One Way To Decide When To Sell

How do you know the right time to sell your company? One answer to this age-old question is that the time to sell is when someone else is willing to invest more in your business than you are.

When you start a business, nobody is willing to invest in its success more than you. You’ve already worked a 40-hour week by Wednesday and, if you’re like most founders, you’ve invested a big chunk of your liquid assets to get your business going.

You’re all in.

In the early days, you are willing to risk your business on a new strategy because the business is pretty much worthless. As the Bob Dylan lyric goes, “When you ain’t got nothing, you got nothing to lose.”

As your business grows and becomes more valuable, you may find yourself becoming more conservative, unwilling to risk the equity you have created inside your business on your next big idea. You have reached a point where someone else may be willing to risk more time and money for your business than you are.

Peach New Media 

David Will is the founder of Peach New Media, which he started back in 2000 as a reseller of web conferencing. In the early days, Will changed his business strategy frequently, trying to find an idea with legs. After a number of pivots, he landed on selling learning management software to associations.

The business grew nicely and by 2015 Peach New Media had 40 employees and then received an attractive acquisition offer from a large private equity company. Will was conflicted. He loved his business and treasured the team he had built. At the same time, the acquirer was offering him a life-changing check.

In the end, Will realized that he had become somewhat more conservative as his business had grown and the potential acquirer was willing to make a big bet on integrating Peach New Media into another one of its acquisitions. Will realized he had reached a point where his appetite for risk in his own business was lower than his potential acquirer’s. Will decided to sell.

When To Sell

The point where a buyer is willing to risk more than you are happens at a different stage for everyone. Let’s say you have a business worth $1 million today. Would you be willing to risk the entire thing on a new strategy for a shot at making it a $10 million company? Many entrepreneurs would take that bet.

Now imagine you have a company worth $10 million and your business represents the bulk of your net worth. Most would argue $10 million is life-changing money. Would you be willing to risk your entire company for a chance to make it a $100 million company? The marginal utility of an extra $90 million is minimal—we all only need so many cars—but the risk is significant. Fewer owners would bet $10 million for a chance at $100 million.

What if your business was worth $100 million? Would you risk it all for a long shot at becoming a billion-dollar company? It is hard to imagine any one person betting $100 million dollars on anything, but if you’re the CEO of a billion-dollar corporation with ambitious growth goals, $100 million is a bet you may be willing to make.

When someone else is willing to invest more in your business than you are, it is probably time your company finds a new owner.

 

Is now the time to consider selling your business?

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:

Sellability Score


The Surprising Secret To A Big Exit

We get to see a lot of company founders who are contemplating an exit. Some of our customers get lucky early in life, but in the vast majority of examples where a founder is getting a seven- or eight-figure offer, it is not their first rodeo. In fact, most owners have had multiple failures and modest successes before their first big exit.

One of the most compelling reasons to consider selling your business is to give yourself a clean canvass for designing your next business. You can take all of the lessons you’ve learned building your current company and apply them to a new idea.

What would you do with a clean slate?

Michelle Romanow partnered with two friends from her engineering class and together they founded Evandale Caviar in their early 20s. The trio’s idea was to sell caviar to high-end restaurants around the world.

The partners built a fishery and had just started to get the business off the ground by the summer of 2008 when the luxury restaurant industry started to wobble. By fall of that year, high-end restaurants around the world were suffering, and by the end of 2008, the industry was on its knees.

Evandale Caviar failed.

The partners licked their wounds and came together to start a new business, a deal-of-the-day website called Buytopia. They had learned from their Evandale experience and were building a good little business—call it a single, to use a baseball analogy—when the partners started to tinker with a third idea.

From nothing to $25 million in 12 months

Romanow saw big companies wasting millions of dollars printing paper coupons and reasoned that there must be a more efficient way to distribute them. They dreamt up a mobile app that would notify the shoppers in a grocery store of special offers and let them snap a picture of their grocery receipt and receive money back on the products being promoted. The SnapSaves business model was to charge the company advertising its offers through the app.

Romanow and her partners poured more than $100,000 a month of Buytopia cash into SnapSaves, and within six months they had a product they could take to market. They launched SnapSaves in August 2013 and the company was a quick hit with consumers and advertisers. Within a year, the founders were entertaining venture capital investment offers with an implied valuation of around $25 million for their young company.

That’s when Groupon called and said they wanted to buy SnapSaves outright. The partners haggled with Groupon and got them to double their offer in the process. Less than a year after launching SnapSaves, they agreed to be acquired by Groupon.

Third time’s a charm

A casual observer of the SnapSaves story would likely chalk it up to luck: a couple of friends leave school, start a business and become an overnight success. That’s a convenient story, but it’s not true.

SnapSaves would never have happened without the lessons the partners learned from Evandale. And therein lies the secret to many successful entrepreneurs: they got their first few businesses out of the way early in their working lives to make the time, room and capital for a true success.

 

Is your business creating maximum value?

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:

Sellability Score


Do You Really Know the Value of Your Company?

It is common for executives at companies to undergo an annual physical.  Likewise, these same executives will likely examine their own investments at least once a year, if not more often.  However, rather perplexingly, these same capable and responsible executives never consider giving their company an annual physical unless required to do so by rule or regulations.

Most Business Owners Don’t Know

Recently, a leading CPA firm undertook a study that was quite revealing.  In particular, this study concluded that a whopping 65% of business owners don’t know the value of their company and 75% of the surveyed business owners had their net worth tied up in their businesses.  Phrased another way, 75% of business owners don’t know how much they are worth!  Perhaps most striking of all was the fact that a full 85% of business owners have no exit strategy whatsoever.

Having Recurrent Valuations is a Must

Business owners should know what their businesses are worth at least on an annual basis.  Situations, both personal as well as in the economy at large, can change very rapidly.  A failure to have a valuation leaves one exposed if issues suddenly arise involving estate planning or divorce or even partnership issues.  These are just two examples of potential problems.

It is also vital to understand how your business compares to last year and previous years; after all, valuations should be increasing not decreasing.  A valuation can also help you understand how your business compares to other businesses.  Perhaps most importantly, an annual valuation can help you spot and fix problems.

“Buy, Sell or Get Out of the Way”

If you don’t know your valuation, then you truly don’t know where you are headed.  As former Chrysler CEO, Lee Iacocca once stated, “Buy, sell or get out of the way.”

Standing still isn’t an option.  You need to know your valuation in order to take full advantage of opportunities.  You may feel that an acquisition isn’t the right move at the moment, but that doesn’t mean you shouldn’t be ready!  Having a current valuation means you’re ready to go if opportunity does, in fact, knock!

You never know when a potential acquirer may enter the picture.  Imagine missing out on a tremendous opportunity because you didn’t have a valuation in place.  Often hot offers and hot opportunities depend on speed.  The time it takes to get a valuation could mean that the opportunity is no longer available.  An accurate annual valuation of your business provides a valuable option whether you choose to exercise it or not.

Copyright: Business Brokerage Press, Inc.

GaudiLab/BigStock.com


Business Transactions Continue on a Sizzling Pace!

BizBuySell.com, the Internet’s largest business-for-sale marketplace, reported today that the number of annual small business transactions continue to ascend to new highs during the 1st quarter of 2017!

graoh

Noted statistics from the report are:

  • Average revenue for businesses sold increased by 8.4% over same period in 2016.
  • Average Net Income reported by businesses sold increased by 6.6% over same period in 2016.
  • Average sales price for transactions reported increased by 7.7% over same period in 2016.
  • Total number of transactions increased by 29% over same period in 2016
  • The Dallas / Fort Worth metro area reported the 9th highest number of transactions out of the top 67 markets in the US.

The breakdown of business transactions by broad categories are as follows:

  • Service 36%
  • Retail – Other 29%
  • Retail – Restaurant 22%
  • Manufacturing 4%
  • Other 8%

 

The top 5 individual categories for total transactions are as follows:

  • Restaurants
  • Health/Medical/Dental
  • Convenience Store
  • Dry Cleaning / Laundry
  • Beauty Related

 

 

Is now the time to consider selling your business?

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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6 Tips for Creating Company Value

By David Coit, VERTESS | April 12, 2017

What drives the value of a business? This is a primary concern for most business owners, whether they’re looking to sell in the short-term or position their company for future success.

Here are six tips for creating company value.

 

  1. Create A Company Succession Plan

Most companies do not have a formal company succession plan. Company succession planning differs from personal or family succession planning, as it focuses on forming the next generation team of key managers and employees in a company.

A company succession plan creates value by:

  • helping to ensure the survival and future growth of the company in the event of unforeseen changes in personnel;
  • preserving harmony and reduces the chance of repeating mistakes as business owners and senior managers pass-down company specific knowledge;
  • maintaining the legacy of owner’s desires, vision, and cultural goals through company-wide assimilation of the owner’s knowledge; and
  • providing a framework for best practices as next generation managers bubble-up their ideas for improvement based on hands-on observations.

Company succession planning does not have to be complicated but should include mentoring, employee engagement, open communication, and fairness. Senior managers should not feel as though the company’s plans include replacing existing managers. Instead, company succession planning should be viewed as a process of grooming all employees to take the company to a higher level of performance and growth.

 

  1. Don’t Forget Qualitative Factors

Quantitative factors such as changes in revenues, gross and net margins, operating cost, etc. are easy to identify and therefore easy for owners to focus their attention on. However, companies with above-average valuations excel in both quantitative and qualitative factors. Don’t overlook areas like:

  • planning
  • leadership
  • sales management
  • marketing management
  • people management
  • operations management
  • financial management
  • legal management

 

  1. Take a Retirement Account Perspective

I’ve run into numerous business owners who say things like, “I’ll worry about the value of my company when I start thinking about an exit strategy.” That’s like waiting until you’re 65 to check the value of your retirement accounts!

Company value creation is an ongoing process, which includes:

  • creating or expand recurring revenue streams,
  • increasing expected future revenue growth rate,
  • increasing returns on existing assets,
  • discontinuing poor performing activities,
  • reducing non-cash excess working capital,
  • creating or expand barriers to entry,
  • reducing company specific risk

A value growth professional can help you think about your business as an investor as well as an owner.

 

  1. Protect Existing Value

For most companies, 75% of company value is in its intangibles. Some of those intangibles are trade secrets, intellectual property, proprietary methods and/or software, customer relationships, etc. Business owners should identify key value drivers, then takes steps to protect those key value drivers, which will protect company value.

Most business owners limit their actions to protect company value to obtaining hazard insurance, worker’s compensation insurance, and liability insurance. There are other ways to protect company value, including:

  • Obtaining patent protect
  • Requiring employees sign intellectual property assignment agreements
  • Requiring employees sign non-disclosure and non-compete agreements
  • Executing buy-sell agreements will all company owners
  • Acquiring life insurance to support buy-sell agreements
  • Purchasing business interruption insurance
  • Monitoring and taking actions to limit the loss of brand reputation

 

  1. Create Customer Value

The traditional notion of customer value, where benefits minus cost equal customer value, may seem simple but can be much more complicated in practice. Customer benefits and cost can be both direct and indirect, as can be customer value. Moreover, the right set of customer benefits can create barriers to entry and/or competitive advantages.

Many business owners argue that customer value is created by providing consumers with the lowest price, highest quality, and best service. Unfortunately, those three factors are often at odds with one another. Instead, consider adopting a customer-centric approach, taking into account factors like:

  • The value drivers of your customers and would-be customers
  • What customers feel about your product or service offering/delivery
  • The cultural landscape of your target customers
  • Your customers’ value proposition determinants
  • How you can create a value-added experience for your customers
  • When to create value through a collaboration with customers
  • Measurements of customer value creation include increasing customer acquisition, satisfaction, retention, and add-on selling. Additionally, companies that can enhance their customer’s perception of the value of their products or services are likely to enjoy higher margins.

 

  1. Plan Ahead

Business owners who don’t plan often find that they spend most of their time putting out fires. Planning allows company owners and managers an opportunity to set proactive goals and objectives for the intermediate future, as well as identify solutions for key business issues. A great starting point for long-term planning is to conduct analyses around issues like:

Why your company is relevant to existing and future customers

  • Current market trends in your industry
  • Why customers buy from you or don’t
  • Current competitors and their competitive advantages
  • Your company’s competitive advantages and weaknesses
  • How you can build or reinforce barriers to competitors
  • Existing bench strength to ensure your company has the right talent to achieved desired results

The list above is far from exhaustive, but can serve as a guide for future initiatives.

 

Is your business creating maximum value?

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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A Deeper Look at Seller Financing

bigstock-164372315Buying a business requires a good deal of capital or lender resources. The bottom line is that a large percentage of buyers don’t have the necessary capital or lender resources to pay cash and that is where seller financing comes into play. The fact is that seller financing is quite common. In this article, we will take a deeper look at some of the key points to remember.

Is Seller Financing a Good Idea?

Many buyers feel that a seller’s reluctance to provide seller financing is a “red flag.” The notion is that if a business is truly as good as the seller claims it to be, then providing financing shouldn’t be a “scary” proposition. The truth is that this notion does carry some weight in reality. The primary reason that many sellers are reluctant to provide seller financing is that they are concerned that the buyer will be unsuccessful. This, of course, means that if the buyer fails to make payments, that the seller could be forced to take the business back or even forfeit the balance of the note.

However, it is important for sellers to look at the facts. Sellers who sell for all cash receive approximately 70% of the asking price; however, sellers receive approximately 86% of the asking price when they offer terms!

Seller Financing has a Range of Benefits

Here are a few of the most important benefits associated with seller financing: the seller receives a considerably higher price, sellers can get a much higher interest rate from a buyer than they can receive from a financial institution, the interest on a seller-financed deal will add significantly to the actual selling price, there are tax benefits to seller financing versus an all-cash sale and, finally, financing the sale serves as a vote of confidence in the buyer.

Clearly there are no guarantees that the buyer will be successful in operating the business. Yet, it is key that sellers remember that in most situations the buyers are putting a large percentage of their personal wealth into the purchase of the business. In other words, in most situations, the buyer is heavily invested even if financing is involved.

Business brokers excel in helping buyers and sellers discover creative ways to finance the sale of a business. Your broker can recommend a range of payment options and plans that can, in the end, often make the difference between a successful sale and failure.

Copyright: Business Brokerage Press, Inc.

echoevg/BigStock.com


6 Reasons Your Business Won’t Sell for What You Want

By Axial | February 1, 2017

There are many reasons a business might achieve less than its desired price upon sale, the most fundamental of which is that a buyer does not assign the business the same value as the seller.

Here are some common company characteristics that cause buyers to downgrade value — and ways to address them in advance of a sale.

  1. Your business is disproportionately dependent.

A business should not be overwhelmingly dependent on any one customer, employee, or supplier.

If a key employee quits unexpectedly, a supplier goes out of business, or a customer leaves for a competitor, will your revenue dip by a meaningful amount? According to a recent webinar held by John Warrillow, author of a www.builttosell.com, no more than 10-15% of revenue should be coming from one person or source.

  1. You don’t have a plan for growth.

Buyers look for companies with a foreseeable path for growth. As a seller, you should be proactive in identifying where growth opportunities exist and how a new owner might take advantage of them.

You might present the potential buyer with a list of businesses you have considered as potential acquisition targets, or provide details around new geographic markets or customer segments. Be sure to demonstrate what resources are in place to support increased demand, should the new owner choose to pursue any of these strategies.

“You want to present a buyer with a map to growth, not simply say, well, here’s where we’ve gotten and now it’s up to you,” says Giff Constable, a former investment banker and current VP of Product at Axial. “These growth areas should be defendable both in terms of proof points to back your ideas up as well as the company’s ability to actually execute on them.”

Warrillow’s research shows that mid-sized businesses that have plans in place to meet a substantial, overnight increase in demand could get up to 4.5x on earnings (vs. 3.7x for the average business).

  1. Your company is strapped for cash flow.

The more cash you generate in excess of your working capital requirements, the more your company will be worth.

“When a buyer buys your business, he writes two checks — one to you, as the owner, and one for working capital. If they have to inject a lot of working capital into your company, their appetite to write a big check to you is going to be less,” says Warrillow.

The two main ways to increase cash flow are to accelerate accounts receivable and to extend accounts payable. To achieve the first, incent your customers to pay early by offering discounts for paying within a certain period of time. It’s also wise to accommodate as many methods of payment as possible (credit cards, wire transfers, etc.) to offer flexibility to your customers.

While delaying payments made to suppliers or vendors can be a bit trickier, negotiating terms to extend payment deadlines, or opting for annual versus more regular payments (and spreading out those annual contracts) can help you keep more cash on hand.

For companies in industries where the cost of working capital is characteristically high, such as manufacturing and retail/consumer products, think about creative ways to bring more cash into the business, such as charging for ongoing customer service, membership programs, and rewards.

  1. You don’t have recurring revenue.

We’ve all seen the headlines for tech companies fetching high multiples. Particularly for companies with subscription-based revenue models, buyers have been known to pay lofty premiums for the advantage of being able to lock in predictable future revenue.

A subscription, or recurring revenue model, has long been a widely-accepted strategy for companies which have repeat customers and products or services that are consumed over time (for example media and software).

For companies outside of this sphere (e.g., seasonal businesses or companies who have to maintain a high inventory, such as retailers or manufacturers), creating predictable, recurring revenue may not be as obvious. That doesn’t mean, however, that it can’t be achieved.

One great example of a more traditional business with a recurring revenue model is Michelin Tires. Instead of selling tires, Michelin employs a per-mile payment model, which is more effective at establishing loyal long-term customers.

  1. You are in a commoditized business.

The less differentiated your business is, the less attractive it will be to a buyer. Warrillow says that companies should focus on building a “deep and wide competitive moat” — i.e., high barriers that disable other market entrants from gaining share of business from you.

One of the unavoidable side effects of being a highly commoditized business is having to compete on price. The less pricing authority you have, the less money you can make. The less money you make, the less you have to invest into growing the business.

Warrillow’s research shows that companies that focus on creating this level of authority in their market can increase their multiple by a full turn over the average small to mid-sized business.

  1. The business can’t succeed without you.

If you’re exiting the business, expect a buyer to spend less time with you and much more digging into the competencies of your team. A company that expects to get top dollar must prove that operations can not only be sustained, but flourish, under the new owner. Since there’s likely a learning curve before a new chief operator can reach the same level of effectiveness as the exited owner, the support of the existing team is paramount to a successful transition.

Here are few questions to expect from buyers:

  • What proportion of your customers did you personally have to sell in order to convert them into customers?Is their satisfaction and relationship with your company dependent on that personal relationship? If the answer is “a majority” and “yes”, then it’s time to separate yourself from your customer base and move those relationships onto other members of your team.
  • How often do employees come to you with issues within the business? Are they coming for your ideas or for your approval on their own ideas they’ve devised to solve the problem? The former could signal that you don’t have the right people in place to make confident decisions about the business.
  • How often do you take vacation and for how long?Does performance take a dip in your absence? If you find you either can never take vacation, or have to work throughout your time off to keep things afloat, you may need to identify what pieces of the business are faltering and why and put corrections in place.

This article provided courtesy of Axial  –  www.axial.net

 

Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

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The Anatomy of a Successful Exit

Stephanie Breedlove started Breedlove & Associates in 1992 as a way to pay her nanny. The big payroll processors weren’t interested in dealing with one person’s wages and doing it themselves was complicated and time-consuming, too much for the then overwhelmed Breedloves.

Breedlove saw a business opportunity and started a payroll company for parents who needed to pay their nannies. By 2012, Breedlove & Associates had grown to $9MM in revenue and then she received a $54MM acquisition offer.

To give you some context of how incredible it is to sell a $9MM business for $54MM let’s look at the numbers. At The Value Builder System™, more than 25,000 business owners have completed the Value Builder Score questionnaire, part of which asks about any acquisition offers they may have received. The average multiple offered is 3.76 times pre-tax profit. Even the best-performing businesses, those with a Value Builder Score of 80+, only get offers of 6.27 times pre-tax profit on average. Breedlove got close to six times revenue.

What did Breedlove do right? We’re going to look at the five things Breedlove did—and that you can do—to drive up the value of a business.

Sell Less Stuff to More People

When Breedlove hit $30K per month in revenue, she quit her job at Accenture (formerly Anderson Consulting) and devoted herself to Breedlove & Associates full-time. To grow, she had a choice: sell more to her existing customers (e.g. busy couples often need lawn-care, house-cleaning, or grocery-delivery services) or stick with her niche of paying nannies. Most consultants and experts would say it’s easier to sell more to existing customers (and they’re right), but it doesn’t make your business more valuable. Breedlove decided to stick to her niche and find more parents who needed to pay their nannies, and that decision laid the foundation for a more valuable business.

Investors from Warren Buffet look for companies with a deep and wide competitive moat that gives the owner pricing authority. When you have a differentiated product or service, we call it having The Monopoly Control and companies with a monopoly get significantly higher acquisition offers.

Rather than selling existing customers generic services in commoditized markets, Breedlove focused on selling one thing to as many customers as she could find.

Strive for 50%+ Net Promoter Score

One feature that interested acquirers look for is your customer satisfaction levels. Increasingly, they are turning to the Net Promoter Score (NPS) as a measure of this. NPS was developed by Fred Reichheld and his team at Satmetrix, who discovered that your customers’ willingness to refer you to their friends or colleagues is highly predictive of your company’s future growth rate.

The NPS approach is to ask your customers how willing they would be to refer your company to a friend or colleague, on a scale of 0 to 10. They are then categorized into Promoters (9s and 10s), Passives (7s and 8s) or Detractors (0–6s). The NPS is calculated by subtracting the percentage of Promoters from the percentage of Detractors. Most businesses achieve an NPS of 10% to 15%, while the very best companies (think Apple and Amazon) get scores of 50% or more.

Breedlove obsessed over her company’s NPS and realized the key to driving it up was perfecting the first few interactions with a new customer. When you call a big payroll company looking for a service to pay your nanny, the response can be underwhelming. With only one person to pay, you are often relegated to the most junior staff member and even they would rather be dealing with a larger client.

When you call Breedlove, by contrast, you get a team of professionals totally focused on setting you up. You’re not an afterthought. You’re not passed on. Instead, you get the best onboarding talent the company has to offer.

This set-up team was a big part of how Breedlove achieved an astonishing 78% NPS.

Create Recurring Revenue Streams

The third thing that made Breedlove’s company attractive was recurring revenue.

Regardless of what industry you’re in, recurring revenue models give acquirers more confidence that the business will keep going strong after you leave.

By 2012, Breedlove & Associates had grown to $9MM and, given the nature of the payroll business, 100% of their revenue was recurring.

Reduce Reliance on Customers, Employees and Suppliers

Breedlove’s company was also attractive to buyers because she had a highly diversified customer base with no single customer representing even close to 1% of her revenue. If more than 10% to 15% of your revenue comes from one buyer, you can expect prospective acquirers to ask a lot more questions.

Customer concentration is one of three factors that make up The Switzerland Structure Module. The Switzerland Structure measures your business’ dependence on a single customer, employee or supplier.

Find an Acquirer You Can Help Grow

By 2012, Breedlove & Associates was growing 17% per year, which is good but not blow-your-mind good. So how did she attract such an incredible acquisition offer? The trick was showing her acquirer how they could grow.

In Breedlove’s case, she sold her company to Care.com. Think of Care.com as the Angie’s List of care providers (e.g. child care, senior care, etc.). If you need someone to care for your kids or an elderly relative, you enter your address into their website and Care.com will give you a list of vetted caregivers in your area.

At the time of the acquisition, Breedlove had 10,000 customers and Care.com had seven million members. Breedlove argued that if just 1% of Care.com’s members used Breedlove’s payroll service, it would equate to 7X growth in Breedlove & Associates almost overnight.

In 2012, Care.com acquired Breedlove & Associates for $54MM—an outstanding exit made possible by Breedlove’s focus on what drove her company’s value, not just their top-line revenue.

Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

Sellability Score


M&A Trends for Sellers in 2017

For business owners, the New Year is an ideal time to reflect on long-term goals for your organization. A banker can provide valuable insight on trends in your industry and the market as a whole.

We talked to George Shea, Managing Partner at Focus Investment Bank, and Keith Dee, Founder and President of Osage Advisors, about a few of their insights for M&A going into 2017.

For those looking to explore a transaction in 2017, “my biggest advice is to begin thinking long before you execute, whether you do it on your own or hire an investment banker,” says Shea. “Make sure you have your financial house in order and understand the key metrics of your business — you should be able to slice and dice your financial information quickly and efficiently.”

3 M&A Insights

 

  1. “Search funds have proliferated the lower middle market.”

Search funds typically comprise individuals who are looking to buy and then operate a company (usually one smaller in size than the typical target for a private equity firm). “There were a handful of search funds five years ago, and now they’re everywhere,” says Dee. “When a business does not fit the overall objectives of either a strategic buyer or private equity fund, search funds provide a viable option for owners looking to sell their businesses.

Promoted as part of top MBA programs, “they’ve become a generational trend for young entrepreneurs who want to buy a business and who have an investor base backing them up.” He notes that search funds tend to be conservative when it comes to valuations — he estimates 90% will be below strategics or even private equity — “because they will become the owner-operator of the business and have to go back and sell the deal to their investors who write the checks for them.”

  1. “Private equity is going upstream.”  

“I’ve found equity investors are less interested in small add-ons unless they meet very stringent investment criteria,” says Dee, who typically works with companies between $1-$5 million in EBITDA.

“This is especially true for sub-$2 million deals, an area they were much more aggressive in a couple of years ago. With the money they’re raising now — half billion dollar funds vs. quarter billion dollar funds — it might not make sense as they are looking to deploy more capital per transaction.”

This may mean smaller companies looking to sell turn to strategic buyers, search funds, or independent sponsors (also on the rise).

  1. “It’s still a seller’s market.”

We’re not at the peak of the seller’s market yet, according to Dee. “There’s so much money in the lower middle market, and even more being raised on the equity side. Equity investors and strategics alike are all looking for quality deal flow. It all comes back to supply and demand. It continues to be a seller’s market due to a short supply of quality companies, and I’m not sure when the pendulum will switch to a buyer’s market.”

“Timing is everything,” he adds. “You always want to be selling on an uptrend. You don’t have to be selling at the top of the market, but you do want to be selling on positive trends both in terms of sales and EBITDA.”

 

This article provided courtesy of Axial  –  and written By Meghan Daniels,| December 15, 2016

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Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

Sellability Score


Will this be the year you seriously drive up the value of your company?

Will this be the year you seriously drive up the value of your company?

If you have resolved to make your company more valuable in 2017, you may want to think hard about how your customers pay.

If you have a transaction business model where customers pay once for what they buy, expect your company’s value to be a single-digit multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).

If you have a recurring revenue model, by contrast, where customers subscribe and pay on an ongoing basis, you can expect your valuation to be a multiple of your revenue.

Breedlove & Associates Sells for 6X Revenue

In 1992 Stephanie Breedlove started a payroll company to make it easier for parents to pay their nannies on a recurring basis. It began small and Breedlove self-funded her growth, which averaged 20% per year.

By 2012, Breedlove & Associates had hit $9 million in annual sales when Breedlove accepted an offer from Care.com of $55 million for her business—representing an astronomical multiple of more than six times Breedlove’s revenue.

Buyers pay up for companies with recurring revenue because they can clearly see how your company will make money long after you hit the exit.

Not sure how to create recurring revenue? Here are four models to consider:

Products That Run Out

If you have a product that people run out of, consider offering it on subscription. The retailing giant Target sells subscriptions to diapers for busy parents who don’t have the time (or interest) in running to the store to re-stock on Pampers. Dollar Shave Club, which was recently acquired by Unilever for five times revenue, sells razor blades on subscription. The Honest Company sells dish detergent and safe household cleaning products to environmentally conscious consumers and more than 80% of their sales come from subscriptions.

Membership Websites

If you’re a consultant and offer specialized advice, consider whether customers might pay access to a premium membership website where you offer your know-how to subscribers only. Today there are membership websites for people who want to know about anything from Search Engine Marketing to running a restaurant.

Services Contracts

If you bill by the hour or the project, consider moving to a fixed monthly fee for your service. That’s what the marketing agency GoBrandGo! has done to steady cash flow and create a more predictable service business.

Piggyback Services

Ask yourself what your “one-off” customers buy after they buy what you sell. For example, if you make a company a new website, chances are they are going to need somewhere to host their site. While your initial website design may be a one-off service, you could offer to host it for your customer on subscription. If you offer interior design, chances are your customers are going to want to keep their home looking like the day you presented your design, so they might be in the market for a regular cleaning service.

Rentals

If you offer something expensive that customers only need occasionally, consider renting access to it for those who subscribe. ZipCar subscribers can have access to a car when they need it without forking over the cash to buy a hunk of steel. WeWork subscribers can have access to the company’s co-working space without buying a building or committing to a long-term lease.

You don’t have to be a software company to create customers who pay you automatically each month. There is simply no faster way to improve the value of your business this year than to add some recurring revenue.

Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

Sellability Score