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Five Reasons Why It’s Worth Investing in an M&A Adviser When Selling Your Business

You have come to a point in your business life where you have decided that it is time to sell and move onto the next project. Of course, you want to command the best price for your business and explore all the opportunities available. As such, you have considered an M&A adviser to help in the process – but is it really worth it? They could help you generate more value for your business but if you factor in the fee for engaging their services, will you make any more money?

Then again, there are many advantages to hiring an M&A adviser, which are not just limited to value. If you have thought about hiring an M&A adviser, but are unsure of the benefits, consider the below:

 Ready to explore your exit and growth options?


They can Minimise Distractions During the Process

You know your business the best and if you are knowledgeable about the M&A process you could facilitate the transaction yourself – although this doesn’t mean you should. After all, an M&A transaction takes a significant amount of time and the time you have to spend on the transaction could end up being detrimental to business performance. As the value of a business is more often than not linked to financial performance, you need to focus your efforts into making sure the company is performing the best it can be, rather than focusing on the transaction itself.

 

They can Source a Larger Pool of Buyers

If you’re thinking of selling your business you may have an idea of the acquirers you want to approach. This is good, but an M&A adviser constantly networks with various strategic and financial buyers on a national and international basis in various industries; therefore, they have a very large pool of acquirers at their fingertips to contact about the opportunity. Not only is an M&A adviser’s pool of acquirers large, it is also varied, which means they can think outside the box and a lucrative deal could be sourced cross-sector. Another benefit of generating interest from a large pool of acquirers is you are more likely to have multiple competing bids, strengthening your negotiating stance.

 

They can Negotiate a Favourable Deal

As mentioned, an M&A adviser can help to create a competitive bidding environment which can lead to a better deal being negotiated; however, this is not the only way an M&A adviser negotiates on your behalf. Often, deals are not for 100% cash so an M&A adviser will negotiate a deal structure so both parties can reach a compromise and agreement. This can be very beneficial for you if, for example, you have just secured a large contract where earnings will increase over the next year, as, if the deal has been based on a multiple of current earnings, then you will not be correctly compensated for the contract you have secured. Therefore, an M&A adviser will negotiate a deal which will maximise value beyond the purchase price.

 

They can Protect your Interests

It is in your best interest to keep the sale of your company confidential – if it gets out that you are selling this could potentially alienate employees and customers and give your competition the upper hand. By yourself, when approaching potential acquirers, it is difficult to protect the identity of the company as it’s not easy to solicit interest without disclosing who you are. An M&A adviser, on the other hand, will have interested parties sign a non-disclosure agreement before they are given any information about the business, including the name of the business and the owner. At this stage, it is also important to gauge whether the company you are approaching has the finances to purchase your company – again, this is something which is difficult to do without compromising confidentiality.

 

They Add Valuable Resource

They say ‘first impressions are the most lasting’ so when it comes to selling your business, it is important that a potential acquirer’s first impression is first rate. An M&A adviser can assist with this through their proven processes that help businesses to market themselves as the complete package. As well, engaging an M&A adviser can add credibility to potential buyers as they can see that you are serious about conducting a transaction, which can save time and improve offers.

 

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Is an ESOP right for your company?

As a business owner you may be asking yourself how to keep your employees motivated and focused on the long-term objectives you have put in place for your business or you may be asking yourself how to raise additional capital to grow your business. There is a way to keep employees focused and aligned with the company’s growth objectives.  Growing up in a family of entrepreneurs, I was always told that you better care of the things you actually own.  Ever been to a nice hotel room and left the beds undone? The point here is that if employees take ownership of the business, they will have the business’ best interests at heart.  One of the mechanisms used by many business owners as an exit strategy is an ESOP.  An ESOP allows the continuity of an existing business and can be a great way for growth and expansion.

Ready to explore your exit and growth options?

Employee Stock Ownership Plan, or better known as an ESOP, is an employee benefit plan much like a 401(k) that allows your employees to take a real interest in the success of the company ownership. In other words, employees are allocated a number of ownership shares in a business this making them ‘owners.’ Traditionally, when the process of an ESOP begins, ownership shares are usually held in a trust until the employee decides to retire or leave the business, and at that point the company buys back the shares, keeping the ownership under one roof. The best part is the shareholders of your company wouldn’t be some outside investors that are only focused on their return, but they would be the people coming to the office everyday and putting in the work to make a difference. The success of your business will directly affect your employees/shareholders retirement plan, giving them an additional reason to increase productivity and profitability.

Now, let’s say your employees are doing great but you want to take your business to its next growth stage. You may go to a bank to obtain a loan, which will result in high interest rates for a number of years. Your second option may be to seek out a financial investor, that could potentially result in losing a majority or controlling stake in your company. When companies bring in investors, they will want to see a return on their investment as quickly as possible and this can cause unwanted changes in company culture or operations. Luckily, there is a third option, creating an ESOP. This would allow you and your employees to stay in control and maintain the corporate culture you have created for your business over the many years it’s been in operation.

You’re probably thinking how does an ESOP create capital for my company. At a simplified level, the business will have to be able to borrow money from a financial institution to fund the transaction of buying company shares or shares of a current owner. Since this would be considered a loan, the business will have to pay back both principal and interest; however, the way an ESOP is set up is as a pension plan, if you speak to your CPA or tax advisor they might be able to guide you on how these contributions could alleviate your tax burden. In addition, to the contributions to repay the ESOP loan, your tax advisor might be able to illustrate that there are other tax benefits the company can benefit from. Some of these include, cash contributions to the ESOP for the purpose of buying shares from employees or even to build up cash reserves could be tax deductible. In S Corporations, the ownership held by the ESOP could be subjected to tax benefits, as the proportion held by the ESOP does not have to pay federal income tax. For example, if the ESOP owns 30% of the company, 30% of the profits from the business will not be included when paying taxes. There are restrictions on all contributions but these seldom cause an issue for the company.

You may be asking yourself, ‘why would my employees would want a stake in the business?’ ‘it’s just a job for them.’  Well the answer to this is that there are many benefits for the employees to participate in an ESOP. Just like most pension plans, the employee will not pay taxes on these contributions as long as they are working for the company. Instead of giving additional bonuses for hitting goals, which are taxed, you would be able to offer shares in the company and in the end will benefit them when they reach retirement. In a study in 2017, millennials that are in an employee stock ownership plan reported 33% higher wages, 92% higher net household worth, and 53% longer median job tenure.1

Do you have an exit or growth strategy in place?

As a business owner who values the safety and well-being of your employees, before you decide on management buyout to increase capital or step away from your business, consider all the options on the table. Benchmark International a leading lower middle market M&A firm is able to assistance you in this process when making tough decisions on the future of your company. We are here to support our client’s objectives and make an easy and graceful transition as you prepare for the step stage of your life, no matter where that might be.

Author:
Nick Woodyard
Analyst
Benchmark International

T: +1 512 347 2000
E: Woodyard@benchmarkcorporate.com

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Webinar: Life After the Business Sale: How to Stay Wealthy

November 6th, 2018 at 10:00-11:00 am EST

Register for Webinar 

In this webinar, we will be tackling the really fun topic, the one that is really in every seller’s mind - what to do with all that money you get from the sale of your business. Our Benchmark International host, Clinton Johnston, will be joined by BNY Mellon Wealth Management’s Christopher Swink, a specialist in assisting business owners with their transition into passive investing as part of the sale of their business. Most business owners have grown their personal wealth primarily or exclusively from re-investing their income into their business. In this way, their money has made money for them. Once the business is sold, former owners must come to learn new ways of having their money make money for them. Some of the specific topics we will discuss include:  

  • What returns can a former business owner expect to earn on their cash?
  • How can a wealth manager help me either before I decide to sell or while selling?
  • How important is timing my sale to my overall standard of living after the sale?
  • Is getting some of my cash from the deal later as opposed to at closing really a bad thing?
  • What will my life look like after the sale?
  • How can I draw a safe but sufficient income off of my sale proceeds?

Hosts:


Clinton Johnston
Managing Director
Benchmark International


Christopher Swink
Senior Director
BNY Mellon Wealth Management

Register for Webinar

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The Benefits of Choice in Formal M&A Process: Partnership Essentials

After an M&A deal has been concluded, it is unusual for the seller to depart a business immediately. Whether it is a short-term work out or a longer-term growth plan, invariably there will be is a period in which the buyer and seller will operate in partnership.

In all partnerships, be they personal or professional, the ability to achieve the outcomes and aspirations sought relies to some degree upon the compatibility of the individuals. Almost all studies on the essential components and attributes of successful partnerships, unsurprisingly, conclude that the dynamics of a partnership are determined by the same criteria as any relationship, namely, the personalities involved.

The reason for failed M&A transactions has been studied extensively by academics and professionals alike, but these studies contain little to no data comparing the success and failure rates of transactions concluded with the aid of a formal competitive M&A process and those without. However, common to almost all studies of failed M&A transactions, and often deep into the reports, are cursory references to cultural integrations, yet these are rarely addressed or understood during negotiations.

To truly understand whether the fundamentals for an effective and successful partnership exist in a new relationship is not simple, but it is an exercise that can be explored in the context of a process that exposes the business owner—the seller—to choice. It is a common misconception that the M&A processes only generate choices through the creation of price competition.

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Greening Due Diligence: Environmental Factors to Consider in M&A Preparation

‘Green-washing’ is pretty much endemic in the business world, with every company worth its salt aiming to showcase its environmental credentials, whether rightfully or as a PR exercise.

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Due Diligence in Mergers and Acquisitions: A Beginner’s Guide to the Top Five Areas of Interest

Due diligence by potential buyers takes up a serious amount of time in any M&A process. Essentially, it’s designed to make sure the buyer knows exactly what it is that they’re buying – and in other cases, ‘reverse diligence’ helps the target company understand whether a potential buyer or merger partner is right for them.

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To Sell or Not to Sell: The Top Four Reasons Entrepreneurs Choose to Sell

Entrepreneurs, by nature, are people who spend a considerable amount of time looking for the next opportunity. And for them, 'the next opportunity' often includes a suitable time to sell their company.

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