By Davis Blaine
There are about 7 million baby boomer business owners. Two-thirds of those owners plan to sell their businesses. It is estimated that over 4.5 million businesses could be sold over the next 20 years, an average of more than 225,000 per year going to market.
The above scenario could have been pronounced last year. Why is 2014 different for sellers? For numerous professionals, including those closely aligned to the process of selling and buying businesses, 2012 and 2013 were slower than normal. Their clients were probably not ready to sell, or not convinced they could receive maximum value.
The new normal for deals is an elongated time to commit, both for buyers and sellers. Consequently, several impediments follow.
Buyers are more cautious. Even prior to buyers submitting an indication of interest or letter of interest, they want more information on the seller. Sometimes, this delay allows them another month or quarter of financial data. At the same time, their delay may eliminate them from consideration for the highly-sought sellers.
Also, private equity groups often take a longer look at the synergies of a seller fitting their platform, which may delay initiating the letter of interest. With more limited access to debt leverage, this group of buyers may need to ensure their equity flow and returns are properly analyzed.
In the era of advanced technology, buyers can readily access a myriad of seller and market information. Thus, they request numerous types of analyses from the seller.The due diligence process is, therefore, often longer than in the past.
While buyers have available cash, or access thereto, many do not play in the “blind auction” process anymore.
Consequently, there are fewer seller cases where numerous buyers vie for the deal. Many sellers still have financial, customer and/or management issues, inconsistencies and risks. Obviously, the very best managed firms that are market or industry leaders sell quickly and for premiums. However, there is a real dearth of these companies.
Having survived the last five years making fewer deals, today’s buyers often opt to pass before getting into a bidding war. In their minds, safety outweighs sorry.
Finally, for the senior lenders who participate in purchases, the diligence is usually conducted at a snail’s pace. This occurs because the lenders are overly cautious, and the process to create documentation to comply with the burdensome regulations is onerous.
Sellers in 2014
To overcome any uncertainty, sellers should be well-prepared. This preparation process should be started now to go to market in 2014, and include at least the following:
• Ensuring that qualified middle management is in place.
• Tighten company control of information by implementing enterprise accounting and operational systems.
• Understand what intellectual property is owned and the advantages and value it provides your firm.
• Assess what type of deal terms you really want, and how that fits with the market of potential buyers.
• Based on the marketing process, know when to allow your investment bank to reach out to key competitors.
• Determine whether your current advisors are capable of providing you the best professional advice, including experience in selling companies.
• Understand clearly the tax implications of your deal and the advice of tax and wealth management professionals to retain as much as possible.
Buyers in 2014
Buyers this year should:
• Know how much available dry powder (funds) can be applied to each potential deal, and the debt leverage.
• Relate to the seller why you are the “best” suitor and what your intentions are for the firm and employees.
• If the original price needs to be re-traded (downward), do it early in the process. Also, state clearly your reasoning for price changes. For example, understand the EBITDA adjustments proffered by the seller and explain why they are not acceptable. This type of dialogue should continue during the contractual negotiations.
• Elicit early all or nearly all of the seller’s concerns, including the deal structure and working capital computations.
• Provide a purchase agreement that is reasonable and understandable.
Based on our experience in the lower-middle and middle markets, which includes deals from $10 million to $150 million, buyers need to show more intent and urgency for the really well-priced transactions. On the other hand, sellers must plan and prepare for their exit, and not waffle on what they want.
There is rarely a strong second chance to make the best impression and maintain the interest of the right buyer.
• Davis Blaine is chairman of The Mentor Group and Mentor Securities, a Los Angeles-based investment bank focused on advising companies in valuation, mergers and acquisitions, and capital markets transactions