At Benchmark International, your deal team will explore various avenues when sourcing a buyer for your company, from undertaking their own desktop research through to utilising a variety of M&A subscription platforms and connections your deal team has accumulated over the years.

Our process ensures a targeted approach to the market, so we are more likely to generate interest from high-quality buyers and confidentiality is maintained – we don’t just put your company in the ‘shop window’.

We will do the legwork behind this process, but here are some valuable tips for ensuring the best outcomes.

The concept of "skin in the game" in the business world is not just a catchphrase; it's an ideology that defines the level of commitment and risk one has in a particular venture. Particularly in acquisitions, where future trajectories can be as diverse as they are uncertain, having a vested interest becomes paramount.

But whose interest should that be? The seller who's stepping back? Or the buyer taking charge?

Both perspectives carry merit.

According to a recent Pitchbook report, buyers favor non-backed private companies in today’s M&A market. Non-backed companies are defined as not receiving any outside capital from private equity, venture capital backers, or angel investors.

Seller financing is when the seller of a business acts as a lender to the buyer by offering financing for all or some of the purchasing price. The Buyer and Seller negotiate the terms of

As well as understanding the fundamentals and financial aspects of any offer for your business, understanding ‘your buyer’ is critical to the success of the deal and your ongoing relationships post-completion. Whilst it’s not possible to know your buyer ‘warts and all’ at the start of the process, your team at Benchmark International will work with you throughout the process to build your buyer knowledge.

Step by step, we will work with you to ask the right questions at the right time, providing you with the information you need to make the all-important decision of who is the right buyer for your company, for your employees, and for you.

Cross-border mergers and acquisitions offer key geographical diversification benefits for buyers and businesses alike. Gaining new exposure in new regions can lower business and operational risks under different economic and regulatory conditions. Buyers often look for cross-border deals when their core markets become saturated, when business slows down, or if they can find regulatory or monetary benefits in another country. Cross-border deals are important because they allow companies to expand their offerings by entering new markets or adding new products, services, intellectual property, or technologies. Cross-border M&A can bolster revenue opportunities and cost synergies while scaling efficiency as company operations expand to a broader market.

For the sale of a company, the parties involved can choose to structure the deal as an asset sale or a stock sale. An asset sale is when a company sells all of its assets or a portion of them. In this type of deal, the seller remains the legal owner of the business but no longer owns the assets sold. Under a stock sale, the buyer purchases equity from the selling company’s shareholders. There are several different reasons for sellers and buyers to pursue one type of transaction over the other.

The flagship of The Small Business Administration's programs to support small businesses is the SBA 7(a) loan guaranty program. The program was designed to encourage lenders to provide loans to borrowers that might not otherwise obtain financing on reasonable terms and conditions. Under this program, the SBA will guarantee 75% for loans greater than $150,000 with a maximum loan amount of $5 million with reasonable interest rates. This is a viable option for the average person looking to acquire their first business or an existing business looking to grow through acquisition. This loan is so popular that in 2021, the SBA approved 51,856 7(a) loans totaling $36.5 billion.

Before completing a deal, buyers may conduct a variety of different research on a seller’s business to better understand its complexities of it prior to due diligence. This research is an important step to ensuring that due diligence is carried out. Business research occurs in a variety of different ways.

Reps and warranties insurance is a policy secured for corporate transactions such as mergers and acquisitions. In recent years, the amount of this type of insurance sold has increased significantly. It covers the indemnification for certain breaches of the representations and warranties in transaction agreements, either partially or in full. Reps and warranties insurance usually doesn’t cover losses for breaches of covenants (other than pre-closing tax indemnification) or purchase price adjustments. 

We love to hear positive feedback from our clients, and we often share past client experiences with other parties. We showcase how Benchmark went above and beyond for sellers to get a deal across the line, or how value was added to a specific transaction. However, if you are considering hiring an M&A firm to represent you in a sale, isn’t it just as important to hear how buyers perceive the firm?

Benchmark International prides itself on a strong reputation within the lower middle market. Our company’s reputation spans vendors, clients, prospective clients, and buyers. Our team recently attended a conference where we had the opportunity to mingle with some of the most active investors within the lower middle market. The feedback we received from the buyers was highly encouraging and continues to reinforce our position as the best M&A sell-side representative in the industry. 

So, what are buyers saying about Benchmark International?

• Benchmark International has the best deal flow within the market. This means that buyers recognize the quality opportunities that our firm represents. They also recognize us for having the most sectors and diversified listings in the space. When a buyer is looking for a unique opportunity or a quality business, they know to call Benchmark International.
• The Benchmark International team does a great job of following up. Our deal team always strives to close the loop on the buyer’s level of interest, gather market feedback, or push the buyer forward with the process. There is no other firm in the industry that provides clients with the deal expertise and team size that Benchmark International offers. This allows our team to pick up the phone and discuss your deal with a potential buyer. Buyers have often shared that, in other cases, once they receive a Confidential Information Memorandum, they rarely hear back from the sell-side representative. But our team chases buyers during every part of the process, including trying to get a decision on a buyer’s level of interest on a Teaser, trying to gather a buyer profile and Non-Disclosure Agreement, gathering feedback from the Confidential Information Memorandum, feedback after conference calls and meetings, and so on.
• The quality of the information in your Confidential Information Memorandum exceeds other firms. When our clients go through our Benchmark 360 process, our team puts on their buyer hats and asks the tough questions. We want to ensure that the business for sale is presented in the best light, that our team fully understands the offering, and that the seller has the opportunity to think through how their company is positioned for market. Putting on our buyer hats allows us to anticipate the questions and information a buyer will find important for their decision-making process.
• The Benchmark International team is always professional. We understand that emotions can sometimes get the best of people. It does not matter which side of the table you are on, when you want a deal to go forward and the deal has hit a hurdle, we know it can be frustrating. The good news is that our deal team has seen a lot of hurdles and usually has the tools and options to overcome any issues if all parties want to work through them. One thing the Benchmark International team prides itself on is always being professional, even during hard conversations. Oftentimes, we all want the same outcome—a successful deal completion—and Benchmark International needs to take the emotions out of the conversation and ensure that everyone keeps their eye on the ball in order to move the deal forward.

The lower middle market is a tough market. Our deal experts not only have the experience to hold the seller’s hand throughout the process, but also stand up to the largest buyers within the market. Our reputation provides our clients the opportunity to have their Teaser reviewed by buyers that many cannot get in front of, let alone have long-term relationships with that allows our phone calls to be answered. This is critically important because having an M&A firm with a strong buyer reputation will help a seller maximize results once they go to market.

Now that you have found the perfect business for you to acquire, the question is, how do you finance the transaction? Most buyers will use a mix of debt and equity, but if you are a first-time acquirer, you may need help on where to go for the debt piece of the equation.

If you have never acquired another business before, the process of securing a loan for the acquisition might be challenging. Here are some things to consider when looking at your debt options.

Upon your initial conversation with a banker, be prepared to discuss your intent regarding the acquisition and your plans for the business’s future. You should also be ready to discuss your background and its relation to the company you are buying. In addition, you will want to understand the bank’s commercial loan options and which might be best for your goals. For example, you might need a traditional commercial loan or an SBA loan, depending on the acquisition size and details. While there are alternative financing options available, they could be much more costly.

Most financial institutions will underwrite the business and the borrower. If you own a similar business, they might underwrite both businesses as if they are one. Be prepared with documentation regarding your credit history, tax returns for all related entities (potentially including your personal tax returns), collateral options, and industry experience. The financial institution might request a balance sheet, profit and loss statement, projections, etc., for the business you are considering purchasing.

Lenders will provide you with their initial terms. Be sure to compare interest rates, fees, and other terms closely. Some terms you may want to consider are prepayment penalties and covenants that might affect the business. If there is real estate involved in the purchase, you will want to ask questions about the bank’s need for appraisals and various phases for the property.

After considering your options, you will then need to apply for the loan. Each financial institution will have its specific application and underwriting process. Depending on the loan size and the bank, the loan request may need to go to a special loan committee that meets periodically. This could add time to the approval process. You might want to discuss debt options with a bank with which you have a current relationship, as they will know you best given your existing history. If you have already received a loan from the bank, it could make the transaction process easier, which will make for a much better experience for you and the seller of the business you are looking to acquire.

  Author
  Kendall Stafford
  Managing Partner
  Benchmark International

  T: +1 (512) 347 2000
  E: Stafford@benchmarkintl.com 

The COVID-19 pandemic is critically affecting the world's economies when businesses were already adapting to volatility and uncertainty as a way of life. With the economic outlook and threats of all kinds continuing to test even the most influential organizations, companies face various challenges as they work to find growth and stay competitive. One of the most beneficial ways of growing an existing company is through mergers and acquisitions (M&A).

Few firms throughout the world reach the top without conducting at least a few M&A transactions. The most well-known firms employ professional teams whose only role is to seek out attractive potential acquisitions tells its own story. When implemented well, an active M&A strategy can be a highly productive process for any company. M&A always has and always will be a long-term game. We are now in an environment where more and more business owners feel comfortable taking some calculated risks and driving forward an M&A agenda to build the company's future.

Private equity (PE) expects to see record-level fundraising this year. Even amidst the ongoing COVID-19 pandemic, analysts predict that the PE industry will raise an anticipated—and unprecedented—$330 billion in total capital in 2021. According to a survey performed by Ernst & Young, 49% of global companies plan to acquire in the next 12 months actively, and the majority are looking for assets internationally rather than domestically. A healthy fundraising and active acquisition environment coupled with the existing $1 trillion in disposable capital means excellent news for those looking to grow their business. Interest rates are low, equity markets are high, and investors demand, value, and reward growth. With numerous potential international acquirers with strong balance sheets and strong liquidity, our advice to companies is to look for logical strategic targets, be proactive, and focus on long-term value creation.

The U.S. and the U.K. remain primary centers of global M&A. The U.S. consistently holds the top spot for both domestic and for international M&A. The U.K. regularly ranks in the top three. If you are thinking of growing your business internationally, it is worth noting that M&A is regulated in all countries worldwide and has many advantages. Below are four key benefits of merging with or acquiring another company internationally.

Silver Sport Transmissions, the seller, is the largest and most versatile elite distributor of Tremec Corporation’s transmissions.  Their in-house engineering department’s experience is second to none and continually outshines bringing a client’s classic car “up to speed” through various product offerings.  The company prides itself on high quality and innovation in its respective field.     

The Wharton Automotive Group, consisting of McLeod Racing and FTI Performance, is owned by NHRA Nitro Funny Car driver and businessman Paul Lee.

Paul Lee continues to grow this sector of the driveline market. With the outstanding success of McLeod Racing, Lee sets his sights on growth in acquisitions. In 2019 Lee purchased the leading racing transmission and torque converter company, FTI Performance. In addition, he continues to grow his business strategy with the acquisition of Silver Sport Transmissions.

“The team at Benchmark International, including Matthew Kekelis and Jack Chilcutt, did an excellent job of guiding Silver Sport Transmissions as the Sellers representative. Great representation is so important in today’s M&A market. As the Buyer, I was impressed how smooth and issue-free the transaction went to closing.” says Wharton Automotive Group president Paul Lee. “This transaction was the next step for Wharton Automotive Group’s goal of becoming the leader in the automotive driveline segment of the Worldwide Automotive Aftermarket industry.”

Transaction Director Matthew Kekelis at Benchmark International added,  “I genuinely believe that there was no better match for Silver Sport than Paul Lee and his team at The Wharton Group. Their professionalism and attention to detail throughout the acquisition process were outstanding.  We wish the best for all moving forward in this exciting new chapter.”

What is Working Capital?                                                                                 

In the process of selling your business, it is important to understand working capital as you accept an LOI (Letter of Intent) and move into the due diligence stage. Buyers require the business that they are purchasing to leave a predetermined amount of working capital to continue running the business and cover the short-term obligations.

In simple terms, working capital is calculated by subtracting your company's current assets (excluding cash) from your current liabilities (excluding debt). However, the calculation can become more complex in practice. Typically, in the LOI, the buyer will outline how the working capital “peg” will be calculated. The “peg” is a benchmark amount of working capital that is agreed upon toward the end of due diligence by the buyer and seller. The buyer typically considers current assets to include items such as accounts receivable, inventory, and prepaid expenses as necessary to maintain the ongoing operations. Items such as lines of credit, short-term debt, and taxes are not included in this calculation.

How Does Working Capital Influence the M&A Process?

When buyers are reviewing your company for potential acquisition, they want to ensure liquidity once they take over. The minimum level of working capital is considered to be part of the valuation and accounted for in the price included in the LOI. It is important to note that most M&A transactions are set on a cash-free and debt-free basis, meaning the seller maintains cash in the business but is responsible for paying off bank debts.

The working capital analysis is typically part of the buyer’s diligence process, which will involve the analysis of balances at the account level. Some items under the accrued expense or accounts payable may not be operational in nature and therefore are excluded from the calculation. However, the buyer may determine that an item was improperly omitted from the balance sheet and they may adjust the balances. The primary reason for this analysis is to accurately determine what a true normalized level of working capital should be given the company's historical financials.

How Are Working Capital Targets Determined?

In most cases, the buyer will use a historical average, which is typically 12 months to calculate the appropriate target at closing. The reason is that the buyer will be basing their valuation on the revenue, EBITDA, and working capital needed to generate this income will need to be provided. As a seller, it is important to remember that your EBITDA will typically reflect account receivables as revenue and account payables as an expense. The 12-month period for working capital is used to average out potential fluctuations as this correlates to valuations, which are typically based on a multiple of the trailing 12-month EBITDA. Seasonality should also be considered in the calculation. For example, working capital could be much higher or lower depending on if the deal were completed during the peak season. In this case, the buyer would be required to pay more as the working capital would likely be much higher or lower than average. On the other hand, if the transaction were completed during the off-season, working capital would be reduced.

Adjustments During Diligence

As the seller, prior to the closing, you will deliver an estimate of working capital that you believe the business will have at closing. If this estimate exceeds the working capital target, you will receive an amount equal to the excess as an increase in the purchase price. However, if the estimate were less than the working capital target, the buyer would reduce the purchase price. After the closing, the buyer will perform their own calculation to determine the amount of working capital the acquired business had at closing. The purchase price would be further adjusted if the buyer’s calculation differs from the amount of the seller’s estimate. This process is typically referred to as a “true-up.”

Negotiating the Working Capital

During the true-up process, there is sometimes a dispute between the buyer and seller regarding the working capital calculation. From the seller’s point of view, they will argue that working capital should be calculated consistently with the methodology that was used to calculate the working capital target amount. This means that the seller is arguing that the purpose of the working capital adjustment is to compensate for deviations from the target working capital amount. For such changes to be calculated fairly, the closing amount of working capital must be calculated using the same methodology that was used in calculating the working capital target amount.

On the other hand, the buyer will sometimes argue that the purpose of the adjustment is to ensure that the business is delivered at closing with adequate working capital and that it should be made by calculating working capital in accordance with generally accepted accounting principles (GAAP). Both the buyer and seller viewpoints sometimes make their way into the purchase agreement regarding how working capital is to be calculated.

When financial buyers think of HVAC contractors, they see an industry ripe for consolidation. The trend of HVAC consolidation started a few years ago and has not slowed down.

Throughout the United States, there are thousands of independent HVAC contractors. Financial buyers, such as private equity, see the opportunity to consolidate the independent firms to create a regional or national presence. The market is roughly a $20 billion industry that is fairly recession proof, especially throughout warmer states, such as Texas and Florida.

Private equity seeks opportunities to expand businesses through acquisition and organic growth. Once they have a foothold in the industry, they can add related services, such as plumbing services, to the roll-up strategy.

HVAC consolidations tend to be in high demand in markets that have a need for the services. Some focus on new construction, while others focus on servicing existing units that can be viewed as a recurring revenue model. The competition in the local market is key when an acquirer is looking at an acquisition. Is the HVAC target company a big fish in a small pond, or vice versa? What is the growth potential within the market? Cities and towns that are growing tend to be more attractive.

Additionally, HVAC contractors might specialize in commercial or residential services. Depending on the roll-up strategy, the acquirers might have different goals on what they are looking for in the consolidation.

The consolidation allows for a larger firm to take advantage of perks that a smaller firm might not have access to due to size or cost prohibition. For example, the roll-up might be able to build out software and accounting systems to help increase the efficiencies of the company or recruit top executives to add a level of professionalism to the company.

Having this type of option within the market allows for the seller to have options about their company’s next phase. Having a larger, growing firm complete the acquisition allows the seller and the company’s employees opportunities that the selling firm could not achieve on its own. The seller may stay on post-closing in a different capacity or retire and allow employees to step into the management role. In any case, mergers and acquisitions can be an ideal solution for companies in the HVAC sector.

A lifestyle business is a business that sustains or supports the income and personal needs of the owner. The business is profit-oriented, but the owner's goal is not to grow the company but maximize profits. The goal of a lifestyle business is for the owner to enjoy a work/life balance while generating enough profit to support the owner's current lifestyle without negatively affecting the owner's personal life.

Often, lifestyle businesses are small businesses and center around the owner's passion. Some examples of lifestyle businesses include e-commerce clothing boutiques, breweries, and art galleries.

Lifestyle businesses are different than being self-employed. Typically, when you are self-employed, you work defied hours. Like any business, a lifestyle business has additional time requirements. You open it up daily and work long hours and weekends, but it intertwines with your personal life. The business may be online or have a physical presence. It may or may not sell goods, or it may provide services to others.

Why would someone want to own a lifestyle business? The owner does not have to sacrifice their personal life. You are not required to work certain hours, answer to superiors, or deliver specific amounts of work on strict deadlines. There are no obligations to investors because the owner provides the funding for the business, so they also receive all the profits. You have freedom of time and location, so you can come and go as you please. The owner controls all aspects of the business. There is no board or third party to report to on the state of the business. The business provides financial freedom because the owner is earning an income that supports their chosen lifestyle. Typically, since there are few employees or other overheads, the lifestyle business tends to be positive cash flow early on.

Like all businesses, there will be challenges. The owner may struggle to fund the business at times or have limited funding. Finding the right employees could be challenging because a lifestyle business tends to have fewer employee benefits than other employers within the market.

When considering starting or buying a lifestyle business you should take the following steps:

• Define your goals: Make a list of what you hope to achieve with a lifestyle business. What do you want to accomplish with the business? What are your personal goals? Consider the amount of freedom you are seeking. Set an income target for your personal needs.
• Identify a passion or interest: Businesses can fail because the owner losses interest. A lifestyle has a higher chance of succeeding because the owner is passionate about the business or purpose. People tend to excel at their passion because they tend to spend more time on the topic because they enjoy it.
• Find a problem that needs to be solved: The business is likely to have more customers for your business if you offer them an option to solve a problem. People should be willing to pay for the problem’s solution.
• Decide on the business: After assessing the items above, you should have a good idea of what type of business to buy or start. Put together a business plan to help execute the strategy.
• Execute on the plan: Now is the time to execute your business plan. If you are going to purchase a lifestyle business and need help, there are many resources available to help with the purchase process. If you are going to start the business, begin by establishing the business. You may need to purchase inventory and begin to target clients.

As anyone who has ever done it before will tell you, buying a company is a process. It can take anywhere from a few months to a couple of years to complete. To reduce uncertainties and understand the business as much as possible, buyers must conduct thorough due diligence and ask the right questions. Finances, potential synergy, liabilities, customer relationships, and key employees are just a few areas that the buyer should consider.

Here are five essential questions buyers should ask during management meetings when acquiring a company.

1. Why is now the best time for you to sell your business?

The acquisition process can understandably be a very daunting task for sellers, let alone an uncomfortable experience that pulls back the curtains on their business and its most intimate information. Many sellers realize this is not their area of expertise and will make the informed decision to contract with a sell-side M&A advisory firm before officially entering the marketplace. The M&A advisory represents the seller, but can function as your ally as a buyer if you let them because they have incentive to get a deal done. Although M&A advisors can guide a seller through the sales process and educate them on market norms, they’re not capable of self-fabricating the comfort level between buyer and seller. Over time, a seller’s relationship with a potential buyer will prove to be most advantageous in getting to the finish line of a transaction, as there will be numerous items both sides will have to work through together. Unfortunately, agreements can fall apart due to a lack of mutual comfort between the buyer and seller, and this is typically a result of a combination of multiple factors set in motion long before official due diligence even began. The following are steps you should consider when working side by side with a seller during the transaction life cycle.

The business acquisition process consists of various stages. Taking the broadest view, the process leading up to the close of a transaction typically entails an initial assessment stage, and a more formalized due diligence period during which the buyer often performs a quality of earnings and legal due diligence exercise.

Many business acquirers have enough commercial and financial insight to enable them to evaluate whether they wish to acquire a business during the initial assessment stage and at what price. Prior to transitioning to the more formalized due diligence phase, the parties in an M&A transaction typically agree on a Letter of Intent (LOI). Although it is important to get the LOI right because it essentially lays the foundation on which the transaction should proceed, first-time business buyers are often unnecessarily intimidated by the task of formulating the LOI. Buyers can be generally confident they are taking the right approach to the LOI if they take care to understand the key purpose of the LOI and bear in mind a few simple commercial tips. In fact, when done right, properly crafting an appropriate LOI can help a buyer set themselves apart as a capable buyer, particularly when the seller is receiving multiple offers or there is a formal competitive bid process.

First, it is important to understand the key purpose of the LOI and to realize its scope and limitations. At a high level, the purpose of the LOI is to establish the key commercial terms of the business sale agreement between the parties, and to provide the framework on which the transaction can proceed according to the parties’ agreement. Also, the LOI will serve as the cornerstone document for the lawyers to draft the definitive transaction documents. A helpful LOI will not only specify the commercial agreement between the parties (for example, setting out the purchase price and the types of consideration if there is structure in the deal), but also provide a roadmap for key milestones or conditions to be completed by the parties in order to reach a successful close. The LOI needs to have enough detail to provide an appropriate framework, but it will typically not capture every single transaction detail. Naturally, there is a delicate balance between having enough information to provide a framework on which the deal can proceed, and not being too over detailed so as to prematurely freeze the deal discussions. An ideal LOI should contain enough information to reflect the parties’ agreed commercial terms and also provide a roadmap for the steps to be completed for the transaction to take place.

First-time buyers conducting online research are also often confused by different terminology concerning preliminary acquisition documentation. While there can be certain differences between LOIs, Indications of Interests, Heads of Terms, and Term Sheets (to name a few forms of initial acquisition agreements) depending on the jurisdiction, purpose of the agreement, or stage of a formalized M&A process, these types of documents share a lot of common principles and sometimes serve the same function. In the lower middle-market M&A space in the U.S., the majority of initial acquisition documents are formulated as an LOI.

Letters of Intent can be as short as a single page, or as long as several pages. The length of the LOI, as well as the types of provisions and level of detail in each section, depends on the deal specifics and preference of the parties. At a minimum, most LOIs contain:

• Information about the specifics of the type of proposed transaction (for example, whether the prospective transaction will take the form of a stock or asset deal)
• The purchase price
• Types of consideration if the transaction involves structure
• Conditions to close
• Other commercial or legal provisions the particular parties may wish to specify

Although LOIs are generally commercially viewed as non-binding in nature, buyers and sellers should take care to specify whether any particular provisions of the LOI should remain binding even if the prospective transaction fails to materialize. For example, although a buyer may wish to specify that it is not required to transact a close in the event a condition precedent is not completed, the seller may wish to specify that the buyer will be bound to keep sensitive information learned about the seller’s business confidential even if the transaction is not completed. Specifying which provisions, if any, shall remain binding on the parties can help avoid unnecessary confusion.

While the LOI may be non-binding in nature, this feature should not encourage the buyer (or the seller) to punt difficult or contentious items to a later stage in the transaction if they can be agreed at the LOI stage. Typically, parties best serve transactions when the difficult issues are resolved between them as early as possible. Commercial experience has shown that the parties that try to approach the LOI as if it were “fully binding” and address the difficult or controversial issues upfront are more likely to have a smooth transaction because the tough deal points are sorted earlier in the process. In addition, if it turns out there will be a sticking point between the buyer and seller, it is typically in both parties’ favor to have that issue addressed as soon as possible. If in dealing with the difficult issues an insurmountable deal sticking point is revealed, the buyer will not waste unnecessary time and resources on an unrealistic transaction. This will enable the buyer to more swiftly move on to other potential opportunities potentially enabling them to realize an alternative transaction sooner. Likewise, the seller also benefits from this approach because the sooner a deal stopper is identified, the more time and resources the seller saves compared to wastefully engaging with a buyer who will not acquire the company. Of course, not every deal point can be agreed in final detail at the LOI stage, but as general rule of thumb, addressing the heavy issues as early as possible can help lighten the work later in the transaction process.

Buyers can help themselves avoid an unnecessary deal breakup by understanding the seller’s mindset. In fact, buyers who proactively address points important for the seller in the LOI can build up goodwill towards the seller and help themselves standout as a capable buyer. For example, sellers are typically hesitant to agree on an exclusivity provision in the LOI which prevents the seller from engaging in discussions with other prospective buyers while the signing buyer engages in due diligence. A buyer which, from the outset, proposes an ambitious but realistic due diligence period with a limited exclusivity provision demonstrates an appreciation for the seller’s concerns and exhibits drive to peruse a swift transaction.

Also, savvy sellers understand the LOI will not capture all the details. As a result, sellers are likely to engage in discussions with the buyer about the reasoning and thinking behind the buyer’s provisions in the LOI. Buyers should be familiar enough with their proposed terms to be confident to have a meaningful commercial discussion with the seller. For example, if a buyer offers an exceptionally aggressive price based on limited information about the selling company, the buyer should be prepared to provide details on how they value the company. Otherwise, the seller will be forced to ponder whether the deal is too good to be true and may become unnecessarily overly skeptical. While not every detail needs to be spelled out in the LOI, the buyer’s proposed deal terms need to make sense. For example, if a proposed transaction will involve an earnout component subject to conditions, buyers could better position their offer by providing information on the earnout parameters, including information on how the earnout payment can be achieved.

Bearing these key points in mind should help buyers be less apprehensive about the LOI process. Indeed, the LOI is also often subject to various rounds of markups, so the buyer should be prepared for counter-comments but shouldn’t be shy about starting the negotiating process in writing. It is helpful to put the ideas on paper to allow the parties to focus on the key deal specifics. Putting forth a proper LOI in the first draft will show that you are a professional buyer and will ultimately help set the stage for facilitating a smooth transaction process.

The acquisition process can understandably be a very daunting task for sellers, let alone an uncomfortable experience that pulls back the curtains on their business and its most intimate information. Many sellers realize this is not their area of expertise, and will make the informed decision to contract with a sell-side M&A advisory firm prior to officially entering the marketplace. The M&A advisory represents the seller, but can function as your ally as a buyer if you let them because they have incentive to get a deal done. Although M&A advisors can guide a seller through the sales process and educate them on market norms, they’re not capable of self-fabricating the comfort level between buyer and seller. Over time, a seller’s relationship with a potential buyer will prove to be most advantageous in getting to the finish line of a transaction, as there will be numerous items both sides will have to work through together. Unfortunately, agreements can fall apart due to a lack of mutual comfort between the buyer and seller, and this is typically a result of a combination of multiple factors set in motion long before official due diligence even began. The following are steps you should consider when working side by side with a seller during the transaction life cycle.

Be transparent with your background information in the beginning.

This is a very important first step, and it sets the stage for how trustworthy the seller will perceive you to be going forward. Be prepared to sign an NDA before receiving any confidential information from a seller, as this is a customary measure taken to ensure you bear some level of legal responsibility around any and all sensitive information the seller turns over to you. Understand that the seller is handing over their most private information and they need assurances from you the information will not be used against them by a competitor. With your NDA, make sure to include background information on yourself, your company, your intentions, and your interest in the seller’s business. Take this as an opportunity to highlight your achievements and accomplishments, speak about your goals, and so on. Sell the seller on why they should view it as an honor that you have expressed an interest in their business. 

Take advantage of introduction calls.

Once you’ve gotten past the NDA stage, you will receive a small sample size of a seller’s confidential information. The next step should be an introduction call for both parties to get to know one another on a more personal level. These first calls are meant purely to be introductory in nature, and fairly high level, considering this will be your first chance to speak with the seller. Be willing to field a high number of questions from the seller as this presents another opportunity to highlight yourself, your company, your intentions, and your goals. On the contrary, sellers are proud of what they’ve built, and will be more than willing to discuss their company’s history, struggles, achievements, etc., so be sure to keep an open ear when they speak. Ask open-ended questions and build dialogue. One last but very important item to keep in mind is that every seller has a goal they’re looking to achieve by selling their business, and it’s typically more than a specific dollar figure. Some sellers are looking for a full sale to move into retirement, while others are looking for a partner to infuse capital and new growth ideas, among countless other scenarios. Listen closely to a seller’s intentions as they go beyond the monetary value of a transaction.

Make data requests with care.

As you delve deeper into a seller’s business, you will at times need to request additional information. Sometimes information you requested in the past leads you to new questions. Perhaps your review of the previous three years of financial records leads you to want to review the past five years. Or maybe you heard the seller discussing expected growth on your introduction call so you would like to see their proforma for the next year. Regardless, with each passing data request, more questions will arise from a seller as to why you are requesting this information. Make sure to always explain your reasoning behind each request you make for additional information, and always remain understanding of a seller’s sensitivity around releasing confidential information. Sometimes it’s best to facilitate data requests through a sell-side M&A advisory if the seller is using one. This advisor should be viewed as your ally and can assist in explaining market norms regarding data requests to the seller.

Remember the importance of site visits.

At some point, back and forth via email and phone calls will no longer suffice. Take the initiative with a seller to be the first to suggest an in-person meeting. Be prepared to travel to the seller and field your own travel expenses. If the seller suggests meeting halfway, or accommodating you on your visit, consider this an added bonus to you. A site visit presents the greatest opportunity to build further rapport with a seller, and put a name with a face. There will be conversations you can have in-person with a seller that can be more challenging when done virtually. This will also give you the opportunity to potentially see their operations, facility, location, etc., provided that you are meeting at their location. Remember, there could be possible limitations during your visit as the visit may need to be conducted after-hours and you probably will not be afforded the opportunity to meet the company’s employees. Though not necessary prior to a formal offer, a site visit is a very critical piece of the transaction lifecycle, and should never be discounted.

Submitting and negotiating a formal offer.

Once you are comfortable with your knowledge about a seller’s business, you will be in a position to submit a formal offer. Chances are, your first stab at a formal offer will fall short of a seller’s expectations, so don’t take offense, just remain flexible. Always remain willing to work with a seller towards an agreeable offer for both parties, while maintaining respect. Sometimes buyers and sellers can “outfox” themselves by overthinking the presentation and discussion of offers. Try to cut down on gamesmanship and be straightforward with your intentions. Oftentimes, sellers will have questions regarding topics such as your funding capabilities, and timing. Perhaps you might consider listing out deadlines for yourself in a formal offer that will give the seller assurances you will stay on target. These deadlines could involve a maximum number of days to produce a first draft of a purchase agreement, first draft of an employment/transition agreement, proof of funds, and so forth. Lastly, and this goes without saying, always operate in good faith with formal offers, and never enter the official due diligence phase with intentions not clearly defined in the offer you mutually execute with a seller.

Passing on the opportunity.

Unfortunately, not every transaction is meant to happen, and sometimes this cannot be determined until much later in the process. At some point, you as the buyer may decide an opportunity is not going to work for any number of reasons. The seller will want to be informed and understand why you no longer wish to move forward with them. In some scenarios, the seller may already understand, but giving them details as a courtesy is appreciated. Regardless of the reasons, always make an effort to communicate this in detail when walking away from a possible deal. It could prove to be worthwhile to maintain a relationship post discussions as well. Keep in mind, as you go further down the road with a seller, you will become privy to more confidential information, you will build a deeper relationship, and expectations naturally begin to take shape. The level of detail you provide on the reasoning for your pass should always line up with how much time you have spent on the opportunity and working with a seller.

The first thing that can help a buyer purchase a business is putting their best foot forward in their first conversations with a seller. Buyers are often unsure what exactly a seller is looking to hear or how to impress a seller in the initial discussion. Below are a few of the things Benchmark International tells our clients to look for in a buyer when selling their company.

1. How are they funding the acquisition? It may be cash, a loan, a personal lender, or ownership in a new entity, but sellers will need to know a potential buyer’s source of funding. It’s a straightforward question, but many people will not have considered it by the time they are conducting management meetings. Having a knowledgeable and honest answer for a seller will go a long way in cementing a relationship of trust.
   
   
2. How well will the buyer culturally fit with the company? Were the first questions about the owners, employees, and business operations, or were they about the bottom line? Were they more interested in meeting with the owners and seeing the business they intend to purchase, or rushing into signing into exclusivity and then learning about the business at an unspecified eventual time? A buyer with no interest in the company beyond the free cash flow rarely develops deep relationships with management, employees, and the seller with whom they may partner in the future.
   
   
3. What is the reason behind the buyer’s interest? Direct competitors, strategic buyers, financial buyers, and individual investors all have different goals in buying a business, and they all fit different sellers' strategies. Being forthcoming in the reasons for your interest in acquiring the business will help conversations run more smoothly down the line, and different buyers can bring a lot to the table in terms of enhancing the seller’s business and offering their employees the security and longevity our clients are often trying to attract.
   
   
   
   
4. What does the buyer plan to have our client do after the sale? Is the buyer likely to stay on for several years, or will they be in a consulting position as the buyer takes over immediately? This can affect whether a seller retains equity, offers a seller note, or works for an investor long term. Each deal looks different for the seller after a sale and having a solid plan for our clients after the transaction can help make long-term decisions for their employees and families.
   
   
5. How knowledgeable is the buyer in acquisitions? Will they understand the tax implications, assignment of liabilities and assets, and other nuances behind acquiring a business, or will they need assistance from a third party? Regardless of the buyer’s expertise, a little honesty on both sides goes a long way in explaining both parties' thought process and explain that some actions that can appear aggressive or malicious are often just not well understood by one or both parties. Knowing who will work with both parties to figure out the details of the transaction can save weeks or even months of headaches later down the road.

Addressing these questions can provide a lot of comfort and understanding that can create the foundation for a sale, and in many cases, a partnership. The seller wants to know a buyer's business just as much as the buyer wants to learn about the seller's company.

Many first-time buyers acquiring businesses in the United States are unsure of how to structure their offer in terms of a deal to buy the equity of the business (i.e., the stock, membership interests or partnership interests) or the assets of the business. The below FAQs should help point you in the right direction or at least allow you to have a meaningful conversation with your advisors.

Which do sellers view more favorably, stock deals or asset deals?

Typically, a seller’s initial reaction is to prefer a stock deal to an asset deal. They lean this direction because the first thing they have been told is, “Your tax bill will be smaller on a stock deal.” But there are actually a number of other significant considerations and the conventional wisdom on taxation is not always correct. Even still, when all is said and done and sellers are fully educated, they will almost always seek a stock deal as opposed to an asset deal.

How does this decision affect the definition of the “seller”?

In a stock deal, the owner of the business is the seller. He or she is selling her equity in the business. In an asset deal, the company itself is technically the seller. It is selling its assets to you.

Are the implications of securities laws different?

Yes, federal and state securities laws apply to a stock sale but do not typically apply to an asset sale. This benefits the buyer because of Rule 10b-5 issued by the Securities Exchange Commission (SEC) pursuant to the Securities Exchange Act of 1934. This regulation holds sellers responsible not only for material misstatements in the sale of securities but also material omissions in such sales. With asset deals, the default US rule of caveat emptor applies (unless the purchase agreement says otherwise). Buyers therefore gain a bit of extra protection with both civil and criminal penalties when acquiring via stock deal. However, it is important to remember that Rule 10b-5 applies to both the sale and the purchase of securities so the higher standard applies to both parties to the stock transaction.

What about the meat of the deal? Does it change?

Absolutely. In an asset deal, the buyer and seller must agree which specific assets are being acquired and which are not being acquired. Similarly, they must specify which liabilities are assumed by the buyer and which are left behind. In a stock deal, all assets owned by the company and all liabilities owed by the company move along with the sale unless specifically called out in the purchase agreement. We most often see asset deals in situations where the parties have agreed to leave all or almost all the liabilities behind and stock deals where the reverse is true.

What about those tax issues?

This is often the crux of the difference of opinion between buyer and seller. Though the issue can arise in an infinite number of variations, the most common occurs when the seller has used accelerated depreciation under the Internal Revenue Code and an asset deal occurs. In an asset deal, the parties must mutually agree on a purchase price allocation for tax purposes. All purchased assets are either specified items or “goodwill.” After the acquisition, the buyer can depreciate the value assigned to each specific item but not so with the goodwill. Depreciation creates a “tax shield” that results in the business kicking off more cash for the buyer in the years following the acquisition. The higher the percentage of the purchase price allocated to specific items, especially quickly depreciating items, the more appealing the asset deal is to the buyer and its future cash flows. But the IRS does not like buyers to depreciate assets that the seller already depreciated. In such an instance, the IRS would lose (and we all know that can’t happen). So the IRS has something called “recapture tax.” Suppose a seller bought a machine for $100 and depreciated it quickly down to $15 in its tax books. The result over that time was $85 of expenses that resulted in lower taxes. If the buyer and seller then ascribe a value of $100 back to that item, the buyer will—in future years—get to depreciate that item back to $15 again. “Not fair,” says the government. The recapture tax says, essentially, that if they agree to allocate $100 to that item, then the seller has to pay taxes for the “over-depreciation” it took while it owned the machine. So the buyer wants high value on the specified items and low value on the goodwill, a built-in conflict making deals harder to close.

This is but one of many tax issues that, almost always, tends to pit buyer against seller. Generally speaking though, for most circumstances, the tax issues in a stock deal result in significant reduction in the degree to which buyer and seller are diametrically opposed on tax issues.

Is a stock deal sometimes inevitable?

Yes, it is. When the company being sold has a large number of contracts that require the third parties’ consent to assignment, asset deals can be almost impossible to pull off. This is why larger deals are rarely structured as asset deals.

Most contracts include what is called an “assignment clause.” When a business sells its assets and assigns it liabilities to another company, its contracts are “assigned” and the assignment clause must be consulted. These clauses often require the consent of the counterparty prior to any assignment. Asset deals require assignments; stock deals do not. Obtaining the consent of 4,000 clients and five landlords can often push the buyer and seller to a stock deal regardless of any other consideration.

Some contracts also have “change of control clauses” that essentially state that any change of control of one party will be treated as an assignment. Thus, structuring as a stock sale is not a panacea to this consent issue.

Permits and licenses can pose similar restrictions on the parties, pushing them towards a stock deal. Similarly, in an asset deal, employees must be fired and rehired and must be tied into the buyer’s or new company’s benefits plans.

Is an asset deal sometimes inevitable?

Yes, it is. We see this happen when the company being sold has significant pending litigation, problems with its history, poor documentation, or other defects that make the equity interest in the business unmarketable. Though buying substantially all of the assets can lead to successor liability in some circumstances, asset deals provide fairly effective ways to take the desirable aspects of the business and leave the offensive pieces behind.

Which deal structure moves more quickly?

Stock deals tend to move much more quickly than asset deals for a number of reasons. Buyers can rely on the protection of securities laws so diligence tends to be less involved. Fewer third party consents are required. There are fewer tax issues to debate.

Author
Clinton Johnston
Managing Director
Benchmark International

T: +1 813 898 2350
E: Johnston@benchmarkintl.com

I had the opportunity to meet Linda and Frank this week at a networking event. What I heard from Linda was a reoccurring theme, “Frank has been driving me crazy since he retired in October. He needs to find a job.”

As M&A professionals, we often see people who retire from a career and decide that they can only play so much golf and need something to occupy their time. Buying an existing business is often a good solution because you can control the size of the company and have a flexible schedule to still enjoy traveling, golfing, and fishing.

Many businesses start from a passion that allows the owner to monetize one of their loves. For example, a restaurant is often founded by a person that’s passionate about cooking. Given the age of retirees, it’s often hard to start a business from scratch due to the limitation of our great resource, time. However, being able to purchase an existing business will provide the retiree with a continuous income and often allows the retiree to recoup their investment somewhat quicker than a startup.

Often, people fall into their career and then babies come so people stay in a stable career that provides for their family and family’s future. Once couples are empty nesters and have saved a nest egg for retirement, they can leave their stable career and chase their passion. We see retirees purchasing companies that they have an interest in learning but never had the opportunity to explore or know-how to get started. When an established business is purchased, the seller is available to be retained for a training period or as a consultant to help the purchaser learn the ins and outs of the business, beyond the due diligence period.

We often hear ‘use it or lose it.’ Many people are concerned that if they do not use their brain during retirement that they will become less sharp then they were during their prime career days. Retirees are seeking to buy businesses to keep various skills sharp. Whether that’s business, interpersonal, or specialized skills, owning a business will allow you to continue to challenge your mind.

A business is also an investment that can provide a good return depending on your goals. Many people prefer to bet on themselves instead of the stock market. Purchasing a business during retirement might cause a retiree to receive a return on their investment and cash flow for day-to-day needs.

Owning a business in retirement often helps with legacy planning. Many times, the business is a family business and there is a plan to pass the ownership on to the next generation. If this is one of your goals, purchasing a business in retirement might be a great option.

Author
Kendall Stafford
Managing Partner
Benchmark International

T: +1 512 347 2000
E: Stafford@BenchmarkIntl.com

1. It’s Easier Than You Think
When acquiring a business nowadays, many think of this as a very strenuous and long-term process. Though it is a large investment of time and money, if you already run a successful small business, there are plenty of transferable skills.

2. Synergy Is Key
The growth of a business through acquisition is statistically faster, cheaper, and less risky than the other methods of expansion. It is of the utmost importance to ensure that the synergy is there, and when companies are choosing to acquire or merge, the desire is for the sum to be greater than its individual parts.

3. An Acquisition Can Expedite Growth In Your Current Business
Once an acquisition is done, you immediately have access to a multiplicity of new (to you) assets and employees. Many challenges come along with combining two businesses, but this can give your current company the ability to expand to new areas and cross-sell services to existing and newly acquired customers.

4. Understanding The Value Of The Employees And Management On-Hand
Many deals come with a staff who has vast knowledge about the company and the day-to-day functions of the business. It is important to get to know the staff and ensure they have the same intentions as you for the business and the direction it is trying to take.

5. The Current Owner Is Likely To Stay In The Picture
Though many of our clients are looking to retire, it is never as simple as handing the keys over. The owner built this business, and they know the ins and outs of the company. Usually, the owner signs a contract with the buyer to stay on for a required amount of time to help the new owners/managers learn the entire process. This also gives comfort to the buyer and customers about the change of ownership.

6. Cultural Fit
Selling a business can be a very emotional process for a seller. The company is their baby, and they want to ensure the success of the company and the continued employment of the employees. Commonly, money may not be the primary motivation of a seller. They are concerned with bringing in the right fit, expanding the company, and keeping true to its roots. A good buyer would acknowledge the importance of culture and seek to maintain the culture that was created and fostered by the previous owner.

7. Businesses Can Be Relocatable
When acquiring a business, buyers are concerned with the real estate associated with the company. Many believe that some companies should be relocated for better success geographically, or to a space that has more room for development. Most businesses can do so, which buyers may be unaware of, and most sellers will entertain the idea of selling the real estate, leasing it back, or allow the buyer to break the lease altogether.

8. Funding Options
It’s often easier to fund an existing business than a startup since it already has a track record. Banks tend to offer more loan types for individuals than for established businesses. Right now, banks are lending aggressively and looking to deploy capital due to interest rates being low.

9. Time Is Of The Essence
Due Diligence is a time consuming and arduous process, so it is key to operate with a sense of urgency. Doing so inspires confidence in the seller and helps maintain excitement on both sides for the eventual transaction. Failing to maintain a sense of urgency and stick within the prescribed timeline could result in deal fatigue, a delayed closing, or even the deal coming unraveled altogether. It’s imperative to move as swiftly as possible during due diligence.

10. Using An Intermediary
The process itself is easy, but selling a business takes time and effort that business owners do not always have the time for or knowledge on. Bringing on an investment banker or business broker/intermediary can help with finding financially capable prospects, negotiating the deal, and get the deal closed without anyone finding out until the deal is done.

Author
Jack Chilcutt
Deal Analyst
Benchmark International

T: +1 615 924 8950
E: Jchilcutt@BenchmarkIntl.com

Many buyers, particularly those working at private equity shops and family offices, have experience in larger markets and, therefore, with more financially oriented, data-driven sellers. If this describes your background, it can be helpful to consider the following insights about sellers in the middle markets. You might be surprised by some of these realities

1. If they were pilots, they would fly by sight, not by instrument. They do not make decisions based on data. They do not need the data. They walk the floor. They see how many trucks leave the yards every week. They are in on the big sales call. Their stepson runs the IT department. You of course want the data, but they have not been spending the time or money to collect it.

2. They may not have fully developed back offices. Our clients are successful and their businesses have grown, often beyond their expectations. They are good at what they do and they enjoy being in control. It is common for them to go without hiring a CFO, add staff at certain positions, or turn departments such as HR over to an expert. This means that they may be a little behind in developing the back office. While you might be tempted to chastise them for this, please consider that studies of our clients indicate that this is the number one reason they have come to market.

3. They may not have debt. It is surprising how many businesses with revenues up to $100 million have never had any material amount of debt, especially not bank debt. So, when you speak to them about using leverage in your transaction, or them rolling over into a leveraged business, be prepared for unexpected responses. In addition, recall the mantra that debt imposes discipline. Never having debt, these owners may not adhere to strict discipline when it comes to financial reporting, timely disbursement of invoices to clients, and keeping an eye on the GAAP or IFRS version of “cash flow.”

4. They may view financial statements solely for tax preparation. It may seem a bit surprising, but studies of our clients indicate that the sole use many of them have for financial statements is to allow their accountant to prepare the business’s tax returns. With that in mind, you might see why monthly financials are not available or, if available, not overly reliable.

5. They may not focus on depreciation. Owner-operators are busy growing their businesses, not studying GAAP or IFRS. They may have some significant misconceptions about how depreciation works and why it matters. We do what we can to address this before you speak with our clients but, as they say, we don’t know what we don’t know. Please exercise care when interpreting anything a seller says about depreciation and when communicating these issues with sellers. For example, the difference between accumulated depreciation (on the balance sheet) and depreciation expenses (on the income statement) can trip up some conversations and knock deals off track. Similarly, the concepts of “capitalizing” versus “expensing” costs can get confusing in short order.

6. They may not use budgets or models. Many middle-market business owners started their companies when they were 18 and they never worked in the corporate world. They have worked successfully to this point without being exposed to the concept, or they have seen it just enough to view it as more of a hassle than a benefit. If you do not use budgets, you do not need to borrow money (see above), and you don’t need to build models. Without the historical data from budgets and elsewhere, it is difficult to even make a worthy model. Add to this the obvious issues with coming up with the two key valid assumptions—growth rate and discount rate—and there is simply no way to come up with meaningful models or projections, not to mention a reluctance to attempt to do so.

7. They may define CFO differently. The four terms “CFO,” “Controller,” “CPA,” and “Bookkeeper” are used interchangeably in middle-market companies. Each may have a preconceived meaning to you but there is a 75% chance that these businesses view these titles differently. Set aside your training and experience, try not to judge a book by its cover, and take the time to assess the person in that role (whatever it is called) before making any assumptions.

At Benchmark International, we are well aware of these circumstances. That is why our unique process is built to help you address them, to assist our clients in understanding your standpoint on topics such as these, and to help our clients better speak your language.

How long after I learn of an opportunity will I be expected to submit an offer?

The timing that the offer is first seen does not really play a role in setting any timing expectations. The more precise question might be, “How long will I have to put in an offer before the opportunity is lost?”  Some opportunities come to market with a fixed timeline leading to a formal auction process. In this case, you would be notified of that deadline and, if you found the teaser early in the process, you would have plenty of time. This is unless you came across it later on that same timeline. In other cases, and what is more often the case for businesses in the lower-middle markets, no timelines are set. A business may be on the market one day and gone the next. There really is no way to make a prediction.

How long does a business spend planning to go to market?

Some sell-side advisors spend months or even years “grooming” their clients for the market. They attempt to ensure all the low-hanging fruit in terms of improvements to profitability is addressed before you see the business. Benchmark International’s approach is different. Our pre-marketing work focuses on getting to know our client’s business and preparing the information you need to make an informed decision rather than guessing what improvements you would like to see and then encouraging our clients to spend money on projects that you may or may not value highly. Our clients work with us for two to three months on average before coming to market. We would like to shorten that time period but our clients are typically owner-operators and, as they say, “They already have a day job.”

After I see a teaser, express interest and sign an NDA, how long should I expect to wait for the next data dump?

The next round of data should come in the form of a Confidential Information Memorandum, also called a private placement memo, a CIM, a PPM, or a “book.” The process of getting your NDA to a client and obtaining the client’s approval to share this information should take about three business days.

After receiving a Confidential Information Memorandum, what is my expected response time for expressing further interest or asking additional questions?

There is no set rule here. Buyers are typically looking at multiple opportunities, comparing one to the other and then prioritizing them. The sooner you reply, the lesser the chance the company has gone off the market and the keener your interest will appear to the seller, so sooner is better than later. Aggressive buyers typically reach back out to us within three business days of sending the CIM and, if we have not heard back within one week, we follow up.

How long should I have to wait to have a call or meeting with an owner?

Setting a date for an initial call or meeting should be almost instantaneous. When that exchange actually happens will depend on the parties’ schedules. Phone calls are typically held within a week of the buyer’s request. Timing face-to-face meetings depends on the distance between the parties, the time of year, and other factors, but is usually accommodated within two weeks of the request.

How long does a first call typically take?

These are generally scheduled for one hour.

How long does a first visit typically take?

This will depend on how much information has been shared prior to the meeting and where the buyer and seller are in the process at the time that the initial meeting occurs. These meetings tend to be much longer than calls, up to four hours, and often involve going to a meal together.

How long after speaking with or visiting with the seller do I have to put in an offer?

Unless a formal process has been put in place and announced, there are no rules here. As mentioned above, companies go off the market and quicker responses convey a stronger interest. It is more important that you have the right amount of information before submitting an offer. You need to be comfortable standing behind the offer, and the seller needs to be comfortable that you understand the business, otherwise the offer isn’t worth the paper its printed on. Unless there is a formal deadline, offers should not be rushed. Take as much time as you need and put forth a detailed offer that hits as many of the seller’s points of interest as possible.

How long does it take to get an offer (or letter of intent) signed?

Absent a formal deadline, we typically see letters of intent (or “LOIs”) go back and forth for about two weeks. Sellers rarely accept a first offer and, even if the terms were acceptable, there are always questions to be addressed and additional details to be added at the request of the seller. The seller should respond to your initial offer in a matter of days, perhaps three to five, but you should budget two to three weeks to get the details ironed out.

How long does it take from signing the LOI to closing?

This is almost always in the buyer’s hands. Working with a well-represented seller can help speed up the process. At Benchmark International for example, we run online data rooms for all of our clients, we hold weekly calls, we shepherd the diligence requests back and forth ensuing nothing falls through the cracks, and we push the seller for timely responses when necessary. As the buyer typically prepares the first draft of the definitive agreements, whether you decide to complete diligence first and then have the attorneys start drafting, or if you do the two simultaneously will be the single largest factor in determining timing. How much due diligence you have performed and how well you control your due-diligence providers and attorney will be the second most significant factor. All that said, we see parties aiming to close deals within 90 days of signing the LOI, though that timing sometimes slips.

I am using debt for the acquisition. What impact will my lender have on timing?

If you handle it well, run your offer by the lender before providing it to the seller, and are not asking them to do something they are uncomfortable with; they should not add time. Unfortunately, many buyers are unable to meet these expectations and the lender often becomes the long pole in the tent in terms of timing. A buyer’s inability to get the debt financing lined up can stretch on for months. These delays are what most often kill deals with our clients. If you have any concerns about timing, the most important step you should take is to get your debt financing relationship(s) in line early in the process— perhaps before you even start looking at acquisition targets—and keep your potential debt provider(s) in the loop as the process progresses, constantly obtaining reassurances from them that the deal you are working on is “fundable.”

These are customary in bulge bracket deals. And the middle markets are growing more sophisticated to become similar to larger markets. However, not every tool used in larger markets warrants transplanting. Benchmark International clients rarely offer management presentations and we have no plan to change that practice. Here are reasons why we take that view, and why you should welcome the decision as a buyer.

• Management teams at bulge bracket companies have seen management presentations. They know what to expect and what is expected of them. Yet, this is rarely the case in the middle markets. As a result, presentations on these smaller deals require significantly more preparation time, tend to be derailed, and rarely make it to the end of the anticipated content.
• There is simply not enough to talk about. Middle-market businesses often have single lines of business and single locations. They tend to lack vertical integration, complex supply lines, and paths to market. They do not typically use complex financial engineering that must be understood by buyers. And they simply do not have a slew of issues that require a structured introduction.
• Many middle-market businesses are owner-operated businesses and their owners are driven by intuition, not data. For that reason, they do not collect much data and, accordingly, there is very little for management to analyze and summarize in a presentation.
• The management teams are smaller so the number of team members brought “into the know” when a management presentation is given is typically very limited—sometimes even limited to one person, the owner.
• These management teams do not have the bandwidth to set aside the time required to develop a quality presentation. Many of these businesses are selling precisely because the owners have not invested in overhead. Spending a few days to prepare for management presentations means key employees are taking their eye off the ball and no one is backfilling.
• Deals are done in the middle markets for a far wider variety of reasons than you see in larger markets. Because buyers are coming from so many different angles (and they themselves have a more diverse range of M&A sophistication), developing a standard presentation poses unique difficulties and results in the audience sitting through a higher percentage of unproductive dialogue.

Understanding these realities, as well as your interest in learning as much about our clients as possible and doing so in the most efficient manner, Benchmark International takes the following steps to compensate for the absence of management presentations.

• We frontload much of the material that would be in the presentation into the Confidential Information Memorandum (CIM). We believe our CIMs are far more detailed than what you typically see for businesses of similar size and this is a big reason why.
• We set up online data rooms early in the process. We strive to get as much raw data into your hands as possible through this approach. This is not a feasible approach for larger businesses that have too much data for you to sort through (a reason why they summarize their voluminous data in management presentations). But given how manageable the amount of data is for most middle-market companies, it makes sense for you to get to the unvarnished raw data sooner rather than later.
• We encourage early and frequent informal conversations with our seller clients. In cases where the CIM and the raw data do not cover everything, these less structured conversations allow you to get straight to the point and fill in the remaining gaps.

With all this in mind, we hope you will agree that our approach is actually the most efficient for you. If not, we invite you to comment below and we will reconsider our position as we are constantly attempting to give buyers the best possible experience.

For an academic, this may be an easy answer: prepare a discounted cash flow, look at comparable transaction numbers, or use comparable trading prices of public companies with appropriate discounts. But for an individual on the verge of potentially making their first acquisition, that is all far from useful advice.

In reality, the answers are more complex for an individual buyer. While these academic procedures are well defined in textbooks and on various websites and can certainly be of assistance, our experience indicates there are a few more meaningful yardsticks for assessing the value you might offer on a lower-middle market or middle-market business. These include the following questions:

What will I do with the business? As the academic methods of valuation are all either based on historical performance or rely heavily on historical performance to paint a picture of future cash flows (and thus value), you as a new owner are not likely to run any acquired business the way the selling owners have done it. If you cannot squeeze more growth, margins, and/or cash flow out of the business than the current owners, the two of you are not likely to (and in fact should not) be able to agree on a value for the business. If you cannot bring something to the table that is going to make the business worth more in your hands than it is in their hands, your valuation—however derived—should be lower than their valuation. In other words, every business has a different value in the hands of different owners. You should place whatever unique competitive advantage you would infuse into the business into your valuation.

How do I account for the risk of taking over a business? Another mantra of the academic community holds that the riskier the investment, the higher the required return is on that investment. It is typically fairly easy to account for the risk inherent in any business you may be looking to acquire, but the actual act of acquiring itself carries its own risks. Your valuation must take into account these risks as well. Unlike the inherent risks in any ongoing business, these risks tend to be short-term in nature. For example, the changes you may make in culture may cause personnel issues and the handoff of key customer and supplier relationships may result in some turbulence. Understanding these risks and structuring your transaction correctly can mitigate these risks significantly but both the risks and the desired structuring will play a factor in your valuation. 

How much can I afford? While you may be able to calculate a valuation on paper, if you lack the wherewithal to come up with the required funding, the business actually has no value to you. It is actually quite surprising how little “cash down” is necessary to purchase a business in today’s markets. The high valuations that abound only add to the concern here. However, to take one example in the United States, Small Business Administration loan guarantees are often used to cover up to 80% of the purchase price of a business. The SBA and the lending institution will typically allow another 10% to be “seller financed” meaning that the buyer can pay that amount out later, using the cash flow generated by the business itself to pay up to 90% of the purchase price. While this is an extreme example of leverage, we have seen this and similar structures work on many occasions to the mutual benefit of the seller and buyer.

How do I structure the deal at the right value but avoid a cash crunch?  “Cash is king,” say business school professors. And in this case they are speaking both in academic and practical terms. Your valuation must take into account the cash flow needs of both the business and yourself. The fastest car in the world can’t win a race if it runs out of gas. Financial statements, income, and EBITDA are important, but cash flow is the company’s (and your family’s) true fuel. Missing a mortgage payment at home or a payroll in the office can be a one-time event that is catastrophic. But again, thanks to the ability to structure an acquisition, the struggle between strong cash flow and valuation is not a zero sum game. With proper structure, an attractive offer need not lead you to be overexposed.

Interestingly, all these valuation issues point in one direction: valuation cannot be thought of in a vacuum. If a company is to be bought with 100% cash at close (which sellers love) then the right valuation for you is probably lower than would be the case if you were able to work in some fair structural enhancements to your offer. Unfortunately, most sellers are not up to speed on all the ins and outs of various available structuring options. When looking for a company to acquire, it therefore makes sense to look at represented companies like those in Benchmark International’s portfolios. While we will always represent and work solely for the seller, we have been hired by that seller to help get a deal done. To achieve that objective, we bring our structuring expertise to bear on each and every transaction. If there is a deal to be had but a gap in valuation, you can count on our involvement to find ways to bridge that gap and get that business into your hands with the right valuation for both you and our client.

Author
Clinton Johnston
Managing Partner
Benchmark International

T: +1 813 898 2350
E: Johnston@benchmarkcorporate.com

Over the years, we’ve collected the questions acquirers most often ask about our relationships with our clients. We hope you will find working with us to be a beneficial experience and invite you to learn a bit more about our relationship with our clients by looking over these most frequently asked questions.

Do you ever represent acquirers? No, we are and always have been a 100% sell-side shop. Many of our team members have significant buy-side experience but we prefer to have a very narrow specialty and we take all our fees from the seller. We have, from time to time, been asked by serial acquirers to search for targets with specific criteria. We are happy to do this and when we do, we do not seek engagement by or fees from the acquirer. Instead, we work to sign up the seller as a client and then bring them to the inquiring potential buyer for a pre-market first look. 

Is the relationship with your client exclusive? Yes, all of our contracts are executed on a sole and exclusive basis. The financial investment we make in each of our clients is far greater than the typical broker in the mid and lower-mid market. The process only works if we work on this basis. For the same reason, we do not co-broker with other sell-side brokers.

How are you compensated? We require a one-time retainer from all clients upon engagement and we have a success fee due upon (and at) closing. The one-time retainer is significant enough to ensure that our client is serious about undertaking the process but not large enough to muddy the waters as to our incentive. For us, the profit is in the success fee. Our success fee is a percentage of the total benefit our client will receive from you as a result of the transaction, subject to a smaller fixed minimum amount. Our contract states that it is to be paid at closing by the acquirer out of the purchase price (on behalf of the seller) on the funds flow memo.

What authority do you have? We never have authority to bind our clients in any manner. We have authority to release the teaser, which they will have previously approved of in writing, as we see fit. Following the execution of a NDA by an acquirer and our client’s written sign off on that NDA and acquirer, we are authorized to release the Confidential Information Memorandum and have wide latitude to discuss anything relevant to a potential transaction.

Are your clients tied to you for a fixed term? No. If one of our clients no longer desires to sell, they can terminate our contract by written notice. Termination is not valid if delivered while engaged in negotiations with an acquirer. In exchange for this right to come off market at any time and to defend the exclusive nature of our engagement, we have tails that we feel are industry standard.

What visibility do your clients have into the exact size of your fee? We will provide a pro forma invoice to our clients at any time. All they need to do is ask. This may be upon presentment of proposed letter of intent (LOI), upon execution of an LOI, upon review of the first draft of the definitive agreements, or even the day before closing. Our contract obligates us to do this and we believe it is the most productive way to handle the issue of fees. We encourage our clients to ask early and often. Our accounts department can typically prepare these within 24 hours of the request and they are, of course, subject to modification if and as the deal develops or changes.

What notification and information rights do you have? Our clients are obligated to keep us informed of their negotiations and provide copies of agreements relevant to the calculation of our success fee for any transaction for which we may be due such a fee.

At Benchmark International, we see hundreds of letters of intent (LOI), term sheets, and heads of terms every year. And though the title of the document changes from location to location, we see acquirers making the same mistakes across the globe. These mistakes cause delays, lead to good LOIs not being signed, and lead to LOIs being signed but then resulting in nothing more than blown deal costs (and angry sellers). We would like to offer a little advice from the sell-side about how to make your offers come across in the best possible light.

1. Do not include an automatic extension to the exclusivity period.

When there are no conditions on an extension other than your sole discretion, our clients see that for exactly what it is. Unless either (a) they have some veto right over any extension or (b) it kicks in only if certain material and tangible milestones have been hit, extensions cause our clients to get a bit suspicious of the other terms in the LOI. Its one of the easiest clauses for an M&A novice to understand so if they feel weary of that clause, you can imagine the effect it has on their reading of the more complex sections.

2. Do include a sources and uses of funds table.

Missing the table is problematic for a few reasons. Our clients often have a hard time following the complexity of a structured offer and the table can clear up some things for them. In addition, when the client is rolling over an interest and you are using the target company (or newco) to undertake the acquisition debt, a clear picture of the debt is necessary to ensure the rollover is correctly valued and, more importantly, for us to best explain to our clients the magic of leverage. Our clients tend to be less comfortable with debt than you are. When they learn later in the process that the company will be taking on large amounts of debt, it serves no one's interests for them to feel they have been left out in the dark or that they are suddenly facing a riskier proposition than they thought—even when they are not going to retain any interest in the business.

3. Do not get too specific on the net working capital when the closing date is not yet known.

Our clients' business' have seasonality. Most of them don't have the same working capital in June that they have in October. With a two, three or even four-month window for the closing date, setting the target at the time of LOI is a recipe for disaster. Most acquirers have an adequate enough understanding of our client's business at the time of presenting an LOI to allow them to set the balance sheet line items to be included in the definition. But setting an amount causes extra pains both when trying to get the LOI signed and later if the closing date moves.

4. Put the total purchase price in the first paragraph.

Sellers look for the headline number. Why not put your best foot forward? Starting off with a nice sentence or short paragraph outlining the total benefit to be received by the sellers is a great way to get the momentum rolling for the offer. It is surprising how many acquirers do not put their best foot forward in this way.

5. Avoid being too specific on indemnification and other legal terms.

Sellers like our clients do not want to engage legal counsel at the time your LOI arrives. When an LOI comes in with the baskets, caps, timing limitations of indemnification and the list of the fundamental reps, our clients either (a) feel inclined to engage legal counsel—which slows everything—or (b) later hear from their counsel that they should not have agreed to such terms in the LOI, prior to engaging counsel. These extra details create a lose-lose proposition.

6. Send the offer to the broker first, not the client.

The error rate on sellers reading LOIs in the dark is astronomically high. Let us give your offer a read and come back to you with anything we think our client will misunderstand. As this is such an emotional and important process for sellers like ours, it can be difficult to get them unstuck from a misreading of your offer. It's best to do whatever is possible to get them started in the right frame of mind and we can (and are motivated to) help you ensure that happens. After we have had a chance to give it a once-over with our professional eye and provide some feedback, feel free to send it directly to the seller if that is important to you.

Our seller clients know that we see quite a few offers come through every week, month, and year and they expect us to provide our input on the timeframes that are “market.” As this is a buyer-seller neutral point and a strong set of mutual expectations is productive to achieving a closing, we want to give you an idea as to what is happening on our side of the table.

Nobody is getting deals closed in less than 90 days.

Even well-funded, experienced buyers seem to require 90 to 120 days get from letter of intent (LOI) execution to close in the middle and lower-middle markets. 

A request for more than 120 days is exorbitant.

A third of a year is a long time to be off the market for an owner who is committed to selling their business.When the time comes, there may well be good reason to extend exclusivity but we know that our clients more often than not regret any grant of 120 days or thereabouts. We can work with them to set up specific grounds for extending exclusivity beyond 90 days where a situation warrants it, but blanket grants of 120 days, or even 90 days with a 30-day automatic extension, are something we highly discourage our clients from accepting.

Diligence should start quickly.

We encourage acquirers to use the offer letter to inform the seller about diligence timings, especially when the initial diligence list will be sent and, if possible, when the initial diligence visit will start. All too often, we see LOIs signed followed by a long pause in activity and that drastically alters our clients’ attitudes toward the buyer and the offer. We encourage or clients to have this expectation set at the time of signing and expect that there will not be a pause but rather an aggressive start, even if that start only covers a portion of the scope of the overall diligence effort. When this happens, we see diligence lists arriving within a week of signing and the first onsite (or the next face-to-face meeting) within three weeks of signing.  

First drafts do not wait until the diligence is complete.

We understand that acquirers may not want to incur the cost of engaging counsel based solely on the information in the Confidential Information Memorandum and a meeting or two. But we also understand that waiting two months to engage counsel and get first drafts out does not lead to a high close rate. We all know that drafts can be sent “pending finalization of due diligence.” Our successful deal closings have the first drafts coming out within a month of LOI signing. Our clients know that if they have not seen a draft by then, the deal is not likely to close.  

The seller can really mess up the timeline.

Failure to provide prompt and complete responses to diligence requests, abnormal reservation of disclosure of “sensitive” issues until later in the process, going on vacation, or simply the lack of organized files are all things we have discussed with our clients prior to going to market (and again when the LOIs start to arrive). They know that they can be the problem when it comes to timing. 

But if the seller does not mess up the timing…

Our clients know that time kills all deals. And they know that if they have been prompt and thorough, and the LOI signing date is approaching triple-digit days in the rearview mirror, things are not going well. Our statistics show that few deals die in the first 100 days after signing and few deals close more than 100 days after signing. This is something we share with our clients—both to set their expectations and to motivate them to be prompt and complete. 

Questions should be responded to within three business days.

We instruct our clients that deals require momentum to close. Precisely when they are most exhausted by the process is when they must reply in an even more expedient manner. Being realistic, we feel that the seller owes the buyer responses to every question within three business days, even if the response is, “We are working on it. It’s been a bit difficult to get our hands on that data.” Similarly, we believe the acquirer should respond to the seller’s questions, and send their follow up questions, within three business days. Allowing sellers to feel that anything that has not yielded a follow up within those three days has a “soft close” around it and goes an immeasurable distance in keeping sellers motivated, focused, and responsive.  

It has been very interesting to follow the changes in market norms for indemnification over the last two decades. As due diligence has escalated dramatically, especially in the U.S. lower-mid markets, over that time, indemnification terms have moved in equal measure in the opposite direction. It seems that acquirers believe that an ounce of prevention is worth a pound of cure. While this has significantly increased the time between signing a letter of intent and closing, it has also made the negotiation of the purchase agreements a bit simpler. First-time sellers—always attentive to post-closing liabilities—seem to be much more comfortable with the current market terms for indemnification than they did with those in practice at the turn of the millennium.

While Benchmark International does not provide legal advice to its clients (or to acquirers), we do rely on our viewing of hundreds of purchase agreements per year to offer our seller clients a perspective on what we see as the norms for their market. While this is a moving target, our insights have remained fairly constant for the last three or four years as follows:

• We see indemnification for any item other than a fundamental representation being capped at between 10 and 20% of the non-contingent portion of the purchase price.
• Acquirers are still alternating between both baskets and true deductibles. These are typically agreed at between one and two percent of the non-contingent portion of the purchase price with baskets being at the higher end and deductibles being at the lower end. These de minimis carve-outs are applied to fundamental representations in about half of all deals.
• The obligations for everything but fundamental representations survive for between 12 and 24 months, with 18 months coming on strong as the mode.

• Fundamental representations are almost always capped at the entire purchase price and survive for very long periods such as seven years, until the expiration of the applicable statute of limitations, or indefinitely. This survival period is one deal point for which we would say there is no market norm at the moment.
• The representations classified as fundamental have not changed much over the years: organization, capitalization, authority, no conflict, ownership of assets, brokers, environmental, tax, and ERISA.
• Fraud continues to be treated like the fundamental representations.
• We still see a few acquirers attempting to leave out the provision encapsulating the indemnification as the exclusive remedy. And we still see sellers’ counsel never allowing that to be absent in the final draft. Leaving it out of a first draft has become so rare that it is almost seen as painting outside the lines, poor sportsmanship, or the like by our clients’ counsel.

Acquiring an existing business can offer great advantages over starting a new business from scratch, especially if the target business is thriving and holds more opportunities for growth. When considering the purchase of a company, you should take certain steps so that you can be confident that you are minimizing your risk and making a smart move. Use this comprehensive checklist to help you ask the right questions and guide you through the process. 

☐ Is the Target Company Financially Healthy? 

This is a question you must ask yourself before considering anything else about the business. You will want to carefully comb through the business's financial statements for the past five years (at least) to identify if anything appears out of the ordinary and to assess how the numbers compare with standard performance in that sector. Also, request to see the tax returns for the same years. This will help you determine whether the owner has put personal expenses through the company books and give you a more complete picture of the company's actual value. You also will want to know if you will be taking on any existing debt, and exactly how much.

☐ Will You Be Able to Generate Cash Flow?

It is crucial that you know whether you will be able to generate cash flow immediately upon purchasing the business. If not, are you in a position to carry the business until that time comes? No matter how attractive the company may seem, you must ensure that you are not getting in over your head. Take a thorough look at sales records to assess past and future performance. You must also find out if any existing clients or customers are planning to part ways and what you can do to retain their business. 

☐ Does the Company Have a Good Reputation? 

Doing a quick Google search can reveal quite a bit about a business. You will want to see how the company is perceived in the world. Does it have a lot of negative reviews or bad press? Are there any customer complaints, and do you know how they were handled? Get a comprehensive look at the business's reputation because you are going to need to see if you have work to do in order to turn it around. This could include a complete rebranding and marketing effort, which costs money. 

☐ Have You Done Your Homework on the Staff?

When you acquire an existing business, you are also acquiring its management team and employees. You should know the skill levels and proficiencies of any staff you will be inheriting, and whether you are going to be faced with the task of replacing key staff members. Do all team members plan to stay with the company? Have they been made any promises by previous ownership that you will now be expected to fulfill? Is anyone retiring or planning to go on extended leave? Is anyone disgruntled about the sale? When you know the answers to these questions, you'll be best prepared to address any issues. 

☐ What is the State of the Inventory?

If inventory is applicable to the business in question, everything should be itemized and given a carefully determined value. Will any inventory lose value with time, or only have a value at certain times of the year? Will it be adequately stocked for when you take over the company? When you are investing in a company, you're going to want to have everything you need on hand to generate revenue from its operation. 

☐ What is the State of the Physical Property?

First things first: you need to know if the business owns the property on which it resides or if there is a lease agreement in place. Then seek out answers to the following questions. What are the details of the lease and the reputation of the landlord? How much is the rent, and is it due to increase? Is the property in good condition, or is it in need of repair? If the business owns the property, what are the real estate taxes? Is the property able to accommodate any planned growth? Is it legally zoned? Is the location appropriate? Are you going to need to make changes, or find a new location altogether? This is an area where you cannot be too thorough. 

☐ Do You Have All the Legal Documents and Contracts?

This is another critical step in purchasing a business. You are going to need to have every last piece of paperwork that pertains to that business. This includes business licenses, copyright agreements, patents, trademarks, import and export permits, mining rights, real estate documents, etc. Basically, if something relates to the business in any way, you should have documentation of it. If the current owner has not kept good records, there is your first sign that you might want to think twice about moving forward with the acquisition. 

☐ What is the Condition of the Business's Equipment?

You should assess the condition of all office equipment, furniture, machinery, and vehicles used for the business. What is owned and what is leased? What are the items' lease or purchase details, and are there maintenance agreements in place? You should assess the condition of all equipment to determine if anything will need to be replaced because this will be a factor in the purchase price of the business.

☐ Are You Familiar With the Business's Suppliers?

This is important because suppliers can have a significant impact on how reliable your business is able to run. You want to ensure that they are established and committed to providing superior quality and service. Find out if they fill orders on time and meet their obligations. Look into any contracts that are in place, so you understand the relationship. You also will want to ask if there are any expected price increases or factors that may impact the existing arrangement.

☐ Contact Benchmark International 

If you are looking to buy a business, we represent highly motivated sellers in the lower-middle and middle market that may be the perfect fit for you. Contact one of our experts to discuss how we can help with target company searches. 

As we work exclusively in the mid and lower-mid markets, we see many deals succeed, and some wither. In an effort to have more of the former and less of the latter, we would like to share our core philosophies with the belief that helping you understand them will make working with us a more rewarding experience.

1. Time kills all deals.

Prudent and deliberate action are certainly also key aspects of getting deals closed but, in our experience, neither buyers nor sellers are inclined to be under-prudent or lacking deliberateness. Rather, unexplained and avoidable delays tend to stack up between the first meeting and the closing. Each delay shaves off a small percentage from the probability of closing. There are enough legitimate delays in the M&A process. When we see one that can be avoided, we will step in and attempt to get the ball rolling once again.

2. Transparency is the best antiseptic.

3. The emotional must be covered as well as the financial.

This may be somewhat unique to our clients as our process appeals to a certain owner type. As you probably know, we specialize in closely-held and owner-operated businesses. Nowhere is it more true that “every business is a family business.” Our clients have typically had 20- to 30-year relationships with their businesses and often equate the sale process to sending their son or daughter off to college. When we work with acquirers that understand the effects of this fact pattern, we see a much higher level of success. In fact, we have built our teams, our process, and our engagements around it. We will be more than happy to help you deal with this interesting aspect of our clients. Please just ask.

Author
Clinton Johnston
Managing Partner
Benchmark International

T: +1 813 898 2350
E: Johnston@benchmarkcorporate.com

Growing a Business

By Paul Hawken

In this book, Paul Hawken explains how a successful business is an expression of the individual behind it, along with practical advice, common sense, and down-to-earth ideas. Even though it was written 30 years ago, it remains an excellent and very relevant read, backed by the fact that the author’s own companies are still successful after all these years.

Organizational Physics - The Science of Growing a Business 

By Lex Sisney

The author of this book spent more than a decade leading and coaching high-growth technology companies. In his work, he discovered that companies that thrive do so in accordance with six universal principles. The book covers a blend of important business and entrepreneurial topics in a manner that stands out from other business books.

Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine

By Mike Michalowicz

In this book, the author offers principles to simplify accounting and easily manage a business through analysis of bank account balances. The theory is that a small, profitable business can be more valuable than a large business surviving on its top line, and those that achieve early and sustained profitability have a better chance of maintaining long-term growth.

Explosive Growth: A Few Things I Learned While Growing To 100 Million Users - And Losing $78 Million

By Cliff Lerner

This best seller provides step-by-step instructions, case studies and proven tactics on how to explode business growth. It reveals the detailed growth frameworks that propelled the author’s small online dating startup to grow to 100 million users while coupling humorous storytelling with concrete examples.

Traction: How Any Startup Can Achieve Explosive Customer Growth

By Gabriel Weinberg

Traction is based on interviews with more than 40 successful business founders about their real-life successes. It covers 19 channels that can be used to gain traction for a business, and how to select the best ones for your company. The book discusses topics such as targeted media coverage, effective email marketing strategy, and online search optimization.  

Growing Influence: A Story of How to Lead with Character, Expertise, and Impact

By Ron Price and Stacy Ennis

Growing Influence is packed with relatable human experiences and practical advice on developing the right leadership skills. It chronicles two main characters’ growth as they applied the principles in the book, mixing solid business advice with a novel that is fresh, timely and inspiring.

Ready to Grow Your Business?

Contact us for help with unique growth strategies for your company and how we can partner for your successful future.

What Is Buy and Build?

When private equity acquires a well-positioned platform company to acquire additional smaller companies, using the developed expertise in a specialized area to grow and increase returns, it is considered a buy-and-build strategy. This strategy is common with private equity firms with shorter holding periods of about three to five years.

Why It Is An Effective Growth Strategy

If a buy-and-build strategy is executed correctly, a great deal of value can be created when smaller companies are combined under the control of a new company.

• This type of acquisition saves time regarding the development of specialized skills or knowledge, allowing for growth and expansion to other markets more quickly and successfully with lower production costs.
• Creating a larger, more attractive company offers a path to exploit the market’s inclination to assign larger companies higher valuations than smaller ones.
• It provides a clear plan when deal multiples are at record levels and there is a need for less traditional strategies.
• Buy-and-build deals generate an average internal rate of return of 31.6% from entry to exit, versus 23.1% for standalone deals.

Getting It Right

The buy-and-build acquisition is not simple to execute. The process demands meticulous planning and due diligence for the strategy to work. The best deals usually employ multiple paths to create value.

• Synergy between the acquirer and the acquired is important to the outcome of the deal. Companies should target existing firms that will be a good fit as a team both tactically and culturally. The human element should always be considered.
• The management team must be an appropriate fit and have experience with these types of transitions.
• There should be a vision in place for where the company will be five years down the road.
• The platform company must be stable enough to endure the process regarding operations, cash flow, and infrastructure (IT integration in particular).
• Sector dynamics should also be considered. Avoid sectors that are dominated by low-cost rivals or mature, stable players. Focus on sectors with many active smaller suppliers and service providers. Consolidation should result in cost savings and improved service.
• While no two deals are the same, there are patterns for getting it right. Those experienced with buy-and-build strategies are more likely to lead to a successful deal.
• It can be difficult to identify private equity firms because of the nature of the way they do business. It helps to have an experienced M&A firm with extensive connections and a proven track record of negotiating successfully with buy-and-build-focused private equity firms.

These reasons are among several as to why it is a sensible decision to enlist the help of an experienced M&A firm such as Benchmark International for your vision for growth. Count on us to help you get your buy-and-build strategy done right.

The Complete Guide to Buying a Business
By Fred Steingold J.D.

Written by a Michigan Attorney who has extensive experience representing small businesses in several capacities, this book is a comprehensive resource that provides a thorough overview of the buying process with concrete examples. If you are looking to acquire a huge corporation, this is probably not the book for you. However, if you are seeking to purchase a small business, this book serves as a great guide to subjects such as financing, negotiating, comparisons of entities, and standard forms. It will also inform you of when you likely need to enlist the help of a professional broker or lawyer.   

Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game
By Walker Deibel

Buying and growing an existing business is considered a smarter path to success than dealing with the pitfalls of start-up companies. This book outlines the ins and outs of becoming a successful acquisition entrepreneur, written by an investor who has co-founded three startups and acquired seven companies. It delves into beneficial topics such as spending less time raising capital, using ownership to achieve financial independence, discovering the best opportunities, and finding quality business brokers.

Buying a Business That Makes You Rich

By John Martinka

The author has of this book has more than 20 years of experience as a business buyer advocate, helping executives to abandon the corporate world to enjoy the freedoms of business ownership. In this book you will read about being smart when purchasing a business, including ways to avoiding overpaying and knowing the right questions to ask throughout the process. It offers smart methodologies and practical insights without overwhelming the reader with what can be a complex undertaking.

How to Buy a Business without Being Had: Successfully Negotiating the Purchase of a Small Business 
By Jack Gibson

Case studies, practical advice, and simple terminology are all part of what make this book a great read for anyone looking to purchase a business. The author offers more than 30 years of experience helping entrepreneurs learn how to talk to sellers and brokers, with a focus on avoiding missteps. The book also includes commentary from business owners who wished they had known how to avoid common mistakes, as well as a useful study and discussion guide.

HBR Guide to Buying a Small Business: Think Big, Buy Small, Own Your Own Company (HBR Guide Series)
By Richard S. Ruback and Royce Yudkoff

This book is written from the perspective of professors at Harvard Business School as a guide to entrepreneurship for small business owners. The text was previously only available to Harvard students through the authors’ courses. It is a concise yet thorough resource that will arm you with important topics you should discuss with sellers, brokers and attorneys along the way when buying a small business.  

Ready to Buy?

If you feel you are ready to buy a business, while these books can be helpful, Benchmark International can help ensure you are making the right move. Our strategists will use our insider knowledge and exclusive databases to connect you with the ideal match for an acquisition or growth plan.

If your business is in or serves one or more of the 8,762 neighborhoods identified by your state’s governor as a “Qualified Opportunity Zone” under the 2017 federal tax legislation, new buyers will be entering the market for your company in the coming months and they will be looking to make some quick deals.

When the tax cut law passed, investors in these zones were granted numerous attractive tax benefits including:

• Deferment until 2026 of tax on capital gains from the sale of projects outside the zones if those profits were now invested in any zone
• A 15% reduction certain capital gains taxes
• No capital gains taxes on any investment held for at least 10 years

But acquirers of businesses never took advantage of the new opportunity. Reports came back to the Administration that the statute called for the Treasury Department to implement regulations laying out the details as to which investments would qualify and absent those regulations there was too much concern that the “investments” would only cover real estate acquisitions and improvements.

Seeing that the real estate industry had wholeheartedly undertaken the desired action - investing in the zones – and wanting other investors such as acquirers of businesses to do the same, the President publicly released draft regulations last Wednesday.

The M&A investment community is quite pleased with the breadth and clarity of the regulations and appear to be jumping into action to exploit the new guidelines.  And their action will likely be immediate. The incentives are set to cover only those investments made by the end of 2019.

To view all Qualified Opportunity Zones to see if your business may qualify, visit the IRS’s map here. https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xmland follow these instructions. https://www.cdfifund.gov/Pages/Opportunity-Zones.aspxAs this map of Tennessee demonstrates, you might be surprised which areas are covered. The official method of designation is by “census track” and you can also search this website by your track – if you know it.

The regulations remain complex as there are a number of independent ways for an operating business to qualify based on where income is generated, where labor is provided, where services are provided, where working capital is invested, and where tangible property is maintained – among others. But business acquirers are getting ahold of the new details, have the firepower to get command of them, and will very quickly be refocusing their searches in light of these significant benefits. 

There is still time to get your business on the market to take advantage of this increased interest and the potential boost to your sale price that it should also carry with it. Eight months from engagement to closing is not difficult with a properly motivated seller and buyer – and nothing motivates people like tax breaks!

Author
Clinton Johnston 
Managing Director
Benchmark International

T: +1 813 898 2350
E: Johnston@benchmarkcorporate.com 

Benchmark International is pleased to announce our exclusive attendance at the national ACG Intergrowth 2019 conference on May 6th-8th in Orlando, Florida. This is a valuable opportunity where we meet with thousands of well-funded private equity deal-makers and draw their attention to the opportunities we are currently representing.

We have had major success at this event in the past with offers on over 75% of the businesses we featured. This creates competitive tension between financial buyers and strategic buyers.

ACG’s annual event is specifically designed for those on the hunt for private capital in the middle market. With over 2,000 registered attendees and $189 billion of investable capital, this is not your typical meet-and-greet. We currently have 60 one-on-one meetings scheduled with business development team members (the people who analyze Teasers and CIMs) of these PE funds.

Would you like to be showcased to leading dealmakers with strong, acquisitive appetites? Naturally, we present only a select number of companies for each event, so we would encourage you to contact us now to ensure your business is included.

*All opportunities must be submitted by April 30^th, 2019.