Key Advisors Shared Advice with Business Owners on Factors to Consider When Selling a Business during Recent M&A Seminar
With record amounts of private equity funds, interest rates at all-time lows, and cash-flush Fortune 500 companies, the M&A industry continues to see historically high multiples across most industries. But will it last? This was the topic of a recent panel presentation sponsored by The Forbes M+A Group, EKS&H, Guaranty Bank and Kendall, Koenig & Oelsner PC.
During the invite-only breakfast, three panelists (Bill Nack, Managing Director at The Forbes M+A Group; Bob Janson, Senior Vice President for GCG Financial; and Eric Wolf, Partner and Co-Founder, Bow River Capital) shared with business owners market insights and personal M&A experiences. Attendees learned, among other things, current changes in the transaction process, what buyers look for in a company, actions sellers can take to prepare for a successful transaction and reasons why deals fail in today's market.
Joanne Baginski, Consulting Partner at EKS&H, moderated the program and began by asking how transactions are changing in 2016. All three panelists agreed that both buyers and sellers are taking a more disciplined approach to the deal process. According to Bill Nack, “we are seeing buyers who are making sure the ROI is going to be there post-transaction. Quality of Earnings studies are more common placed, for example, which helps buyers ensure profit and loss statements are accurate.” On the seller side, Bob Janson explained that sellers are discovering and addressing all potential liabilities prior to going to market, such as employee benefits, risk management, etc.
Next, panelists were asked how buyers identify good businesses and what sellers can do to help their companies stand out. Eric Wolf explained that as a private equity firm, he looks for organizations with substantial growth opportunities and that are well positioned in an expandable market. Panelists discussed the importance of seller preparation to avoid common “red flags” such as a concentrated customer base, too much owner investment, legal issues and unorganized financials. Joanne emphasized the importance of disclosure sharing that she saw one deal that had 30% of the purchase price held back for 3 years to deal with undisclosed tax issues. Eric agreed disclosure was important saying, “if we uncover something during due diligence, it calls into question everything else you’ve shared.”
When asked about the economy and which segments are heating up, Bill shared that in 2015 manufacturing and healthcare had higher multiples, while technology was down from 2014. However, he explained that the real key to securing a higher multiple is to have predictable and reoccurring revenue. Bob encouraged the audience to follow the “Index of Economic Indicators.” With a 60-year track record, this tool is a good indicator of economic trends.
Panelists also shared some of the reasons deals fail. Bill explained that there are things that owners can and can’t control that make deals fail including market timing. For example, he knows of two owners that took their oil and gas companies off the market due to the drop in oil prices. He also shared his own experience with selling his construction company prior to the burst of the housing bubble in 2008. While the purchase price was less than he had hoped for, he said, “it was a minor miracle I got any money out of it.”
Bob encouraged owners to think about what will happen after the sale. The resulting capital will need to create personal cash flow and sometimes it can be hard to separate personal and business goals. “The best time to make a decision is not in the member, but well in advance,” he advised.
In conclusion, Joanne asked each panelist to share one last piece of advice to business owners. Bill encouraged business owners to take advantage of what he described as an “aggressive and frothy” seller’s market. “Buyers are paying top dollar now, but it is uncertain what the future will look like past 2017,” he said. Eric advised owners to spend time developing their “pitch” prior to going to market. He had a company sell for 30% more than the competition based on what he believed was the upfront preparation the team did in explaining why it was well poised to take advantage of the market. Finally, Bob urged owners to take a deep breath and think about what will happen after the deal. He explained the importance of assembling a team of trusted advisors and taking time to make the right decisions at the right time.
Audience response from the event confirmed that the information share by all three panelists was interesting and informative. For more information about timing the market or other exit strategies questions, visit www.ForbesMA.com or call 1-303-770-6017.