the owners, founders, and managers of these types of firms, such as community, culture, loyalty, and legacy,” said Bill Haan, Silver Peak’s managing partner. “We are theme-based investors, seeking companies that operate in industry segments that are poised to benefit from global macro-trends and positive industry forces. We are excited about the team at StormWater Pros and believe we have a bright future with them.”

“What do I do now?” Preparing for life after your business sale

Mon, 28 Feb 2022 18:08:44 GMT

A personal exit plan can help you avoid the trap of selling your business before knowing what you will do next.

By IBG Business

Selling his rock quarry was the farthest thing from Norm’s mind.

Starting from a dormant, water-filled pit, five rusty conveyors, and no customers, he had built a highly profitable business that was the crown jewel of the five competing quarries on a rich Illinois limestone lode. He enjoyed the hard work, the satisfaction of business success, close friendships with customers and suppliers, a loyal core of managers and laborers, and the pride of making an impact on the local economy.

And then one September day an M&A broker with whom he was acquainted called with a message that Norm couldn’t ignore.

“I’ve got a company that wants to buy your quarry,” the broker said. “They want to give you X million dollars – half now, half on a five-year note guaranteed by their Fortune 500 parent company. They want to close by the end of the year, and you won’t need to stay on after the sale.

“I think we can get another couple of million out of them, and if you’re interested I can come up tomorrow and bring the listing agreement.”

Norm said he would call him back. Closing his scale-house office door, he took off his hard hat and started to think.

I’m not going to live forever. My blood pressure’s a little high. My son wants to be a sportswriter. My wife wants to spend more time in Arizona. They’re offering a lot of money. Maybe it’s time to sell.

With no more mental preparation than that (not to mention forfeiting valuable opportunities to maximize his price), he decided to move forward. Thanks in part to his broker’s good work, the quarry sold for $4 million more than the original offer, the deal closed on schedule, and Norm and his wife moved to Scottsdale.

The story should have ended happily there, but it did not. Norm may have been willing to sell – but he wasn’t ready to do nothing.

Two years after he sold out, bored and frustrated by a lack of meaningful activity, he came out of retirement to work his entrepreneurial magic on an abandoned granite crushing operation in Colorado. He failed, losing a lifetime’s worth of accumulated wealth, and the only thing that spared him the humiliation of appearing in bankruptcy court was the heart attack that took his life.

Are You Ready to Sell?

Norm’s sale and its aftermath illustrate what can happen when a business is ready to sell before the owner is.

For would-be sellers, among the many lessons to be learned from this story is the importance of being personally ready for life without business ownership. Achieving that readiness involves having solid answers to at least three key questions:

Why am I selling?
What’s next?
How do I prepare myself for that?

Whatever your motivation – retirement and liquidity are two common objectives – the answers to those questions help you embark on drafting your personal exit plan. And that plan can provide the structure to transition you, financially and emotionally, from business ownership to whatever is next for you.

“Most owners have a strong personal connection to their company,” notes Jim Afinowich of IBG Fox & Fin. "It’s not just the source of their income and wealth; it may also be a major source of their identity and purpose.

“That’s why timing is so important in a sale. Three stars have to be in alignment: The business has to be ready; the owner needs to be ready; and the market has to be right.”

Gary Papay , managing partner of IBG’s offices in Pennsylvania and North Carolina, also is quick to recognize the emotional attachment of many owners to their businesses and understands why that exists.

“Typically, business owners invest not only a considerable amount of time and money into their business,” Gary notes, “but a good bit of themselves as well. However, the fact is that no one will work forever, as retirement or some other form of separation eventually comes for every business owner.”

Exit Plan

In most cases, personal exit plans are necessary to secure a business owner’s financial future. However, as was described in a recent article by the U.S. Chamber of Commerce (“ Ready to Move On? How to Create an Exit Plan for Your Business ”), many business owners don’t think, or want, to establish an exit plan until they’re ready to leave – if then.

Whether the delay stems from the owner not wanting to confront their mortality, being better at business planning than personal planning, or simply not knowing where to start, procrastination has real consequences.

“Leaving your business can be emotional and overwhelming,” the Chamber article notes,” and planning a proper exit strategy requires diligence in time and care.”

Key Questions

To provide a well-lit path for would-be business sellers in drafting a personal exit strategy, IBG’s Gary Papay developed a “Financial Independence Quiz” – a simple list of questions that have helped many of IBG’s clients overcome their planning inertia and begin preparing themselves for life after business ownership.

Our quiz includes a number of questions that focus on the owner’s personal expectations and needs, including:

Why are you considering selling?
If you received your “ideal” purchase price offer from your “ideal” buyer, would you sell today?
If the answer is no, why not?
How long do you want to stay actively involved in your business? If you reduce your involvement, will that also reduce your desire to own it?
If you sell, are you interested in staying on for a while?
How much do you spend in a typical year to support your style of living?
How much more would you like to spend to support your “ideal” lifestyle?
What do you think your business is worth on the market?
If you received that amount for your business today and combined the proceeds with your other income-producing assets, would you have enough to comfortably support your ideal lifestyle indefinitely?
Can you survive emotionally without your business?
Can you envision a meaningful and personally fulfilling life if you no longer own your own business?
Can you name three to five significant, ongoing activities or interests that you would pursue after the sale?
Have you had meaningful discussions with your spouse about an exit from your business?
Do you have a departure date in mind?

A New Season

In reflecting on IBG’s 1,100-plus successful closings and examining his pending deals, IBG co-founder and principal John Johnson says that there is a defining point in most transactions – an ah-hah moment – at which the selling owner comes to grips with the positive realities of transitioning to their new season of life.

“Once an owner works through the emotional and identity issues of business ownership,” John Johnson observes, “they begin to recognize that selling is their key to seizing new control, over time, attention and energy – perhaps en route to new opportunities and a life of fulfillment that is free of the consuming constraints of ownership.”

Helping business owners achieve freedom as a reward for their years of successful ownership is a key part of IBG Business’s mission. Whether or not your company is ready for sale, you can look to our experienced M&A advisors to guide you through a valuable, no-obligation process of exit-planning your life to follow a successful sale of your business.

Successful sale of Phoenix construction firm Hernandez Companies

Thu, 24 Feb 2022 19:42:04 GMT

DMS Companies, Inc., has acquired Hernandez Companies, Inc., Arizona’s market leader in performing commercial building remodels and maintenance.

“The price that we achieved was 180% of our expectations,” Denise Hernandez wrote in a post-closing letter to Lance Meilech. “We could not have maximized our selling price on our own – we needed you.”

“It is incredible all that was done to get us to the finish line,” she continued, praising Lance for his “calm disposition, passion in deal making, and commitment to us.”

“I am really pleased that you were on our side … and I am glad to have been on your team!”

Mind games: coming to grips with selling your business

Fri, 11 Feb 2022 15:48:49 GMT

At some point, nearly every business owner will want or need to think about selling their business. As you prepare for that day – Is it already here? – you should anticipate the wide range of obstacles that can stand in the way of a successful sale.

By Jim Afinowich

Those obstacles can be tangible – Will the buyer come up with the money at closing? Will the deal survive the due diligence phase? – and they can be intangible. This article will focus on the latter.

From your side of the table, the attitudinal and psychological factors involved in selling a business must not be overlooked or underestimated.

For example, many sellers have unrealistic expectations about their company’s market value and the time and process required for a successful sale. Sellers should enter the selling process with their eyes open and realistic expectations in place, and an experienced M&A advisor or business broker with many successful closings under their belt can be invaluable in shaping the seller’s proper expectations.

Even with their expectations in line, it’s a rare business owner who can emerge from a business sale or purchase without having paid a high emotional price. We have scar tissue that bears witness to the stress experienced in buying or selling a company, which often causes abrupt behavioral changes:

Normally calm people become volatile.

Expressive people become stoic.

Confident people become vulnerable and defensive.

Meek people become bold (but awkwardly so).

Normally accessible people go into hiding.

People who normally keep their professional advisors at or beyond arm’s length become clingy.

And people who you think would sell their company to their worst enemy if he were the highest bidder will end up selling to the second-highest bidder – perhaps at a cost of hundreds of thousands of dollars – because they have decided that the top bidder is not their kind of people.

Most owners have a strong personal connection to their company. It is not just the source of their income and wealth; it may also be a major source of their identity and purpose. If they built the business from scratch, they might liken that process to parenting – nurturing the company through sleepless nights, protecting it from threats, helping it recover from illness, constantly leading and nudging it in the right direction, and preparing it to survive without them. Regardless of their motivation in selling, they will likely revisit that motivation and second-guess their decision over and over, up until, and probably for a time following, the closing.

Roller Coaster. The separation anxiety that sellers experience is magnified by the emotional roller-coaster that both buyers and sellers must ride, and that is largely defined by the process of the transaction.

First, there is the courtship. The buyer and seller meet, find a certain amount of chemistry between them, and then fall in love (figuratively speaking), coming to an initial agreement as to price and terms.

Next, infatuation and optimism usually give way to less blissful emotions, as the parties negotiate the details of the transaction.

The decline in bliss may lead to suspicion, resentment, anger and outright fury, as the parties proceed through the due diligence phase. Offended sellers ask Why does he want that? and Why doesn’t he appreciate what he’s buying? while skeptical buyers demand to know What is he hiding? and Why won’t he just give me what I need?

Professional Buffer. It is sometime during the due diligence period – about five minutes after the buyer’s latest request for this or that scrap of minutiae is interpreted by the seller as calling his company an “ugly child” – that the parties’ professional advisors can make their biggest impact. When the buyer-seller relationship appears headed for the rocky shoals, whether the ship returns to safer waters may depend on whether the M&A professional or the parties’ attorneys and CPAs view themselves as “consensus builders,” focused on helping their client get what he or she ultimately wants (i.e., to buy or sell the company), or as “stake drivers” who may inflate the importance of the deal’s risky aspects to the point that their clients are needlessly (and perhaps harmfully) scared away from completing a deal that they really want.

As professional buffer-providers between anxious buyers and sellers, how your M&A professional responds is key. From offer through closing, the broker provides the greatest value to everyone involved in managing the emotional ups and downs of the process.

An M&A professional who can fulfill that role – of getting both parties back on the same page – is invaluable. A common expression among IBG Business advisors is this one: “When the parties are telling each other to go to hell at the same time, they’re finally starting to think alike.”

Seller Stories: “The fee that we paid IBG was insignificant compared to the value that they brought to the table.”

Wed, 26 Jan 2022 19:06:13 GMT

How IBG helped overcome multiple challenges – including long-standing animosity between the parties – to deliver top dollar and support a seller’s life-long goal.

“But the longer I looked at it,” Doug continued, “the more I realized that you really need somebody that knows the product – and the product is a viable company – presenting it to the market in such a way that it brings value to the table.”

It was upon that realization that Doug began the search for the right M&A advisor to guide him through the process of selling his most valuable asset. On a referral by a trusted advisor, he selected John Johnson in IBG Business’s Tulsa office. It was only then that Doug began to appreciate the myriad complexities and challenges of a successful business sale.

First came the groundwork.

“We spent a couple of years just getting our company into shape,” Doug recalls.” It helped me position the company where it was a viable entity on the market.”

Doug credits IBG with identifying and assembling the information and documents needed to properly present the business and effectively tell its story.

“One of the things that you have to do as the seller of a company is put together a mountain of information for the buyer. This is stuff that you've accumulated, in my case, over 25 years. Their help in that effort was immense. We couldn't have done it without them.”

The painstaking preparation by Doug and IBG paid off.

“The opportunity came along, and we were ready to pull the trigger on it,” Doug said. “Had I not worked with John and his group, I wouldn't have been able to do that. The results wouldn't have been the same.”

Next came the negotiation and due diligence, where Doug came to value IBG’s ability to see around corners and over the hills in the process of delivering the best outcome for him.

“During the negotiation process, there were so many things to consider that I didn't even realize,” Doug acknowledges. “We had elements to the acquisition that were completely foreign to me, and [IBG’s] expertise was invaluable. Having someone on board that's able to communicate with the buyer, using their language, facilitated the acquisition process greatly. They have done this numerous times over several years and know where all the obstacles are.”

One of those obstacles in this particular transaction was the difficult history between Doug and his buyer, a long-time competitor.

“There was a certain amount of bitterness going into this thing,” Doug vividly recalled. “IBG was made aware of that, and we addressed it right up front and got it behind us. IBG was really instrumental in making that happen.”

One of the reasons that many business owners try to sell their business on their own is the desire to avoid paying a broker’s commission. While Doug acknowledges that he, too, had to get past that desire, the favorable result of his sale put the commission in perspective: “The fee that we paid IBG was insignificant compared to the value that they brought to the table.”

The value to Doug went far beyond monetary considerations.

“What IBG really brought to the table for me was peace of mind and the ability for me to achieve my lifelong goal: to build this company and retire with finances that hopefully will outlive my life.

“And that is what has brought me the most joy. I'll be able to pass that on to my grandchildren and help them with everything that they're trying to do, and I don't think I could have gotten that value if I hadn't involved IBG.”

View Doug Padgett’s video interview (5:37).

Pinewell Capital acquires majority stake in Dickens Quality Demolition

Fri, 24 Dec 2021 16:43:05 GMT

Private equity firm Pinewell Capital has acquired a majority interest in Phoenix-based Dickens Quality Demolition, LLC , one of the Southwest's largest demolition contractors.

“I made the decision to partner with Pinewell Capital after very careful consideration and nearly a year of getting to know Pinewell and its owners,” said company founder Richard Dickens, who will continue as president. “The additional support, resources, and relevant knowledge that Pinewell brings to the table will provide a force multiplier to continue and accelerate our leading position in the industry.”

Scottsdale-based Pinewell Capital invests in and partners with companies in operationally intensive sectors that provide services to businesses and governments. Since its founding in 2015, Pinewell has made seven investments, five of which are controlled positions. In each acquisition, Pinewell has retained the acquired company’s management team and employee base.

"Leaders to Watch": AzBusiness magazine features IBG Fox & Fin's Jim Afinowich

Thu, 18 Nov 2021 17:11:31 GMT

View the full interview with Jim Afinowich by AzBusiness editor Michael Gossie:

How to price your business - and build an auction environment for its sale

Mon, 25 Oct 2021 22:33:34 GMT

Attracting interest from more than one candidate not only generates multiple offers and shifts the leverage to you; it can also reveal your “best fit” buyer.

By Jim Afinowich

How you arrive at a market value for a company is an interesting topic. Most sellers believe they know what their company is worth, and usually they're wrong. The market is what actually determines the market value.

We can look at it and give them a range of price, a range of value, but you're not going to know for sure until you have multiple offers for a company.

Basically, a company is worth some multiple of its earnings. In the simplest form you have some multiple of your earnings that a buyer is going to look at and say, "This is how much money I'm going to make in the future if I own this, and here's the rate of return that need to get on my money, and so therefore this is what I'm willing to pay for it."

We get top dollar for a company by first planning in advance. Ideally I like to talk to potential sellers two to three years before we're going to market, to prepare the company for sale. It's kind of like selling a house; you put a fresh coat of paint on it before you put it on the market. So we want to do that with the business. Then when the business is prepared for sale, you run an auction process; you get multiple buyers, and you make sure that they know there's competition and that they're going to have to pay what the market will bear at the far end if they're going to be the winning bidder.

Creating an Auction Environment

At IBG, we have a saying: “One buyer is no buyer.” If a potential buyer is the only horse in the race, that gives him power and leverage over the seller.

As we discussed in in our August 10, 2021, post (“ To Get Top Dollar for Your Business, Create Buyer Competition ”), when you go to market without a price – which is our approach – it is very important to create an auction. To create an auction environment, we start out with good research, identifying a good selection of potential buyers – maybe a good synergistic buyer, maybe a financial buyer, maybe an industry buyer.

Attracting interest from more than one candidate not only generates multiple offers and shifts the leverage to you; it can also reveal your “best fit” buyer – someone who, in addition to offering an attractive price and favorable terms, appears to share your values and seems likely to take good care of your company and its customers and employees.

When you run an auction, it's kind of like running a horse race where you want all of the horses to end up at the finish line at the same time. We try to enforce very rigid rules; we have schedules and deadline that buyers have to meet, so that they know that they are in a race, there are other people next to them, and they had better give it their all if they want to get be the first to reach the finish line – even if it means paying more than they originally intended.

You can run your business or sell your business - but not both at the same time

Tue, 07 Sep 2021 18:32:29 GMT

This article is adapted from a short video (1:50) by Jim Afinowich

Reason 4 of 4 Great Reasons to Professionalize the Sale of Your Business (see Reason 1 , Reason 2 , and Reason 3 ) .

A common problem for business owners who are trying to sell their company directly is that they get so focused on the sale that their business starts to suffer.

By Jim Afinowich

One of the biggest things most business owners don’t realize is the amount of time that it takes to sell a business properly. To shorten that time, we take a team approach: We will have four or five people working on a transaction, and, by the time the deal closes, it’s not uncommon for us to have invested a thousand man-hours.

Even if you have the skill and experience necessary to achieve a successful sale, you probably do not have that amount of time to spend. When it comes to selling your business – perhaps the largest transaction of your life – you probably don’t want to learn the marketing and sales process as you go along.

Among the many benefits of having a broker represent you in a sale that is that it keeps you from getting totally distracted. One of the most counter-productive things you can do in selling your company is to put it on the market and then loosen the reins and have the company falter.

Keeping a sale process going is very time consuming. If you have an intermediary, you can focus on doing what you do best: running your business and growing its market value.

Also, most buyers work on acquisitions during normal business hours. It is very hard to maintain confidentiality and not raise the suspicions of your employees talking with buyers at work or running out to the parking lot to take a call. An intermediary will help you maintain confidentiality.

You don’t know that it’s going to sell; there’s no guarantee that any business is going to sell until it’s actually sold. While you’re waiting to find out, you can keep running your business while the intermediary devotes his time and energy to the process. The intermediary is going to know where to find the buyers; he’s going to know the process and how to navigate it; he’s going to know when to advise you not to do a deal because the buyer and the terms may not be the best fit for you. On average, one out of 15 people who inquire about a business for sale end up buying one. A good representative will screen out the time wasting tires kickers.

Finally, do you have the time and resources to identify and communicate with every qualified prospect? Do you have the right connections to the market? In our experience, even when the seller has a short list of good candidates, the ultimate buyer was unknown to the seller when he or she started the process. We have a database of over 55,000 names, including over 3,500 private equity groups, that has taken us years to assemble.

You running the business, and the intermediary putting to work for you his resources and his understanding of the market and the process – that is a winning formula for a successful sale that brings top dollar.

To get top dollar for your business, create buyer competition

Tue, 10 Aug 2021 19:31:47 GMT

This article is adapted from a short video (1:50) by Jim Afinowich

Reason 3 of 4 Great Reasons to Professionalize the Sale of Your Business (see Reason 1 , Reason 2 , and Reason 4 ).

If a potential buyer is the only horse in the race, that gives them power and leverage. But if they know they're competing with another buyer, they're likely to pay a lot more than they – or you – ever expected.

By Jim Afinowich

If you receive a phone call from a potential buyer, how should you respond? What do you do if he makes an offer?

We are in a seller's market, and there are a lot of buyers chasing deals. Good businesses get calls from buyers regularly, and owners are often tempted to try and work that deal themselves, because they think they have a good buyer, and the price seems right.

However, in the end the owner has a better chance of actually getting a deal done if they have selected an M&A intermediary to represent them. As M&A professionals, we know where the potential landmines are in the process – and there are a lot of them, such as price, terms and conditions, due diligence, inquiries and demands that come in from “left field,” etc.

Whenever you step on a landmine, or even brush up against it, because of your lack of familiarity with the process, one of two things is likely to happen:

your deal may fall apart, or

you may still get the deal done, but you're going to leave money on the table – in the form of a lower price or less favorable terms – and not know it.

Creating an Auction Environment

At IBG, we have a saying: “One buyer is no buyer.” If a potential buyer is the only horse in the race, that gives him power and leverage over the seller.

We work very hard to create competition for the business. People want to buy what's hard to get; if they know they're competing with someone else for the business, they're liable to pay a lot more than they – or you – ever expected.

See also: Selling Your Business, a “Trip to Tahiti,” and the Perils of a One-Buyer Deal

When you go to market without a price – which is our approach – it is very important to create an auction. To create an auction environment, we start out with good research, identifying a good selection of potential buyers – maybe a good synergistic buyer, maybe a financial buyer, maybe an industry buyer.

But until you have a full market scan and go to every potential type of buyer, you're not going to have a good field of horses to start the race. When you run an auction, it's kind of like running a horse race where you want all of the horses to end up at the finish line at the same time. So you start out with the right field of buyers; you do a very timed process, just like a horse race, that starts at a certain time.

Each buyer starts at a different pace, and each of them runs at a different pace. Again, our goal is to get them all to the finish line at the same time. So the timing of the process – when you go to which buyer – is important. We try to enforce very rigid rules; we have schedules and deadline that buyers have to meet, so that they know that they are in a race, there are other people next to them, and they had better give it their all if they want to get be the first to reach the finish line – even if it means paying top dollar, and far more than they originally intended.

Higher Price, Different Buyer

Several years ago, a gentleman called me on a Wednesday and said, “My lawyer said I should call you. I'm about to sign a letter of intent. A buyer contacted me directly about my business, we've negotiated for the last eight months, and he's agreed to pay $6 million for it, but my attorney said I should talk to you before I sign the letter of intent.”

I said, “Fine, call the buyer, tell them this is the largest transaction of your life, and you want to be professionally represented. Give them my name and tell them I'll call them in a couple weeks, when I have my arms around the deal.”

The seller said, “Well, we can't wait a couple weeks – the letter of intent expires on Monday.”

I said, “It will wait. Trust me – I've done this before.”

He called the buyer and delivered the message, and the buyer said, “No! We don't want a broker getting in the middle of this. We've spent eight months putting this together – please don't get a broker involved.”

The next day, the buyer called him back and said, “If you leave the broker out of this – because brokers just delay things – it's going to take forever. Leave the broker out of it, and I'll give you $8 million instead of six million.”

But the seller stuck to his guns and insisted on using us. He became a client, and we ended up selling the business – not to that buyer, but to another buyer – for $10 million.

That’s a real-life example of how being represented, and attracting competition, is going to maximize your price and ultimately result in a better deal.

Selling your business? An M&A professional can keep it confidential

Fri, 16 Jul 2021 15:08:04 GMT

This article is adapted from a video (1:36) by Jim Afinowich

Reason 2 of 4 Great Reasons to Professionalize the Sale of Your Business (see Reason 1 , Reason 3 and Reason 4 ).

You want to maintain your business as usual for as long as possible. Keeping the sale confidential until the right time will help you reduce uncertainty and maximize the ultimate selling price.

One of the biggest concerns – and a valid concern – that is most common among sellers of a business is confidentiality. They do not want their employees knowing they're selling their business, they don't want their competitors knowing, they don't want their customers knowing.

In selling your business, using an outside party gives you some space in the market and a buffer to maintain your confidentiality.

When we market a business, we never identify that business or where it is. We may say a “widget company in the southern part of the United States.” When our buyers respond to our general or blind profile, they sign a confidentiality agreement. Then they go through a screening process.

If an owner is selling a business by himself, it's hard to maintain confidentiality when your buyer is calling you. They know your name, they can look you up, they can see who you are.

Having an intermediary – an experienced layer of protection between you and the market – helps maintain confidentiality and prevent uncertainty that can hurt your bottom line and put your sale, not to mention your profitability, in jeopardy.

What’s likely to happen if people find out your business is up for sale?

Employees Get Nervous. They worry that they will lose their jobs or that they won’t get along with a new owner. Some employees - perhaps your best ones - may even quit before you have a chance to reassure them. Losing key people is serious, particularly during the sale process. Key staff members provide valuable continuity and business knowledge that buyers are looking for. Lose them, and potential buyers may be lost too.

Customers Begin to Wonder. They may assume that your business has problems that could threaten their supply chain. They may worry that they won’t get the same quality of product or service from the new owner.

Competitors Will Spread the Word. Once the competition finds out, they’ll tell your customers and use it as leverage to bring that business to their company. It opens the door for them to steal business from you.

Vendors and Creditors May Tighten Terms. You may be working with terms of net 45 or more to benefit your own cash flow. But once creditors learn that your company is in play, you may find those terms tightening or notes called due.

On average, a business sale takes nine months to one year. If even just a few of these changes occur early on, the impact can be dramatic. You’re not only running a business; you’re a fireman, busy putting out fires.

A buyer wants a successful operation with few changes until he or she can make them. Too many question marks mean greater risk and lower offers.

Your M&A intermediary can screen inquiries to ensure that competitors aren’t fishing for details. The intermediary should share your identity only after concluding that a potential buyer is qualified and serious. Such prospective buyers should also be required to sign a binding confidentiality agreement that holds them accountable for any leaked information.

You want to maintain your business as usual for as long as possible. Keeping the sale confidential until the right time will help you reduce uncertainty and maximize the ultimate selling price.

Good buyers like having an M&A professional on the seller's side

Wed, 23 Jun 2021 21:29:59 GMT

Why? See Jim Afinowich's 2-minute YouTube video .

Reason 1 of 4 Great Reasons to Professionalize the Sale of Your Business (see Reason 2 , Reason 3 and Reason 4 ).

A steady hand on the wheel: Involving an M&A professional to represent the seller is good for both sides. Sophisticated buyers know that going in, and successful sellers learn that, to their lasting benefit, on the way to the finish line.

In today’s market, 70% of buyers are financial buyers – family offices, private equity groups, or perhaps synergistic buyers. They are professionals, and buying businesses is what they do for a living. They like to have someone on the other side who can package the information as they want to see it, who knows the process, who can guide the seller through it.

From the perspective of an experienced buyer, having an M&A professional involved in the deal on the seller’s side actually:

speeds up the process, and
increases the chances for a successful closing.

We recently closed a deal in which a large company bought a business through us. Six months later the buyer came back to us and said, “Here’s another company we want to buy. We’ve signed a letter of intent with the seller, and we want you to represent them.”

We pointed out to the buyer what they already knew: If we represent the seller, our job is to get as much money out of the buyer as we possibly can.

The buyer’s reply: “We really want this company, and without professional help we will not get a deal done.”

So, at the buyer’s request, the seller hired us. We ended up selling the business, to that buyer, for almost double the price to which they had originally agreed.

But the buyer was willing to pay the extra amount, which included our fees, as a premium for the relative certainty of closing the deal.

The buyer’s willingness to pay that premium should not come as a total surprise. The purchase of an attractive business requires substantial commitments of time, energy, and money – on both sides – and neither buyer nor seller will devote their maximum effort if they foresee too many issues on the other side that could cause the deal to fall apart.

From the buyer’s viewpoint, they appreciate knowing that:

the company has been professionally valued and critically assessed by an experienced third party;

the M&A intermediary can keep the seller grounded in the realities of a complex deal, the timeline (see a simplified sample below), the exchanges of information, the bothersome minutiae of due diligence, and more;

the seller has someone on their side who can hold their hand and keep them committed to the deal when the going gets tough (as it invariably does);

the seller has someone on their side who speaks the buyer’s language and can look at the deal through the buyer’s eyes (while retaining their commitment to the seller’s interests); and

the seller’s M&A professional will see the deal through to a successful closing and help ensure that the post-closing process – including the transition of ownership – is completed.

Involving an M&A professional to represent the seller is good for both sides. Sophisticated buyers know that going in, and successful sellers learn that, to their lasting benefit, on the way to the finish line.

IBG Fox & Fin, Jim Afinowich receive 2021 honors from M&A Source

Tue, 25 May 2021 16:40:17 GMT

M&A Source named IBG Fox & Fin its "Top Firm of the Year" (5-10 M&A professionals) and Jim Afinowich its "Advisor of the Year" for 2021 at the organization’s Spring 2021 Virtual Deal Summit.

Good news for private companies: Robust economy translates into EBITDA growth

Thu, 11 Mar 2021 14:45:15 GMT

In a January 2021 “Eaton Square Perspectives” interview, Stefan Shaffer, founder and managing partner of SPP Capital in New York, offered a 2021 outlook on the private capital market and the overall business and lending environment ( view the 8-minute video ).

We have recast and updated some of the highlights, starting with an outlook for the economy and its favorable impact for business sales and M&A activity.

EBITDA Growth. At the time of the interview, expectations were high for fourth quarter 2020 GDP growth. While the actual growth rate fell short of those expectations, the late-February upgrade to 4.1% nonetheless indicated a robust economy.

The outlook for 2021 is even brighter. This week the Organization for Economic Co-Operation and Development (OECD) more than doubled its growth forecast for the U.S. economy, to 6.5% (see the March 9 Bloomberg article, “ U.S. Stimulus Set to Turbocharge World Economy as Europe Lags ”).

Note: Similarly, the Atlanta Federal Reserve had predicted 6.1% GDP growth for the third quarter of 2021, but late summer's supply-side strains, caused largely by lackluster job growth, caused the Atlanta Fed to downgrade its prediction for the quarter to 1.3%. See " Where Did All the Workers Go? " in the October 8, 2021, Wall Street Journal.

“OECD models indicate that [the $1.9 trillion stimulus passed in March] will raise output around 3% to 4% on average in the first full year of the package,” the article states, “and add a full percentage point to world economic output.”

Impact for Business Owners. Of importance to business owners contemplating the sale of the company, robust GDP growth tends to translate into robust growth in EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which is an important factor in a business’s market value.

Private Capital Market. The private capital market is healthy. The fourth quarter of 2020 was a challenging time – not because of liquidity constraints, but because there was so much work related to COVID-deferred deals that should have closed earlier in the year.

The new year began with favorable liquidity conditions and more time to dedicate to the market. Many investment bankers – including SPP Capital Partners , with which IBG Fox & Fin has a relationship – have lowered their pricing and expanded their leverage tolerances, reflecting what they perceive as a forgiving market for issuers.

Direct Lenders vs. Commercial Banks. There is a continuation of a trend that started several years ago, with direct lending and private debt funds replacing commercial banks as the primary source of liquidity in the market. Private debt funds grew from $300 billion in 2010 to $845 billion in 2020 and are expected to reach $1.4 trillion by 2025.

That growth has created a bit of “disintermediation” for commercial banks — i.e., reducing or eliminating the use of banks as intermediaries between capital producers and consumers – and to some degree the subordinated debt market. As a result, deal structuring is more efficient; it is common to see one lender providing the senior and the sub all in one instrument, getting leverage up to five times with a single lender.

Still, bank pricing and the commercial bank market represent the lowest cost of capital, and banks are having to be a little bit more competitive because of the amount of capital that is coming to the direct-lending community on a private basis.

In the bank market, asset-based lending ranges and cash flow pricing are in the lower LIBOR (London Interbank Offered Rate) ranges. In contrast, non-bank direct-lending market pricing starts at about LIBOR 5 and goes up to about LIBOR 9. Borrowers pay a premium to go into a direct lender to achieve looser covenant packages.

Banks require amortization structures, ranging from 4.5% to 15% per annum, while a non-bank direct-lender leverage amortization is generally between 1% and 5%, a much easier debt service component.

There is also ease of execution component with a non-bank lender, which will not require inter-creditor agreements and does not have to deal with the Fed, the FDIC or the OCC.

To discuss how current economic trends and the state of the private capital market affect your business’s value and marketability, contact an IBG Fox & Fin M&A advisor .

IBG Business forms partnership with international M&A, capital formation firm

Mon, 23 Nov 2020 15:23:07 GMT

Our strategic partnership with Eaton Square increases our exposure to buyers and sellers internationally, greater access to capital, and expertise in key verticals.

Photo by KOBU AGENCY on Unsplash

IBG Fox & Fin is very pleased to announce our partnership, through IBG Business, with Eaton Square , an international M&A and capital service firm with 26 offices in 11 countries.

Our Eaton Square partnership benefits our clients in three key ways:

exposure to buyers and sellers internationally,
greater access to capital, and
expertise in key verticals.

Those are extremely valuable assets for the buyers and sellers who entrust their deals to IBG Fox & Fin and our IBG Business affiliates.

Growth Capital

In tandem with New York-based SPP Capital Partners , Eaton Square provides private debt and equity as growth capital for established middle-market companies in the US, Canada and Asia Pacific.

Eaton Square offers access to funding anywhere between $15 million to $500 million per transaction in companies with EBITDA of $8 million or more, and is a capital-raise resource for start-up companies.

To learn more about the benefits of the IBG / Eaton Square partnership, contact your IBG Fox & Fin M&A advisor .

Not ready to sell today? Our “Two-Year Plan” was made for you

Tue, 17 Nov 2020 17:31:55 GMT

Some of our most successful deals resulted from the owner’s patient, resolute commitment to preparing their business to sell at the right time, for top dollar.

The sale of a business is different than the sale of any other asset. Unlike real estate or capital equipment, which can often sell quickly at a good price, businesses usually require extensive preparation for their sale to yield maximum value.

Recognizing that a business sale is a relatively long-term proposition, IBG Fox & Fin has throughout our 27-year history taken the long view: We often create relationships with business owners two or more years before their company is ready to sell, so that we can:

Assist in building business value.
Maximize our knowledge of the business.
More readily identify the best-fit buyers for the subject company.

This article focuses on item 1 – building business value – and examines some of the key steps you can take to prepare your business to bring top dollar.

Understand the Types of Value. As you consider selling your business, it’s critical to look at its value – or, more accurately, its two values: academic value, determined by a professional business valuation, and true market value.

The academic value is arrived at with a formula based on the firms’ tangible assets, cash flow, industry averages and multiples.

The fair market value also takes those items into consideration, but then considers what buyers are really and willing to pay.

For many small and mid-sized businesses, tangible assets – e.g., equipment, vehicles, real estate and inventory – may be relatively scarce. In some small businesses there may be no hard assets at all. Instead, their value is based primarily on earnings and intangible assets, such as reputation, market share, employees, proprietary processes, intellectual property, customer lists, location and business relationships.

To maximize the fair market value of your business, capitalize on those intangible assets. And begin taking a critical look – through a buyer’s eyes – at issues that might undermine your company’s ultimate value.

Seeing the value of your business from the right buyer’s perspective is a prime example of how an industry-savvy M&A advisor can help you achieve top dollar. In a recent deal, our knowledge of market conditions in an industry sector revealed a timely opportunity for a strategic buyer, resulting in the seller receiving substantially more for his company than he had thought possible.

Find and Build Your Niche. You don’t have to be everything to everyone. Buyers will pay a premium for a niche that has barriers to competitive entry.

Clean Up Your Financials. While we can help you recast your financials in the most faithful and positive light, it’s primarily up to you to clean them up.

Make sure your inventory and asset records align with what is physically there.

Strengthen your ratios: working capital, debt-to-equity, “quick,” price-to-earnings, return on equity, etc. (This will not be accomplished overnight; if you need to improve the quality of your financial advisors, this is a good time to break them in.)

Rid your income statement of non-business expenses. Dubious moves designed to lower your tax bill can come back to haunt you when it’s time to sell.

Improve Cash Flows. A prospective buyer wants to see the “true” cash flow. And, of course, in the business world, cash is king. Be sure you are driving all income to the bottom line.

Review Your Assets. Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any assets that are primarily for your personal use.

Develop Key Employees. Buyers generally aren’t interested in paying top dollar if the business is overly reliant on the owner for its success. If you aren’t already doing so, start delegating responsibility to key employees and involve your senior staff members in the decision-making process. Demonstrating that your company’s success rests on your team, and not just you, will pay off at the time of sale.

Document What You Do. Job descriptions, operation processes, and strategic plans should be well documented. Written records and plans give a buyer greater comfort that he or she will be able to emulate your successful growth and will help your buyer obtain financing if needed. Also, be sure to keep business records like sales and expense reports, internal profit and loss statements/balance sheet, and tax returns clean and well-organized.

Build Relationships. Name recognition, customer awareness and your reputation are all part of your business value. Even if your company doesn’t have many hard assets, your relationships may be your most valuable commodity. If you are overly reliant on a one or two suppliers or customers, try to diversify your supplier and customer accounts.

Remodel, Clean and Organize. What’s the first thing anyone does when they put their home on the market? They freshen things up and make sure everything is in its right place. It is peculiar that, in business, that’s rarely considered. A well-maintained facility will get the best price. Even businesses that lease space can benefit from a thorough cleaning and organization to convey a feeling of quality and efficiency.

Reduce Risk. How much a buyer is willing to pay, or whether they are willing to buy at all, is influenced by their perceptions of business risks. Some areas that put the business at risk for continuing income on a long-term basis include:

risks of customer concentration

supplier dependency

absence of contracts with key employees

competition

environmental issues and regulatory compliance

legal challenges.

START NOW

Keep these important intangible assets in mind if you’re looking to sell your business. They convey a value that financial statements alone do not. If you are looking to sell, plan. Start working on the intangibles and reducing risk well in advance of putting your business on the market. For many business owners, they reach a point where they burn out and psychologically retire early, before a sale is made. It’s important to work to keep your focus right until the sale is complete.

Finally, when the time to put your business on the market arrives, consider lining up key specialists who will help you make the most of the sale – an attorney, an accountant, and a business intermediary to name a few. Remember, you may have only one chance to sell your business, and you will want to do it right.

To revisit our introduction, you may not be – and probably aren’t – ready to sell your business today. But you can start the process today. If you’re willing to take the long view toward maximizing your selling price, IBG Fox & Fin can guide you toward your destination – and maybe show you a few shortcuts along the way.

Call us today at 480-421-9789 .

EBITDA a key indicator of your company's value

Wed, 09 Sep 2020 20:50:39 GMT

EBITDA is a very helpful tool for assessing a business’s market value and marketability, but it does not account for factors that could influence the company's future growth and prosperity.

EBITDA is an acronym for “Earnings Before Interest, Taxes, Depreciation and Amortization.” EBITDA can be a useful tool in comparing the financial strength of two or more companies, and it can be used as a key business valuation factor in determining your company’s market value when you are considering selling your business.

There are some important issues to address when using the EBITDA profitability calculation.

See also: EBITDA: What's It Worth?

Normalized or “adjusted” EBITDA means adjusted to remove the income or expenses that would not be present under new ownership. Examples might include rental income from a vacation home that would be excluded from the sale, or the owner’s $1 million salary, when fair market value for the job might be $75,000.

Divided Opinions on EBITDA

Some business and financial professionals believe that EBITDA is a less-than-perfect business valuation metric. Their common complaint: In calculating EBITDA, one must take a complicated issue with a myriad of moving parts required to plug in and ultimately be able to compare the value of businesses.

Nonetheless, EBITDA is typically a dominant factor when buyers, sellers and M&A brokers set out to determine and negotiate business values in mergers and acquisitions. Though the calculation can be complicated, the goal is to distill the inputs to an easy-to-understand formula. In turn, the formula is designed to generate a single number.

Key Factors Ignored by EBITDA

EBITDA is valuable as an accepted measure in valuing a business, but there are important factors to consider that are omitted by its very definition.

A key concern in using EBITDA in M&A planning, marketing and negotiation is that it is often used as a substitute for true value – when in fact a “true value” does not exist for any business. One must remember that profit, the owner/seller’s discretionary earnings, EBITDA and cash flow are never the same number. All of those have uses in determining a businesses market value.

By definition and custom, the use of EBITDA omits the seller’s interest, income taxes, and non-cash charges. It does so because those seller expense amounts will generally not be applicable under the buyer’s ownership.

Also, EBITDA may not allow for necessary capital expenditures, whether to hold the status quo or to enable growth.

While EBITDA establishes a factor commonly used in business valuation discussions, a buyer will need to prepare pro forma plans to envision new levels of interest expense, income taxes, and non-cash charges that will be appropriate for the buyer after the closing.

Achieving Optimal Results

Despite its imperfections, in the M&A and business sales marketplace, EBITDA is a very helpful tool for assessing a business’s market value and marketability. It does not, however, account for factors that could influence the potential future growth and prosperity of a given business entity.

Most experienced M&A brokers, investment bankers and other M&A professionals have a refined awareness of those factors, and M&A brokers are trained to fully understand how they affect business valuations and help the parties analyze, set, and negotiate the sale of a business. In the end, taking into account EBITDA and the myriad other value drivers help buyers and sellers recognize the value of the subject business en route to a successful closing and transition. Learn how IBG Fox & Fin can help you achieve your transaction goals.

Preparing your business for a successful sale

Tue, 07 May 2019 18:53:02 GMT

To receive top dollar for your business, planning is critical! It is not something to put off until the decision to sell. Following are some factors to consider, both long-term and short-term.

Long-Term Considerations

Ideally, the seller will start planning a full year in advance of a sale, because numerous elements will take considerable time and expense to execute. Most small private companies, for example, have their financial documents “reviewed” or “compiled” but rarely audited. Auditing statements involves conducting an actual physical inventory, with each accounts receivable and all other financial details verified in the process. While audited statements are mandatory for public companies, many private companies opt not to pay the extra cost of auditing, which can range from $10,000 to $40,000. However, an audited statement, which is a verification of the reported numbers in the financials, may result in a higher offer by the buyer.

Other items to address in preparation for selling a company include cleaning up the balance sheet of old debts and writing off uncollectable accounts receivable and old inventory. This ensures that the buyer is not deterred by a less than pristine financial statement.

Settle outstanding lawsuits and engage top management in non-competitive and stay agreements.

Further, make sure the plant is in excellent physical shape; spruce it up if need be. If the facility does not show well, it will very quickly turn off buyers.

Short-Term Considerations

In addition to the long-term issues discussed above, certain elements need to be considered in the short term. Prior to going to market with the sale of a company, sellers need to allocate about two to four months for organization purposes. A critical element in organizing a business sale is to assemble a team of advisors, including a mergers and acquisition (M&A) intermediary. This representative will partner with the seller during the entire selling process and will probably be in contact with the seller almost daily for the next six to twelve months. The intermediary will also orchestrate the process and act as “quarterback” for the team of advisors. A transaction attorney, an accountant, and most likely a tax attorney who will be knowledgeable about the company’s personal affairs should also be by the seller’s side.

Next, it is advisable to have a valuation of the business that not only determines the “anchor” price but also supports the seller’s reasoning in the negotiating process. Along with the business appraisal, sellers should consider obtaining a machinery/equipment appraisal and a real estate appraisal. The buyer will need these separate appraisals to know what will be required in order to finance some of the hard assets.

Finally, the preparation of the selling memorandum by the intermediary is the major selling tool in the entire process. This document describes in detail the industry, the company, the financials, and investment considerations.

Along with this document, a seller should have a “data room” of various documents pertaining to the business: lease agreements, bank agreements, a sales representative agreement, and corporate minutes. The data room would be the single place where all of the necessary secured files are kept. These files contain all the pertinent facts of the company, which buyers will want to review as part of their due diligence process.

There is an old saying that the right time to prepare to sell your company is the day you start or purchase it.

A Reasonable Price for Private Companies

Putting a price on privately-held companies is more complicated than placing a value or price on a publicly held one. For one thing, many privately-held businesses do not have audited financial statements; these statements are very expensive and not required. Public companies also have to reveal a lot more about their financial issues and other information than the privately held ones.

This makes digging out information for a privately-held company difficult for a prospective purchaser. So, a seller should gather as much information as possible, and have their accountant put the numbers in a usable format if they are not already.

Another expert has said that when the seller of a privately held company decides to sell, there are four estimates of price or value:

A value placed on the company by an outside appraiser or expert. This can be either formal or informal.

The seller’s “wish price.” This is the price the seller would really like to receive – best case scenario.

The “go-to-market price” or the actual asking price.

And, last but not least, the “won’t accept less than this price” set by the seller.

The selling price is usually somewhere between the asking price and the bottom-dollar price set by the seller. However, sometimes it is less than all four estimates mentioned above. The ultimate selling price is set by the marketplace, which is usually governed by how badly the seller wants to sell and how badly the buyer wants to buy. What can a buyer review in assessing the price he or she is willing to pay? The seller should have answers available for all of the pertinent items on the following checklist.

The more favorable each item is, the higher the price.

Stability of Market

Stability of Historical Earnings

Cost Savings Post-Purchase

Minimal Capital Expenditures Required

Minimal Competitive Threats

EBITDA: What's it worth?

Mon, 18 Feb 2019 19:02:24 GMT

“What is this business worth?” It is a question that owners and buyers often consider. Frequently, the answer is tied to a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization), leaving the further question, “What is EBITDA worth as a key factor in value metrics?”

Fundamentally, what a business is really worth is a number between what the owner will take and what the best buyer will pay. The range presented by those numbers is where negotiations can bring the two together, assuming the buyer’s maximum is equal to or more than the seller’s minimum.

Methods are available to help the buyer and seller derive estimates of value based on assumptions and calculations, which can help in decision making and in the communication and negotiation between buyer and a seller. Because that process can raise many complexities, it is common for valuation discussions to be based on simplifying measurements.

EBITDA is probably the most common approach today. Is EBITDA worth its weight in mathematical gyrations to determine it? Yes – but that is a nuanced answer.

See also: EBITDA a Key Indicator of Your Company's Value

Valuation models can be as simple as applying a rule-of-thumb multiple of revenues or can include highly complex representations of future cash flows or other profit measures, also ignoring or factoring into the mix various add-ons or deductions for intellectual property, goodwill, assets and liabilities, and many other factors.

In the sphere of business sale transactions, quite often the parties rely heavily on multiples of EBITDA. While the term may be bandied about casually, it is essential to understand that there are many variations of what EBITDA means and when and how it should be used in valuation considerations.

Appraisal educators state that all value is a prophesy of the future. Like science buffs, they also teach that the past is a key for assessing future expectations. Value calculations are efforts to try to consider the past and the future to determine the “value” of a business. They always fail in perfection, as the best efforts derive only an approximation of what might be the value of the business, often expressed as one point in a range of possible values.

In theory, if perfectly applied, all the various approaches and methods – such as multiples of net profit, cash flow, revenues, EBITDA, seller’s discretionary earnings, net book value and scores of others – might be expected to reach same value conclusions for the same business. Of course, they never yield the same answers in practice. Normally, they are not even close. But each view can help evaluate value within a range.

EBITDA is a leading factor for weighing the worth of a business, and it is so common that it enjoys “coin of the realm” status. It is used not because it is perfect or right, but because it is widely accepted and simple to apply. However, even well-informed people talking about the EBITDA of a business may be talking about quite different things.

Earnings before interest, taxes, depreciation and amortization present an easy but incomplete calculation of EBITDA for transactions. That is because, in most cases, it is best to consider an “Adjusted EBITDA.” Even that is by no means pure, because different people may perceive, understand, and accept adjustments differently.

What then are some of the possible adjustments that will yield a relevant number? Examples could include:

Discretionary expenses. Smaller businesses are seldom managed to create maximum taxable income. Instead, they are managed to create benefit for the owner. “Business” expenses might be made at the owner’s discretion in areas such as paying an owner above- or below-market compensation, unusual benefits, paying a relative above market rent, or others. Perhaps they can be justified, but they are not truly relevant to the business. All things being equal, if continuing these outlays would not be needed under new owners, then they may be valid adjustments to EBITDA.

Extraordinary expenses. Business expenses that, in all probability, will never recur are legitimate targets for adjustment. Examples are such things as a loss incurred in a 100-year flood or the expenses or revenues of a permanently discontinued business activity. Expenses made in support of introducing a new business line should be evaluated, as they may represent “dead weight” outlays incurred historically for earnings to be generated at some later time but not yet seen in past earnings.

Accounting treatment. By choice, some expenditures, such as the buildout of new shop space using company labor or materials, may have been expensed but should have been capitalized and are possible adjustments. Similarly, perhaps there were revenue or expense items, spanning multiple years, that were not “booked” until completed. They, too, are potential adjustments.

Other factors besides a measure of earnings must be considered in analysis of value, such as:

Capital expenditures. Does the company have ongoing capital needs? If they are substantial, then imputing a capital expenditure load, perhaps as economic depreciation, may be necessary to account for this burden against cash-based earnings. When this factor is predominant, as in a capital-intense business such as heavy equipment rentals, EBIT may be more appropriate than EBITDA.

Transferable earnings. Value to a buyer presupposes that the seller’s earnings will be effectively transferred to the buyer for the future. Obstacles that may require value adjustments include customer concentrations, disruptive competition or innovations, deferred maintenance costs, seller relationships that drive business, continuation of key employees, and others.

In summary, because of its prevalence, EBITDA is worth a lot in support of deal making. At the same time, value assessments often center on Adjusted EBITDA. Through skilled analysis of the “rest of the story,” the worth of Adjusted EBITDA or any other method of valuation becomes far more relevant and is worth much more to a decision maker.

Sellers who fail to have their value analyzed and assessed, to discover and allow for the full range of adjustments and factors, will likely misperceive value and may well leave a lot of money on the table in closing a business sale. An experienced deal maker, such as a certified M&A broker and advisor, can be “worth their weight in gold” in guiding an owner to obtain their best understanding of market value and then produce full valued outcomes for their business owner clients in a business sale.

Cottonwood Tucson has been acquired by Tennessee-based Summit Company

Mon, 02 Apr 2018 16:13:51 GMT

IBG Fox & Fin is pleased to announce that Cottonwood Tucson has been acquired by Summit Company of Franklin, Tennessee. Cottonwood Tucson is an inpatient holistic behavioral health treatment and addiction rehab center that utilizes the latest research on the neurobiology of human development and the neuroscience of addiction and mood disorders to design cutting-edge, patient-responsive treatment programs.

IBG Fox & Fin acted as the exclusive advisor to Cottonwood Tucson.

“We are excited to announce the acquisition of Cottonwood Tucson,” stated Trey Carter, Summit CEO and founder. “As a company we are passionate about quality, innovation to improve outcomes and caring for the clients we serve. Cottonwood Tucson has a nationally recognized thirty-year track record of providing innovative and evidence-based behavioral health treatment, with an integrative approach in the treatment of co-occurring disorders which makes it a perfect match. We couldn’t be more proud and excited in welcoming them to Summit.”

Cottonwood Tucson CEO Brian Welch concurred. “We are thrilled to be joining the Summit family. Finding a partner who values clinical excellence and integrity, as well as fostering a healthy professional environment for our employees was critical in our family’s decision-making process. We found that in Summit.

"It has been the Welch family’s mission for over twenty-five years to help people suffering from behavioral health and addiction disorders through the delivery of innovative, compassionate and individualized services. We are excited to partner with Summit and together we will be successful in maintaining our mission while leading Cottonwood successfully into the future.”

About Summit BHC

Headquartered in Franklin, Tennessee, and founded in June 2013, Summit was established to develop and operate a network of leading addiction treatment and behavioral health centers throughout the country. The company’s sole focus is on the provision and management of specialty chemical dependency and addiction disorder services within a flexible and dynamic continuum of care. The leadership team at Summit is comprised of senior executives with decades of combined experience in the behavioral healthcare industry at the national level. The company currently owns and operates fourteen freestanding addiction treatment centers in eight states across the country.

About Cottonwood Tucson

Located on a scenic 35-acre campus in the Sonoran Desert, Cottonwood Tucson is a holistic behavioral health treatment and addiction rehabilitation center dedicated to providing innovative and evidence-based treatment in an environment of safety and respect for patients, family members and staff. In operation more than thirty years, Cottonwood offers many different therapeutic modalities, full-time psychiatric and medical care, and comfortable amenities. Cottonwood Tucson is licensed by the Arizona Department of Health Services and is accredited by the Commission on Accreditation of Rehabilitation Facilities (CARF).

About IBG Fox & Fin

IBG Fox & Fin is a middle-market mergers and acquisitions advisory company headquartered in Scottsdale, Arizona. Working with the owners of middle-market businesses with annual sales between $2 million and $100 million and their potential acquisition or merger partners, the firm’s professionals work in communities throughout the country, with a focus on the western US.

The recipient of many industry awards, IBG Fox & Fin has also been ranked #1 by Ranking Arizona among business broker/M&A advisory firms every year since 2003. IBG Fox & Fin or its principals and agents are members of the following organizations: International Business Brokers Association, M&A Source, Institute of Business Appraisers, Association for Corporate Growth, M&A Roundtable, Arizona Business Brokers Association, Arizona Business Leadership, Turnaround Management Association, and Arizona Small Business Association.