Posts Categorized: Buyer Articles

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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Middle-Market Dealmaking Continues to Outperform

Article written by Danielle Fugazy and provided courtesy of Axial.net

Middle market deal activity in the first half of 2019 is on pace with 2018’s record-setting figures in respect to both deal count and value. In Q2 2019, buyout shops closed 866 deals for a total of $124.2 billion, representing a year over year increase of 12.9 percent and 15.8 percent, respectively, according to Pitchbook Data.

The middle market continues to dominate the private equity sector. Middle market private equity deal activity (deal sizes between $25 million and $1 billion) comprised 82.4 percent of all buyouts in the U.S., marking five consecutive years. The middle market also made up 69.2 percent of private equity deal value in the first half, higher than any full year figure since 2014, according to Pitchbook.

Add-on acquisitions remain popular among middle market private equity firms looking to add value. In the first half of 2019, add-ons made up 59.5 percent of deal value as well as 68.8 percent of deals closed in the middle market.

“Private equity in the lower middle market remains vibrant and active. Riverside has seen a record pace of deal flow this year, especially in the lower end of the middle market where we focus our investing,” says Jeremy Holland, a managing partner at The Riverside Company. “Entrepreneurs have a plethora of choices today, whether it be full liquidity or growth capital. We are offering an array of private capital solutions to entrepreneurs, including non-control solutions such as structured equity and non-dilutive growth capital to B2B SaaS companies. It’s what makes sense today.”

Surprisingly, exits showed a decline in the first half of 2019. In the second quarter, middle market exit activity saw GPs exit 176 companies for a combined value of $31 billion—a decline of 19.4 percent. Although exits were down overall, there were five private equity-backed IPOs in the second quarter. The largest middle market exit of the quarter was Change Healthcare’s $557.1 million IPO, which had a valuation of $981.2 million. The company was initially taken private by The Blackstone Group and Crimson Ventures in 2011. In 2016, the company was merged with McKesson’s technology solutions business. What’s more, Pitchbook anticipates an uptick in IPO activity and corresponding IPO value going forward.

“We all know that add-ons can lower blended purchase price multiple and add scale, and they remain one of the most powerful levers into not only building bigger but better companies. Add-ons offer geographic balance as well as supplier and customer diversity. And oftentimes, they add intellectual property such as brands and patents. Perhaps most importantly, add-ons can bring tremendous human capital adding depth to our management teams,” says Holland.

Middle market fundraising figures were down in the second quarter, with $17.2 billion raised across 19 funds. Fundraising value in the first half of 2019 declined by 19.5 percent from the first half of 2018. Nineteen funds raised in Q2 is the lowest quarterly figure since Q3 2012. Some of the more notable funds raised include Silver Lake’s first mezzanine fund, Silver Lake Alpine Funds, which closed with $2.5 billion and is focused on making non-control equity and credit investment in technology and technology-enable companies. One first-time equity fund closed in Q2, Gainline Capital Partners, which held a final close with $155 million in May. Grain Communication’s Opportunity Fund II also closed during the quarter with $900 million. The firm focuses on investments in the global communication sector.

Middle market funds are a declining portion of all U.S. funds in terms of value as mega firms swell in size.

 

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You’ve Received an Unsolicited Offer to Buy Your Business — Now What?

Article written by Ari Fuchs of The DAK Group and provided courtesy of Axial.net

Nearly 1 in 3 business owners report receiving an unsolicited offer to buy their business in the prior twelve-month period. If someone approached you with an offer to buy your business, would you know what to do? You’ve probably said to someone, or thought, something along the lines of “my business isn’t for sale, but for the right price I’d consider it.”

You may be flattered because the number may be higher than you imagined, and you may respond positively. But how do you know for sure? Even if your first reaction is a resounding “yes,” and you want to start the process, is that the prudent approach? It’s unlikely that you would ever make a decision about your business with information from only one source.

There are a number of questions to consider. What is your business worth? What is the right price for my business? What are similar businesses selling for? Could there be other interested buyers out there? How do you negotiate a better deal? What kind of partner will this company be? What do I want out of my business anyway at this point?

Business owners will be tempted to begin the process on their own for many reasons.. It’s certainly do-able to take the DIY approach. But the primary risk associated with going it alone is that you get in over your head in a short period of time. A sale process is a substantial undertaking which can often be overly distracting to the ongoing growth and success of your business. What is likely the largest financial decision of your life is not a time to learn on the fly. Often the acquirer has gone through the process many times – they are perhaps experts at doing deals and sometimes speak a different language than the business owner. It is for these reasons that a business owner might consider assembling a team of experienced advisors to assist throughout the process and to help evaluate the situation. Usually, this team is composed of an M&A advisor, your lawyer, your accountant, and possibly a wealth manager.

If you decide to assemble a deal team to help you with the process, here are four things your team of advisors will help you with:

1. Figuring out if the offer is fair and reasonable

Your M&A professional should be able to help you understand the value of your business and consequently whether the offer you received is fair and reasonable. The specifics of your business can really impact its value, making it important for you to understand the way an investor is evaluating your company’s worth. If the acquirer is strategic, then you need to understand how your business will impact the value of their business to negotiate the highest possible purchase price and most favorable terms. Even if an initial offer is deemed fair and reasonable, your investment banker should help you maintain the upper hand and push a buyer to give you the best value and terms by threatening or even proceeding to create a competitive bid process. The presence (or even threat) of another buyer may push the acquirer to adjust their offer.

2. Managing the flow of due diligence information

It’s important to employ good judgment about what information you share. How can the information be best positioned to amplify the strengths of my business? At what stage should you be sharing sensitive competitive information about customers and employees? The answers to these questions can have serious implications on how a buyer views and values the business.

3. Negotiation technique and approach

Repeat corporate or private equity buyers are generally experienced negotiators. How can you ensure that you’re not being out-negotiated and leaving money on the table? This is where high quality M&A advisors can earn their fee. The banker can also play the role of bad cop when you need to be insulated from a difficult negotiation point to ensure that you preserve the principal-to-principal relationship with the buyer. This is particularly relevant if you expect to play an ongoing role in the management of your business post-closing.

4. Allow you to focus more time on running the business.

Selling your business is time consuming for a business owner even when they have a good deal team supporting them. Without a deal team, it can become all consuming. Having the capacity to focus your time on running your business during a sale process better ensures the likelihood of a closed transaction. When businesses underperform during a period of scrutiny like this, it can break the deal.

The sale process — from negotiating and accepting an offer, getting through due diligence, and finally closing — has its ups and downs. You can benefit from experienced advisors in the process to act as a sounding board and to provide you with coaching and recommendations throughout the process.

Whether you are considering selling your business now or at some point in the future, you should always be prepared for that phone call and have a plan for how you will respond. Understand the value of your business in today’s market. Be aware of what enhances or detracts from the value of your business. Work with advisors who are knowledgeable and can help you navigate through the process of qualifying and validating a buyer.

You have invested years, possibly decades of your life building a successful business. When the time comes to sell the business, being prepared matters.

 

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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