Five Key Issues to Address in a Business Sale Transaction

Austin M&A Advisory

These five issues are key to consider when you are contemplating selling your business.

1. Non-Disclosure Agreement

This agreement contains a few key elements that may easily be overlooked by an uninformed Seller. The first of these is the “non-solicitation” of employees, which should be coupled with a time frame of a minimum of two years, we suggest three years. A second important provision will state that “all obligations under this agreement shall survive for a period of ___ years (we suggest three), except that sections _ , _, _, and _ shall continue at all times. One of these specifically enumerated provisions states that the entire discussion must remain confidential. When a business owner goes to market, if they do not sell, they surely want that fact to remain confidential, even after two years, so this provision is extremely important. Buyers sometimes strike this provision, and a Seller must understand its importance.

2. Excluding Certain Types of Buyers from the Marketing Process

The goal of the business owner is to receive maximum value in the sale of their business. Strategic buyers typically pay a premium of 10% – 20% ( or more ) than pure financial buyers. A Seller should let their M&A professional contact the universe of qualified acquirers, including strategics, to insure that they receive the maximum value. If strategics are not included in the marketing effort, the Seller will never know if they received the highest price that was possible.

3. Letter of Intent – Timeline

One of the pitfalls that a Seller may experience when dealing with only one buyer, is the buyer’s total control of the timeline of the transaction. “Time is the enemy of a transaction.” That is not to say that the parties should rush to closing, but stretching out the timeline of due diligence and closing typically benefits the buyer, not the seller. The letter of intent should include a timeline of critical dates for important milestones, such as confirmation from the bank that a loan is approved, date for buyer to deliver initial contract draft, and closing date. The letter should contain language that the binding provisions of the LOI are contingent upon the buyer’s adherence to the timeline.

4. Letter of Intent – No Shop Provisions

Most Buyers insist upon a “No-shop” provision in the letter of intent. The Buyer is committing time, energy, paying CPA’s and attorneys, and as a reasonable request, typically asks the Seller for exclusivity (as long as the timeline is met !). However, many Buyers will include an additional sentence in the no-shop provision that the Seller must inform the Buyer if they are contacted by another party during the due diligence period, including the name of the potential buyer. We do not recommend our clients accept this specific provision.

5. Contacting Employees Early in the Due Diligence Process

Many Buyers will ask to speak to key employees early in the process – this should not happen. Discussions with key employees should only occur after financial due diligence is complete, a draft of the contract is received, evidence that financing is in place is received, and we are at the 11th hour. The Seller should always attend these meetings, which can be an issue for the Buyer. This is an extremely sensitive issue and must be handled carefully.

 Considering selling your business? Corporate Investment M&A Advisors can advise you in how to start the process.

Ten Ways to Maximize the Value of Your Business

Choosing a business broker

Achieving the maximum value for the business when it sells is the goal of every business owner. These ten ideas can help you see if you are on the right track

1. Develop a strong, stable management team

A business with a strong management team, allowing for key activities to operate independent of the owner, will command a higher price. The depth and stability of the management team are extremely important factors in the valuation analysis by a buyer. In many businesses, sales and marketing may be very dependent upon the owner, and this can be a significant value detractor. If most of the key account relationships reside with the owner, buyers will factor this risk into the valuation or the deal structure. Part of the price may become contingent upon the owner remaining with the business to maintain continuing customer relationships.

2. Demonstrate sustainability of earnings

Revenue and earnings that have been steadily growing over several years, versus earnings that fluctuate dramatically, will drive a higher valuation. Year over year growth demonstrates a solid operation that is gaining new customers and/or market share. Dramatic fluctuations in revenue typically indicate that either product demand may be subject to outside factors, or the business has experienced problems, indicating management is not stable. Recession proof businesses have been commanding very strong multiples in the market over the past three years.

3. Develop systems and procedures

A business must exist separate and apart from the daily actions of its owner to have a valuation, including goodwill, over and above the asset valuation. An owner who takes a week off at least one or two times per year, is exhibiting confidence in the systems and procedures of the business to function while they are away. If the owner is seldom or never away from the business for any length of time, buyers will question the strength of the operating systems, and the management team. The amount of goodwill that a buyer is willing to include in the purchase price will be dependent upon systems and procedures.

4. Maintain excellent financial records

Sloppy financials are a worry for both buyers and lenders. Valuation will be based primarily upon the numbers, and the more reliable the financial statements, the more chance they will hold up in due diligence. If your business has revenue in excess of $10,000,000, audited financials will be worth the investment. In the absence of audited financials, reviewed financials are preferable over internal financials, as the presentation, account classifications, footnotes, and organization of the statements, in general, will be much more professional than internally prepared financials. Most purchase agreements will contain a representation that  “Seller’s financials are presented in accordance with GAAP”. We routinely ask for this representation to be reviewed very carefully, as the majority of private company financial statements do not contain all the disclosures required by GAAP.

5. Minimize personal expenses paid by the business

When the financials are “clean,” with very few “add backs” related to owner’s personal expenses paid through the business, buyers and lenders believe the numbers are more credible. Asking a buyer to believe that various expenses that have been paid by the company are in fact “not necessary” for the business creates uncertainty. Uncertainty is the enemy of a successful sale transaction. When the EBITDA computation is partially based on excessive “add backs” to earnings, the seller will be hard pressed to obtain a favorable valuation.

6. Transition Planning

When a seller has a definite plan to “phase out” of the operation, whether that is over one year, or three to five years, the buyer recognizes that sound planning has occurred. The process of developing this transition plan will often generate excellent suggestions for improvement in management’s role in the everyday operations of the business. Many sellers begin to outline their “job description” as part of this process, which highlights areas where there is a need to delegate more to the management team. Quite often this activity will result in improvements to the organization structure of the business and produce tangible benefits.

7. Diversified Customer Base

Customer concentration is a significant value detractor. When the revenue from any one customer accounts for over 20-25% of the total revenue of the business, the business will be valued at a discount.  Losing 20-25% of revenue in most businesses will typically wipe out most or all of the profit of the operation, so this risk may not be ignored.  When the buyer’s valuation is prepared, and this risk is factored into the valuation analysis, the goodwill included in the valuation of the business will be dramatically altered. Working to diversify the customer base will result in significant increases in the value of the business.

8. Solid Reputation in the Marketplace

Business acquirers are constantly searching for the leading business in the industry, and many sellers refer to their business as an “industry leader”. Savvy buyers can mine the internet for information about what customers actually think about most businesses. Multiple websites exist that give “feedback” from customers about businesses, and buyers may gather this data easily.  Buyers will attend trade shows, industry conferences, and multiple other events, quietly asking competitors and suppliers about a company, using multiple techniques to determine what customers think about a business.

9. Diversified Base of Suppliers

A very narrow base of suppliers, or extreme dependence upon one supplier, may cause a decrease in valuation. Many business owners routinely buy from multiple sources, just to manage the risk that one supplier may experience shortages or interruptions in supply. This extends to the labor pool as well, if the business needs specialized skills, such as in healthcare. “What happens if…” is a typical question a buyer may ask – and many sellers do not have a ready answer for that question.

10. Stable Facility of Operations

A business may or may not be dependent upon its location, but a buyer will not want to take the risk of moving the business right after the purchase. The business should have the right to remain in their current facility for at least 3 – 5 years through an existing lease, or ownership of the building.  The location may be critical to a retail operation or restaurant, but also important to a wholesale or manufacturing operation. Many times key employees live close by, and the buyer having to relocate the business may place loyal employees in peril. If the lease is about to expire, and the buyer will have to renegotiate the lease right after closing, this situation creates uncertainty, which reduces the valuation. Lease options are an excellent method to remove this uncertainty, whereby the business has the right, but not the obligation to extend their lease beyond the current term.

Dominion Care Home Health, Inc. Acquired by Jordan Healthcare

Dominion Care Home Health, Inc., based in San Antonio, Texas, has been acquired  by Jordan Healthcare, based in Mount Vernon, Texas. Dominion Care Home Health is one of the leading Medicare certified home healthcare providers in San Antonio and Central Texas.  The company was founded in 2001 by Elcee and David Cortez and Adrian Martinez.

Jordan Healthcare, based in Mt Vernon, Texas, is a diversified healthcare operation, operating Community care, Hospice care, Skilled care, and Pediatric care facilities in 30 cities across Texas.

Phillip Wilhite, Managing Director of  Corporate Investment, stated “Jordan Healthcare was an excellent fit for Dominion. Jordan is able to leverage Dominion’s award winning reputation in the San Antonio and central Texas markets, coupled with Jordan’s suite of healthcare services, to grow the business. Dominion’s reputation in the medical community is excellent, providing Jordan with an outstanding platform. Our firm was pleased to represent the owners of Dominion Healthcare in this transaction.”

About Corporate Investment
Corporate Investment, founded in 1984, is a leading merger & acquisition firm based in Austin, Texas, representing companies throughout Texas.  Phillip Wilhite, with Corporate Investment, advised the seller, and facilitated the transaction. Corporate Investment has completed multiple transactions in the healthcare services sector. 

A J Brauer Stone, Inc. Acquired by Materials Marketing Limited

A J Brauer Stone, Inc.,which operates a 320 acre stone and building materials quarry near Jarrell, Texas, has been acquired by Materials Marketing Limited. A J Brauer Stone produces chopped stone, landscape boulders, patio stones  and architectural stone veneer, as well as block and large slab modules. Lawrence (Larry) Schumann, with Corporate Investment, advised the seller, and facilitated the transaction.

A J Brauer Stone was founded 35 years ago and will continue to operate under the A. J. Brauer Stone name. Materials Marketing Limited, a RAF Industries, Inc. portfolio company, is an architectural stone and natural stone flooring supplier based in San Antonio, Texas.

“A J Brauer Stone  is an attractive addition to Materials Marketing Limited ,” Larry Schumann, Managing Director of  Corporate Investment, stated. “With this acquisition, Materials Marketing plans to  add new stone building materials to their line and benefit from improved U.S. based manufacturing capabilities. Our firm was pleased to represent A.J. Brauer Stone Company in this transaction.”

About Corporate Investment
Corporate Investment is a financial advisory firm specializing in business sales, mergers and acquisitions. Founded in 1984 in Austin, Texas, Corporate Investment works primarily with the owners of middle-market businesses in a variety of industries, and their potential acquisition or merger partners.

Legiant Acquired by Asure Software

Legiant, a software company based in Austin, Texas, has been acquired by Asure Software, Inc. (NasdaqCM:ASUR). Legiant sells time and attendance solutions that deliver improvements in workforce productivity through a software-as-a-service (SaaS) platform. Lawrence (Larry) Schumann, with Corporate Investment, advised the seller and facilitated the transaction.

Asure Software, headquartered in Austin, Texas, offers intuitive and innovative technologies that enable companies of all sizes and complexities to operate more efficiently. The company ensures a high-performing work environment by integrating its "keep it simple" solutions and expertise to more than 3,500 clients worldwide. Asure Software's suite of solutions range from time and attendance workforce management solutions to asset optimization and meeting room management.

“Legiant is a great fit with Asure’s cloud growth strategy,” Larry Schumann, Managing Director of Corporate Investment, stated. “There are many synergies that Asure should benefit from with this acquisition. Our firm was pleased to represent Legiant in this transaction.”

About Corporate Investment
Corporate Investment is a financial advisory firm specializing in business sales, mergers and acquisitions. Founded in 1984 in Austin, Texas, Corporate Investment works primarily with the owners of middle-market businesses in a variety of industries, and their potential acquisition or merger partners.