Frequently Asked Questions

Who might buy my company?

Financial buyers typically are looking to acquire your company and keep the existing management structure in place. They will provide capital for growth and board-level support. Financial buyers typically have size ranges that they target. In many cases, the minimum acquisition value for financial buyers is $5 million.

Strategic buyers (also known as company or corporate buyers) may have an interest in acquiring your company to expand geographically, to increase their range of products or services, to leverage your brand name and reputation, to access a new client base or for various other reasons. Many U.S. corporations still hold sizable cash reserves. Of the cash available at corporations, more is being used for strategic investment through acquisitions than anything else.  The minimum value for strategic buyers can be much smaller than for financial buyers, even as low as $1 million in some cases.

Individual buyers may include wealthy individuals, corporate executives and former business owners. Many buyers are driven to buy a business rather than start a business, theoretically giving them a better chance for success. Most individual buyers have little or no experience in operating the types of businesses they buy. Equity and debt capital for individual buyers come from their own equity funds, family members, financial institutions and seller financing. Individual buyers focus on the lower end in deal values, usually between $2 million and $10 million.

International buyers have enjoyed the advantage of the weak U.S. dollar, but this has diminished somewhat for many foreign buyers seeking to enter the vast U.S. market. But there is still strong interest in successful, well-managed U.S. companies. International buyers typically look at deals valued at a minimum of $5 million.

When is the optimum time to sell my business?

• Revenues and profits are growing.
• Continued upside and buildup of new business in the pipeline.
• High proportion of revenue is EBITDA and there is positive cash flow.
• Industry business cycle is at or  near the recent peak and when there is high demand for your products and services.
• Positive press, accreditation and good reputation.
• Competitive advantage and differentiation, which lead customers to prefer your products or services.

What is EBITDA and why is it so important?

EBITDA = Operating Revenue – Operating Expenses + Other Revenue

• Earnings before interest, taxes, depreciation and amortization (EBITDA).
• Not an approved measure, according to generally accepted accounting principles (GAAP).
• Differs from operating cash flow, primarily by excluding payments for taxes or interest as well as changes in working capital.
• Excludes cash requirements for replacing capital assets.

EBITDA is important to a buyer, because it:

• Evaluates a company’s ability to earn a profit.
• Indicates the potential operating cash flow of a business, which would be used by a buyer to pay down the debt used to finance the purchase.
• Approximates the fundamental earning power of the company’s operations, while separately factoring in the projected capital expenditures needed to maintain those operations.
• Approximates the company’s earnings potential as if financed with zero debt, which corrects a difference in the company’s valuation due to the company’s capital structure.

How do I calculate EBITDA multiple to value my company?

• The market sets the price multiple, and the only true way of determining the market value of your company is to package and present your business for sale. Only real bids from the most qualified buyers will give you the true answer for what the market would pay.
• Typically, for companies with EBITDA between $1 million and $20 million, the market will pay multiples between 3.5 to 7 times EBITDA.
• The multiple changes from industry to industry.
• The larger the company, the higher the EBITDA multiple. This is due to larger companies being less vulnerable and having more consistent, predictable revenue and profit streams. Also, the supply of larger companies is smaller, so demand is higher.

What can affect the EBITDA price multiple and sale price for my business?

• The larger the company, the higher the multiple.
• Financial performance, revenue growth and profitability growth.
• Organizational structure.
• Management structure and concentration.
• Documented business processes.
• Accounting practices with audited financial statements.
• Patents or trademarks.
• Tenure of employees.
• Customer base.
• Sales and marketing efforts.
• Market share, phase in the industry cycle and potential for growth.

Are there options other than selling the business to receive a big payday?

There may be a number of reasons why selling your company today may be a good option:

• Your company has enjoyed a sustained period of growth and profitability, so would earn a high sale price.
• Your industry may be at a peak in its cycle, so you could sell when demand for your products or services is high.
• To continue growing your company further requires an injection of capital, which you would prefer not to commit.
• M&A activity and price multiples paid for companies is at a high after six years of growth.
• Record levels of capital are available to buy companies, so demand is high and resulting sale prices paid are high.
• Selling the company today may be a good option, but your preference is to work for another few years before retiring. It may be that you should consider recapitalizing your business and drawing money out of the business.

So how does that work?

Typically, a recapitalization involves introducing a private-equity firm as an investor in the business. The private-equity firm manages a fund of money invested across a variety of privately owned companies. The firm partners with successful business owners, acquires an equity interest in their companies, and provides capital and other resources to grow the companies and make them more valuable when the companies are sold.

Recapitalization funding
Debt secured by private equity	$10.5 million
Cash from private equity	$5.5 million
20% reinvested by owner	$4 million
	$20 million
Payout to owner
Cash paid to owner	$16 million
Reinvested capital	$4 million
Ownership after recapitalization
Private-equity buyer	55%
Owner	45%

The table above shows an example of a business recapitalized at a value of $20 million. The owner reinvests 20 percent of the sale proceeds and is rewarded with 45 percent ownership in the new business. While the owner no longer has a majority shareholding, he remains as manager of the business and is rewarded with a sizable ownership stake in the business for a lesser capital investment.

So how would an owner benefit from this?

Liquidity: The owner receives most of the value of the company in cash at closing, reducing financial risk in the business, and preserving the wealth he/she has created over many years.

Potential for future earnings, growth and sale: The owner retains a significant equity interest in the company after the transaction, retaining upside potential in the company.
Operating control: The owner and his/her management team typically retain operational control of the company, because the private equity firm prefers to keep those who have grown the business in control of running the business.
Reduced liability: The owner is relieved of personal guarantees for company debt obligations.

Capital to grow the business: Private equity firms have deep pockets to fund development and grow the business. In certain circumstances, this option is preferable to an outright sale of the business, and while the benefits may be clear, it can be a complicated process to find a suitable buyer, negotiate the best terms and close the deal most appropriate for you. You may wish to contact us for more information and advice.

What can I do during the sale process to ensure that I get the highest value?

Run your business as if you are planning to keep the business for years to come, push out all the stops to generate as much revenue growth as possible, and in turn keep profits growing.

The process of selling your business can take around six to nine months or longer, and during that period you need to ensure that your business is in a stronger financial position than ever, so you are in a position of strength during final negotiations.

Let us manage the negotiations. It is important that all prospective buyers retain the highest opinion of you and your business. We will ensure that you are free to court the potential buyers in a friendly, approachable manner and leave us to conduct the tense negotiations to obtain the highest price. Our experience tells us that we can secure a higher price for your company if we represent you in all the negotiations. This prevents the buyer from bouncing between the seller and advisor in an effort to undermine the negotiations, which in turn leads to weaker negotiations and a lower sale price.

Ensure that there are no surprises. During due diligence, everything comes out about your company – good and bad. It is important that we are honest with the buyer throughout the process and declare any problems up front. The buyer needs to believe that we have been clear and honest throughout the sale process, and typically a problem disclosed up front does not obstruct a deal. But surprises during due diligence can cause lack of trust to kill a deal altogether.

Should I tell my managers of my intention to sell?

This is an individual decision that depends on your circumstances. At the same time, there is an optimum way to sell your business. Ideally, your managers are aware of your intention to sell. The buyer feels more comfortable if the management team has embraced your intention to sell. But the timing is a delicate decision and the way you present your intention to sell is very important. You may have reached a stage where you no longer want the responsibility or financial commitment of growing the business further. Your managers probably understand this and likely relish the idea of new growth prospects and development of the business by new owners.

How active is the M&A market in the U.S.?

2008 will be remembered as the year when the record deal-making streak ended. After three consecutive years of growth culminating in a record $475 billion in deals in 2007, 2008 was a fraction of the prior years. Through the first half of 2008, only $55 billion in deals were completed, according to Thomson Reuters. But all is not doom and gloom, as many headlines indicate. There may not be as many deals completed and they may not be as large, but deals are still getting done.  One difference is a general flight to quality. Buyout firms are looking for quality companies with strong management and a solid plan for growth as we move toward a more stable and growing economy. Also, industry buyers are looking to purchase distressed assets in their current marketplace, thereby strengthening their position for future growth. Multiples have contracted and financing terms have tightened, but deals are still getting done and continue to get done. It takes a dedicated approach and hard work to make it happen. One final item for consideration is that some industry sectors remain stronger than the economy as a whole. In particular, energy, technology and health care companies are still considered strong investments by private equity and should remain so in the years to come.

Is a buyer all I need?

If you want to sell your business and you have only one, two or three buyers, who is in control? If you have one business to sell and only a few potential buyers, then the buyers are in control of negotiations. What you need is a position of negotiating strength. You need to find the highest and best buyer available anywhere, and receive offers from many potential buyers. In this way, you create higher demand for your business. It doesn’t happen by chance. It happens through hard work. Even when a client comes to us with buyer candidates, the overwhelming majority of deals are still completed with a buyer whom the seller has never heard of before. Unless we conduct a full search, we never know who can buy your company for the highest price.

How long does it take to sell a business?

Most business owners think that it takes little time or effort to sell a company, and that they can work out a deal without assistance. Yes, it is possible to work out a deal alone, but that almost never results in securing the best deal for you and your family. It takes a considerable amount of time and energy to sell a company, but most of that workload can be done on your behalf. The main time commitment for the seller is during due diligence, when the buyer prospect will seek to interview you and gain an in-depth understanding of the business.

Do I simply work out the sale terms and agree to a deal?

Negotiations start when you have approved our selection of buyer candidates and continue until the money is in your bank account. The buyer pressures you throughout the months it takes to sell your business, questioning and probing into all aspects of your business. If you hire M&A professionals,  they manage all these negotiations on your behalf and are accustomed to dealing with the buyer pressure and negotiation techniques. We want to ensure that you are in the position of strength through all these negotiations. The deal is done when we sign the sale agreement with the buyer! The deal is not done until the wire transfer hits your bank account. The buyer could choose to renegotiate terms anytime until he/she transfers the money. We do not rest until the process is complete.

Are competitors the best buyers?

Typically, competitors are not the best buyers. They already have much of your infrastructure and knowledge of the industry. They are less likely to pay a higher premium for skills or assets they already possess. More often than not, a competitor is not prepared to pay you the highest price on the best terms.

When I sell, will the buyer fire all my employees?

Talent is very hard to find and it rarely happens that a buyer has a management team lined up and to fire all your employees. These scare stories typically relate to two larger organizations merging, rather than a privately owned business being acquired. In fact, the buyer’s offer often hinges on the agreement that all your managers and employees are happy to stay in the firm to manage and grow the business.

Does a business sale mean that 100 percent of my business is sold and I leave the company?

In fact, many M&A transactions occur where the buyer buys 40, 60 or 80 percent of the business. The seller takes cash out of the business, reducing his/her financial risk and is rewarded with a big payday and stays on to manage the business. The new partner provides contacts, capital and other support to help grow the business.

Is selling a business purely a financial transaction?

Without sales, marketing and negotiating skills, you are unlikely to come close to identifying and receiving offers from the best buyers and then securing the highest value and best terms.

Are companies sold for financial reasons for a big payday?

Most private companies are sold for reasons other than money. The seller typically has decided to be free of the time commitments, constraints and pressure of managing a business. For the most part, the seller does not need the money but seeks a new challenge or simply some freedom ownership.

Why hire an M&A advisor?

Months of careful preparation and planning are required. A buyer needs to visualize and understand your business without you being involved. If no restructuring or management transition is required, then the first step is to go through the last three to five years of income statements, recasting the statements to pull out nonessential and non-recurring expenses, discretionary expenditure, depreciation and amortization, owner compensation and benefits, and cleaning up the accounting.

Second, you need to make the necessary balance sheet adjustments.

Third, you need to prepare a business appraisal, a description of your processes, business model, history, products and services, customers, industry reviews, geographic coverage, strategies for growth, ownership and legal structure, facilities, key people, competitors, competitive advantage, assets, capital expenditures and opportunity statements, not forgetting legal disclaimers, notices of confidentiality and an executive summary.

Acquisition Advisors has a staff of researchers, writers, accountants and editors to produce offering documents that your preferred buyers can study, but only after they have executed a confidentiality agreement. Your goal is to appear professional and well prepared, with all the information a buyer needs in a clear, professional format. Right or wrong, buyers initially judge the quality of your business on the quality of your offering documents and presentation. In many cases, the best buyers lose interest if you do not have all this information immediately available in a complete package up front.

Negotiation. Even for business owners skilled in buying and selling private companies, experience and tactics in negotiations are critical to gaining the highest price. Negotiating strength comes largely from practice, refinement and repetition. Your adversaries in these negotiations are well trained and well educated, with considerable experience in buying and selling companies. You want to have a team on your side that is expert in pricing, appraising, selling and merging companies.

Representation. For many important negotiations that take place in our society today—courtrooms, politics, professional sports—the parties are represented by professionals. The best representation rewards you with an improved deal and higher sale price at many times the cost of the representation. Representation eliminates much of the emotional roller-coaster of selling your business, ensures that potential buyers maintain a high opinion of your business, and allows you to be friendly, courteous and helpful with preferred buyers. Meanwhile, your representatives lead negotiations with effective and proven tactics. This can be a complicated process and you want to make sure you have a team of advisors you trust to support you through the entire process. The alternative is hiring attorneys or CPAs, who may have minimal or no professional M&A experience.

How are we paid?

Compensation is based on a success fee paid on completion of the transaction. But part of this fee is payable as a nonrefundable retainer every month of the engagement for the first six months. For buy-side representation, we bill on an hourly basis, but most engagements are based on a success fee. Acquisition Advisors has a long track record of successfully completing projects. Ask us how many clients we have taken on and how many deals we have completed. We are confident that most other firms are uncomfortable answering this question, and few come close to our success rate.