Build to Sell

You, as a business owner, should have the goal of creating the most value possible in your business. Likewise, an owner should be thinking about their exit strategy from the day they start or acquire the business.

As a wise business owner you will build to sell and time your exit to coincide with the most value created in your business. The psychology involved is much like selling in the stock market – the time to sell is when things are going great, not when they are spiraling downward.

Your business has value when it can exist separately and apart from its owners, when it has taken on a structure and culture of its own, or where there are processes, methods, products, property rights or anything else that allows the business to continue as a going concern as its own entity.

Other things you can do to increase value are: Make certain you have verifiable cash flow. The more cash the business can prove that it generates annually, the more value your business will have to a buyer. That means keeping accurate financial records in the business that can be verified during the due diligence part of the business sale process.

If your business has a history of sustained annual growth it will have increased value to a buyer. If your company is growing profitably at very strong, consistent rates of growth and you can accurately project those rates to continue or even increase in the future, then you have created a lot of value in your business. Likewise, if your company is perceived as recession resistant and you can show years where you have not only weathered a bad economy but have actually grown during troubled times, then you have created more value for a buyer.

Your reputation and image in the marketplace also create value. If you have branded your company and it is recognized and well spoken of in the community then you have added value to your sale. Along with a great reputation you should naturally have customer loyalty with many continuing customers. This gives a buyer comfort that the business will continue to have revenue from customers after the sale and this certainty adds value for the buyer.

You will add value to your company if your customer base is diverse. Buyers are fearful of one giant customer controlling much of the company revenue because there is great risk to the buyer should that one large customer take their business elsewhere after the sale. You should mitigate this concern by adding numerous customers and working to lower the percentage that any one customer controls of the company’s revenue.

Your operational policies and procedures can add value to the business if they are well-conceived and provide a good roadmap to operating your business for new employees and new business owners. That means you should have good systems in place and provide logical training that gets people up to speed quickly when taking on new tasks or business operations.

By hiring and retaining great people in your business you can add much value. The more management depth and breadth that exists in the business, the more valuable the business is to a buyer.

Your market size and penetration rate also affects your business value. Buyers want significant upside potential so the larger the market the greater the value. Also, if the buyer perceives an  ability to obtain a higher penetration into the market after the sale,  the value of the acquisition increases.  

It is also useful to look at what decreases value in order to avoid certain pitfalls. For instance, worn out assets are not desirable to the acquirer. Another value detractor is earnings that are unpredictable, rising and falling drastically from year-to-year. This uncertainty will give a buyer concern and lower the value of your company, as well as the ability to finance the acquisition. If your revenue and profits are descending instead of ascending, the value of your business is declining as well.

A business owner should develop a realistic expectation of the value of the business as it relates to the earnings. Earnings drive value and they must support the price of the business.

You want to create value above and beyond just the value of the tangible assets of the business. This value is referred  to as the goodwill of your business and can include many things such as: your customer relationships, advertising campaigns and marketing materials, computer databases, contracts, training procedures, trademarks, copyrights, trade secrets, supplier list, management, tooling, name recognition, location, reputation, delivery systems, proprietary designs,  loyal customer base, low employee turnover, know-how, credit files, favorable financing, employee manual, procedures and policy manual, skilled employees, technologically advanced equipment, and favorable comparison to industry ratio’s to name a few items considered as part of goodwill. We sometimes refer to these assets as “Phantom Assets” because they tend to be hidden and must be uncovered when analyzing the value of your business. Some of the items in the list simply add value to your business while others are actually considered intangible assets applicable to Code Section 197 of the IRS – Amortization of Goodwill and Certain other Intangibles.

At Corporate Investment, our grasp of intangible elements as well as our thorough analysis of your historical financial performance enables us to fairly value your business in the current marketplace.

Understanding what creates value, and how to present those items in a positive manner, is the role of the intermediary. When you have built a significant amount of value into your business and are ready to proceed with the sale,  the professionals at Corporate Investment stand ready to assist in this complex marketing, financial and legal transaction. 

A Race Against Time: Exit Planning

Successful, active business owners seldom slow down. Many business owners are both great at planning (for their businesses) and terrible at planning (for themselves).  There are so many great business challenges to tackle, planning for your personal ownership future can get pushed to the back burner.  We all know that the only things likely to reduce your pace are death or terminal burn-out. This is not to imply that you are not well intentioned; quite the contrary. You may be so well intentioned that you’ve taken on more responsibility than you can possibly complete.

Today, our goal is not to alter the number of hours in your workday but to alter your mindset. To do that, let’s look at a fictional business owner.

Renaldo LeMond owned a growing hospitality services business. As business increased, he hired more employees and learned to delegate. Both these improvements freed up time to sell more, to manage more, and to grow the business more.

No matter how much Renaldo delegated, there were always additional tasks and new priorities. Renaldo’s daily activities left no time to plan. Even if he had had the time, Renaldo really didn’t know how to create a plan founded on a clear vision, backed by definite plans that created definable steps subject to deadlines and accountability.

This was Renaldo’s situation when he was approached by a would-be buyer for his business. Renaldo hadn’t actively considered selling his business, but at age 49, he was beginning to think that life after work might have something to offer. He was open to talking about and exploring the idea of selling his business because business growth, and more importantly, profitability, had been slowing for years.

Renaldo found an hour in his schedule to talk to the interested buyer. In only 60 minutes, Renaldo’s blinders were removed and his priorities were turned upside-down.
The buyer turned out to be a large national company seeking to establish a presence in Renaldo’s community. It was interested in Renaldo’s business because of its reputation as well as its broad and diversified customer base. The buyer was looking to acquire a business that could grow with little other than financial support.

Naturally, it sought a business with a good management structure because, like most buyers, it did not have its own management team to place in the business. Renaldo, however, had not attracted or retained solid management (nor had he created a plan to do so). His business lacked this most basic Value Driver.

Like many buyers, this buyer also looked for two additional Value Drivers: increasing cash flow and sustainable systems throughout the organization (from Human Resources to marketing and sales to work flow). Renaldo quickly realized that his business was a hodgepodge of separate systems each created to patch a particular problem.

Finally, the buyer asked Renaldo to describe his plans for growing the business. Renaldo had none. What this buyer and Renaldo now understood was that this business revolved around Renaldo.

As Renaldo left the meeting, he expected that, given his company’s deficiencies, he would receive a low offer from the buyer. He waited weeks but no low offer was forthcoming. In fact, the buyer simply disappeared.

The message to all of us is clear: Unless a business is ready to be sold, many buyers, especially financial buyers, are not interested. They have neither the time nor the in-house talent to correct deficiencies. The look for (and pay top dollar for) businesses that are poised for ownership transition.

It is a fact of life for owners that unless you work on your business, rather than in your business, you will never find time to plan for your future and for the future of the business.

Is there a way to change your priorities before your 60 minutes with a prospective buyer? Of course. You simply acquire new knowledge (about Exit Planning) and apply it to your life.

Exit Planning requires time: time not only to create the plan but also time to implement it and to achieve measurable results. That timeline may be considerably longer than you anticipate because, in creating an Exit Plan, you need to rely on others who are also busy (minimally an attorney, CPA, and financial planning professional). Additionally, you can not anticipate all of the issues that might arise, and it is unlikely that everyone you work with is as motivated or experienced as you are. Finally, and inevitably, not everything will go as planned.

Exit Planning encompasses all sorts of planning: your growth, strategic, tactical and ownership succession planning for your business, as well as your personal financial, and estate planning. By wrapping business, estate, and personal (or family) planning into one process, Exit Planning is all-encompassing rather than a subset of the planning that you are sure you will one day undertake. In short, there is much to do.

It may be helpful here to recognize that planning, properly undertaken, can help enrich your business as well as your personal life. According to Brian Tracy, "A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power." And, in the case of Exit Planning, it works, too. Find out more about exit planning.

The example provided is hypothetical and for illustrative purposes only. It includes fictitious names and does not represent any particular person or entity. Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

Providing Due Diligence

As a business owner your main function is to keep your business running profitably.  However, when an offer is made and accepted through a letter of intent for the purchase of your business, another priority is established – providing due diligence information to the prospective buyer.

You, as the business owner, want to have a team assembled who are competent and knowledgeable professionals familiar with the process of selling a business.  Your accountant/CPA, transaction attorney (not the guy that handled your brother’s divorce), financial advisor and professional business broker (preferably with the designations of BCB - Board Certified Broker and CBI - Certified Business Intermediary) are the team members you want assisting you.

Your professional business broker should be the “quarterback” in controlling and managing the tasks that others are performing in the due diligence process.  The broker will prepare a timeline with milestones that should be part of the letter of intent.  The timeline should be adhered to if at all possible.  Time is a killer in business sale transactions. 

It is to your benefit to have as much due diligence information and documents available as possible prior to the start of the process. Again, time is a killer in deals and you don’t want your slow response to seem as an indication of not wanting to complete the due diligence list.

What will a prospective buyer want to see before they complete the purchase of your business?  Due diligence check lists can consist of one page of information developed by an individual buyer or 30 pages from a private equity group or corporate entity.

Each deal varies, but at a minimum tax returns for at least the last three years as well as the profit and loss statements that were used in preparing the tax returns. Customer lists, vendor contacts and when to meet key employees must be managed carefully.

Your professional business broker will also be in a better position to advise you on when, what kind and how much information to release.  Some buyers find a boilerplate list of due diligence items on a web site. Your broker can remind them that some information is not pertinent to a business like yours. 

“Year to date” profit and loss statements will be expected as well as an up to date balance sheet for the most recent reporting period.

It is best to disclose early any potential “red flag” problem(s).  Pending litigation, outstanding liens or judgments, major personnel problems or loss of major customers are all items that prospective buyers do not like to find as surprises.  Such problems that pop up may cause renegotiation of the price or be grounds for cancellation of the letter of intent.

Remember, even though you are in the midst of selling your business you do not want to mentally “check out” or become “retired in place”.  You should continue to run it as if you were going to keep it for another five years.  You don’t want the buyer to change their mind if something happens during due diligence that negatively affects the business and you have disengaged from the daily operations.

Let your professional sell side M&A advisors work with you and the buyer to make the due diligence process smooth.

Q3 2017 M&A Update: Who Will Buy Your Business?

Businesses with enterprise values above $10 million are primarily sold to institutional investors. Those acquirers fall into two broad categories: financial and strategic. This article discusses the four most common types of financial buyers, sources of funding, and investment horizons.

Private Equity Group, or PEG. A private equity group, or firm, is an investment management company that provides financial backing and makes investments in operating companies through a variety of investment strategies including leveraged buyout, venture capital, and growth capital. The PEG is responsible for finding suitable business opportunities, screening those opportunities, and selecting ones to pursue. A Committed Fund is the most common of the following three PEGs.

PEG Committed Fund or a fund with committed capital has set up a “Fund” which receives money from institutional investors, such as pension funds, college endowment funds, and high net worth individuals. Corporate Investment recently worked with a private equity fund that invested money from a high profile college’s endowment fund. The private equity group reviews the acquisition candidates, selects the desirable ones, manages the acquisition, and monitors the investment in the business. Each “Fund” typically has a defined investment horizon, which is typically 5 - 7 years, meaning the investors anticipate receiving their capital back and related returns in that time frame. The managers of the “Fund” are typically paid a management fee and participate in the gains realized on the investments made by the “Fund.”

A Fundless Sponsor or independent sponsor is a type of capital group or individual seeking acquisition candidates without having the equity financing required to complete the transaction up front (hence, they are “fundless”). Fundless sponsors raise the equity required to fund an acquisition after they have executed a letter of intent (“LOI”). Fundless sponsors may consist of a single individual or group of individuals with years of experience in investment banking and traditional private equity, who accumulated a significant amount of capital. They will then split off and operate a small office, and with their track record, there are other investors that will invest alongside them in business acquisitions. The typical investment horizon for fundless sponsors is also 5 - 7 years, but may be longer.

Search Funds are vehicles for entrepreneurs to raise funds from investors interested in making private equity investments. In the first two examples shown here, the PEG wants to rely on existing  management to continue to run the business day-to-day. In the search fund model, a small group of investors back an operating manager(s) to search for a target company to acquire. The manager typically has an established track record in a specific industry, and wishes to take over day-to-day management. Search funds may have a longer investment horizon, and be more flexible.

Now – the new kids on the block:

Family Offices are a relatively new entrant into the financial acquirer mix. These are private wealth management advisory firms that serve ultra-high-net-worth investors. They are different from traditional wealth management shops in that they offer a total outsourced solution to managing the financial and investment side of an affluent individual or family. Family offices serve multi-role functionality as well as wealth management, including, accounting, security, and property management. Family Offices can be Single Family or more recently, Multi Family offices. More recently, many family offices have hired an experienced professional from a traditional private equity firm to search for companies to acquire. Corporate Investment recently dealt with two large family offices who have hired individuals from private equity firms to help them source, acquire, and manage their acquisitions of entire companies. They typically have a longer investment hold period than traditional funded private equity firms.


Our client, the seller, must align their objectives in the transaction with the right type of purchaser.  Knowledge of the type of funding, risk of being able to close, and investment time horizon of purchasers must be taken into account for us to successfully achieve our client’s goals.

An understanding of the types of institutional buyers is very important, as private equity buyers are now actively investing in lower middle market companies. Over the past 8 years, significant institutional funds have been committed to private equity firms, and the competition for middle market companies (revenue above $100 million) has increased dramatically, leading many firms to lower their sights and seek investments in lower middle market companies.

There are about 350,000 companies with annual revenues between $5 million and $100 million, compared with less than 30,000 companies with revenues above $100 million, according to Forbes magazine. “Interest in the lower middle market has grown substantially,” according to Probitas Partners Private Equity Institutional Investors Trends for 2017 Survey. “In 2017, 63 percent of institutional investors said they are focusing on the U.S. small market buyout sector.” (Mergers & Acquisitions magazine, October 2017).

This development is extremely positive for Central Texas business owners, as the competition for a well managed, profitable business to acquire leads to attractive transactions.

Is a Private Equity Group the Best Buyer for Your Business?

Private Equity Groups (PEGs) are currently purchasing middle market businesses at record levels. Middle market companies typically have annual sales of $3 to $100 million, and values from $5 to $50 million.

Most of these middle market businesses are family owned, and selling to a Private Equity Group is a viable exit strategy for the owner wanting to take some or all of their chips off the table. Private Equity Groups are investment funds set up to purchase businesses with stable operating histories and cash flow, grow them for 5-7 years, then sell for a profit.

Returns on real estate investment have fallen to 8% or less, and many investors are now looking for alternatives. That money is flowing into Private Equity Groups at record levels, with investors hoping for returns of 20-30%. PEGs typically invest in established businesses, not impacted heavily by technology. What are types of businesses are they looking for?

Cambria Group, based in Menlo Park, CA, describe themselves as a “private investment company which acquires and invests in small and mid size businesses with established operating histories. The firm seeks four critical elements in every situation – 1) a fundamentally sound and durable business with a history of profitability, 2) availability of a strong management team, 3) a fair purchase price in relation to historical performance, and 4) opportunities for management and Cambria to add value to the business over time.”

A common philosophy heard is "defensible market niche, strong management team, and proven track record,” all of which indicate a solid business. Less interest has been shown by PEGs in recent years in turnaround companies in distressed situations.

PEGs will often purchase 100% of the company, letting the owner retire and cash out his or her equity in the business. Many younger owners just want to take some chips off the table and are happy to combine their valuable knowledge and experience with the equity infusion of the PEG to continue to grow the business. This is a win/win strategy, with the PEG getting an experienced manager with a proven track record, and the owner typically cashing out 80% - 90%, and getting a second bite of the apple five to seven years down the road on a subsequent transaction, as the PEG exits the investment.

PEGs review hundreds of opportunities and purchase less than 10%. “We look at 100 Executive Summaries for every 10 that we actually meet with the owner,” said Vincent Foster, of Main Street Capital Partners. “We will then typically make 5-6 offers on businesses for every transaction we close. We rely on the M&A professional to analyze and present the business to us in a coherent manner.”

An intermediary will typically spend 30 to 45 days to prepare an in-depth Confidential Information Memorandum of the business, which may be 25 to 60 pages in length. This document will analyze growth opportunities, historical financial performance, organizational strengths, and market information. The initial contact with the PEG is accomplished with a one or two page Blind Profile of the business, without disclosing the name of the Company. The intermediary then asks the purchaser to sign a Confidentiality Agreement, and have the necessary qualifications before being sent the entire Confidential Information Memorandum.

Walt Lipski, CBI, M&AMI, of Fox and Fin in Phoenix, president of the M & A Source, states, “We have not seen market conditions such as the ones existing today, driven by excess investment capital, low interest rates, and low tax rates, in many years, and savvy owners wanting to cash out for maximum values should be wary of waiting too long.”

Multiples of EBITDA – What Factors Turn a 3x into a 5x?

We all know that “money doesn’t grow on trees.”  

And neither does business value.  You can’t just wait until you are ready to leave your business to find out how much “value” you need or want and how much “value” exists in your business.  By then it will be too late.  The tree metaphor is relevant, though.  Value is something that you can grow, nourish and ultimately harvest in your business.  Let’s look at an example.

Picture three identical companies each engaged in moving time-sensitive freight for customers. All have a national presence, $2M in EBITDA (Earnings Before Interest, Tax Depreciation and Amortization) and about $25M in annual sales. It would be logical to assume that they all have about the same value.

In fact, one had little value, one sold for 3.5 times EBITDA and one sold for 5.5 times EBITDA.  The difference in value was $3M to $7M to $11M. Neither gross sales nor EBITDA alone determined the price and terms of these deals.  The key to the variation in purchase prices was the presence or absence of value drivers in the companies as well as the ability of these value drivers to survive the owner’s departure.

Value drivers are internal characteristics of a company that buyers look for in acquisitions. You’ll see that it doesn’t matter if you plan to keep your business forever, transition it to family members, sell it to your management team or find an outside buyer - value drivers can give you more options, more flexibility and more money from your ownership interest. Strong value drivers are those that are effective and will continue to operate once the original owner departs.  Consequently, those are the value drivers that increase both EBITDA and the multiple of EBITDA buyers may be willing to pay.

We may measure the effectiveness of value drivers in two ways:  1) their positive contribution to cash flow and 2) their ability to continue to contribute to cash flow under new ownership.

Think of it this way: why would anyone want to buy your business if its continued success is dependent on you-the departing owner? Buyers are more likely to pay top dollar for businesses that will not miss a beat when the original owner is no longer in charge.

Success in business is determined not by how well you run the business, but by how well the business runs without you.

Let’s look at the three freight-moving companies more closely to see what motivated buyers either to open their wallets or walk on by.

Company A:  

The owner/operator was responsible for management, operations and his personal and industry contacts were the source for new business. All roads ran through the owner so without him, the business had little value.

Company B:  

This company had a capable management team.  Many of its systems and procedures were state-of-the-art.  There was, however, one glaring weakness: the major customer, responsible for over 50 percent of the company’s revenue, had a decades’ long relationship with the company’s owner, not with the company.

Buyers are much less likely to pay millions for customer accounts that can, and indeed often do, go elsewhere the day after they find out the owner has sold the business.

Company C:

Finding the owner of Company C wasn’t easy.  She spent weeks on vacation or visiting grandchildren and when she was in town, was engaged in a variety of civic and charitable activities.  She made workplace appearances only sporadically and left operations in the hands of her stable, effective management team.

She had deliberately created plenty of diversification in her company’s customer base knowing that one day she’d sell the business.  She had thought about what she would look for in an acquisition so had included customer diversification as one of many attributes or value drivers she wanted in her company. She understood that value drivers were necessary to maximize sale-ability as well as the sale price and amount of cash she could demand from a buyer.

Interested buyers were delighted that she had changed her role in the company over the years so that a new owner could step in, almost unnoticed.  

There are a number of value drivers that are critically important to today’s buyers.  The value drivers that are most important to your business may or may not be the same as those that were identified for Company C.  What we can say with some certainty is that value drivers can help your business value grow to bring you closer to the value that you need.  If you are interested in learning more about them, we will be happy to sit down with you and talk about how value drivers might improve your business value.

Corporate Investment is unique in that we take a holistic approach to working with business owners. Exit planning is a part of our process. We help business owners plan for one of the biggest financial events of their lives - the transition out of their business. 

Experienced Austin Financial Executives Robert (Bob) Kay and Laine Holman Affiliate with Corporate Investment

Robert (Bob) Kay, an experienced executive in finance, investments, private equity intermediary, banking, and private business management, and his long-time business associate, Laine Holman, a seasoned CFO, have joined Corporate Investment, an Austin-based financial advisory firm specializing in mergers and acquisitions and business sales.

“We are excited to join Corporate Investment and use our years of experience in business operations, deal making, capital raising and private equity investing to help our clients,” said Kay. “Corporate Investment has a well earned reputation in the region as business intermediary and merger and acquisition experts. With mergers and acquisitions picking up steam in Central Texas, we are in the right place to help owners get the most value from their transactions,” Kay added.

Most recently, Mr. Kay has led Excelleration Partners, an early stage growth company consultancy and capital raising advisor, after having served for six years as EVP/COO/CFO at Drilling Info, Inc., an online oil and gas data provider. While at Drilling Info, Bob partnered with CEO Allen Gilmer in leading the company through an explosive growth phase and eventual control sale to a NYC-based private equity fund.  

 Prior to his most recent career stop as Consulting CFO to Durbin and Bennett Tax Advisors, Mr. Holman served as CFO to The Kucera Companies, a full-service commercial real estate company from 2003-2011. Kay and Holman partnered during the 1980s and 1990s within several business entities controlled by Robert W. Hughes and the Prime Cable family of companies.

Serving as a M&A team at Corporate Investment, Kay and Holman will lead clients through the sale preparation and sale of their businesses. Their diverse and combined business experiences have provided them deep experience and insight into the business sales process.

 A native of Austin, Mr. Kay earned a BBA in General Business with an accounting concentration from The University of Texas in 1974. Mr. Holman is a native of Taylor, Texas, and is an Honors graduate in Accounting from UT Austin in 1981.

What factors determine the “Multiple” of earnings?

A multiple of earnings is a valuation method whereby the value of a company is expressed through the use of a multiple applied to the Company's earnings.  For instance, a company that has Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) of $2,000,000, that has a "value" of $10,000,000, was valued at  5 x EBITDA. The appropriate earnings multiple that should be used to value any particular company depends upon a number of factors, or attributes.  One way to drive a higher value for your company is for it to possess some of those attributes that warrant a higher earnings multiple.  Predictability of revenue, sometimes referred to as "stickiness" of revenue, is one of those attributes that impacts the earnings multiple.

Companies with highly predictable or recurring revenue streams sell for much higher multiples than companies whose revenue is not recurring, or is dependent upon constantly generating transactions with new customers for its revenue stream.

Some of the factors that demonstrate a higher level of predictability of revenue include:

  • Contractual agreements with customers for repetitive sales of goods or services, such as manufacturing companies with long term purchase orders, or service companies that have annual recurring service contracts.
  • Operating in an industry where the barriers to entry are high. 
  • A solid and growing customer base with very little turnover.
  • Serving a market, either industrial or geographic, that is growing. 
  • In the case of distribution companies, protected territories or exclusive rights to product lines.
  • A revenue model that resembles a razor/ razor blade concept - where customers are "locked in" to a company's product or services. 

Factors that indicate revenue is not highly predictable include:

  • The majority of the customer relationships are managed by the owner of the business, or a small group of sales executives (the risk being that if the owner is no longer involved, or if the sales executives leave, the customer base may no longer have loyalty to the company). 
  • The barriers to entry are low - new competitors can easily enter the market, thus increasing the competitive landscape. 
  • Revenue is project dependent. 
  • There are pricing risks, either from changing technology or governmental regulation.

There are many other factors that come into play, way too many to outline in this article. As a business owner, we recommend that you review the sources of revenue for your company and, if possible, take steps to improve the "stickiness" of your company's revenue stream.

In future articles, we will discuss other factors that impact a company's earnings multiple, such as strength and depth of the management team, the company's operating systems, reliability of the financial reporting system, opportunities for growth, the make-up of the customer base, intangible assets, strength of cash flow, scaleability, the amount of capital investment required to sustain or grow a business and preparedness for the due diligence process.

If you have any questions or would like to discuss your particular company and how you can improve your valuation multiple, contact us, we would be happy to share our knowledge with you.

Q4 2016 M&A Update: When a Business Owner Receives “The Call”


As a business owner, perhaps the most flattering event that may occur is an unsolicited call from a “buyer” who asks, “Would you like to sell your business?” Do you turn down that call? Certainly not! Someone is calling to pay you lots of money, perhaps top dollar, for your business that you have worked so hard to build. So you take the call, and the buyer asks to set up an introductory meeting. The buyer could be a strategic or financial buyer that believes, “Your business is a great fit for our acquisition strategy.” That statement translates in the business owner’s mind to, “This buyer will pay top dollar for my business.” However, the business owner is about to begin an extremely complex and emotionally taxing process that will engage him/her in many, many hours of data gathering, meetings, information exchange, financial questions, legal questions, intense negotiation, and hopefully, a positive outcome. Although that outcome will more likely occur 6-9 months down the road, if at all.

So the real question the business owner needs to think about is, “Am I really ready to sell my business?”

Most of the time, the seller will not have really thought about the answer to that question, which is much more complex. Do you have the answers to each of the following questions? 

  • What is my business really worth?
  • What will the net proceeds of a transaction total, after paying off the business debt and income taxes?
  • What amount will I need to net from the transaction to maintain my current lifestyle, and achieve my financial goals?
  • What will I really do after the sale (extremely important)?
  • Are there issues in my business that may cause problems during due diligence (management team, customers, suppliers, legal, etc.)?

The problem with negotiating with only one buyer

However, the question that most sellers have not considered is this, “If I only negotiate with one buyer, will I ever know if I received the best price?” There is a very old saying in the M&A world, “If you only have one buyer, you don’t have a buyer, they have you!” The buyer controls the timeline, controls the information flow, and controls the process – they have all of the leverage. At a minimum, the business owner should engage an M&A professional to level the playing field. The best case would be for the seller to engage an M&A professional to run a “limited process” in parallel with the unsolicited offer.  The investment banker prepares a brief outline of the business, and contacts 6-10 of the best possible buyers, and will usually find other interested parties. This strategy shifts the leverage back to the seller, and allows the business owner to “keep the buyer honest.”

One of the strategies of a buyer who is in an exclusive process with a seller is to stretch out the process, which is emotionally taxing to the business owner, emotionally draining over time, and results in “deal fatigue.” The buyer may keep asking for pieces of information, delay in actually putting a written offer together, or ask for concessions after the offer is made. Without any leverage, the seller’s only option is to walk away from the table and terminate the process, which is very difficult after significant time, energy, and emotions have been invested over 6-9 months. Most of the time the seller has invested so much time, energy, and resources in the transaction that they agree to concessions just to get to closing.

The worst result can be a transaction that does not meet the seller’s financial needs, falls apart at the eleventh hour after the buyer has obtained sensitive information, or the seller does not have any real plans for life after closing.

Case study

We met with the owners of an excellent business about 15 months ago, who had been approached by a strategic buyer. The owners are at retirement age, and very open to a transaction.  Almost 50% of the consideration for the business in the buyer’s current offer was in the form of an “earnout”, however, and that was a real concern. We suggested engaging our firm to work with that buyer to improve the terms of that offer, while also contacting 6-8 other possible buyers to solicit additional offers, for two important reasons. First, to gain leverage with the one buyer, and keep that process moving, and second, to let the seller know what other buyers might offer for the business. The seller chose to “go it alone” with the one buyer. Their CPA called us 10 months later and said that the deal never closed, and the seller is back to square one, weighing their options. The seller has now invested significant time, energy, and emotions into a process that did not produce a result, and will probably be starting all over again.


Selling a business is a significant event in the life of a business owner, and must be planned well in advance to achieve the best result. While it’s very flattering to receive “the call” from a buyer wanting to discuss buying your business, the reality is that a business owner should not begin the exit process without:

  • Clearly establishing their exit goals (including timeline) and financial needs
  • Knowing what their business is really worth
  • Knowing what they will net from a transaction
  • Having a team of top-flight advisors
  • Possessing a clear understanding of what they want to do after closing.

Our firm is routinely contacted two or three times a year by attorneys and CPA’s introducing us to business owners that received “the call,” and the transaction did not happen. They are now ready to engage in a well-planned, well-executed, competitive process designed to close a transaction at a fair price in the open market.

Q3 2016 M&A Update: Earn-outs: Uses, Pitfalls, and Opportunities

What is an "Earn-out" as it relates to the sale of a business? An earn-out is a contingent payment agreement whereby the buyer agrees to pay additional money for the business upon the attainment of certain post-closing performance targets. An earn-out is a financial tool used to bridge the gap between the seller's price expectations and the buyer's perceived value for the business. The most common reason for a gap between the offer and the seller's price expectations results from the two parties to the transaction having differing views of "business risks." The sale of a business is extremely complex, and involves risk factors related to revenue, customer retention, the management team, and many others, which are viewed through different lenses by the buyer and seller.  

Let's remember - in an "all cash" purchase, the buyer has all the risk, therefore the selling price will usually be at the lower end of the spectrum. In a transaction with cash plus a promissory note to seller, there is some level of risk tied to the promissory note - so the seller can justify a price that is a bit higher than "all cash." If an earn-out is included in the transaction structure, the seller expects to receive more for their business, but the last piece of the consideration is tied to future events, so both parties share the risk.

Earn-out structures will be very specific to each transaction. A typical earn-out structure may start with "If revenue in year #1, year #2 and year #3 after closing is equal to or above these targets,  "X", "Y", and "Z", then the seller is paid a certain amount each year."  As simple as that concept sounds, each earn-out structure will be as unique as the business itself. Many times the seller wants the earn-out tied to gross revenue, while the buyer typically wants the earn-out tied to EBITDA. At that point, the negotiation begins, and the actual measured performance often ends up tied to a metric somewhere in between revenue and EBITDA. In our experience, the least amount of computations that must be made to compute the earn-out will result in the most desirable structure.

Our firm recently represented the seller in a transaction whereby approximately $6,000,000 of the price was fixed, and another $3,000,000 of the consideration was based upon an earn-out tied to gross profit earned each year for the first twenty four months after closing. This company was in a cyclical industry, and the seller believed that the industry would maintain their momentum for several years. The buyer was not willing to pay the full price without some part being tied to future performance. The seller was willing to stay with the business through the term of the earn-out, to insure that it would be met. This client has now collected the targeted payments for year one, and is now completing year two.

 One tip to remember is that earn-outs should not be "all or none," but rather based upon incremental levels of the performance metric. They should also be structured whereby meeting the target on a cumulative basis over multiple years will still trigger payments, even if one year was below the target (a "lookback provision").

Our firm does not begin marketing a business with an earn-out in mind, but it may be an appropriate financial tool used to facilitate a transaction in certain situations. Earn-out structures are complex and require the seller to evaluate the risk they are willing to assume in utilizing that structure to achieve the maximum consideration. A seller will need an experienced M&A professional and transactional lawyer to carefully negotiate the earn-out and make sure their agreements are well drafted.

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