No matter what business you are in, we all know that life becomes much easier when we have our finances in order. Whether preparing for Tax season, doing an audit, or ensuring that your business is operating at its highest potential, having accountable financials is vital. This becomes especially true when you are trying to sell your business. Not only do your financials need to make sense to you, but they need to be as attractive as possible to potential buyers. A key to making this financial transition as smooth as possible lies in the hands of one person: your bookkeeper.READ MORE >>
After completing the sale of your business, there is typically a handover process between the seller and the buyer. One of a buyer’s most significant concerns when taking over a business is that the company’s performance continues as it was before the sale. When a seller is willing to stay on for a handover process post-closing, the buyer has increased trust in the business, resulting in the business selling more quickly and at a higher valuation. Therefore, it will be beneficial to both parties to plan this part of the process well and in advance of the time that the handover will take place. The length, compensation, etc., of the Handover period will be worked through during the Purchase Agreement negotiations. If there is a failure to recognize and offer an acceptable handover period for the business, it could cause a deal to fall apart while it is in due diligence.
Stages Of A Business Handover
The typical stages of a business handover are the Training Stage, Handover Stage, and Assistance Stage. Immediately following the sale, the seller will usually continue to run 100% of the business. During this time, the new owner will take some time to familiarize themselves with the business. Then, as the Training stage begins, the seller will slowly reduce their involvement while the buyer continues to increase theirs. In the Training stage, the seller must create a checklist of items that he can run through with the new owner. Mark each item as complete once it’s finished, and keep this for your records if you run into any issues down the road. It is a good idea to observe how a day in the life of your business typically goes. Take note of every payroll task you complete, every person you communicate with, any supplier or contractor documentation, provide copies of all budgets, information about cash flow, etc. Continue with this process until you feel that you have been able to document all of the particulars that the new owner will need to know in order to keep the business operating smoothly. As the seller trains the new owner, the seller will slowly start to reduce their involvement while the buyer continues to increase theirs. This sequence will continue until the complete handover is achieved.
During the Handover stage, the new owner runs 75%-100% of the business with the seller still on hand to help answer questions and ensure that processes are running smoothly. If you have had a successful Training stage, the new owner will have increased confidence in successfully running the business. This may matter to the seller as well, particularly if there are any deferred payments or earnouts that have been agreed to in the structure of the sale. It is imperative to train the buyer and put them in a position to be successful, as both parties benefit from doing so. The new owner will now be in charge of making crucial decisions and bringing innovative ideas and future plans for the business to the table. Customer and employee relationships with the new owner should be solidly in place at this point, and the seller should have very limited involvement in the day-to-day activities of the business.
Once the new owner is running 100% of the business, it is common to enter the Assistance stage, where both parties have made an agreement to remain in contact for a set period of time in case there are any questions that come up. While the seller is no longer directly engaged with the daily runnings of the company, it is best for them to make themselves available to answer any questions that the new owner might have. Many times the majority of this communication can be handled through email and phone conversations. An essential item to have established for this stage is the amount of time the new owner can expect to receive help from the seller, paying particular care to have the expectations and limitations outlined.
A properly planned Handover period can help the seller and the new owner is mentally prepared for the seller’s exit and help prepare the business, customers, and employees for the handover. Once the handover is complete and the seller exits fully, they can know that the business is in good hands. It is time for them to recover from and reflect on the ownership handover period and identify their next goal to get excited about.
T: 512 861 3301
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If you’ve received an offer for your business, you have three options – the first being take the offer and sell your business. This is possibly something you have been considering, or it seems too good an offer to refuse; however, you should be cautious in such an event and, if you do want to pursue the offer, make sure you do the following:
Keep the Business Sale Confidential
Confidentiality is very important when it comes to the sale of your business. If it gets out that you are selling your business then this could potentially lose you staff, customers, and suppliers as they could get nervous about an impending sale and the changes that could be in store for them. Therefore, do not discuss anything until a non-disclosure agreement (NDA) has been signed, including whether you are prepared to sell the business.
Make Sure you Stay Focused on Your Business
One of the dangers of the sales process is that it is very time-consuming at the point where you really need to focus on maintaining a good business performance – if business performance dips, then this can give a buyer an excuse to lower their offer.
In fact, this is not the only situation where a buyer might decide to lower their initial offer. The buyer is under no obligation to actually pay this price for your company until you both sign the Sales and Purchase Agreement (SPA) and there are several reasons a buyer might try and chip away at the offer to try and get your business for a bargain price.
For example, when you have accepted the offer and signed the subsequent Letter of Intent (LOI), the buyer can commence the due diligence process, providing them with access to confidential information such as financial documents and contracts for a specified period of time, typically 30-60 days. There are two related problems with this. Number one is the fact that the due diligence process is time-consuming and a resource drain, which could lead you to take your eye off the business. Number two is the buyer can now look at re-negotiating now they have had a thorough look at the ins and outs of your business.
Therefore, after this huge resource drain, you now have an offer on the table that does not meet your expectations as the buyer has chipped away at the price. Either you still take this less than favourable offer, or you turn away from the deal. While it is your prerogative to do so, you have lost time and valuable resources, you have given information about your company to another party, and you have not had your full focus on the business.
So – what are the alternatives to accepting an unsolicited offer?READ MORE >>
Benchmark International has successfully negotiated the sale of its client, MC2, Inc. ("MC2 ") to Stark Holdings America, Inc. ("Stark"), formerly known as Stark Technologies Group, Inc., a New York corporation.
Based in Sanford, Florida, MC2 is recognized as Florida's automated control and security systems leader, with more than 20 years of on-site experience. MC2 has successfully evolved into a premier provider of engineered, state-of-the-art direct digital control, energy management systems, security access control, and closed circuit television systems, and lighting control for customers in both public and private sectors.
Under President Roy G. Hoffman Jr.'s leadership, the company has successfully expanded and continues to increase its service footprint throughout the state of Florida. With a team of more than 50 knowledgeable engineers and technicians trained in a variety of automation and security systems, the company is prepared to deploy professionally designed systems to meet customers' specific needs. MC2' s flexibility allows the company to offer proprietary and non-proprietary systems, including integration services to third party systems, offering complete low voltage building solutions.
Mr Hoffman stated, "While Benchmark was involved throughout the process, their assistance on getting extra value built into the deal after the acquirer's initial valuation was received really demonstrated their unique expertise and command of the process."
With more than 29 years in business, Stark is a North American provider of comprehensive intelligent building and energy management solutions. The company boasts over 250 employees and has been involved in projects across all 50 states, as well as 1 0 Canadian Provinces. While Stark continues to experience year-over-year revenue growth, the acquisition of MC2 provides Stark with an expanded geographic presence in the Florida market.
"MC2 is a compelling addition to Stark's platform, and we are truly honored to have worked alongside the MC2 team toward this successful outcome", said Trevor Talkie, Senior Associate at Benchmark International.
Leo VanderSchuur, Director at Benchmark International added, "Allowing both the seller and acquirer to prosper and benefit is always an ideal end result. On behalf of Benchmark International, I'd like to wish both parties the best of luck moving forward."READ MORE >>
Tuesday, February 12th at 10:00am - 11:00am EST
Maximizing value isn’t only about the headline price. It’s about getting the deal right, using your leverage when you have it, and knowing where you stand in the deal at all times.
Sellers lose more money at the Term Sheet stage than in any other part of the process. Buyers know the ins and outs. They know how to best use the Term Sheet and the process that surrounds it to make their offers look better than they might end up being. For sellers, this is typically the least understood part of the company sale process. This experience gap is unfortunate for sellers because it results in not only lost value but at times the loss of the entire deal; a loss that comes after a great deal of financial and emotional investment.
For sellers to truly maximize the value of their business in a sale, they must look beyond the headline number that usually appears in the first paragraph of the Term Sheet and understand the other key value drivers in the rest of the document. If the headline number was the only key term, Term Sheet’s would be one paragraph long. This quick introduction will concentrate on the 12 most common sell-side errors in the Term Sheet process.
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As an owner of a business, there are often times when the employees of the business can become like an extension of the owner’s family. Employees are often present during challenging times in the business owners professional and personal life and the owners of the business can often be a stabilizing presence in an employee’s life. One of the biggest concerns of a business owner is what the welfare of their employees will be upon a successful sale of the business. Often times, the concerns can be placed into four broad buckets,
1.) Will the employees be keeping their jobs?
2.) Will the employees be keeping their same level of compensation?
3.) How will the insurance benefits change, if at all?
4.) How will our company culture change – do we still have team building events planned every quarter and holiday bonuses we can count on?
The answers to these questions can go a long way in determining whether a buyer is the perfect fit for a business, outside of the fundamental valuation and transaction structure. Mergers and acquisitions are complicated endeavors, involving an incredible amount of work and attention to detail. While in the midst of an acquisition, HR Departments are the group tasked with managing perhaps the most valuable part of a company – the human capital. Granted, some aspects of the transaction are unavoidable, including the letting go of employees in an underperforming division or in a role that will be redundant within the acquirer’s organization. But, if both buyer and seller can get on the same page and formulate a plan for informing the employees of a change, this will ease the transition and mitigate the fear of the unknown.
Now, to address the first question that will come to an employee’s mind upon finding out their firm is being acquired – am I going to keep my job? In the vast majority of transactions, employees will retain their roles and often times an acquisition can be an opportunity for upward mobility within a larger organization. Timing will be of the utmost importance when it comes to making any type of announcement regarding an employee’s employment status, whether positive or negative. One hurdle to avoid at all costs is raising alarms unnecessarily. In order to avoid this complication, it’s best to announce a merger or acquisition upon execution of a Definitive Purchase Agreement and the transfer of funds. This ensures that the deal is closed and official and will eliminate the risk of pulling the rug out from under the employees of a recently acquired company.
When the topic of compensation arises, there are numerous factors at play, including the performance of both the buyer, seller and individual employee as well as the defined compensation structure that already exists within the buyer’s corporate infrastructure. Having a discussion regarding compensation can also take a different tone – perhaps a buyer can offer employees a more compelling work/life balance, an office space that offers the opportunity to exercise, eat healthy or be in a location that is convenient and offers easy access to post office hours entertainment. Being able to pitch potential employees on all of the value that a buyer offers aside from the number on their paycheck can help bridge any perceived gaps
Beyond the importance of staying employed and maintaining the current level of earnings, individual employees will also be concerned with their benefits package and whether the buyer offers a more compelling insurance package or one that could be considered a down grade. In any event, being completely transparent about the pros and cons of the new benefits package will be important in mitigating the fear associated with change. A buyer who makes themselves available to answer questions that are both qualitative and quantitative in nature will be able to ensure a smoother transition. This would include providing feedback mechanisms such as one-on-one interviews, focus groups and anonymous surveys. In most cases, there is not a need to turn everything upside down immediately – buyers should not expect for all the new employees to join their new health insurance plan immediately, buyers should also consider letting the new employees keep their old PTO until the end of the year, if a new employees has already reserved PTO, a buyer can still honor that time and garner a little morale.
Ultimately, communication will be key - giving employees an opportunity to feel seen and heard will give them the sense of feeling valued by their new employers. Additionally, this will bring a level of comfort to the seller that those individuals who helped them achieve success will continue to be taken care of and that the culture of a company that takes years to create will remain intact and continue to permeate throughout the new company.
T: +1 (512) 861 3309
Benchmark International has successfully facilitated the acquisition of FullfillPlus, Inc to a private group of buyers. Benchmark International worked diligently to find a Buyer that was a good cultural fit for the business and would allow for the owners of FulfillPlus, Inc to achieve their personal and professional goals.
FulfillPlus, Inc offers a wide range of fulfillment, warehousing, order processing, kitting, assembly, and shipping services tailored to meet their client’s exact marketing needs. They are a single-source supplier for all services related to delivering clients’ products to their clients in a timely and cost-efficient manner. Centrally located on the Gulf Coast, near the Port of Houston, they are ideally situated to handle large and small clients that manufacture in the United States or import products from as far away as China and India to reach their clients efficiently.
The Buyers are part of a company with investment holdings in diverse market segments including hospitality, real estate development, and manufacturing. With a large international presence, the firm was looking to diversify its holdings in both market segment and geography and had a particular interest in the logistics business.
FulfillPlus, the Seller, and the Buyers are pictured together.
Benchmark International was able to procure for FulfillPlus, Inc a buyer that met their financial goals while also being an ideal cultural fit. Benchmark International corresponded with numerous potential buyers and the owners of FulfillPlus, Inc had several in-person meetings and offers to choose from however once they had the opportunity to meet with the representatives from the buyers, both parties knew immediately that FulfillPlus would be a great fit for both.
Benchmark International’s Senior Associate, J.P. Santos, commented “The Benchmark International team is ecstatic that Chuck and Michele, the owners of FulfullPlus, chose a buyer that is going to contribute to the continued growth of the company. Chuck and Michele were communicative, responsive, and collaborative through the Benchmark 360 process. Ultimately, the transaction will allow Chuck and Michele to reap the rewards of years of hard work while continuing to focus on the positive trajectory the company is on and enjoy more leisure time. This was a great result and we couldn’t be happier for all parties.”
Charles Gleason, CEO of FulfillPlus wrote a beautiful letter to the Benchmark International team regarding his experience working with us:
Dear J.P. and entire Benchmark Team:
Michele & I would like to thank you for the great job your entire team did helping us sell our company. We selected Benchmark because of the professionalism shown by all of your representatives as well as the breadth and scope of your company.
Being the founder of this business, it wasn’t easy for me to decide to sell it. We had been so focused on running the company for so many years, dealing with day-to-day issues, we never had time to even think about selling, and I wasn’t quite sure I really wanted to. But we knew we needed some sort of exit strategy for retirement and decided to at least sit-down and review the process with your team. Your team answered all of our concerns and made us feel comfortable enough to initiate the selling process. You re-affirmed to me that it would be my decision on who we sell to and there is no time limit on finding the right buyer. I was skeptical, but after going through the process, I now know it's 100% true. You didn’t pressure us to make decisions and focused your efforts on guiding us through the valuation and sales process at our pace. Nowhere along the way did we feel that you were pressuring us for time or a quick decision.
When it came to meeting prospective buyers, you allowed us to review each prospective buyer’s background before they were allowed to see our financials or meet us. You let us meet (on the phone & in person) with each buyer on our own, then scheduled calls to review the meetings and get our feedback on each prospective buyer. When offers were made, you offered insights into buyer tendencies and how we should respond. It was truly a team effort.
We are now 2 weeks past the closing date and have been working day-to-day with the new owners. We feel we made the right decision and are now finding ourselves looking at golf course communities around the country trying to decide where we eventually want to retire. We’re looking at Anthem, Arizona, Palm Spring, Ca, San Antonio, Tx (Hill country), Austin, Tx, and Greensboro, Ga (Lake Oconee). All areas with beautiful homes and golf communities.
Thanks again for all your help and good luck with future sales,
Over 88% of business owners think their business will stay in the family. In fact, only about 30% of family-owned businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond. As baby boomers are heading for retirement, who is going to take over the businesses the boomers are looking to sell?
Today’s business owners are faced with multiple factors when deciding the right time to sell. The perfect time can be tricky to predict as several economic considerations need to be weighed. The majority of business owners begin this thought process when nearing retirement age, but is this too late? The most important considerations are current economic statistics, market conditions, and industry trends. These are good predictors of a sellers’ market and shows the types of buyers and private equity companies ready to invest. Buyers are looking for businesses in the growth and maturity stages of their business life cycles. During these stages, operational bottlenecks are becoming managed and demand, profits and lasting customer relationships have been built. Business owners sometimes have the tendency to postpone selling until operations and profits begin to decline. This is a costly mistake for any business owner wanting to maximize their company’s value.
Sellers should strive to put aside personal feelings anchoring their decision-making process when considering their exit strategy. When considering selling, business owners should focus their attention on asking is my business in a financial incline, is my staff in place able to succeed without me, do I have a diversified client structure, and are my capital expenditures under control?Business owners need to consider these objectives now and determine if a sale is the right decision. Economic environments quickly change and in order to achieve a premium sales price, a favorable market is the key. Currently, multiples are at a historic high with limited quality businesses available for sale. Baby boomers are holding on to their businesses and aren’t willing to sell until they have to.
This can be a hard-personal decision to make for owners who have built their companies from infancy. Owners are conflicted with their decision, asking did I do the right thing, did I maximize my company’s value, will my employees be taken care of, and what is next in my life.Before considering the sale of your business, define both the internal and external factors and remove any hidden traps that cloud your decision-making process and can result in missed opportunities. By having a written exit plan, an experienced team of advisors, and patience, business owners will realize the full value of their life’s work.
Here at Benchmark International, we understand the emotional and physical stress that accompanies the decision to sell. Our experienced advisors assist by providing an outside perspective to business owners and by identifying suitable conditions in the M&A sector. Our responsibility is to ensure our clients are presented with all the facts and strategies to move forward. Benchmark International values close relationships and ensures that our clients are fully prepared to make the right decision when the day comes.
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Many individuals or companies feel that the best way to either enter an industry or expand within an industry is through buying a business. While this is often true, it is hard to know where to begin the process of buying a business.
Define your search criteria?
The first step to buying a business is comprise a list of features that you are seeking in a business. Similar to the car buying process. Do you want leather seats, a certain brand, navigation, power windows, etc? Narrowing your search criteria will help save you time, resources, and frustration.
Here’s a few questions you will want to be able to answer as you begin your search:
- What size business are you seeking? This question relates to both revenue and profitability.
- Do you want the owner to remain apart of the business post-closing? If so, for how long?
- What geographical areas do you prefer?
- What industry and sectors are of interest to you? Be as specific as possible. If you are looking to buy a marketing firm, what type of end customers do you prefer? Do you want the business to cater to government customers, healthcare companies, etc?
- What is your budget?
Begin your search
There are many ways to uncover businesses for sale. You can search various websites, reach out to a Mergers and Acquisitions’ (M&A) specialist, or network to try and find deals that have not hit the market yet. Some buyers will approach business owners directly to see if they are interested in selling their business directly to the buyer.
Websites featuring businesses for sale often can be overwhelming. If you search several websites, you may see the same listing on multiple websites.
There are M&A specialists that work with buyers to find businesses for sale and others that work with sellers to find buyers. Some M&A specialists represent both buyers and sellers. If you are working with a specialist that represents both parties in a transaction, you will want to understand the intermediary’s incentives. It is hard to keep interests aligned if there are conflicts between the parties. If you are working with a sell-side M&A specialist, often times they will have exclusive listings meaning that you can only have access to that specific deal through that specialist. Also, a sell-side M&A specialist may take a commitment fee. This will show the seller’s commitment to the sale process.
Some potential buyers build a network to look for opportunities to purchase businesses or build their own database of potential businesses they would like to purchase and begin reaching out to those business owners. While this sounds like an easy process, do not be fooled by the amount of time and resources you will use trying to speak with the business owners and convincing them to complete a deal with you. Typically, business owners that are open to exploring the idea of selling will entertain a conversation but they eventually want to go to market to test the valuation. Often times buyers will get close to the end of a transaction but then the seller will decide not to sale. If you are willing to pay an amount that is acceptable to the seller then they often wonder if there is someone that is willing to pay more and if they have undervalued their business.
Begin to review businesses
Sellers will want a Non-Disclosure Agreement (NDA) in place prior to releasing confidential information. This practice is very typical in the lower mid-market. As a buyer, you will want to have the opportunity to speak directly with the business owner. They will know their business better than anyone, and you will have specific questions that only the business owner will be able to answer. You will also want to visit the business' facility. This visit will tell you a lot about the company, its culture, and what type of liabilities you may want to explore further during the due diligence process. Once you find the perfect business, you will want to move swiftly to the next stage of the purchasing process as there are probably other buyers looking at the same opportunity and you do not want to miss out.
I found the perfect business, now what?
After you find the perfect business, you will need to comprise a valuation for the business. The valuation will be covered in a Letter of Intent (LOI) as well as the structure (how is the valuation going to be paid to the seller) of the offer and other high-level details. In the LOI, you will want to include the seller’s involvement post close, an exclusivity clause allowing you the exclusive right to review the opportunity, the requirements of due diligence along with a timeline, if possible, and the anticipated closing date. A LOI tends to include many more details but above highlights some of the details a seller will want to understand prior to agreeing to move forward.
The LOI is executed. Where do we go from here?
After a LOI is executed, due diligence begins. As the buyer, you want to confirm that what you think you are buying is what you are actually buying. You will want to understand the risk associated with the purchase of the business. You will also want to engage your advisors to provide legal advice for the purchase agreement and tax advice for the structure of the transaction.
While purchasing a business sounds like a quick and easy process, it can take months, if not a year or two, to make the purchase. There are a lot of factors that you will encounter and unforeseen obstacles that stand in your way. An M&A specialist can help you navigate these obstacles and help you purchase a business within your desired timeframe. Whether you choose to seek to purchase a business on your own or bring in a M&A specialist, we wish you the best of luck with your journey.
T: +1 (512) 347 2000
Many business owners come to a point where they are ready to “take some chips off the table,” and continue to run their business on a day to day basis while cashing in on some of their hard-earned growth. In these deals a business owner sells equity in the company while staying on and maintaining a salary. These deals are known as elevator deals. An elevator deal consists of a buyer taking a stake in the business for an agreed amount of cash while leaving day to day management to the current owner.
Perhaps your children have reached college age and you now have tuition bills coming in twice a year. Perhaps you’re not quite ready to retire, but would like to cash-in on some of your business’ current market value, and invest that money in your retirement fund. Or, perhaps you’re simply ready to take some chips off the table while continuing to earn a salary. In these cases, an elevator deal would be the right fit for you.
Elevator Deals include the owner selling part of their business in exchange for partial ownership. In this manner of exchange, the business owner(s) will maintain a minority equity stake in their company, while new ownership takes on the majority position. These deals often include prior owners staying on, working on their business in a day-to-day capacity, while earning a salary, with a percentage of the business’ bottom line passing through to new ownership. In some cases, owners are able to step outside of their prior managerial roles while maintaining a stake in the company and its profits.
The goal for new investors is to grow the business and the value of their stake in the company. These owners may have the goal of a resale several years down the road, and growing your business and its place in your community, be it regional or national, just as you have done is their goal. In maintaining the high standard you have set for the quality of your products or services, equity investors are growing the value of their investment.
Many business owners worry about selling part or most of their company. They worry that the buyer’s intent is to take as much cash out of the business as possible and leave prior owners, those people who built the business from scratch, with a company they love left in tatters. Benchmark International will secure equity investors in your business are the right fit. Ensuring that they intend to increase the value of your company while maintaining its true identity.
In engaging Benchmark International, our team will diligently craft marketing materials to accurately reflect your business to the market. Once you approve of those marketing materials, our transaction team will take over and begin marketing your company to potential investors. At this point, many business owners begin to feel as though they are pressured to sell to individuals who don’t understand the heart and values of their company. Benchmark International will work tirelessly to ensure you never feel those emotions. We will work for you until we find the right fit, in order to ensure that as you continue to manage your company you’re not hand-tied to investors who are simply concerned with how much they can take out of your business’ profits each year.
If you are interested in selling a portion of your business to help grow your company while maintaining a portion of your business, please reach out to us and let us help you take the
Benchmark International has facilitated the sale of certain assets of South Texas Precision Inc. to Harris Machine Tools. South Texas Precision Inc., is a Texas-based custom machine shop that manufactures and provides turnkey oilfield equipment for OEMs in the Houston market.
The company is a qualified vendor of choice for many of its products. Harris Machine Tools is a Houston-based sales and machinery company that distributes a full line of quality CNC machine tools, such as mills, drills, lathes, presses and saws. The company has been an international leader in the metal working market place since 1979.
Benchmark International’s extensive network and ability to reach a wide market of buyers allowed us to find an acquirer interested in purchasing the manufacturing division of South Texas Precision. Benchmark provided a variety of options to the client to allow them to make the best selection for the future of their business.
In reference to the transaction, Walter Schouten, President of South Texas Precision,
explained his experience with Benchmark International, “We enjoyed working with Benchmark International. From the beginning, they understood the Oil & Gas Manufacturing market and were able to uncover various competent buyers for the machine shop portion of the business. The team continuously worked with us and adapted their strategy to match the ever changing market conditions. Benchmark International presented several options to us, which allowed us to choose the best option for South Texas Precision. We choose to carve out the manufacturing division of our business while continuing to operate the retail and distribution division of the business.”
Senior Associate, William Van Buren, mentioned “The Austin, Texas team truly enjoyed working with the South Texas Precision team. We understand what business owners go through on a daily basis to keep their businesses successful. The Austin team focused on presenting our clients, Walt and Jeff, options for them to continue the longevity and success of their business. Walt and Jeff were responsive to our inquiries and were the ideal partners to work with for our team.”
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A merger is very similar to a marriage and, like every long-term relationship, it is imperative that mergers happen for the right reasons. Like many things in life, there is no secret recipe for a successful transaction. While the strategy behind most mergers is very important to obtain the maximum value for a business, finding the right reason to execute a merger could determine the success post-acquisition.
When two companies hold a strong position in their respective areas, a merger targeted to enhance their position in the market, or capture a larger market share, makes perfect sense. One of the most common goals for transactions is to achieve or enhance value; however, buyers have different reasons for considering an acquisition and each entity looks at a new opportunity differently. The following points summarize some of the primary reasons that entities choose the mergers and acquisition route.
- Increased capacity
When entertaining an acquisition opportunity, buyers tend to focus on the increased capacity the target business will provide when combined with the acquiring company. For example, a company in the manufacturing space could be interested in acquiring a business to leverage the expensive manufacturing operations. Another great example are companies wanting to procure a unique technology platform instead of building it on their own.
- Competitive Edge
Business owners are constantly looking to remain competitive. Many have realized that, without adequate strategies in place, their companies cannot survive the ever-changing innovations in the market. Therefore, business owners are taking the merger route to expand their footprints and capabilities. For example, a buyer can focus on opportunities that will allow their business to expand into a new market where the partnering company already has a strong presence, and leverage their experience to quickly gain additional market share.
Diversification is key to remain successful and competitive in the business world. Buyers understand that by combining their products and services with other companies, they may gain a competitive edge over others. Buyers tend to look for companies that offer other products or services that complement the buyer’s current operations. An example is the recent acquisition of Aetna by CVS Health. With this acquisition, CVS pharmacy locations are able to include additional services previously not available to its customers.
- Cost Savings
Most business owners are constantly looking for ways to increase profitability. For most businesses, economies of scale is a great way to increase profits. When two companies are in the same line of business or produce similar goods or services, it makes sense for them to merge together and combine locations, or reduce operating costs by integrating and streamlining support functions. Buyers understand this concept and seek to acquire businesses where the total cost of production is lowered with increasing volume, and total profits are maximized.
The above points are merely four of the most common reasons buyers seek to acquire a new business. Even if the acquirer is a financial buyer, they still have a strategic reason for considering the opportunity.
T: +1 (813) 313 6150
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The decision to sell your business can be incredibly difficult. In addition to the financial capital you have invested in your company, you have incurred an intangible amount of “sweat equity, through the hard work spent building your business and the natural emotional investment made in the company. That’s why, once the decision to sell has been made, it is imperative that proper preparation is put in place to ensure your goals are met once your company is brought to market. Owners who approach exit planning systematically and methodically are more likely to maximize the value of their business and sell on their own terms.
The primary factor influencing a company’s value is its earnings. It is essential that the company’s financials present potential buyers with a clear story, allowing them to fully evaluate the company’s production. Presenting your business as efficient, with solid cash flows, a clean balance sheet, and low expense requirements, will position it as an attractive acquisition. There are several steps a business owner can take when reassessing their financials.
First, small private companies’ income statements are typically geared towards minimizing the company’s taxable net income. Although beneficial to the business owner, this approach is counterproductive in the context of a sale. As such, discretionary expenses that are not critical to operations and have not, or will not, impact revenues should be identified and eliminated. This could include owner/shareholder expenses, family-member salaries, fringe benefits or exorbitant perks, and extraordinary one-time expenses. Not only will this exercise maximize net income, but it will also present a normalized picture of the business to acquirers.
Second, organizing your balance sheet is key in preparing for a transaction. Sellers should remove all assets unrelated to their business from the balance sheet, as well as identify excess assets that could be converted to cash without adversely impacting the business. A buyer will not be interested in paying for excess inventory and, as such, this presents an opportunity for the seller to increase the total yield from the sale.
Third, it is important that a seller fully understands the company’s working capital before engaging a buyer. Working capital is often a point of negotiation between the buyer and seller. Buyers expect to receive a “normal” level, and often use low amounts of working capital to drive down the total cash paid at close. Managing working capital requires both time and effort, but it can result in greater efficiency and can lower the total level of working capital buyers expect to have delivered.
Lastly, the reliability of a company’s financial statements is critical in influencing a buyer’s decision. It is recommended that, before going to market, a seller contracts an independent accounting firm to review or audit their company’s financial statements. This will ensure the company is presented in an accurate manner, and will instill a sense of confidence in potential buyers, resulting in a greater level of trust and better valuations.
A company’s operations are just as important as financials. Potential buyers will seek to comprehensively understand the business practices behind a company’s earnings. A well-run business, with efficient operations, and good growth prospects will appear more attractive to any buyer. Unfortunately, businesses often have operational issues that could jeopardize a transaction. It is necessary for sellers to identify these issues before going to market and, in any case where the issue cannot be resolved, prepare to address it in a forthright manner.
For example, although a company’s clientele is not directly reflected in its financial statements, a company’s book of clients is a critical point of examination for a buyer. An ideal business has a broad customer base with little customer concentration. Dependency on a limited number of large customers could significantly reduce the marketability of a company. In these cases, it is important that the seller address this issue head on by either diversifying the company’s clientele before going to market, or developing a narrative to mitigate this issue and reassure buyers.
Additionally, a business owner’s level of involvement in the company is an important factor to buyers. They are acquiring the business, not the seller. As such, buyers will want to see a strong supporting management team, indicating the business will continue to be successful long after the owner has left. As a business owner prepares to go to market, it is key that they evaluate their role in business operations and implement a succession plan.
Lastly, it is imperative that a business owner continues to grow revenues, as well as develop a realistic growth strategy. Buyers are purchasing the current and future cash flows of the business; historical growth, as well as a growth strategy with expansion opportunities, provides a blueprint for what’s to come. Presenting buyers with growth plans that are reasonable and achievable validates the credibility of management, and demonstrating that credibility through continued revenue growth illustrates the quality of the business.
For many business owners, selling a business happens once in a lifetime. When dealing with such a monumental event, a little more preparation today is certainly worth the added value tomorrow. Proper planning and advanced preparation is critical in order to maximize the value of your business and the probability of closing a transaction. Additionally, advice from seasoned professionals can provide you with savings and add significant value. At Benchmark International, we are proud to provide world-class mergers and acquisitions services, and we work hard to ensure your company’s value is maximized and your business is sold on your terms.
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