Posts Categorized: Buyer Articles

Is Your Business Charging Enough For Goods & Services?

A small increase in what you charge for your goods and services can make a tremendous difference to your bottom line.  The fact is that many businesses could charge more for their goods and services than they do, but fail to do so.  Owners often do not realize the great value of charging just one-percent more.  In this article, we’ll explore how charging even slightly more can dramatically impact your business.

Let’s consider a hypothetical example.  A business owner tells a potential buyer that he or she could safely increase their prices by 1.5% and do so without the price increase causing any negative impact to sales or business disruption.  The savvy buyer quickly realizes that the business, which has $70 million in sales, is leaving $1 million dollars on the table by not increasing its prices by 1.5%.  A smart buyer realizes that after purchasing the business, all he or she has to do is institute this small price increase in order to achieve a sizable increase in profits.

In his best-selling book The Art of Pricing, Rafi Mohammed explores the often-overlooked area of pricing.  He keenly observes that one of the biggest fallacies in all of business is to believe that a product’s price should be based on the cost of the product.  In The Art of Pricing, Mohammed points to several examples.  One comes from the restaurant industry.  He points to the fact that McDonald’s keeps entrée prices attractive with the idea of making up profit shortfalls in other areas, ranging from desserts to drinks and more.  Or as Mohammed points out, McDonald’s profits on hamburgers is marginal.  However, its profits on French fries are considerable.

Mohammed’s view is that companies should always be looking to develop a culture of producing profits.  He states, “through better pricing, companies can increase profits and generate growth.”  Importantly, Mohammed points out that it is through what he calls “smart pricing” that it is possible to extract hidden profits from a business.  Summed up another way, pricing couldn’t matter more.

All too often business owners, in the course of their day-to-day operations, fail to place sufficient importance of pricing.  Any business looking to achieve more will be well served by first stopping and taking a good look at its pricing structure. 

Likewise, buyers should be vigilant in their quest to find businesses that can safely increase prices without experiencing any disruption.  At the end of the day, small changes to pricing can have a profound impact on a company’s bottom line.

Copyright: Business Brokerage Press, Inc.

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4 Reasons Why It’s Better to Own a Big Chunk of a Small Company

Is it better to own a big chunk of a small business or a minority stake in a big company?

It’s one of the fundamental questions all owners must wrestle with. Owning a relatively small slice of a big pie has worked out well for both Elon Musk and Jeff Bezos, who recently traded places on the list of the world’s richest person. Musk still owns around 20% of Tesla, and Bezos controls about 10% of Amazon, so they both have chosen to sell most of their company to fund their ambitions. The success of their bet has been amplified lately given the stock market’s run over the last 12 months.

However, selling part of your business comes with some significant downsides. Let’s take a look at four reasons it’s better to own a big slice of a smaller pie.

Operational Freedom

The most obvious benefit of keeping all of your shares is that you get to decide how to run your company. Nobody can tell you what products to launch or markets to enter. You are the king or queen of your kingdom and can decide the rules.

No Pressure to Exit

Tim Ferriss, the author of five books, including the wildly popular New York Times bestseller The 4-Hour Workweek, recently urged his Twitter followers to consider their endgame before investing in a business: “Before you get into an investment position, know how and when you’re going to get out, or at least how and when you will reevaluate. Getting in is the easy part….”

Once you accept outside investment in your business, you must try to earn your shareholders a return. For your investors to realize a gain, you must sell your company (or part of it). Needing to sell so your investors can realize a return means you give up the option to run your business forever and need to start thinking about how your shareholders will get liquid. Some will pressure you while others will wait patiently, but the exit clock starts ticking once you take outside investment.

Nobody Ahead of You in Line

Sophisticated outside investors often demand preferred returns when they invest in your company, which can undermine your take from a sale.

For example, Ana Chaud started Garden Bar to offer fast-casual salads to Portland hipsters. The first store was a success, but the restaurant industry’s thin margins inspired her to grow to get some economies of scale. She raised two rounds of outside capital, including one from a group of convertible noteholders. Chaud skimmed the term sheet but trusted her investors, so she didn’t think much about a clause that gave noteholders 2.5 times their money if she sold the business before the note expired.

Chaud continued to grow to nine locations, with a tenth on the way, when she attracted an exciting offer from Evergreens, Seattle’s fastest-growing salad restaurant. Things were going according to plan right up until Chaud’s lawyer pointed out the investors clause, which had the potential to wash out all her equity.

Chaud agreed to give the proceeds of her acquisition to investors. She negotiated an earn-out, which she hoped would allow her the possibility of a return on her years of sacrifice. Then COVID-19 hit, Portland restaurants were closed, and Chaud ended up with nothing.

Avoid an $80 Million Mistake

The most obvious reason to hang on to your shares is to avoid dilution. When your company is not worth very much in the early days, it can be tempting to give away equity to attract a key team member, but it could end up costing you dearly if you’re too generous.

Take a look at the story of Greg Alexander, who started Sales Benchmark Index (SBI). Alexander started the sales consultancy at his kitchen table and, early into his tenure, gave two employees a quarter share in his business. Ten years later, Alexander ended up selling SBI for $162 million, prompting him to refer to easily giving up half the company as an “$80 million mistake.”

Given the runaway success of some high-profile stocks of late, it can be tempting to consider raising money to fund your growth, but there are still several benefits to owning a big slice of a small pie.

 

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The Top 50 Lower Middle Market Consumer Investors & M&A Advisors

Written by Dani Forman Axial | November 16, 2020

The polarized economic performance of the Consumer industry over the last 9 months has all the makings of a great business school case study.

Where brick and mortar has struggled, e-commerce has thrived. Where travel-oriented businesses have watched their sales all but disappear, producers of home exercise equipment can’t keep up with the sudden and sustained spike in demand. Consumer-focused deal professionals are carefully studying these trends in an effort to predict a return to baseline, what the new baseline will be, and what trends are here to stay.

In this report, we profile 50 top consumer industry private equity investment firms and M&A advisors who are best positioned to advise and capitalize on Covid’s sweeping change to the consumer economy.

We also reveal an analysis of the relative overlap between transactions going to market via Axial and the specific consumer segments most in demand on the platform. The analysis is accompanied by commentary from Axial Members and consumer industry specialists Triangle Capital, Threadstone Advisors, L Catterton, and Camano Capital.

Introduction

Consumer spending habits were already undergoing a major paradigm shift prior to Covid-19. As we’ve seen in other industries, the pandemic has accelerated certain emerging trends by an estimated 5-10 years. As an example, consumers spent $211.5 billion on e-commerce in the second quarter of 2020, up 31.8% quarter-over-quarter according to JP Morgan, citing data from the U.S. Census Bureau.

Consumers’ minds have shifted,” says co-founder and Partner at Triangle Capital, Richard Kestenbaum. “More people are acting like early adopters, which has accelerated the acceptance of a lot of the digital trends we’re seeing in the consumer space today. That won’t go away. Some consumer habits will return to normal, but some won’t, meaning they are real and enduring.”

Top Consumer Segments in the Lower Middle Market

We analyzed the consumer focused investment criteria of over 750 private equity investors and corporate acquirers on Axial and over 1,000 consumer related deals that have come to market in the last 12 months. The analysis yielded the following top 7 lower middle market consumer segments on the buy and sell-side:

Rapidly evolving digital trends within the consumer space, along with a number of Covid-related consolidation opportunities in consumer manufacturing, distribution, and supply chain management, represent a majority of the verticals included within these 7 core-categories.

Retail, E-Commerce, and the Growth of Direct-to-Consumer 

Predicting consumer trends has and always will be the name of the game in consumer M&A. Even those with the strongest intuition have been kept on their toes since the onset of the pandemic. McKinsey’s recent survey of over 2,000 consumers showed that 73% of Americans have tried new shopping behaviors since Covid-19 began.

“Consumer preferences haven’t changed materially during Covid,” says Harry Fackelmayer, Vice President at L Catterton. “What has changed materially is how those consumers are interacting with, obtaining, and paying for products & services.” One of the most pronounced areas within Consumer that reflects this ever-evolving interaction with products and services is the movement away from traditional retail, towards direct-to-consumer (DTC) offerings.

“To thrive today, a large part of your business needs to be direct-to-consumer, with a real, prominent e-commerce presence,” Fackelmayer points out. Digitally native, DTC brands need to remember amidst the Covid-induced surge in demand, the core tenants that made DTC so appealing (and profitable) to begin with. First, the relatively inexpensive cost of customer acquisition, and second, the gross margins of the product being sold, which experts benchmark at between 50% and 85% for the most successful DTC companies.

Taylor Fish, Partner at Camano Capital has spent a significant amount of time with existing portfolio companies, making sure they’re equipped and ready to capitalize on this push to DTC. “The margin profile and ability to cost-effectively manage your customer base are a few of the things that makes DTC so attractive from an investment profile perspective.” Fish points out that DTC enabled businesses in the lower middle market make especially appealing targets, because “most LMM businesses haven’t yet reached the scale or don’t have the know-how to effectively execute on both e-commerce and retail go to market strategies at the same time. That’s where we can help.”

Retail is Down but not Out for the Count

As we’ve established, there’s reason to believe that the recent spike in e-commerce activity, which has contributed to the proliferation of DTC offerings, will continue for the foreseeable future. The question then becomes, is this the end of retail?

Not by a long shot.

“Almost every square foot of retail space in America is worth less than it was a year ago,” Kestenbaum points out. “That means if I’m a retailer, I can have a bigger store for the same scale of operation than I could have before. What do I do with that extra space?”

Retail businesses that were not instrumented to support e-commerce or DTC prior to March are likely feeling the pain of the recent lockdowns. Those that were and are managing to weather the storm, however, have a real long-term opportunity to capitalize on a growing experiential consumer trend, with more physical space, and less resources, to win the loyalty and attention of a new customer base.

Impact on Retail M&A

Segments of retail M&A were already on the decline for a number of reasons before 2020, dropping 59% since it’s peak in 2016. “I suspect this is the nail in the coffin for a lot of mom and pop retailers who have already been struggling to compete with the Amazon’s and big box retailers of the world,” says Josh Goldberg, Managing Director at Threadstone Advisors. “ Investors are aware of that struggle and are mostly staying away from pure-play brick and mortar retail because of it. Some retailers will recover, but it will take a significant amount of time for investors to see how they respond.”

Goldberg continues, “Investors buying into retail and consumer companies today need to think about what’s around the corner. You’re buying based on historical revenue and EBITDA, but you’re buying for future revenue and EBITDA. Explaining the net results of the consumer behavioral shifts from Covid, and what you’re doing to generate additional revenue because you experienced Covid will become an imperative part of the M&A narrative.”

Private Label vs Brands

“Panic buying” – think Charmin toilet paper flying off the shelves in the early days of the pandemic – was a blessing in disguise for private label brands. The consumer rush to buy familiar brands in March and April led to a sudden and severe shortage of those products. Consumers were then forced to buy “store brand” foods, beverages, cleaning products, and personal goods only to realize that they weren’t so bad afterall. A recent study showed that more than 45% of consumers that recently switched to private label products did so first and foremost because the prices were better, followed closely by a “lack of availability of their preferred national brands.”

Now that consumers know there are comparable, cheaper options out there, how much does brand influence the purchase decision making process?

“Brands used to give people more comfort and security than they do now,” says Kestenbaum. “Sustainability, fair wages, and health benefits trump the importance of the brand for today’s consumer. Target is a perfect example of a company who used private label manufacturing to drive more people into their stores. Their value proposition used to be about coming to the store to buy other brands. Now, it’s come to our stores because we make everything ourselves. The prices are fair and the products are better.”

Private label brands from stores like Target have gained popularity at a much faster pace due to the pandemic, but according to a recent study from LEK, this is likely only the beginning. In the beauty and cosmetic sector, 67% of shoppers believe that private label products provide better value for your money. Millennials in particular are evangelizing the move towards off brand products, purchasing at a significantly higher rate of 32% compared with 25% in older age brackets.

While this trend is undeniable, a strong brand is still crucial for many consumer-focused investors. This newfound emphasis on price and values has made smaller, value-based brands prime acquisition targets as a means of insulating larger CPG brands from the consumer preference shift towards private label.

Supply Chain Resilience is Key

The third and final trend we’ll cover in this report stems directly from the migration towards e-commerce/DTC offerings and the increased consumer acceptance of private label products.

At the heart of every successful consumer operation lies a supply chain that manages the flow of goods – from raw material procurement through fulfillment and consumption. The logistical complexities of the supply chain make it extremely prone to inefficiencies – blood in the water for opportunistic investors who can leverage their experience and resources to transform leaky supply chains into opportunity.

The demand shock from Covid-19 exposed pre-existing problems with smaller consumer manufacturing businesses and their overwhelmed supply chains. Investors and larger manufacturers aware of these issues have begun targeting smaller manufacturing operations in hopes of finding discounted opportunities that will also enable them to expand into new product lines, verticals, and geographies.

Aside from the M&A consolidation opportunities, investors have used their portfolio company’s supply chain woes as inspiration to invent and simplify. “An investment in optimizing your supply chain directly benefits your balance sheet and indirectly benefits your customer,” Kestenbaum points out. “The capital that you free up by running an efficient supply chain can be deployed elsewhere in the business. The good news is, technology has reached a stage where you can get that efficiency without adding labor costs.”

Conclusion

2020 has been a year of violent change for consumer economy entrepreneurs and investors.

The challenge and opportunity, as always, is predicting what comes next. Having a digital presence, offering sustainable, cost-effective products, and optimizing supply chains have become imperative focus areas for all businesses operating in the consumer space, whether they were ready for it or not. As we’ve learned over the last 9 months, however, those that improvise and adapt are in a prime position to overcome.

To conclude, we’re excited to present Axial’s 2020 Top 50 Consumer Investors and M&A Advisors, whose efforts in advising and capitalizing consumer industry business owners deserve recognition.

The 2020 Axial Consumer Top 50

Buy-Side Sell-Side
L Catterton Triangle Capital
Camano Capital Threadstone Advisors
Pattern Consumer Growth Partners
Akoya Capital Partners 41 North
Morgan Stanley Global Private Equity Tully & Holland
HIG Capital CCC Investment Banking
Entrepreneur Partners Boxwood Partners
Gauge Capital Britehorn Partners
San Francisco Equity Partners White Rock Advisors
Encore Consumer Capital SDR Ventures
Bregal Partners Stephens
Peterson Partners Balmoral Advisors
Varsity Brands Consensus Advisors
Cannondale Capital Investors Bryant Park Capital
NRD Capital Management Carl Marks Advisors
WJ Partners Cross Keys Capital
Kidd & Company The Peakstone Group
Branford Castle Capstone Headwaters
Reliance Industries City Capital Advisors
GreyLion Capital FINNEA Group
High Road Capital Meridian Capital
Blue Point Capital Partners Janney Montgomery Scott
Spanos Barber Jesse Mann, Armistead & Epperson, Ltd.
Peak Rock Capital Carter Morse & Goodrich
Hammond, Kennedy, Whitney & Co. Blue Ash Capital

 

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Buying a Distressed Business 

It is safe to state that Howard Brownstein, President of The Brownstein Corporation, is a true expert in providing turnaround management and advisory services to companies, as well as their stakeholders.  Brownstein serves as an independent corporate board member for both publicly held as well as privately-owned companies and nonprofits.  During his career, he has been named a Board Leadership Fellow by the National Association of Corporate Directors (NACD) and served as Board Chair and President of its Philadelphia Chapter.  He also serves as Vice Chair of the ABA Corporate Governance Committee and has been named a Fellow of the American Bar Foundation.  He has been a speaker at many of the world’s top universities including Harvard Business School and Wharton.  Brownstein received his J.D. and M.B.A. degrees from the University of Pennsylvania.

Mr. Brownstein is considered to be one of the world’s top experts in distressed businesses.  He believes it is essential to remember that not all distressed businesses are, in fact, the same.  There is simply no way to know how bad things are for a given distressed business until one begins to “look under the hood,” and get a full view of what problems may lurk underneath. 

Brownstein firmly believes that distressed businesses can represent a real and often overlooked opportunity for buyers.  The recent economic downturn brought about by COVID-19 means that there will likely be a great deal more distressed businesses on the market in the coming months or even in the next couple of years. 

Why is a Given Business Distressed? 

Before you consider purchasing a distressed business, you absolutely must understand the core reasons for the distresses.  Without a proper and detailed understanding of why the business entered a state of distress in the first place, it is impossible to clearly articulate why the business will potentially be valuable in the future.  It is essential to be able to convey “what went wrong” and how the problems can be fixed.

Brownstein points out that while there are many reasons for a business to enter distress, two symptoms top the list.  The first is cash flow issues and the second issue relates to management.  Often it turns out that the management was simply not rigorous enough.  He also notes that companies will tend to gravitate to external issues as a way to explain away their failure.

Of course, no two distressed businesses are failing from 100% identical causes.  Brownstein suggests a series of questions that you need to ask when you begin exploring a distressed business.

  1. What is the business’ potential value?
  2. Is there something of value under the problems?
  3. Under better or different circumstances, could the business be viable?

These are all questions that your business broker or M&A advisor can assist with.  It’s important to gain a clear understanding of the business’ past, present and future. 

Copyright: Business Brokerage Press, Inc.

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Insights from BizBuySell’s 3rd Quarter Insight Report

Most business buyers and sellers are wondering what 2021 and beyond will bring.  BizBuySell and BizQuest President Bob House provided a range of insights stemming from BizBuySell’s 3rd Quarter Insight Report and a survey of over 2,300 business owners. 

The simple fact is that the pandemic has most definitely had a major impact on the buying and selling of businesses.  This fact is obvious.  But diving deeper, there are a range of insights that can be gleaned. 

First, owners do understand that COVID is a massive force in business right now.  According to the survey, 68% of owners feel that they would have received a better price for their business in 2019 than in 2020.  Only 37% of respondents felt that they would receive a better price this year.  Of owners who felt that they would receive a lower price in 2020 than in 2019, 71% of these owners said that their assessment was directly tied to the pandemic and its accompanying economic impact.

A question on the survey asked owners if the pandemic had impacted their exit plans.  55% responded that the pandemic had not changed their exit plans.  Additionally, 22% said that they now planned on exiting later, and 12% stated that they planned on exiting earlier.  In short, the majority of business owners were not changing their exit plans.

On the other side of the coin, buyers are acknowledging that the present seems to be a very good time to buy.  A staggering 81% of buyers stated that they felt confident that they would be able to find an acceptable price point.  In terms of their purchasing timeline, 72% of respondents stated that they were planning on buying a business soon.  Survey follow-ups indicated that large numbers of buyers were also planning on buying in 2021.

Generational differences are playing a role as well.  Baby Boomers tend to be more optimistic than non-boomers as far as their overall views on the recovery.  43% of Baby Boomers now expect the economy to recover within the next year as compared to just 30% of non-Boomers.  House pointed out, “Baby Boomers are the generation that did not plan, which makes it harder for them to adjust transition plans if they were preparing to retire, as small businesses don’t have the infrastructure and management teams in place to wait out a bad cycle.”

Based on the information collected by BizBuySell’s 3rd Quarter Insight Report and their survey, it is clear that there is a new wave of buyers on the horizon.  The report supports the notion that the pandemic has made small business ownership an attractive option for new entrepreneurs.  Factors driving new entrepreneurs into the marketplace include everything from being unemployed and wanting more control over their own futures to a desire to capitalize on opportunities. 

Finally, House notes that 2021 could be a “perfect storm for business sales,” as 10,000 Americans will turn 65 each and every day.  This means that the supply of excellent businesses entering the marketplace will likely increase dramatically.

Copyright: Business Brokerage Press, Inc.

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What Makes a Deal Close?

For every reason that a pending sale of a business collapses, there is a positive reason why the sale closed successfully.  What does it take for the sale of a business to close successfully?  Certainly there are reasons that a sale might not close that are beyond anyone’s control.  A fire, for example, the death of a principal, or a natural disaster such as a hurricane or tornado.  There might be an environmental problem that the seller was unaware of when he or she decided to sell.  Aside from these unplanned catastrophic events, deals abort because of the people involved.  Here are a few examples of how a sale closes successfully.

The Buyer and Seller Are in Agreement From the Beginning

In too many cases, the buyer and seller really weren’t in agreement, or didn’t understand the terms of the sale.  If an offer to purchase is too vague, or has too many loose ends, the sale can unravel somewhere along the line.  However, if prior to the offer to purchase the loose ends are taken care of and the agreement specifically spells out the details of the sale, it has a much better chance to close.  This means that a lot of answers and information are supplied prior to the offer and that many of the buyer’s questions are answered before the offer is made.  The seller may also have some questions about the buyer’s financial qualifications or his or her ability to operate the business.  Again, these concerns should be addressed prior to the offer or, at least, if they are part of it, both sides should understand exactly what needs to be done and when.  The key ingredient of the offer to purchase is that both sides completely understand the terms and are comfortable with them.  Too many sales fall apart because of a misunderstanding on one side or the other.

The Buyer and Seller Don’t Lose Their Patience

Both sides need to understand that the closing process takes time.  There is a myriad of details that must take place for the sale to close successfully, or to close at all.  If the parties are using outside advisors, they should make sure that they are deal-oriented.  In other words, unless the deal is illegal or unethical, the parties should insist that the deal works.  The buyer and seller should understand that the outside advisors work for them and that most decisions concerning the sale are business related and should be decided by the buyer and seller themselves.  The buyer and seller should also insist that the outside advisors keep to the scheduled closing date, unless they, not the outside advisors, delay the timing.  Prior to engaging the outside advisors, the buyer and seller should make sure that their advisors can work within the schedule.  However, the buyer and seller have to also understand that nothing can be done overnight and the closing process does take some time.

No One Likes Surprises

The seller has to be up front about his or her business.  Nothing is perfect and buyers understand this.  The minuses should be revealed at the outset because sooner or later they will be exposed.  For example, the seller should consult with his or her accountant about any tax implications prior to going to market.  The same is true for the buyer.  If financing is an issue it should be mentioned at the beginning.  If all of the concerns and problems are dealt with initially, the closing will be just a technicality.

The Buyer and Seller Must Both Feel Like They Got a Good Deal

If they do, the closing should be a simple matter.  If the chemistry works, and everyone understands and accepts the terms of the agreement, and feels that the sale is a win-win, the closing is a mere formality.

Copyright: Business Brokerage Press, Inc.

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2nd Quarter Business Transactions Activity Report

The following information has been provided by BizBuySell.com –the largest business for sale marketplace online, receiving over a million visitors a month.  Each quarter, BizBuySell analyzes business transaction data from its website and provides summary information to the business broker community.  The BizBuySell Insight report focuses on the data available for 70 of the major US markets.

Here are a few highlights of the most recent report, pertaining to transaction and business for sale listings in the Dallas/Fort Worth Metro area, which includes a total of twelve counties.

  • 62 Business transactions reported in 2Q 2020 – a 22.5% decline in the number of transactions reported in 1Q 2020, and a 46% decline from 2Q 2019.
  • However, the financial data for the 2Q 2020 transactions showed a marked increase over 1Q 2020 – the median sales price for businesses sold in 2Q 2020 increased by 14% over 1Q, as well as the same 14% increase in price over 2Q 2019
  • Additionally, the average pricing multiple realized in 2Q 2020 was the highest multiple noted in a given quarter since 1Q 2017!
  • The median revenue reported for transactions in Q2 2020 was the highest average number reported in the last 4 years, as was the median cash flow for those same transactions.
  • When comparing this data for the same time period for all VR Business Broker offices across the country, we see a similar trend. Fewer transactions, but statistically stronger businesses being sold during the 2Q 2020.

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How Coronavirus Is Impacting Lower Middle Market M&A Activity

By Meghan Daniels, Axial

Last week, Axial convened a virtual roundtable of members to review the impact of the coronavirus pandemic on lower middle market business owners, M&A activity, and dealmaking. We assembled specialist and generalist investment bankers, corporate buyers and private equity investors (eight in total) to cut across the LMM and understand reactions to the chaos of the past few weeks. What are PE buyers and sell-side bankers doing when it comes to deals under LOI? Are strategic buyers pausing M&A to handle operations? How is the virus impacting industries from healthcare to manufacturing to restaurants to e-commerce and more?

Here are the Axial member attendees. Thank you to each of them for joining on almost no notice and for sharing freely what they’re seeing and experiencing on the ground.

Start at minute 11 if you want to get into the meat of it (the video starts with a round of introductions by its attendees). Quick disclaimer: This conversation was recorded Wednesday, March 11, and plenty has arguably changed since then already; much of the substance here is still relevant.

If you don’t have time to watch, here are a few quick takeaways from the conversation:

  1. Deals under LOI are proceeding with maximum urgency or they’re on hold. We’re not seeing a lot of in between.
  2. For deals in earlier stages, there’s definitely a lot of anxiety on the part of sellers and a bit more caution on the part of buyers — there are some who are hitting the pause button to wait and see how the situation shakes out in a few months. But at the same time, buyers remain flush with capital, so there will be others who continue to engage actively on opportunities assuming the worst will be over in a few months (we’re seeing China ramp back up now). For sellers, the advice is to “get as far you can as fast as you can” and beyond that just keep doing what you’re doing and try to keep up operations to the extent possible. If this passes, bankers will be able to pro-forma the disruption.
  3. It’s inevitable that there will be supply chain issues for many companies, but these are fluid and highly variable depending on your business. Companies that rely on China may be in a better position at this point than those who rely on other countries in Europe or domestically as infections ramp up here.
  4. Supply chain disruption was less severe than anticipated, with speculation that the Trump tariff activity of 2018/2019 had already precipitated moves toward a more diverse supply chain among both scale and niche manufacturers.
  5. Telehealth, tele-education, e-commerce, and virtualized communication are immediate obvious investment themes, as is distressed special situation investing across energy, leisure, consumer, and other industries.

 

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2019 Was Another Very Good Year for Business Transactions

The following information has been provided by BizBuySell.com –the largest business for sale marketplace online, receiving over a million visitors a month.

In total, 9,746 closed sales were reported by brokers in 2019, a 5.5 percent decrease from the 10,312 deals reported in 2018, which set the BizBuySell record for most transactions. While full-year activity slowed compared to 2018, 4th quarter transactions bounced back to positive growth and it’s important to remember that levels remain historically high.

Some additional statistical data that you may find of interest.

The median revenue of a sold business in 2019 was up seven percent from 2018, and the median cash flow was up two percent from 2018.

These financials represent the highest annual revenue and cash flow since BizBuySell started measuring this data in 2007. While 2018 set the record for most transactions, 2019 has been characterized as having the most financially strong business transactions.

More than 1,300 transactions had an asking price of over $1 million. Those businesses tend to take longer to sell, averaging 15 more days on the market than others, but the reward is well worth it. Owners who were able to show such strong business performance earned 93 percent of their asking price and received significant value for their high financials. In fact, these businesses earned a .90 revenue multiple and 3.66 cash flow multiple, both significantly higher than the .59 revenue and 2.35 cash flow multiples received by all businesses.  The average time to sell a business was ~6 months from the time of listing to being placed in contract.

The Dallas / Fort Worth Metro area ranked 5th in the total number of transactions during the year, and experienced a 24% increase over 2018!

Market Outlook

2019 marks the third straight year of high transaction activity after a noticeable spike from 2016 to 2017. While 2020 is not without questions, we still expect this level of activity to continue, in part due to the ongoing supply created by retiring Baby Boomers. According to a recent BizBuySell survey of business brokers, 75% expect more Baby Boomers to sell their business in 2020 than did in 2019.

 

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What Buyers Look For In A Business Opportunity

by Peter C. King, VR Business Brokers/Mergers & Acquisitions, CEO

You have built a great business with love and care. It has grown larger than you’d ever imagined, and generates a nice profit that has allowed you and your family to live comfortably. Now you’re ready to sell. You assume there’s a buyer out there who will pay you a fair price and then nurture the company with the same attention you have. What’s more, 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.

What Buyers Look For?

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?

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, or outside 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 that believes it can increase revenues substantially will pay more for the business than one that believes the current owners have already maximized opportunities. What sellers should do?

It may seem counter intuitive, 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 that their company could run just fine without them or that there are plenty of opportunities they’ve failed to exploit. Yet these may be the very factors buyers seek, along with lower cash requirements. Please call us for help in understanding how to best present your company for sale.

 

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