Q&A on Selling a Business

1. What are the key items that impact a business’ valuation?
While every buyer is different, the major items that we will look at first are cash flow ( with EBITDA being used as the metric), historical growth, customer concentration, market position, strength of customer relationships, industry stability, strength of customer relationships, and the condition of property, facilities, and equipment.
a. Cash flow (EBITDA): The focus is on the EBITDA for the last twelve months and whether this has grown relative to the EBITDA for previous years.
b. Customer Concentration: A buyer will prefer for a company to have a variety of customers that make up a small amount of the overall revenue.
c. Growth History: Buyers will prefer to see a trend of growth especially recently. A consistent historical growth rate can contribute to a higher valuation.
d. Industry Stability: A buyer will prefer an industry that remains relatively consistent and growing.
e. Competitive Landscape: A buyer prefers for there to be a healthy competitive environmental without any one dominant player.
f. Market Position: Having a reputation for a quality service or product can have a positive impact on valuation.
g. Strength of Customer Relationships: Customer relationships that have lasted multiple years and have grown consistently can have a positive impact on valuation.
h. State of PP&E: Poorly maintained equipment and facilities can result in a lower valuation, because a buyer will most likely have to make significant investment after the transaction. However, well maintained and recent investment can have a positive impact on the overall valuation.

2. What benefits come from selling to a Private Equity firm?
a. Private Equity firms are very growth oriented and will take a particular focus on the business. This focus on growth can yield additional opportunities for employees to advance within the company. Additionally, once companies get to a certain size Private Equity firms will implement benefits programs for fulltime employees to remain in accordance with the ACA.

3. How can a business owner prepare for a sale in a year or less?
a. This will depend greatly on the business and the business owner; however, a very common issue that requires preparation is the transition of customer relationships. Business owners that have built a company will often have strong client relationships that can be damaged if the owner suddenly sells and leaves the business. If a business owner is able to transition these relationships to managers or sales personnel, this can greatly assist in the sale and give the buyer greater comfort in the business they are buying.

4. How about for a sale that may be multiple years away?
a. If a business owner realizes they will want to sell their business in a few years, they can take multiple steps to make transactions easier and achieve a higher valuation. The most obvious steps would be to look at the factors discussed above and work to improve on each category.

5. How can a buyer bridge the gap between their valuation and the seller’s perceived value?
a. If there is a disconnect between what the seller believes their business is worth and what the buyer believes it is worth there are multiple options that can help bridge the gap. The primary way a buyer can reach amicable terms is by using an earn-out to compensate the seller. An earn-out is essentially a pay-out to the seller after the business is sold when the business reaches a designated milestone, usually set in revenue, EBITDA, or net income.

6. Is there any reason why a seller should continue to invest in equipment leading up to a sale?
a. An experienced buyer will always look into the state of current equipment and facilities. If a seller has been putting off repairing or replacing equipment it will quickly be apparent. This will often complicate a sale, slow down the purchase, process, and can result in a lower valuation.

7. What are some of the factors that may slow down a purchase process?
a. A seller not being upfront about legal or environmental issues can result in a slower or even stalled purchase process. If you are aware of environmental issues at a site or if there is recent or ongoing litigation it is best to upfront about these issues so it is not advisors that identify a potential problem.

8. Is it possible to retain an ownership stake in a company when selling to a Private Equity firm?
a. Yes, some Private Equity firms will encourage the previous owner to remain invested in a company. This shows that the business owner has confidence in the business moving forward and it allows for the business owner to benefit from the growth the company undergoes in the subsequent years to a sale.

9. Is it possible to continue to work with a company after it has been purchased?
a.Yes, some firms will ask a business owner who has been an active manager to stay with the company for at least a transition period. Additionally, if a business owner is interested in continuing with the company for longer or if the company is being acquired by an existing portfolio company there can be opportunities for an owner to take on a larger role in the company.

10. What can a seller do from an accounting perspective that can help facilitate the purchase process?
a. If a company has the capabilities, meeting GAAP standards will greatly expedite financial due diligence on a company.

11. Is there anything that can be done to protect family members that work in the business moving forward?
a. The best practice for this is to have a very frank conversation with your family about how they will be employees moving forward. This means they will often have additional opportunities for advancement, but they will need to perform and meet the expectations set for all employees.

12. When considering selling a business what kind of professional help should I get?
a. It is of the utmost importance to have sound legal advice. While there are many attorneys out there, it is crucial to use a firm or individual that has experience with sale of businesses.

Story by Erik Emmett – Soundcore Capital Partners
212-390-4149 | EEMMETT@SOUNDCORECAP.COM

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