Where will buyers come from in the next 6 to 12 months? What types of companies will be hot in 2015 and what attributes will make them most attractive? Is the end of the seller-driven market in sight?
These questions and more were answered during a recent event featuring a panel of professional advisors who shared their experiences helping buyers and sellers prepare for and execute successful company transactions. As more sellers are expected to enter the market in the next 12 months, analysts are anticipating a shift in supply and demand for certain industries. Combined with changing economic conditions and possible rising interest rates, executives looking to sell in 2015 must be well prepared in order to achieve their financial objectives. At this free breakfast seminar titled “Looking Ahead to 2015,” attendees learned, among other things, the due diligence processes of buyers, pitfalls to avoid, current M&A trends and essential steps to take prior to the end of 2014.
Trends in Deal Structures
Adams Price, Managing Director of Forbes M&A and panel moderator, began the program by asking about the latest trends in deal structure. Todd Criger, Associate with Holland & Hart, shared three business transaction trends. First, he said that typically 5-10% of the purchase price is being held in escrow. He’s also seeing companies hold 10-20% of the purchase price for one audit cycle for indemnification. Finally, Mr. Criger discussed the growing popularity of parties bridging the purchase price through earn-outs. “Although there are lots of challenges to earn out structures, they are much more prevalent now,” said Criger.
The Importance of Preparation
Bob Tinglestad, an experienced IT professional and entrepreneur, shared details of his recent experience selling his IT consulting organization to EKS&H. His transaction process began years ago when he began working with a business coach. From there, he established core company values, a mission statement and made sure he had strong processes in place. This was critical to his successful deal, which only took five months from the start of discussions to transaction close. When asked what he wished he’d known prior to the process, Mr. Tinglestad pointed to the importance of finance knowledge. “I wished I had known more about core finance capabilities and forecasting,” he said. “I had to learn a lot about business valuations in just five months.”
Francis Brown, Wealth Specialist with Key Bank, also emphasized the importance of planning ahead and using qualified, trusted advisors. “One business owner I worked with decided to hire a friend as his attorney to save money,” said Brown. “Unfortunately, he ended up not having a proper tax plan in place and failed to maximize what he took home on the back end.”
Mr. Criger concurred with both other panelists, adding that the due diligence process will uncover any issues, so have messaging prepared ahead of time to explain anything upfront will increase the likelihood of a successful transaction. “If there are any issues, work with an advisor to communicate it upfront,” said Criger. “Transactions are adversarial by nature, but buyers want to get the deal done. You don’t want to lose trust by not being honest.”
When asked what he did to prepare his team for the acquisition, Mr. Tinglestad explained that finding a buyer with a similar culture and values were top priority for him. He knew that if his people weren’t happy, it wouldn’t work. However, he did not talk about the acquisition process with his team because he didn’t want it to be a distraction. A week before the transaction closed, he held a 3-day long meeting to share the news and answer questions. This time spent with employees paid off, as 100% of the staff are still with the company post-acquisition.
Mr. Price also asked the panelists to share what surprised them most during the transaction process. Mr. Tinglestad shared how he was shocked at the amount of due diligence that was involved. Had he know this ahead of time, he would have had better worded contracts and been more organized with paperwork. “I couldn’t ask my staff to help gather the necessary documentation,” said Tinglestad. “It puts a lot of pressure on owners in addition to running the business.” Fortunately he had decided early on to seek help from M&A advisors and a legal firm, which he said made the process much smoother.
Mr. Brown shared with the audience three criteria business owners must have before moving forward with an exit strategy. First, the business has to be ready. Second, the capital markets must be right. And third, the business owner must be mentally ready to sell and “be willing to give up your baby.” So much time is spent on the pre-transaction planning, that owners often neglect to consider their wealth accumulation objectives until it is too late. For example, is a seller comfortable with annuity payments rather than a lump sum?
When asked what trends they were seeing in business valuations, the panelists agreed multiples were rising. “10-12 times EBITDA is common now, but I’ve seen higher in the market” said Criger. However, all panelists cautioned to not focus too much on multiples as it can be a misleading way to value a company. “Owners have little control over multiples because they are driven by the market,” said Price.
Companies will be more valuable if they are matched to the right buyer. For example, Mr. Brown advised owners to ask themselves, “Do you want to stay involved?” If so, then a private equity firm might be the best fit. Another key question is, “Can your business run without you?” If yes, then your business might be worth more to a different type of buyer. If it can’t, then you may look for a buyer that wants to invest in a management team and is dedicated to growth.
Many different buying scenarios were discussed during the question and answer period. Audience engagement confirmed that all three panelists did a terrific job of providing relevant, educational and actionable advice for potential sell and buyers. For more information about preparing for an exit strategy, visit www.ForbesMA.com or call 1-303-770-6017.