Sabre Capital is a leading Merger & Acquisition firm in the Carolinas. Since 1984 we have assisted companies in a broad range of industries manage their strategic alternatives. Services include valuation, pre-marketing consulting to maximize value and an aggressive team driven implementation with hands-on professional follow through.

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James A. "Trip" Holmes, III - CBI
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holmes@sabrecapital.com

Will You Sell Within Three Years?

Business experts have stated that with many “baby boomer” business owners approaching retirement age, a large number of these owners will sell their companies in the next few years. Surveys of business owners confirm that a very high percentage anticipate selling their businesses within the next three years.

As these baby boomers age, the number of family-owned businesses for sale will increase. Age is certainly an important motivating factor for owners considering the sale of their company. Since only a very small percentage of these businesses will remain in the family, most owners will be left with only one alternative: selling the business.

However, many of these owners are holding off selling now because they feel that their company is growing and, therefore, so is its value. This could be a mistake. Understandably, all business owners want to get the highest price possible for their hard work and effort, but trying to time the market and sell when the business is at its peak is almost impossible.

It’s difficult to convince an owner of a growing business that the best time to sell is often now, and that the business will most likely bring a higher price while it is growing than after the growth has slowed down. Buyers want to buy companies on the way up, not companies who have reached their peak, have grown stagnant, or are on their way down. Value is in the eyes of the buyer, not the seller! In addition, sellers waiting to sell for tax reasons need to remember that tax implications are always going to be there – waiting won’t change them.

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Two Similar Companies - Big Difference in Value!

Consider two different companies in virtually the same industry. Both companies have an EBITDA of $6 million – but, they have very different valuations. One is valued at five times EBITDA, pricing it at $30 million. The other is valued at seven times EBITDA, making it $42 million. What’s the difference?
One can look at the usual checklist for the answer, such as:

  • The Market
  • Management/Employees
  • Uniqueness/Proprietary
  • Systems/Controls
  • Revenue Size
  • Profitability
  • Regional/Global Distribution
  • Capital Equipment Requirements
  • Intangibles (brand/patents/etc.)
  • Growth Rate

There is the key, at the very end of the checklist – the growth rate. This value driver is a major consideration when buyers are considering value. For example, the seven times EBITDA company has a growth rate of 50 percent, while the five times EBITDA company has a growth rate of only 12 percent. In order to arrive at the real growth story, some important questions need to be answered. For example:

  • Are the company’s projections believable?
  • Where is the growth coming from?
  • What services/products are creating the growth?
  • Where are the customers coming from to support the projected growth – and why?
  • Are there long-term contracts in place?
  • How reliable are the contracts/orders?

The difference in value usually lies somewhere in the company’s growth rate!

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Family Businesses

A recent study revealed that only about 28 percent of family businesses have developed a succession plan. Here are a few tips for family-owned businesses to ponder when considering selling the business:

  • You may have to consider a lower price if maintaining jobs for family members is important.
  • Make sure that your legal and accounting representatives have “deal” experience. Too many times, the outside advisors have been with the business since the beginning and just aren’t “deal” savvy.
  • Keep in mind that family members who stay with the buyer(s) will most likely have to answer to new management, an outside board of directors and/or outside investors.
  • All family members involved either as employees and/or investors in the business must be in agreement regarding the sale of the company. They must also be in agreement about price and terms of the sale.
    Confidentiality in the sale of a family business is a must. Meetings should be held off-site and selling documentation kept off-site, if possible.
  • Family owners should appoint one member who can speak for everyone. If family members have to be involved in all decision-making, delays are often created, causing many deals to fall apart.

Many experts in family-owned businesses suggest that a professional intermediary be engaged by the family to handle the sale. Intermediaries are aware of the critical time element and can help sellers locate experienced outside advisors. They can also move the sales process along as quickly as possible and assist in negotiations.

All in the Family

  • It’s hard to transfer a family business to a younger kin.
  • 30% of family businesses pass to a second generation.
  • 10% of family businesses reach a third generation.
  • 40% to 60% of owners want to keep firms in their family.
  • 28% of family businesses have developed a succession plan.
  • 80% to 95% of all businesses are family owned.

Source: Ted Clark, Northeastern University Center for Family Business

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The Devil May Be in the Details

When the sale of a business falls apart, everyone involved in the transaction is disappointed – usually. Sometimes the reasons are insurmountable, and other times they are minuscule – even personal. Some intermediaries report a closure rate of 80 percent; others say it is even lower. Still other intermediaries claim to close 80 percent or higher. When asked how, this last group responded that they require a three-year exclusive engagement period to sell the company. The theory is that the longer an intermediary has to work on selling the company, the better the chance they will sell it. No one can argue with this theory. However, most sellers would find this unacceptable.

In many cases, prior to placing anything in a written document, the parties have to agree on price and some basic terms. However, once these important issues are agreed upon, the devil may be in the details. As mentioned in “Highest Price is Not Always the Highest Priority” in this issue, the Reps and Warranties may kill the deal. Other areas, such as employment contracts, non-compete agreements and the ensuing penalties for breach of any of these, can quash the deal. Personality conflicts between the outside advisors, especially during the due diligence process, can also prevent the deal from closing.

One expert in the deal-making (and closing) process has suggested that some of the following items can kill the deal even before it gets to the Letter of Intent stage:

  • Buyers who lose patience and give up the acquisition search prematurely.
  • Buyers who are not highly focused on their target companies and who have not thought through the real reasons for doing a deal.
  • Buyers who are not willing to “pay up” for a near perfect fit, failing to realize that such circumstances justify a premium price.
  • Buyers who are not well financed or capable of accessing the necessary equity and debt to do the deal.
  • Inexperienced buyers who are unwilling to lean heavily on their experienced advisors for proper advice.
  • Sellers who have unrealistic expectations for the sale price.
  • Sellers who have second thoughts about selling, commonly known as seller’s remorse and most frequently found in family businesses.
  • Sellers who insist on all cash at closing and/or who are inflexible with other terms of the deal including stringent reps and warranties.
  • Sellers who fail to give their professional intermediaries their undivided attention and cooperation.
  • Sellers who allow their company’s performance in sales and earnings to deteriorate during the selling process.

Deals obviously fall apart for many other reasons. The reasons above cover just a few of the concerns that can often be prevented or dealt with prior to any documents being signed. If the deal doesn’t look like it is going to work – it probably isn’t. It may be time to move on.

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Highest Price is Not Always the Highest Priority

Many M&A experts believe that the highest price may not be the highest factor in putting a deal together. Here is one such expert’s opinion of the most important factors:

  • The assurance that the sale will close promptly.
  • The deal terms, e.g., cash, stock, notes, all cash at closing, earnouts, contingencies, etc.
  • Total price and/or consideration.
  • Legal issues.

In many cases, the legal issues can make or break a deal. The expert mentioned above feels strongly that the Representations and Warranties requested by the buyer should be submitted along with the Letter of Intent. He feels that the business shouldn’t be removed from the market until there is basic agreement on the Reps and Warranties – this negotiation may be more complex than the price, especially if the buyer is not willing to bend.

Is Your Company Going Downhill?

Let’s assume that you own and operate a company that manufactures a product in an industry that is eroding or going downhill. What are your choices or alternatives?
Run the company as a “cash cow,” resigning yourself to the fact that your industry is slowly declining or is no longer a growth industry. Keep what you are doing profitable even if you have to increase prices and/or cut costs.

  • Increase R&D to develop new products.
  • Acquire or merge with a competitor or strategic partner.
  • Expand geographically.
  • Diversify within the same familiar market.
  • Sell the company now before there is further erosion in your industry.

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This newsletter is not intended to render accounting, legal or other professional service; the publisher and sponsors assume no liability for a reader’s use of the information herein.