A few months ago I had the privilege of interviewing a Generational Equity client for one of our testimonial reference videos. Robert Evans Jr. was co-owner of MealTracker Dietary Software, an SaaS program designed to help kitchen staffs in long-term care facilities provide meals in compliance with each resident’s individual dietary needs. Evans, along with his father and brother-in-law, were the three owners of the business, and his story really resonated with me for several reasons.
Business owners are usually unaware how two key issues can negatively impact the market value of their business. These are customer and supplier concentration.
Frequently we work with clients who are justifiably proud of the long-term relationship they have developed with an important client. They rightly point out that the only reason that 50% of their revenue comes from this blue chip, Fortune 500 firm is because of the great service and reliable products they provide.
On the surface this is correct. There is no way a Fortune 500 client is going to establish and maintain a relationship with a key supplier if the product and service are not exemplary; multiple alternative sources abound in the market.
However, from a buyer’s viewpoint, even though this relationship may be annually renewed by written contract, there is substantial risk involved.
It is always gratifying to get third-party validation for topics we cover in this publication on a regular basis. That is why this article title from USA Today a few weeks ago caught my attention:
As we have pointed out before, creating an exit plan for your business is one of the most important strategic concepts you can focus on. Unfortunately, even though most business owners know this, sadly, few follow through and create an organized way to transfer their business to new ownership. Here is how Rhonda Abrams, the author of the USA Today piece describes the importance of exit planning:
Attendees at our M&A conferences often ask us to break down our ideas on building a buyer-ready business into three easy steps. Unfortunately it doesn’t work that simply; there are lots of areas you can address to create a business that will withstand buyer scrutiny.
If you would like to see many of them, download our whitepaper on the topic: How to Build a Buyer Ready Business. After reading our research on this theme, you will have a much better idea of steps you can take, many of them relatively simple, to enhance your company’s sale-ability.
However, if I had to narrow it down to one key area, I would say this: Get your financials in order before approaching buyers. Far too often we meet with business owners, some of them running some very large companies, whose financials are simply a mess and inadequate.
We have discussed how private equity (PE) firms operate throughout the years, pointing out that the reputation created by the business media is more heavily weighted by the operations of firms that specialize in billion-dollar, mega deals rather than those that focus on companies in the lower middle-market size range. Firms that work in the latter arena have a “buy and build” strategy rather than the “buy and break up” philosophy that gets all the bad press.
I always keep my eyes open for real world examples of lower middle-market equity firms in operation, so the title of this press release caught my attention:
On an annual basis, PitchBook, a leading research organization tracking private equity and venture capital investing activity, looks back at the prior 12 months to do a fundamental analysis of activity. Their research is stellar and their findings paint an in-depth picture of private equity’s focus on the middle market, which for this report is defined as buyouts of U.S.-based companies valued between $25 million to $1 billion.
Their analysis of 2015 was published a few weeks ago, and some of the data caught my attention. For example, did you know that the inventory of PE-backed middle-market companies has grown at a compound annual rate of roughly 13% from 2005 through 2015?
We get this question quite a bit at our educational exit planning seminars. And it makes sense because for many attendees, the first time they really start to consider potential buyers is when we introduce them to the key steps of any M&A process. So we like to actually turn the question around and ask the business owner who he or she believes would be a good buyer. Invariably the answer is almost always the same: Company XYZ who is my key competitor.
In fact, in the end, that may be truly the optimal buyer for your business. We sell lots of our clients to their competitors. However, we don’t start there, with only one buyer, and if you do and you are trying to close a deal without M&A advice from a firm like Generational Equity, odds are pretty good you will be leaving cash on the table when you close.
Two key components of our success as the leading lower middle-market M&A advisor in North America are the quality of our deal makers and the value of our buyers. Both go hand in hand and are equally important.
For the past 10 years, KPMG has surveyed business executives to get a pulse for projected M&A activity in the ensuing year. Typically their survey is telling and accurately predicts what dealmakers will be doing (or not doing) in any particular year. This is how KPMG summarized their findings in the latest survey:
The mergers and acquisitions industry, like many other industries, has developed a jargon and lexicon that is unique to itself and can be confusing to the general public and even small business owners.
Because we realize the process of selling a business can be complicated and detailed, we have created an M&A glossary of terms that may provide you with some guidance as you work your way through the course of selling your company.
Topics: m&a terms