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Selling A Company

Goofyboy

By Goofyboy
in Can You Help Me With This?

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Dbeasy

Dbeasy 15160

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I do strategic, operational, and m&a advisory consulting for tech companies and small businesses. I’ve run multiple companies over 25 years and have bought and sold many. Based on what you’re looking for I could either help or point you to the right people to help. I’m finishing an m&a deal this week. 

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troph

troph 24916

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M&A attorney here. Deals ranging from $500k to $100m as first chair. Second chaired many higher. 6-8 per year usually.  In the middle of one that should close in January, closing another, starting one for first quarter next week, closed one week after Thanksgiving. I’ve bought and sold my own 4 times. Happy to chat even if there’s no work or it’s not a good fit. Lemme know.  Plenty of expertise in this community. Dbeasy sounds like a rock star.  T’boone has recently bought a company and he’s got prior experience on the advisory side. No need to chat with only one of us. 

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Goofyboy

Goofyboy 3300

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I’ll put some info together and message ya’ll.

Long and short of it is my wife and her brother are looking into selling the family business. Their father has introduced them to a broker (I think), but I don’t know if what he is asking for is reasonable.

I just want some second opinions and possibly another option to work through this.

Thank you for the help - this is really new territory for us.

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troph

troph 24916

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18 minutes ago, BeardIP said:

 

You guys have to be pretty dang good to stay busy-- M&A was at a 10 year low this past year (and IPOs at a 15 year low). Lots of finance and bankers got a pittance of a bonus. Thems the cycles, I guess.

Big firm expertise for about half the cost. I'm a former big law (Texas based firm), my top lawyer helping me (read: does all the drafting) is a former latham/wilson sonsini attorney. I think we are pretty good.

I think our work may slow down second quarter next year though. I was honestly surprised how busy second half of the year was for us.

I had one die this fall, another die twice before coming back (hence closing in January). Two of mine in the 4th quarter were work outs/turnarounds. first quarter deal is structured for the buyer so well it's ridiculous (we leveraged that to negotiate all key legal issues to our advantage in the LOI). no one is happy with the purchase price, even those that are not work outs/turnaround. valuations are lower, mostly due to interest rates and separately the lending environment.

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14 hours ago, Chewbacca said:

What multiples are folks seeing for service businesses these days? Partners and I thinking it's getting close to selling time.

Without knowing more, I wouldn't expect more than 4x-4.5x EBITDA right now (note all the deals on my desk were priced 3-6 months ago). It could be lower depending on a whole host of factors (size, condition, founder dependent, 2024 outlook, etc). You might expect more from a strategic buyer (case in point we are 1-1.5x higher with a strategic buyer than what PE firms offered on a deal right now (not a service company, multiples were/are higher)). there will be industries and individual companies that can drive a multiple higher but don't bet against the law of averages unless you have clear indication you are an outlier.

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I'd like to know size and how great that 10x company is knowing you are in residential services businesses....  I'm selling a manufacturing company in a sought after market segment for 7x right now.  and chewbacca may be in a niche market that could drive multiples up so that's entirely possible.

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T’Boo Ted Marshall

T’Boo Ted Marshall 2740

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4 minutes ago, troph said:

I'd like to know size and how great that 10x company is knowing you are in residential services businesses....  I'm selling a manufacturing company in a sought after market segment for 7x right now.  and chewbacca may be in a niche market that could drive multiples up so that's entirely possible.

We offered 10X on $10MM Adjusted EBITDA and were 2-3 turns short on Total Enterprise Value.  $47MM in Annual Gross Revenue.  

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Dbeasy

Dbeasy 15160

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As you guys know, the multiples depend on how good the company looks when it reaches out to potential buyers. A poorly prepared company will sell for a terrible multiple, or not sell at all. A well-prepared company can get a big premium. I usually tell owners to spend 12-24 months addressing the ugly parts of their business with strategies and operational initiatives to make themselves more attractive at sell time. 

More often than not, by the time someone brings me in to help them prepare, they don't have enough runway time to do it well. It's pretty unfortunate. They spent all these years building a pretty good company, but didn't put in the same effort to dress it up. I worked with one company a few years ago who did take the time (27 months), and we were able to triple their valuation. The investment bankers love to have someone like me come in to help them prepare because it makes their job easier on the sale, and at a much higher multiple.

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troph

troph 24916

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what he said. also multiples go higher the larger the business (assuming higher EBITDA).  deal that fell through a few months ago (not the one that came back) was lost at 8x on around $20-22M in gross sales, don't remember EBITDA, and about 1/3 of the purchase price was rollover equity.

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Chewbacca

Chewbacca 7788

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3 hours ago, troph said:

I'd like to know size and how great that 10x company is knowing you are in residential services businesses....  I'm selling a manufacturing company in a sought after market segment for 7x right now.  and chewbacca may be in a niche market that could drive multiples up so that's entirely possible.

We are not residential services.  We are a professional services company.  But we're not selling for 4-5x.  We would probably sell for 8-10x, though, if we could land that.  I guess I get to keep working to get that EBITDA number up.

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TwiceHorn

TwiceHorn 31646

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5 hours ago, BeardIP said:

Agreed, no pity from me for Wall St. I'm just saying because it sounds like, in a historically down year, troph has been super busy with deals coming out of her ears and dbeasy is active as well, which probably means they are dang good at this stuff.

Well, there is a lot of "m&a" activity that goes on well below the radar of Wall Street, per se.  A pretty fair number of small business owners sell off to finance their retirements and that's a lot of the activity we see around here discussed on threads like these.  Not sure if that is down or not, although I suspect economic conditions might deter potential buyers these days, even if it doesn't require a major underwriting from a big bank.  Probably quite a few sellers who figure they won't get top dollar, too.

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Chewbacca

Chewbacca 7788

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2 hours ago, Dbeasy said:

As you guys know, the multiples depend on how good the company looks when it reaches out to potential buyers. A poorly prepared company will sell for a terrible multiple, or not sell at all. A well-prepared company can get a big premium. I usually tell owners to spend 12-24 months addressing the ugly parts of their business with strategies and operational initiatives to make themselves more attractive at sell time. 

More often than not, by the time someone brings me in to help them prepare, they don't have enough runway time to do it well. It's pretty unfortunate. They spent all these years building a pretty good company, but didn't put in the same effort to dress it up. I worked with one company a few years ago who did take the time (27 months), and we were able to triple their valuation. The investment bankers love to have someone like me come in to help them prepare because it makes their job easier on the sale, and at a much higher multiple.

What kind of things, in general, do you see that companies need to clean up?

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troph

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13 minutes ago, Chewbacca said:

We are not residential services.  We are a professional services company.  But we're not selling for 4-5x.  We would probably sell for 8-10x, though, if we could land that.  I guess I get to keep working to get that EBITDA number up.

Is your business founder dependent or can you easily transition out after a year?  If it’s a desirable service sector with sustainable growth and reoccurring revenue or predictable pipeline you can get a lot more. You won’t clear 5x until you are reliably north of $1M EBIDTA and no real concern of it falling below that. As you increase EBITDA multiple increases at a rate of increase dependent on all these factors discussed. 

7 minutes ago, Chewbacca said:

What kind of things, in general, do you see that companies need to clean up?

The parts that are messy. 
 

serious answer - financial reporting, contracts, contract terms, everything from employee / contractor classification to employee handbooks to resolving any HR complaints, if IP is important a whole host of things from IP assignments to registrations to contracts, overall customer pricing, proper spending in areas that matter to a buyer, resolving disputes, warranty terms, clean up warranty claims, insurance evaluation, coverage changes, lease terms if real estate is involved and important, diversifying customer base, I mean the list can go on, and on, and on.  It’s like reverse due diligence you ask all questions a buyer would then you fix problems. I’ll let others add to it. 

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I really like his disregard for “the market” as I hate it when lawyers only respond “well this is market” in a negotiation. I don’t do market deals, I do individual deals. Now granted often we follow the herd but still sometimes you don’t have to or you are required not to. 

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Chewbacca

Chewbacca 7788

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8 minutes ago, troph said:

Is your business founder dependent or can you easily transition out after a year?  If it’s a desirable service sector with sustainable growth and reoccurring revenue or predictable pipeline you can get a lot more. You won’t clear 5x until you are reliably north of $1M EBIDTA and no real concern of it falling below that. As you increase EBITDA multiple increases at a rate of increase dependent on all these factors discussed. 

Yeah, we're well north of $1M EBITDA and revenues have been increasing at a rapid pace the past 3 years.  Our 2023 revenues are up 67% over 2022 revenues.  We project 2024 will be up 50% or more on 2023.  We have spent the past year getting to a point where we will be able to walk away after the sale and the business will keep chugging along.

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1 minute ago, Chewbacca said:

Yeah, we're well north of $1M EBITDA and revenues have been increasing at a rapid pace the past 3 years.  Our 2023 revenues are up 67% over 2022 revenues.  We project 2024 will be up 50% or more on 2023.  We have spent the past year getting to a point where we will be able to walk away after the sale and the business will keep chugging along.

Then you might be 7-8x or higher. And that’s going to point to hiring an m&a advisor to help you maximize it.  

I do agree if you are just now thinking about selling you are at least 12 months out from being able to market it for sale. So if you want to sell soon you may want to start those conversations. 

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Chewbacca

Chewbacca 7788

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3 minutes ago, troph said:

Then you might be 7-8x or higher. And that’s going to point to hiring an m&a advisor to help you maximize it.  

I do agree if you are just now thinking about selling you are at least 12 months out from being able to market it for sale. So if you want to sell soon you may want to start those conversations. 

We've been thinking about it for a while but were approached a couple months ago out of the blue.  No offer materialized from those talks due to unrelated things going on with their business, but it got us thinking that we might be closer to selling this thing than we thought.  We have a planning retreat coming up in 5 weeks and this will be a big topic of discussion.

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Chewbacca

Chewbacca 7788

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46 minutes ago, troph said:

Then you might be 7-8x or higher. And that’s going to point to hiring an m&a advisor to help you maximize it.  

I do agree if you are just now thinking about selling you are at least 12 months out from being able to market it for sale. So if you want to sell soon you may want to start those conversations. 

What kind of fees would an M&A advisor typically charge?  Flat fee or % of sale?

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DalTxHornFan

DalTxHornFan 3121

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Good thread.  Just a point about prepping a company for sale. 

A strategic buyer is going to be less concerned about well-documented systems and processes, succession planning, etc.  They will just be looking at how easy or difficult it will be to bolt-on the acquisition to their existing platform.

Whereas all of those at systems and processes, etc. documentation will be likely very important to a financial buyer.  They will be looking for the ability to replicate, scale and grow the company based upon the additional capital they are providing, hopefully without having to get their hands too dirty beyond inserting a CFO that they trust and having board-level involvement.  It seems that they almost always have a 5-year timeline until they intend to achieve an "equity event."  So they will pay a premium for a company that is ready to hit the ground running, so to speak.

Edited by DalTxHornFan
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troph

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23 minutes ago, DalTxHornFan said:

Good thread.  Just a point about prepping a company for sale. 

A strategic buyer is going to be less concerned about well-documented systems and processes, succession planning, etc.  They will just be looking at how easy or difficult it will be to bolt-on the acquisition to their existing platform.

Whereas all of those at systems and processes, etc. documentation will be likely very important to a financial buyer.  They will be looking for the ability to replicate, scale and grow the company based upon the additional capital they are providing, hopefully without having to get their hands too dirty beyond inserting a CFO that they trust and having board-level involvement.  It seems that they almost always have a 5-year timeline until they intend to achieve an "equity event."  So they will pay a premium for a company that is ready to hit the ground running, so to speak.

depends on the buyer to be quite honest. my client selling to a strategic right now is buried in third party firms scouring legal, accounting, insurance, benefits, and HR.  it really just depends. I am closing a work out/turnaround acquisition by another strategic buyer and the due diligence was intense. 

I do represent a buyer that is doing roll ups and they are exactly like what you describe. don't care about anything other than quality of accounts.

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Dbeasy

Dbeasy 15160

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1 hour ago, Chewbacca said:

What kind of things, in general, do you see that companies need to clean up?

 

21 minutes ago, Chewbacca said:

What kind of fees would an M&A advisor typically charge?  Flat fee or % of sale?

An M&A advisor can fall into two categories: a) people who help you prepare to sale and help identify and fix strategic and operational issues (someone like me), and b) the actual investment banks that reach out to buyers to sell the company.  You may need one, both or none of those two categories. You always need the lawyers llike Troph and accountants.

The investment banks will typically have a minimum fee of $300k+, and almost always will be defined as a percent of the deal, ranging from 3-7% or more. If you are selling a small company (revenue under $30m), it's extremely difficult to find an investment banking firm that will do it, or be useful. There are a few specialty firms out there, but a lot stink.

For someone like me, the first category, the charges are simply for the work provided. By definition, compensation can't be tied to the sale level. Otherwise a broker license is required.  The amount you pay for those services can be thought of as executive pay for the amount of time required.  For example, if you have someone help half time for a year, you'd probably pay between ~$100-250k, for example.

Others above have listed out many of the things you have to address before starting a sales process. I won't repeat those.  But fundamentally, the company strategy and operations has to be solid, with clear communications, plans, organization, etc.  It is usually helpful to bring in an outsider, because the people in the business seem to never see the issues that will cause a problem in a sales process.  It's amazing to me.  I think people just get caught up in the business and because they don't have a lot of experience selling companies, they don't have a feel for the things that will hang up a sale. One company I worked with had huge product quality issues, but had become numb to them.  It was destroying their customer satisfaction and would have torpedoed deals.  I helped them work through the processes to fix the quality problems.

The M&A advisor can also help you determine whether you should engage an investment banker and when, and usually has a roster of companies to suggest.

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troph

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For the OP or anyone else. There are markets up and down the chain including sub-$1M EBITDA companies so don’t let numbers like $50M scare you. It’s true the advisor talent starts to disappear as you go lower but there is a way to sell even at lower numbers.  I don’t necessarily know those that can help at lower ranges but from time to time we help those companies with an LOI or acquirer in hand. 

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Dbeasy

Dbeasy 15160

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15 minutes ago, troph said:

For the OP or anyone else. There are markets up and down the chain including sub-$1M EBITDA companies so don’t let numbers like $50M scare you. It’s true the advisor talent starts to disappear as you go lower but there is a way to sell even at lower numbers.  I don’t necessarily know those that can help at lower ranges but from time to time we help those companies with an LOI or acquirer in hand. 

I sometimes run the process when it doesn’t make sense to hire an investment bank. I’m doing that now for a small company. I also sometimes go out and find people that can run the process in a particular industry segment. I prefer to find a true investment bank who will do the work for a reasonable fee. That has the best chance of a good offer. 

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