- Who are the potential buyers of my business?
Generally, buyers fall into two distinct buckets – strategic and financial. Strategic buyers are operating businesses who already have management teams in place and might be a supplier, customer, or competitor of yours. They are typically less concerned about keeping an owner in place post-closing. Financial buyers, however, are private equity investors looking to back existing management teams and therefore, are keen on retaining management talent to operate the business on a daily basis. Also, are there potential competitive sensitivities that need to be considered before approaching certain buyers? Would you want to exclude certain parties from your buyer/investor list?
- How long will an M&A transaction take?
Matrix generally estimates an M&A sale process will take approximately six months following receipt of all requested company information requested. This timeframe can vary in length (both shorter and longer) based on a variety of factors. Matrix’s transaction process is efficient and shepherds businesses and their owners towards a quick and quiet transaction closing. This timetable assumes a broader process is involved in order to encourage competition between and among interested parties.
- How much is my business worth?
There are several academic methodologies for valuing a business, most of which are commonly used by all acquirers when evaluating a business. A number of models and comparative tools allow buyers (with the help of a few assumptions about your business) to triangulate on a value they feel is appropriate. Ultimately though, beauty (and value) is in the eye of the beholder. The manner in which a strategic buyer will look at your business will differ from the way a private equity investor will view things. Every potential acquirer will weigh the information provided to them differently and evaluate what a “fair” price is. Buyers and investors typically value a privately-owned company on a multiple of cash flow or EBITDA (earnings before interest, taxes, depreciation, and amortization). Credit is usually given to unusual or one-time expenses and therefore an adjusted cash flow number is reconstructed – this is also known as Adjusted EBITDA, or “normalized” cash flow. Investors and buyers want to understand the true cash flow generating capability of the target entity.
- What are investors going to want to know and learn about my business?
Broadly speaking, investors are going to want to explore and understand two things: risk and growth potential. Whether it is measuring the stability and predictability of your customer base, your margin profile over time, or your company’s backlog, the ultimate goal is to assess how risky a purchase of your business will be, and their potential for upside.
- Will the buyers want me to stay with the business going forward?
If so, for how long? Most owners have a wealth of institutional knowledge based on their years of building and growing their companies. In most cases, acquirers will want to preserve that knowledge by keeping shareholders in the business going forward. The way that role evolves or manifests itself is typically a collaborative discussion between the buyer and seller. This is a point of negotiation like everything else in a transaction, but often times we see sellers in a position to pursue their desired role going forward. Most buyers will request shareholders stay in the business for a minimum two year “transition period”, particularly if the owners maintain a key operational role. In some strategic sales, sellers are not required to stay if the buyer is convinced that the sellers are not critical to the future success of the company. Also, do you have the management depth to support the transaction you are pursuing? If you want to ride off into the sunset, do you have a second in command that’s ready to take the reins?
- What should I tell my employees?
This can be entirely dictated by the culture of the company or the type of transaction being pursued. We often recommend keeping the circle of knowledge as small as possible during initial dialogues and until the transaction is nearly completed. There is some risk of destabilizing the workforce or employees if a transaction does not close, so the fewer people that know, the better. In general, most transactions bring greater opportunities to employees. The goal of all acquisitions is growth, which should have a positive impact overall.
- What is a recapitalization?
A recapitalization (or “recap”), as opposed to a complete sale, gives business owners the opportunity to sell a portion of their company while still maintaining a significant ownership stake and executive role – in essence creating liquidity and risk diversification today, while setting the stage for a second “bite of the apple” down the road when the company is sold again in 3-7 years. These transactions enable business owners to partially cash out of their investment in the business and capitalize on the enormous amount of sweat equity they have contributed over the years. It is very different from a complete sale of the company. The controlling shareholders continue as partners, investors, and managers of the company while the new partners are typically a private equity group that share the ownership’s culture and vision for the future of the business. If you would like to learn more about this type of transaction, click here.
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The contents of this publication are presented for informational purposes only. While Matrix Capital Markets Group, Inc. and MCMG Capital Advisors, Inc. (“Matrix”) believe the information presented in this publication is accurate, this publication is provided “AS IS” and without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranty of merchantability, fitness for a particular purpose, or non-infringement. Matrix assumes no responsibility for errors or omissions in this publication or other documents which may be contained in, referenced, or linked to this publication. Any recipient of this publication is expressly responsible to seek out its own professional advice with respect to the information contained herein.