Valuation vs. Terms in a Business Sale

This article is provided by Brent Beshore, courtesy of

The following is an excerpt from investor Brent Beshore’s recent book, The Messy Marketplace: Selling Your Business in a World of Imperfect Buyers. Beshore is founder and CEO of, a Midwestern-based permanent equity firm. 

As a seller, it can be easy to fixate on the numbers. “My business is worth X. I’m going to get Y cash at close.” These figures will represent some of the largest you’ve seen in your lifetime. The focus on valuation is understandable, but remember that structure and terms are equally important in negotiation.

When negotiating with a qualified and trustworthy investor (a.k.a. the type of buyer you probably want), you should take advantage of their expertise. While this may seem counterintuitive, they have spent their careers understanding creative ways to structure a deal, from responsible options and uses of debt to how to properly incentivize existing leadership to ensure a smooth transition. Your best path is to tell them what is important to you and why, and also what you recognize to be the risks in the deal. Then let them explain what options may satisfy both parties best. To be clear, I’m not suggesting blind trust in a buyer regardless of reputation, or your intuition. Always approach a proposed solution with open-minded skepticism.

To illustrate, here are a handful of scenarios:

QUICK EXIT: You tell the buyer that you will only consider an offer that provides all cash at close because of grave health concerns. Immediate liquidity is priority number one. You are asking the buyer to assume all responsibility and liability for not only the future prospects of the organization, but also the transition post-close. The buyer will apply a discount and the resulting valuation will likely be substantially less than a deal with more structure over a longer time period.

MARKET-BASED EXIT: You tell the buyer that you have a target valuation range, providing research that backs up why you believe it is reasonable for your business. The buyer will compare your research against their own, and also the circumstances of your company. Sellers sometimes bring forth research on industry-relevant com- panies unrelated in scale, leadership depth, and earnings history, which a buyer will quickly disregard. If the research is valid, how- ever, the buyer will likely calculate a similar valuation range (it may not be exactly the same, but they’ll tell you why) and focus on structure and terms. What percentage will be earned out to ensure performance? What guarantees will be outlined about key employees and customers?

BRIGHT FUTURE EXIT: You tell the buyer the company is set up for future growth, you have confidence in the projections provided, and, while you need some immediate liquidity, you want to share in the upside. The buyer will structure the deal to share risk and reward.

Valuation and terms for each of these exit scenarios will be varied, and that’s a good thing. They’re creative solutions. It’s key to remember what’s important to you and evaluate the options against those criteria. And above all, communicate your interests clearly.

There are no hard rules in valuation. A buyer doesn’t have to match another buyer’s offer, accept your presented adjustments, or meet your demands on timeline or payment structure in their offer. And, you don’t have to sell. Every value and formula is negotiable.


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EBITDA Engineering Before Selling a Business

Source: FeelPic/iStock

Takeaway: Take control of your financial statement by learning how accounting policies can positively impact EBITDA.

This article written by John Carvalho, president and founder of Stone Oak Capital Inc., an M&A advisory firm, as well as a co-founder of Divestopedia

EBITDA is a commonly used metric for the valuation of mid-market businesses. Now, the appropriateness of using EBITDA can be debated, but the fact is that most estimates of business value start with this number. So needless to say, increasing EBITDA will increase the value of a business.

Most often, business owners of privately held companies are motivated to minimize taxes. They will try to expense as much as possible and even defer recording revenue to reduce taxable income. Business brokers or investment bankers will often normalize the results of a vendor’s financial statements for nonrecurring or one-time costs. These normalizations are scrutinized by potential buyers and often rejected as legitimate adjustments. On the other hand, EBITDA (before normalizations) calculated from financial statements that are prepared by an external accountant receive much less scrutiny from the prospective buyer.

To this end, business owners should consider how their accounting policies are impacting EBITDA. The truth is that business owners can choose between various accepted accounting methods to show higher EBITDA on their externally prepared financial statement and thus positively impact business value. Some people may consider this to be financial engineering, which carries a negative connotation. I consider it to be smart exit planning.

Selection of Accounting Principles

Accounting principles are rarely black and white. There is a significant amount of gray in determining how to record a transaction. Let’s thank Luca Pacioli, the father of accounting, for the double entry system of bookkeeping that has been used for over four centuries. In its simplest form, cash outlays can be recorded as an expense on the income statement or as some sort of assets on the balance sheet. Comparatively, cash inflows can be recorded as revenue or some sort of liability (or equity) on the balance sheet. There is significant judgment and flexibility that goes into recording each transaction. This, of course, can have a material impact on the EBITDA of a business.

Here are five common accounting policy selections that can be managed to increase EBITDA:

Capital Leases versus Operating Leases

One on the biggest knocks against EBITDA as a valuation metric is that it is supposed to reflect a company’s cash flow, but it does not consider the requirement for capital expenditures. Warren Buffett, in his criticism of EBITDA, is credited as saying, “Does management think the tooth fairy pays for capital expenditures?” Regardless of your stance on EBITDA, capital asset expenditures are not considered in the calculation of EBITDA, but depreciation and amortization is added back.

If your company is capital intensive, recording equipment leases as capital versus operating will improve EBITDA. For operating leases, rental payments are expensed on the income statement and therefore reduce earnings. On the other hand, if a lease is recorded as a capital lease, the assets are recorded on the balance sheet and depreciated over time. The related liability is recorded as debt on the balance sheet and the interest is expensed on the income statement. Payments toward the capital lease are not expensed and instead are recorded against the liability which would not impact earning. Also depreciation on the asset and interest on the debt are added back, therefore EBITDA would be higher.


Another method to increase EBITDA is to be more aggressive on capitalization of costs, which means moving cash outlays from being recorded as an expense on the income statement to an asset on the balance sheet. This has two positive effects: The first is that it strengthens your balance sheet by showing more assets; the second is reducing expenses and increase EBITDA.

A transaction can be capitalized if it extends the useful life of a capital asset. Significant repairs and maintenance costs are often expensed in privately held businesses to reduce net income and, correspondingly, income tax at the detriment of higher EBITDA.

Costs that have future economic value that can be measured might also be eligible for capitalization. As an example, wages paid to employees for the development of a new software can be added to the cost of that implementation. Capitalization of costs is a gray area that requires just as much qualitative justification as quantitative.


Many privately held businesses will hold inventory even though it is fully expensed when purchased. A periodic inventory count can move the inventory still sitting in the shop or warehouse off of the income statement and on to the balance sheet. This has the immediate effect of increasing EBITDA and also, from a financial reporting perspective, presents a more realistic picture of the working capital required to operate the business.

Revenue Recognition

Revenue recognition is an accounting principle that determines the specific conditions under which revenue is recognized or accounted for. Revenues are recognized when they are earned and corresponding expenses are recorded to match that timing. But when is the revenue actually earned?

Many businesses will record revenue when a project is completed, but there are many instances when partially completed jobs will straddle a company’s year-end. If revenue was recognized for the percentage of the work completed on those projects, the profit margin would be recorded on the income statement and increase EBITDA for that period.


Cut-off relates to whether transactions and events have been recorded in the correct accounting period. Moving certain transactions from one period to the next can have a significant impact on EBITDA. For example, delaying major purchases or taking delivery of major items after year-end can push costs to the subsequent year and thus increase EBITDA. The same is true on the revenue side if a company is able to close a major deal or make a large shipment to a customer prior to a year-end.

Own Your Financial Statement

Let me be clear that I am not suggesting perpetrating fraud or any sort of misrepresentation that could mislead a potential buyer; I am merely suggesting that selection and knowledge of accounting policies can have a significant impact on EBITDA and, consequently, the determination of a company’s value during a sale process. I see too many business owners blindly accept the adjustments that are presented to them by their external accountants. Your company’s financial statement are exactly that — yours! You should have significant input into the policies used in their creation and the ending results that they communicate to outside stakeholders.


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The Biggest Mistake Owners Make When Selling

One of the biggest mistake owners make in selling their company is being lured into a proprietary deal.

The Definition Of A Proprietary Deal

Acquirers land a proprietary deal (or “prop deal”) when they convince owners to sell their businesses without creating a competitive marketplace. Acquirers running a proprietary deal know they don’t have any competition and tend to make weaker offers with more punitive terms because they know nobody else is bidding.

Many founders become the target of a proprietary deal without even knowing they have been duped. First, someone senior from the acquiring company approaches the founder, complimenting them on their business. The acquirer suggests lunch, and then high-level financials are exchanged. Soon, the owner starts going down a path that is difficult to come back from.

As the parties in a proprietary deal get to know one another, founders often share information with the acquirer that puts them in a compromised negotiation position. The interactions are set up as friendly exchanges between two industry leaders, but many founders reveal key facts in these discussions that end up being used against them when negotiations turn serious. Business owners also become more emotionally committed to selling the more resources they invest in the process and the more time they spend thinking—perhaps dreaming—of what it would mean to sell their business.

How To Avoid Getting Taken In By A Proprietary Deal

Savvy sellers avoid the proprietary deal by creating a competitive process for their company. Take for example Dan Martell, the founder of, among other companies. When Martell decided to sell Clarity, he knew the likely buyer was one of five New York-based companies. Instead of negotiating with one, he invited all five to an event he hosted in New York. The five CEOs—all of whom knew one another—saw a room full of their competitors and realized that if Clarity went on the market, they would have to out-bid the other buyers in that room.

Hosting the event was Martell’s way of communicating to all the potential buyers that a proprietary deal was off the table and that if they wanted to buy Clarity, they would have to compete for it.

It’s flattering to receive a call from an executive at a company you respect. Just know that if you accept their invitation of lunch, you run the risk of becoming the latest casualty of the proprietary deal.


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The Initial Price May Not Be Real

The following article written by Paris Aden of Valitas Capital Partners.

Takeaway: The Due Diligence Grind is often practiced by sophisticated acquirers to reduce the purchase price of a business by citing negative findings during due diligence.

The initial dollar figure presented as a purchase price for a business, whether written on a napkin over coffee or floated in a conversation, is not a binding offer. Any potential acquirer will need to conduct a due diligence investigation before they can enter into a definitive agreement to buy your business. Initial indications can be tactically inflated to ensure the acquirer gains access to your confidential information after which this price is systematically reduced, citing negative findings during due diligence — also known as “The Due Diligence Grind”. The most effective antidotes are preparation and competitive tension. Let’s take a closer look at how a prospective buyer can grind down the purchase price.

Due Diligence Becomes a Reactive Process for the Seller

Whether you have received a preliminary proposal from a single party who approached you or you’ve received several non-binding bids through a structured auction process, the nature of the process changes from proactive to reactive as due diligence progresses. Ultimately, each bidder will have different due diligence requirements and the onus is on the seller to satisfy those requirements (or not). The due diligence stage is the acquirer’s opportunity to investigate the business from top to bottom. Although difficult, it is essential to maintain control of the process, despite your reactive position during this phase of the process.

How Due Diligence Increases Transaction Risk and Impacts Valuation

The purpose of due diligence is for the acquirer to conduct his or her own assessment of the value of your business and to confirm their initial assumptions. As you submit information about your business to a potential acquirer, they will investigate potential risks, including validating information that may have been presented to them earlier in the process. Due diligence is an essential step for the acquirer to make a binding commitment to a price and to inform the negotiation of the definitive agreement. However, savvy acquirers are skillful at gaming this process to their advantage.

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Potential acquirers can by cynical. A key due diligence objective is lowering the price of the business by focusing on its flaws. Imagine a customer listing a litany of complaints or deficiencies about your product or service as you are presenting your case for a routine pricing increase. Potential acquirers may attempt to reduce the value of the business either explicitly, by reducing the headline price or, indirectly, by revealing transaction terms that erode the value you receive.

Headline Price Adjustments via Valuation Metrics

Private businesses are routinely valued as a multiple of a particular financial metric. One of the more commonly used metrics is earnings before interest, taxes, depreciation and amortization (EBITDA). Adjustments are commonly applied to normalize EBITDA for what it would be in the hands of the new owner. These metrics are reported as part of the preliminary documentation and are scrutinized heavily during the due diligence process. The acquirer will typically seek to expose weaknesses in the information and rationale for the normalization adjustments to make a case that the metric is inflated. A few examples include:

  • Accounting Policies: Suggesting accounting policies, such as revenue recognition, allowance for doubtful accounts or capitalization policy are too aggressive.
  • Normalization Adjustments: Suggesting that non-recurring normalization adjustments really are normal-course business, that market value of the owner’s compensation is understated, that certain expense savings really are buyer synergies that are not appropriate for stand-alone valuation.
  • Budgets and Forecasts: Often the valuation is based on a forward metric, such as forecast EBITDA. The seller’s forecast assumptions may be deemed too optimistic, or as we Canadians like to describe it, a “hockey stick forecast”, where projected growth is out of line with historical growth.

Given that the headline value is simply the product of the valuation metric and the valuation multiple, a reduction in the metric will have a proportionate impact on the headline price.

Headline Price Adjustments via the Multiple

Though less common that a negative revision to the metric, a bidder may suggest they have justification to reduce the multiple they have applied in their initial valuation assumptions because of newly identified/revised risks that they claim they were not aware of earlier. There are generally four reasons the valuation multiple may be reduced, the first three of which are specific to the business:

  1. Greater business risk, such as poor quality of earnings;
  2. Lower expected growth as a result of improperly supported growth forecasts;
  3. Reduced free cash flow conversion expectations, such as higher than expected capital expenditure or working capital requirements; or
  4. Deterioration in market conditions, such as a drop in capital markets valuations or tightening credit.

Adjustments to the Transaction Terms

Negative revisions can also manifest in the deal terms. This can be more difficult to control because such details are usually ignored as part of the “business deal” and left for the lawyers. The acquirer may claim due diligence findings that require terms that either erode the value of the headline price or significantly shift risk to the seller. Examples include:

  • Shifting Risk to the Seller: Out-of-market representations and warrantiesindemnities or hold-backs. For example, an acquirer may agree on the ‘price tag’ of the deal, but add a condition that if the seller misses the five-year forecast by one dollar, the price paid will be reduced by 50%.
  • Changing the Form of Consideration: That firm cash price may become payable in IOU’s and store coupons. A portion of the price may become contingent on performance of the business post-closing, i.e. as an earnout.
  • Working Capital: This one is a favorite! Instead of delivering the business with a level of working capital appropriate to operate the business in the normal course, you are presented with a convoluted adjustment mechanism that suggests the business should be delivered with more working capital than needed, resulting in a negative price revision for you post-closing. Or the most egregious of working capital manipulation, the cash dam.
  • Effective Date: Seems innocent enough. Let’s make the effective date at the beginning of this year. The problem is that all of that free cash flow from the effective date until closing now belongs to the acquirer. Another effective reduction in the purchase price.


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Big Players Love the Lower Middle Market

Written by Danielle Fugazy and provided courtesy of

The M&A environment continues to be as competitive as ever. Looking for relief from high valuations and hotly contested auction processes, many private equity firms and strategic acquirers are moving down market.

It’s no secret that companies purchased at lower entry valuation generally achieve better returns because of their potential for multiple expansion. This is not lost on many of the largest players in the private equity industry. The venerable KKR has taken an interest in smaller technology, healthcare, and industrial businesses — some generating as little as $25 million — and is currently raising a middle market fund. Two years ago, another giant private equity firm, The Carlyle Group, raised $2.4 billion to pursue middle market buyouts in North America. The fund targets control investments requiring equity capital of as little as $20 million to $200 million per transaction.

As the larger private equity firms move down market, so do the lenders. “The larger lenders compete for smaller deals when their sponsor relationships come down. They follow their clients, but it’s not necessarily where they focus,” says Joseph Burkhart, a managing director with Saratoga Partners.

Impact on Traditional Lower Middle Market PE Firms

The impact of larger players moving down is twofold: first, traditional lower middle market private equity firms are pursuing additional strategies so they can continue to compete as the larger players come in to the space while others are working harder than ever to win deals today. For example, earlier this year Sentinel Capital Partners, which was already investing in the lower middle market, closed on Sentinel Capital Partners VI at $2.15 billion, and Sentinel Junior Capital, a $460 million fund that gave the firm a presence in the mezzanine financing market. Also early this year, Huron Capital closed on its inaugural non-control fund The Huron Flex Equity Fund with $142 million, which gives the firm flexibility to make non-control investments that are  smaller than their typical deals.

Watervale Partners, a private equity firm that spun out of Linsalata Capital Partners last year, is looking for deals pretty far down market in hopes of escaping some of the competition in the larger markets. Unlike Linsalata—a private equity firm focused squarely on the middle market—the Cleveland, Ohio-based Watervale is looking to make control investments in companies with less than $6 million of EBITDA. The typical transaction value for Watervale will likely be less than $50 million.

“There’s no question that firms are moving down market in general, but at some point—we think around $6 million in EBITDA—the economics call for a different model and all of your support systems change,” says Bacon. “One of the advantages of larger firms is their ability to absorb dead deal costs or spend more money before exclusivity; that isn’t as prevalent to these smaller deals where the company really can’t handle multiple bidders simultaneously.”

In today’s frothy market one of the biggest impact of larger firms coming down market is the lack of exclusivity on potential deals. With bankers asking multiple parties to do the proper due diligence on a company, many lower middle market firms are at a disadvantage. While the larger firms can afford to spend with no exclusivity it’s not easy for smaller firms to that.

Dan Ryan, a partner at lower middle market private equity firm Milestone Partners, says his firm recently submitted a letter of interest to acquire for a tech-enabled solutions platform. When the process started the company’s valuation was a little higher than $100 million. A firm with a $2 billion fund wound up as the winner and by the time the deal was closed the valuation has risen by 33 percent. When the deal was closed there were seven parties that had undergone  extensive due diligence without exclusivity. “A larger firm can more easily afford to spend significant dollars with attorneys, accountants and other vendors to conduct preliminary due diligence without exclusivity. It’s over $100,000 spend all-in. For a lower middle market firm, $100,000 is meaningful. We can’t expose ourselves and our LPs to that risk without real confidence in our ability to close the deal and add value,” says Ryan. “We really need to pick our spots.”

Additionally, buyers are competing on speed to close and larger firms typically don’t have a financing contingency, which gives the larger firms an advantage.

While these dynamics have made it tough for lower middle market buyers, conversely, it’s a great time to be a seller in the lower middle market. Case in point: Inverness Graham is squarely a lower middle market firm investing out of its $283 million third fund. When the firm recently sold a business with $23 million in revenues, they got 74 letters of interest on the business. Fifty percent of them were from firm with funds north of $750 million; some of those firms had funds of more than $1 billion.

However, Matt Moran, a principal with Inverness, notes that sector focus does make a difference when it comes to the larger players’ appetite. Moran says you can expect to see more firms pushing into the lower middle market around sectors like healthcare services, vertical software, and industrial technology that have large consolidation play opportunities.

Saratoga Partners’ Burkhart agrees. “I have a relationship with an owner of a nurse staffing business with less than $2 million in EBITDA and people are clamoring to look at the business — but nursing is one of those hot sectors right now.”

In hopes of looking more unique sellers many lower middle market firms have turned to specialization. “There’s a huge trend toward specialization. Firms are changing their entire hiring, fundraising, and sourcing strategies. It’s staggering,” says Moran.

““Being a generalist fund isn’t viewed as favorably as it once was. Sector specialization in the lower middle market has become a differentiator,” says Burkhart. It’s important to note, that although more firms are heading toward specialization the returns aren’t proving out to be exponentially larger. According to research done by RCP Advisors, a limited partner that invests in lower middle market private equity firms, the likelihood of earning an outsized return on a transaction executed by a manager whose strategy is characterized by sector specialization is only about 100 basis points higher than a deal that is executed by a generalist fund.

How to Win

The increased competition has made it hard but not impossible for traditional lower middle market firms to win. The market dynamics has forced these firms to stay true to their strategies. “You can’t let what others are doing change your process. Our best deals are when we stick close to our knitting. There is more noise out there and that probably won’t change, but you still have to go after what you want with certainty and conviction,” says Moran.

Milestone’s Ryan says his firm has lost more deals than it’s won. Many of the deals they have won have come down to operating expertise and/or relationships. In one case the firm’s operating partner had specific operating experience in a company’s niche and was able to make a strong connection with the company’s CEO as a result. In another case, as a result of a longstanding relationship with Capstone Headwaters, the investment banker on the deal, Milestone got to meet the team ahead of the process, which was extremely helpful. “This doesn’t happen all the time. But Capstone Headwaters understands our approach and our industry focus and what we get excited about, and they called us early. It was really helpful,” says Ryan. “It’s these kinds of things that allow the smaller firm to win deals in today’s market.”


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Setting Up for Selling Your Business

JoAnn Lombardi, VR Business Brokers/Mergers & Acquisitions, President

How to Develop a Successful Exit Strategy

Recently, many entrepreneurs fulfilled their life-long dreams of buying a business. Others have seen their businesses grow gradually over the years. They are pursuits these business owners have enjoyed and cherished. However as a business owner, you have to remember there will be a time you will have to pass your dream along to somebody else – owning the business you have started.

Whether you’re selling the business because of burnout, retirement or the desire to move on, when the time arrives to do so, do it right and receive the optimal sales price.

Often when you contemplate, plan or pursue the opportunity to sell your business, you discover the selling process doesn’t give you the flexibility needed to make the best deal. But you don’t need to fear, feel manipulated by or go through the resale process alone.

You will be at an advantage as an owner if you start thinking about selling the business before you actually proceed. You will easily be able to identify the important elements of the resale process, and have some control over them in the future. Preparing to sell before you move forward will help you better understand the business transaction, your needs as an owner and be in a better position to develop a strategy to make it through the resale efficiently and profitably.

There are five obstacles in the resale process you will have to examine as you proceed. With each one, there are some helpful tips every VR business intermediary will recommend to you. This will assist you in understanding the process better and successfully sell your business.

  1. Position Your Business for Sale.
  2. Determine a Fair Listing Price.
  3. Running Your Business during the Marketing Period.
  4. Finding the Qualified Buyer.
  5. When to Consider Selling Your Business.

Position Your Business for Sale

The day you purchase the business is the day you start positioning your business for resale. You might not think so, but thinking about building long-term value for your business is just as important as making money in the short term.

You want to maintain detailed records of finances, permits, licenses, equipment and inventory through your ownership. This will be critical when you are trying to sell your business, so don’t neglect this part!

Determine a Fair Listing Price

There are many methods you can use to price your business. The most common method includes a multiple of cash flow – normally, 1 to 3 times annual cash flow, depending on the type and size of the business. Also included in this method are value of equipment and inventory plus one year’s cash flow, 3 to 12 monthly gross sales and book value of assets.

There are many factors contributing to pricing your business:

  • Financial terms.
  • An earnout.
  • Non-compete clause.
  • General attractiveness of the business.
  • Future potential.
  • How the business fits with the buyer’s strategic plan.
  • Size of the business – larger businesses bring a higher multiple.
  • Rarity of the business.
  • Whether the business is a service business tied to the seller’s relationship with customers, retail or other type of a business with a skilled staff in place.

Any VR business intermediary will help you determine the right method to use, given our 40-plus years standing as a contributing innovator of business sales, understanding the marketplace, taking into account the various ways a business can be sold and a comprehensive database of comparable sales.

Running Your Business during the Marketing Period

Just because you are planning to sell your business doesn’t mean you neglect it during the process. You have to continue to personally attend to the business and not place too much time and effort in the selling process. If you do, a deterioration of revenue and ultimate the resale value will happen.

This is where your VR business intermediary will be beneficial in assisting you in finding qualified buyers, while you concentrate on managing your business to ensure you maintain the maximum resale value possible.

Finding the Qualified Buyer

Not every potential buyer is qualified to take ownership of your business. Your VR business intermediary will attempt to find a qualified buyer through examining their capital and source of that capital, motivation to buy, needs and expectations, background and skills. Your VR business intermediary will sit down with the buyer, asking all the pertinent questions to determine if the business will transition successfully to them.

When to Consider Selling Your Business

The right time to sell a business will vary from one owner to another. You may have a complete realization it’s time to move on. Thinking and planning the sale of your business before you decide will be much more satisfying and profitable; whether it’s when the business is doing well, in a non-seasonal downward trend, hitting its peak of growth, deciding it’s time for retirement, family issues, health issues or simply tired of being the owner. This question can only be answered by you.


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Preparing Before Presenting

Follow the Necessary Steps to a Successful Business Sale

Most business owners, who are looking to sell, make the mistake of not preparing early enough. This can result in not receiving the maximum dollar amount for your business.

The selling process should start when you buy your business. You should know the return that you are receiving on your investment so when the time comes to sell you will not leave any money on the table. In order to consummate a successful sale with a qualified buyer, each VR business intermediary has been trained to help you take the necessary steps. Most business owners should be preparing to sell long before they make the decision to move forward. The following are some helpful ways that will keep your business in good shape, and prepare you for when the time’s right to have your VR business intermediary search for a qualified buyer.

Evaluate Your Business Before the Buyer Does

If you want the buyer to avoid finding anything that could jeopardize your chances of successfully selling your business, you should perform due diligence before they do. A qualified buyer will perform a comprehensive evaluation that goes beyond financial records; therefore, it’s a smart decision to make sure everything is accounted for before presenting the business to them. Make sure that the due diligence covers a variety of different areas such as:

  • Operations
  • Marketing
  • Personnel
  • Technology
  • Legal
  • Regulatory
  • Environmental
  • Insurance
  • Contractual, credit and accounting issues

Every buyer has specific criteria that they are not going to compromise on such as their return on investment. Depending upon the industry, current economic climate and the type of buyer that walks through the door, it’s important to understand what their needs are before negotiations take place. As the seller, you will be able to maximize the likelihood of completing a successful transaction.

Cleaning Up the Balance Sheet

Buyers will always examine balance sheets first after they sign a confidentiality agreement so they can start reviewing the business. You want to avoid revising a balance sheet after this point. By doing so, you will raise concerns from the buyer about the legitimacy of the business’ financial documents, and increase the chance of the deal falling apart. If there is real estate, equipment, copyrights or patents or excess cash that you do not want included in the balance sheet, remove them before a qualified buyer reviews.

Have Your Financials Audited

As a seller, you will put your business in a better position for sale if you have financials audited. This will help add both legitimacy and value in the business to a qualified buyer. They will want to make sure everything financially is accurate and correct through their due diligence, and this will help move the process along. At the very least, a seller should have a credible CPA observe the year-end inventory and file it away if you can’t afford an established auditor. The cost will be minimal, and this often makes a retroactive audit possible if all other financials are in order.

Stable Management in Place

Many businesses have managers assist the owner in its operation. Unless your business is a oneperson show, you must make sure that you have no loose ends when it comes to management. Businesses that appear to operate “fly by night” will not look appealing to prospective buyers. Stable management that has been in place for more than 90 days is important. Many buyers in the market for a business consider management to be one of their top priorities.

Using Comparisons to Better Position Your Company

If you’re shopping in a grocery store, it’s natural to compare different brands of foods to decide which one you’re going to purchase. The same analogy can be used for buyers when it comes to businesses for sale. They will compare similar businesses with yours, so you should maintain a comparison of your financial and operating statistics against those of your competition.

Review sources such as trade associations and bankers’ industry profile books. If you own a business in the middle-market, seek out annual reports. A VR business intermediary will assist you in documenting the facts on your competition and doing an objective comparison of what are the similarities, differences, strengths and vulnerabilities. It should be both understandable by someone not familiar with the industry and believable to one that’s well versed in it.

Publicity Generates Value

Having good and credible publicity clippings will not only help visibility for your business but create value for qualified buyers. In addition to using local and regional press, you can also put yourself in national publications such as Business Week. Many businesses will employ a PR firm or consultant that knows how to generate publicity.

Through VR Business Sales, you will be able to work with advisors who have decades of experience in working with both buyers and sellers in all industries worldwide. We will be able to facilitate the selling process from start to finish, providing you with counsel you can trust.


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5 Predictions for Manufacturing in 2019

Article written by Kay Cruse of Strategex and Anthony Bahr, and provided courtesy of Axial

On November 1, Strategex and Axial brought together a diverse group of private equity investors, family offices, lenders, and advisors in Cleveland for a manufacturing-focused event. Over lunch, the group discussed today’s most prevalent topics in manufacturing, and the direction in which they see the industry heading in the short term. Here are the top-five takeaways from this conversation.

1. An economic contraction is coming, but the short-term outlook is strong.
While the group unanimously agreed the next recession is matter of “When?”, not “If?”, the consensus was that leading indicators are overwhelming positive and the economic expansion — now in its ninth year — is expected to continue through 2019 and potentially 2020. However, acquirers are beginning to place more value on targets which have the ability to weather a downtown. For example, targets with a healthy aftermarket business, which tend to be countercyclical, are increasingly attractive to buyers.   

2. The labor supply is the dominant challenge in manufacturing today.
A near-record low unemployment rate, increasing minimum wages, more restrictive immigration policies, and an aversion to manufacturing jobs among younger cohorts are just some of the factors which have resulted in a severe shortage of qualified candidates. Furthermore, the ability to retain productive employees is becoming more difficult as fewer see manufacturing as a viable long-term career. In response, manufacturing firms are investing heavily in the employee experience, flex benefits (tuition reimbursement, gym memberships, paid parental leave, etc.), and workplace culture.

3. Industry 4.0 is on the horizon, but implementation will be slow.
Deal professionals see the advent of “Industry 4.0” as a potential solution to the labor and talent delimma, but the timeline for implementation is unclear. One component of 4.0, the utilization of computerization and robotics, is starting to take hold, but most don’t see a complete overhaul of traditional manufacturing taking place anytime soon.

4. Increasing interest rates are both a threat and an opportunity.
Many manufacturers are experiencing growing pains such as severe backorders, over-utilized facilities and equipment, and obsolete information technology infrastructure. Recent interest rate hikes have deterred some from borrowing to finance capital expenditures and capacity building, putting their ability to sustain growth at risk.

On the other hand, many lenders have seen a spike in originations as borrowers attempt to lock in rates given the expectation they will only increase in the short term. On the private equity front, the increasing aversion to debt has led to an increased demand for growth equity investments.

5. The lack of stability is the new norm, and agility is essential for success.
Above all, markets seek stability, but current socio-economic conditions are anything but stable. Volatility is everywhere, including tariffs, regulations, trade agreements, tax policy, and fluctuations in government spending (particularly infrastructure spending). Those involved in running manufacturing businesses, however, have come to accept volatility as business as usual. Rather than deferring action in hopes of tides turning, and rather than proactively embracing change to get ahead of the curve, managers agree nimble planning and rapid execution is key to succeeding in this new reality.


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Selling Your Business? Learn to Think Like a Buyer

You’ve built a great business with love and care. It has grown larger than you’d ever imagined. It generates a nice profit. As a result, this has allowed you and your family to live comfortably.

Now, you’re ready to sell. You assume there’s a buyer out there. You want someone to pay you a fair price and nurture the company with the same attention you have. Most importantly, selling the business is a major part of your retirement plan.

Needless to say, buyers look at businesses differently than sellers. So to achieve the outcome you want, it’s important to think like buyers and understand how they evaluate a business.

Knowing What Buyers Want

There are many types of buyers: strategic and financial, individuals, companies and private equity funds. Despite differences, all buyers consider how much they’ll invest to acquire a business, the amount of risk they’ll bear and the potential return on their investment. To evaluate an opportunity, buyers focus on three major areas:

1. Cost and terms. What will it take to acquire the business? How much cash and how much debt? What are the deal’s terms and conditions? There’s one standout issue: the amount of cash required to make the deal. By decreasing the cash requirement and increasing the acceptable debt portion, a seller can make its company more attractive — and perhaps even increase its selling price. The biggest factor directly affecting a deal’s attractiveness is the asset base. Simply put, the more the buyer can borrow against (or for post-transaction capital), the less cash it needs upfront. As collateral, banks usually accept land, buildings, equipment, inventory and accounts receivable. Many entrepreneurs have purchased the land their business resides on and leased it to the company. An often unanticipated side effect is this structure reduces the company’s asset base. As a result, this decreases the amount of debt leverage the seller can obtain.

Another way sellers can reduce the buyer’s initial cash requirement is by accepting part of the purchase price over time. Commonly known as “seller paper,” this can do a great deal to lubricate a sale.

2. Continuity. Will the business continue to operate similarly after the sale? Much of the risk of buying a company relates to continuity. For example:

  • The current owner has personal relationships with customers, distributors or vendors that the new owners may have to struggle to maintain
  • The owner has special expertise that is undocumented and difficult to learn
  • Key personnel aren’t committed to staying
  • Offshore competition looms.

Sellers armed with solid responses to these types of continuity concerns are more likely to get their desired price. Even if you don’t want to sell your business for a few years, take steps now to ensure it can run smoothly without your personal involvement. That independence could be worth millions when you sell.

3. Growth. Are there unexploited opportunities? You may have focused your sales efforts in one geographic region, but there may be many opportunities to take the product national or international. A buyer will pay more for the business if they believe it can increase revenues substantially over one assuming the current owners have already maximized opportunities.

What Sellers Should Do

It may seem counterintuitive, but the things you may be most proud of can work against getting the best price for your company. Not many entrepreneurs like to boast their company could run just fine without them. They don’t want to seem like they’ve failed to capitalize the numerous opportunities out there as an owner. Yet these may be the very factors buyers seek, along with lower cash requirements. Contact VR Business Brokers today in understanding how to best present your company for sale.


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3 Things to Consider Before Selling Your Business

Article written by Giff Constable and provided courtesy of Axial

For business owners, summer often brings extra challenges like slower sales cycles and the musical chairs of employee vacations. However, summer is also a good time to unplug and take stock of where you are in your life and your business. If that process leads you to think about a sale of your business, you’re going to want to get ahead of the game in three key areas:

#1: Deal with the things that scare buyers away

There are a few big red flags that scare buyers away, especially financial buyers who play an increasing role in one’s exit options today. You will want to review your business, acknowledge where you have weaknesses, create a plan to improve what you can, and be ready to explain what you cannot.

Some common red flags include:

  1. Revenue concentration: try to avoid a situation where more than 20% of your revenue is tied up in the hands of one or two customers.
  2. Customer churn: High growth is attractive, but not if it comes with a really high churn rate. If your customer lifecycles are short, you’ll want to examine how you are generating leads, how you are converting leads, and ultimately how well you are delivering on your product or service promises.
  3. Legal risk: Are your intellectual property rights clean? Do you have any outstanding lawsuits that can be closed off? While legal risk doesn’t always scuttle a deal, you might end up needing to accept worse escrow and indemnity terms than you’ll want. If you can’t clean these items up before you start a process, you’ll want to disclose them early on.
  4. Key person risk: A lot of lower-middle-market businesses run pretty lean, but you’ll want to avoid too much dependence on any one person, especially the CEO. Now might be a good time to prioritize where you should bring in the right lieutenants and start those recruiting cycles.

In addition to those four, you’ll also want to deal with excessive debt (leverage) in the business, employee churn, and high degrees of sales cyclicality.

#2: Prep for a Fast Process

You want to preserve momentum during an sale process. Delays rarely works in the sellers’ favor because so many things can go wrong. The buyer might change their focus or strategy. You could lose a key customer or an important employee. You could miss your numbers in a key month. Any of these things might be fine in normal course of business, but sometimes it doesn’t take much to give a buyer cold feet.

Much of your preparation is simply about getting organized:

  1. Get your financial books in order, and, if relevant, work with an accountant to disentangle personal finances from the business;
  2. Gather your legal documents;
  3. Assemble your key historical metrics (product, sales funnel, marketing funnel, etc) and market data (addressable market, competition);
  4. Organize your go-forward plans (product roadmap, growth plans, etc).

More complicated is dealing with the human psychology around a deal. Do you know your own mind and are you clear about your own goals? Do you want to continue running the business? Are there showstopper terms and conditions where you simply won’t budge?

Lastly, you need to get your key shareholders on the same page. You want to put in the work to align your current co-owners and set their expectations before the deal process begins in earnest.

#3: Build Your Deal Team

Selling a business is stressful, not least because you’re likely trying to run the business at the same time. Surround yourself with advisors you trust such as an excellent attorney, tax accountant, and sell-side advisor.

It’s also worth pulling your key executives in early. They will likely need to be involved in the due diligence process, and you’re going to need them to stay focused on operational execution during all of this. An exit process is not the time to take the foot off the gas. Help them understand why you want to sell the business. Use your sell-side banker to help set their expectations on what the process will look like, and to help tamp down their fears of the unknown.

Coach your involved executives on the fact that a sale process is just that — a sales process. If they are going to be talking to the buyer, you want to make sure they have been coached on what to say. You’ll want to keep a united front.

In conclusion, while 2018 is a good year to be a seller, it’s still a good idea to take care of the above list. Go into your sales process knowing your own mind, having a clean house, and having built a great team around you.


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Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

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