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When it comes to business valuation, “it depends” is the honest answer to the question, what is the median for small business (sorry, I hate the answer too). Why? Let’s say you own a construction business doing $5 million/year in revenues and $500,000 in EBITDA (profits), or about 10% of revenues. Because construction businesses can range from $0 to $billions, valuation tracking databases have to set parameters. Databases will report multiples to get a value for smaller construction businesses, but the RANGE might look like this: 3.23x for 25th percentile 5.23x median 12.65x for 75th percentile However it really depends on the nature of the businesses selected to generate the range. If an advisor chooses large businesses, the range could be as follows: 8x for 25th percentile 12x median 20x for 75th percentile If you are the owner of the $5 million construction business with $500,000 profits, you may want a value of 20x profits, but you are likely to be disappointed. Even with the smaller range, the 75th percentile probably means companies at $15 million in revenues and 15% profits. So business owners: you need to ask about the range of value for the higher and lower percentiles, to get a fair judge of value. I can assure you that buyers (and their bankers) who use these same databases, will ask about the range. _____________________________ If you’d like to think more deeply about your business, try the LEARN MORE
The sale of a business marks a major life event. It’s emotional, stressful, and exciting all at the same time. And unfortunately, it’s often a lot of work. Most business owners will only experience the process of selling a business once in their life. This is both good and bad news. On the bright side, you only need to get through it once. But many business owners aren’t ready for the process and risk leaving money on the table as a result. With many sellers relying on the sale to fund their retirement and lifelong financial goals, getting it right from the start is critical. Here are tips from sell-side business advisors on what to do (and not do) when selling a business. What to do (and not do) when selling a business Start thinking about selling your business early — really early One of the top mistakes sellers make when selling their business is not starting the process early enough. There are many reasons starting last minute can really hurt your bottom line. It’s not uncommon for business owners to assume they’ll never retire at some point during their life. But as often happens, life changes. Perhaps health concerns for you or a spouse make continuing to run your business difficult. Or maybe you eventually lose the excitement when getting up every day and want a change of pace. Sudden sales or immediate retirements Unfortunately, when business owners want to sell with a tight timeline (or fire sale), they may have fewer options to exit. It’s not uncommon for some buyers to want the owner and/or members of the management team to stay on for a period to help with the transition. If there’s an earn-out, it’ll usually require the seller to stick with the company for different milestones (time, financial, or otherwise) to earn the full purchase price. Earn-outs aren’t ideal for sellers, but if you’re unwilling or unable to consider deals with any continuation component, it could impact the sale price, timeline to find a buyer, or both. Make your business more sellable later by getting advice now Business brokers often recommend getting a valuation done years before expecting to sell the company. Sarah Grossman, Principal of BayState Business Brokers in Needham, MA, says this helps sellers “shape their timeline and any financial planning that needs to be completed prior to a sale.” Understanding the fair market value of the company is critical to setting expectations for the seller, but understanding the drivers of the valuation can help increase the sale price over time. Grossman says, “a [business] broker can advise them on things they can do in their business over the next few years to make it more saleable when it does go on the market.” How to maximize your cash at closing Aaron Naisbitt, Managing Director at Dunn Rush & Co, an investment bank focused on sell-side M&A in Boston, MA, emphasizes the importance of going to market and knowing what your business is worth. He says, “the biggest mistake many businesses owners make is not running a competitive process when the business is capable of attracting interest from a broad number of buyers. This mistake most often occurs when the owner has already made the second biggest mistake – not taking the time to educate themselves and prepare adequately for the process.” Not every business will be able to run a competitive process. But those that can, and don’t, “Will leave money and terms on the table if they do not do so” he adds. Getting professional help is key here as trying to negotiate a sale directly with a buyer might be short-sighted. Grossman says it’s not uncommon for sellers to be approached directly by competitors. She cautions sellers considering working with buyers directly as “They could be leaving significant money on the table without a clear understanding of the valuation of their company. Sellers also need to work with a broker and their advisors to understand a typical deal structure so that they can maximize their cash at closing.” The importance of understanding the terms of the deal cannot be overstated. This is where money is made or lost. Naisbitt cautions that sometimes terms can sound really good, but aren’t always common sense. He adds that without an advisor, sellers “Don’t know where to argue.” During negotiations, you have to consider “What is it that’s important to you and what are you willing to give up” he says. Exit planning is not time to DIY — assemble your team of advisors When selling a company, gathering your team of advisors early on is key to getting a successful outcome. Again, odds are you haven’t sold a business before and probably won’t again. We don’t know what we don’t know…and you only have one shot to get this right. Your team of business and personal advisors will be instrumental in getting the deal over the finish line. Your business advisory team may consist of: a business broker or M&A advisor, accounting and tax advisors, and transaction/M&A attorney. On the personal side, your sudden wealth advisor who focuses on helping individuals experiencing a transformative liquidity event. Be sure to involve your wealth advisor in discussions around deal terms too. For example, when considering deal structure, it’s important to ensure alignment with your objectives or financial needs. What are your income needs after the sale or do you have plans for a big purchase? Your advisor can help determine how much cash you need at closing and whether to consider the pros and cons of arrangements like an installment sale. And at closing, a financial advisor can help you determine Section 1202, realizing the gain over time with an installment sale, asset versus stock purchase, or state tax implications such as the charitable goals, legacy objectives for heirs, or estate tax planning strategies. Brokers explain what sellers are most unprepared for during the process Selling a business is a lot of work. In addition to running the company in the usual course of business, sellers also need to comply with a host of due diligence requests from the buyer’s team and the lender financing the transaction. The magnitude of this process is by far the most
Starting with the End in Mind – webinar for business owners and buyers May 16 at 1PM (EDT) If you have the following questions, this webinar is for you! How do I strategically think about my end game? In other words, how do I figure out what game I am playing? What makes a business hard to sell and limited in market value? What are some major value enhancement strategies available to my business? What are reasonable timeline considerations in growing, preparing, and selling my business and what capacity needs are required to be added? How do I build a team of advisors? Speakers include: Amanda A. Russo: CEO of Cornerstone Paradigm Consulting Ryan Goral: CEO of Gspire Group Paul Cronin: three-time founder and M&A Advisor at True North Advisors Group For event details and registration, click
The other day, a marketing expert asked me for “a hook” to explain what I do. I replied, “I sell smaller companies to larger companies, I am an M&A Advisor”. The truth is that I often say no to a lot of owners who ask me to sell their business, or hear no from a lot of buyers who take a look at my clients. So painful. You see, many business owners are really accidental entrepreneurs. If you are a business owner, maybe you got good at something working for someone else. Then you got ticked off at your boss, or the company goes out of business (because THAT owner failed to build business value), and someone hires you to do a job. That job turns into two, then 10, then 50, and so on. Before you know it, you have to hire employees (ugh), and you have a business. You work every day – Sundays too. 60, 80, 100 hours a week. Skip vacations. Miss your kids’ birthdays and soccer games. Whatever it takes. Why, because “no one else can do the job better than you”. 25 years go by and you feel an ache in your back, or your hip, or your head, and you say – “maybe I can sell this thing”. So you ask your CPA for some names of brokers or M&A advisors and make some calls. Then you get stabbed in the heart, when people like me tell you that your business is not really a business – it’s a job with employees, and late invoices. Hard to relive 25 years – isn’t it? If you want to change this outcome – there is hope, BUT it takes time and money to make your business sell-able. It starts by swallowing your pride and doing the work ON your business. You can turn things around over a few years, and come back to me with real profits, proven systems, and a key manager or two that you trust to run the business. That is when I say, “I can sell your business”. And the pain starts to go away. Maybe you even start to smile – again. It can happen, but it’s your choice: “Whatever it takes” or “Whatever happens” Which do you choose? ********************************* If you are a business owner who’d like to think more deeply about your business, try the
I get this question a lot in M&A. The purchase price of a business can have a number elements: 1. down payment (cash equity from the buyer) 2. bank financing 3. seller’s note 4. installment sale 5. earn-out 6. commissions on future sales 7. consulting agreement for the seller, post-acquisition Earn-out’s, commissions and consulting agreements are often used to “bridge the value gap” between buyer and seller. In some cases, an earn-out is prohibited (SBA loans usually do so), or impractical. So, a consulting agreement can help. Let’s say you own a business and the buyer offer’s $1 million, but you think the business is worth $1.2 million based on growth potential with a new customer coming in. The buyer thinks there is downside risk that customers may leave, once you (the seller) leaves. One solution is where you and the buyer to agree to the $1.2 million purchase price contingent on the terms of the consulting agreement: $200k cash $800k bank loan $200k consulting agreement that might look like this: If the revenues stay at 100% to 90% of the current year (the base year), you earn $200k. If they fall 89% to 80%, you earn $150k, and follow a similar “ladder”. If the new contract yields at least a 10% increase in the base year, you (the seller) gain 20% of the profits from that new customer. This presents a win-win scenario for buyer and seller, and usually works with many lenders.
That is a question many businesses have faced over the years. Today, there are businesses that saw big increases in sales during the early days of the pandemic (2020 – 2021), but 2022 softened and 2023 seems kind of flat. This is especially true in many retail businesses “selling things”. Why? Because many consumers switched to buying services (travel, etc.), after redecorating their house, or buying power sports equipment, etc. Since leisure travel is almost back to 2019 levels, and inflation surged (at least for a while), there is only so much money to go around. As a business owner who wants to sell in such a scenario, you have to show financials from 2018 to 2022, and then estimate 2023 and 2024. If you can show that overall business growth from 2018 to now, then buyers may see this sales dip as part of the normal business cycle. That said, as a seller, you should be prepared for a price that reflects the business as it is, not what it was in 2020-2021. You also may see buyers put earn-outs into their offers, that are based on your forecast for 2024 and 2025. This give your the opportunity to get more money over the next year or two, versus what you may get at the closing table. So the answer to my question is “yes”, you can sell a business when sales take a dip, but you have to be flexible and show that there are growth opportunities for the buyer.
It seems intuitive: a deal requires compromise. Sellers and buyers each have their own goals (some more realistic than others) and should come together, but each often begins the process oblivious to the other’s needs. Suppose you’ve owned an auto service station for 30 years. You are tired of all the hassles and have made a lot of money over that time, plus you are in the typical “retirement age” of your 60’s. You also own the real estate and think you should keep it for “retirement income”. A reasonable goal on its own. After going to market with your friendly M&A advisor, you find the perfect buyer – “young blood”, an excellent mechanic who ran a competitor’s shop for 5 years. Perfect situation, right? Then the buyer looks at bank financing and sees that the cash flow of the business is enough to buy the business, but at current interest rates (11% in 2023), not at the price you want. He asks for some heavy seller financing and you balk. The buyer’s banker says ‘hey, if you buy the real estate, I can package it with the acquisition loan and stretch the term to 30 years” – which makes the cash flow sufficient to cover the loan and a lot closer to the price you want. ‘But what about my rental income?’ you ask. Reasonable question, but your goal of keeping the real estate is in conflict with your goal of avoiding heavy seller financing. Goal vs. goal, as it were. The buyer is thinking that you are greedy, not listening to his needs and begins to withdraw. But your business is near where he lives, bigger than his current job and will help him achieve his goal of financial independence. He is not listening to your goal of retirement income, but risks losing his big life goal. As the seller, if you sell the real estate you are giving up the future rental income, while gaining significant immediate capital from the sale. You are also reducing risk of the buyer not paying back all the seller financing (in truth, many deals require some seller financing). Of course, you will face higher capital gains taxes, the larger the transaction. The buyer’s CPA asks to speak with your CPA and they come up with some ideas that will mitigate your risk and still provide you with retirement income. (I’m saving some ideas on that for another post). Bottom line: talking to trusted advisors, can help you assess your goals/needs versus the buyers goals/needs to arrive at a win-win deal. Cue the champagne!
RSG is excited to announce our new workshop titled “Professionalizing the Family Business,” which is initially available to MA-based family businesses. Generous state funding is available since our workshop is approved through the MA Workforce Training Fund – specifically the Express Program. If you have existing MA clients or others in your network that might benefit from the workshop, let’s discuss further and/or please feel free to share. Thank you! Below are a few workshop highlights and the link to my workshop summary page. Workshop Summary Page: Overview: Through our workshop, we interact one-one one with your family business participants, teaching you how to further “professionalize” your organization, while preserving the company’s unique attributes, culture and history. Our instruction covers your current state of professionalism, improvement areas, prioritization and a change roadmap, as well as important considerations for the family dynamic. Defining Professionalism: An approach to managing your operating rhythms that is organized, clear and repeatable in order to effectively execute upon your company’s big picture objectives. Benefits: Improved organizational effectiveness A more sustainable business model A healthier organization and culture Course Structure: 9 hours of interactive instruction, broken out over 3 sessions Available for up to 8 of your employees At your office and/or virtual sessions available Pricing: $6,000 flat fee with generous MA state funding that could very well allow for quick full or partial MA state reimbursement. Know your state funding eligibility and approval status quickly (typically within 3 weeks) and before you decide whether or not to take the workshop.
Have you ever had a deal blow up at the eleventh hour because your client got cold feet or found fault with the deal terms for seemingly irrational reasons? If so, you have likely witnessed the disruptive effects of unaddressed unpleasant feelings and concerns. All change, even when it results in a huge payout, involves loss. Exiting business owners lose a key part of their identity, long-standing relationships, familiar routines, the sense of doing something well and being recognized for it, and more. They also face tough choices about what to do with the rest of their lives and concerns about how their newly liquid wealth will impact their family and other relationships. This is a lot to deal with. One way clients cope is by trying not to think about it. Instead, they focus on the business of getting the deal done. Meanwhile, advisors often have their own reasons for focusing on getting the deal to close. The unfortunate outcome can be that business owners’ unaddressed mixed feelings get acted out in the form of inexplicable and counter-productive behavior as closing approaches. Advisors who have not had psychological training often try to address last-minute objections with rational counter arguments. This can make things worse, especially if the client begins to feel pressured. Most experienced advisors have observed this pattern. The question is what to do about it. My suggestion is to encourage your clients to use a professional coach to help them anticipate the feelings, concerns, and choices they will face during the exit process and to begin addressing them even as they proceed with the other steps needed to produce a successful exit. Eventually, providing clients with this type of support may come to be seen as a “best practice.” Meanwhile, advisors who adopt the practice will likely gain a competitive advantage, see deals close more smoothly, have happier clients, and receive more referrals.
Succession planning considerations enter into discussions that I have with business owners when discussing their interest in conducting an executive search to find a CEO to run their company. For instance: As a business owner are you worn down and tired from all the extra effort and attention that you have had to spend on your business over the last few years? Have you wondered if there are viable alternatives to growing your business when sometimes you just want to kick back and relax? Knowing what you know now about the level of effort and energy to start and grow a business, do you think it is time for a change, perhaps an exit? These are questions I often encounter when talking with business owners who have founded their business or who have taken over their business from a parent – and know that there is no one in their business who is capable of taking over the business when these current owners decide to move on. It certainly creates a quandary for them. It’s especially challenging for these owners when they think it’s time to sell their business and realize that the business value is not what they expected to yield after many years of hard work and effort. In my experience it’s helpful for owner(s) to take a step back and review the options they have when considering a business exit, because hiring a CEO to run their company is only one option. Business Succession Owners who go through a business succession discussion benefit from a review of the options as these will also consider their personal outcome goals, their company’s outcome goals, and what I call legacy goals. Oftentimes I find owners have not considered their personal goals and it leaves them at a disadvantage when seeking to objectively evaluate their company and legacy goals. Think about it. If you are a business owner you most likely spend the majority of your time working on or in your business, with an occasional look up to reflect on what you might do once you exit the business. But when it comes time to exit the business – you have most likely have not developed your personal exit plan. Not having a personal transition plan will impact the choices owners make when deciding to exit their business. Succession Alternatives Effective evaluation of succession alternatives does require careful planning. If, as an owner, you have not used business planning tools previously it may be challenging to follow a planning process, however, the benefits to a carefully thought-out succession planning process can substantially improve the succession choice to be made. Succession alternatives range from business sale to an outside buyer, selling to your employees, or, my favorite, retaining ownership of your company and hiring a CEO to run the company so that you and the CEO can develop a growth strategy to improve the value of the company prior to its eventual sale. There are several ways in which the succession planning discussion can occur. It’s important however, that the discussion occur. My purposeful approach to conducting an executive search for the CEO of closely held or family-owned company’s benefits from a succession planning discussion with owners because it helps them to engage more proactively in the
Is Your Business Prepared for Battle? – BAS Market Insight Volume 5 Published on December 7, 2022
There are quite a few executive search firms in the Boston area and other regions as well. But, you wonder, which is the best? And, how do you know it is the best? What determines that? I’ve had these questions presented to me regularly, after all, I run an executive search firm. As a matter of fact, someone asked me that yesterday. Let’s start with some assumptions. You need to hire a C-Level executive, perhaps a CEO for a family-owned or closely held business where there is no successor in the company. Sounds simple. Some firms may offer this service. It can include – developing a position announcement, development a confidential company and position profile, developing a psychometric assessment specifically for the position, and then presenting candidates with a series of psychometric assessments, conducting extensive and detailed preliminary interviews, conducting thorough reference and background investigations, aiding clients in the interview and candidate evaluation process, and negotiating terms and conditions of employment, to name more than a few. But what if you add in a succession-based planning process for the owners? Is this different from the few executive search firms in Boston that you are familiar with? This can include – Working with ownership and the executive team to determine the functional and dysfunctional parts of the business, Identifying what needs to happen to improve those dysfunctional parts, Identifying ways to improve those functional elements along with the dysfunctional elements to develop an actionable growth strategy that the executive team and that new CEO can implement over time. You need a vision for the C-Level executive to pursue. Yes, if you have developed a succession-based planning process with the owners and their executive team, chances are you have developed a vision (as well as a mission, goals, and actionable strategies). Taken together the vision will enable that CEO to implement the succession and growth strategy for the owner. The strategy and plan will look out at least five to seven years and include revenue and valuation targets. You want an executive search firm that is local, yet regional, perhaps national, and international. It’s a good strategy to look retain an executive search firm that has the ability to conduct and executive search to find the best candidate for a client company. Most candidates are employed, yet they may not be within the immediate geographic reach of the client company. You want personal service. Is that too much to ask? If you are researching executive search firms in Boston – or any region for that matter, find out what level of attention your executive search process will be provided. Is there a executive search consultant who will provide your firm continued personal and professional attention? Will the personal service want to understand your company’s culture, environment, workforce, customers, vendors, community – the legacy that you want your company to embrace? You want guarantees on the search results. This sounds simple, but oftentimes it is overlooked. Simply stated – is there a guarantee if either the selected candidate or the company decides the new CEO is not working out? Ask what that guarantee is, and how long it will last, and under what conditions? Simply put – The Executive Suite provides up to a one-year guarantee. I trust these simple, yet effective comments help in finding an
“What will I do after selling my business?” he asked. I hear that a lot both in my M&A practice, True North Advisors Group and my coaching business, The Platinum Years. “I fear I will fall into a void, if I sell”, is another common refrain. As we get into our 50’s, 60’s and 70’s, many of us who have achieved financial and business success, start to wonder about this. As my fellow business advisor Josh Patrick, wrote recently, we want to stay “relevant”. But what does that mean, and how to achieve it? For some it is selling and traveling, for others it is hiring a career coach and starting anew. Sadly, other freeze up and do nothing. Of course, that is a bit like letting choosing to let others plan your future – they will clean up your mess after you are gone. If you are a late-career business owner, there is a small step to think more deeply about your future. It is called the What’s Next Self-Assessment (online assessment, book and workbook). Beats wondering how to stay relevant… Learn More:
If you had a business that was doing ok, then had a surge in business, how would that impact selling your business? It is hardly news to say that the Covid-19 pandemic had a profound impact on most business, and life in general. I was talking about this with some other investment bankers, one of whom shared this story. One client had some online sales technology that they were struggling to expand into the US market in 2018 – 2019. The owners hired the investment banker to sell the business. Then Covid-19 with the ensuing lockdowns hit and online sales exploded. This business had to ramp up wildly fast and it was soon rolling in orders and cash for the first time ever – to the tune of $1million/month, many times their previous volume. The owners of the business (who were not the day-today managers) saw this surge in cash flow as validation of their investment. The investment banker saw this as optimal timing to sell and got several offers for the business in early 2021. Sounds like a win-win right? Nope. The owners/sellers suddenly found excuses to turn down the offers. They were fooled by the online sales bonanza thinking that their business had finally found its footing and would keep growing. Nope. As late 2021 turned to 2022, the sales collapsed to less than $100k/month, projected to $1M/year – ouch. Clearly the owners had no idea how to fix the business. Their 2020 results were really dumb luck – rather like finding a four-leaf clover. In mid-year 2022, the investment banker did find another buyer offering a similar price to the 2021 offers, but with a 75% earn-out (where the seller will be paid a portion of the sale price many months later based on revenues that the buyer generates). The sellers grudgingly accepted it. The moral of story is that timing is often everything and that greed kills. When revenues and profits of a business are at a high point, that is often a great time to sell – but owner/sellers may not see this. When sales and profits decline, sellers have to accept the reality of a lower price for the business and/or heavy earn-outs. While some might say they should fix the underlying issues, in this case the owners were the problem. Selling really was their best option.
Many business owners wonder, “What will I do after I sell my business?” While most envision travel, or golf, etc., many fail to understand that they will likely have to stay on board for months or even a couple years to transition the business to the new owners. This period can be hard for many owners, since they have to make a shift from an “ownership mentality” (top-down) to a “management mentality” (up and down). The new owners (particularly a larger corporation and/or private equity firm) will require management reports, milestones, and other protocols that many owners of small enterprises are unused to. For owners who recognize that selling the business is their best choice, this can cause a lot of angst. So what is the “trick” to managing such fear/anxiety? I tell owners to remember three things when they sell their business: 1. I just got paid a lot of money that will give me freedom and peace of mind, versus always worrying about my business and wealth. 2. My employees likely have been given more upward mobility in a larger business, and often better benefits. 3. This transition period is just that; in the context of a 40 year career (and 80+ year life), a year or so of managing/mentoring never killed anyone. Owners who embrace this new role will be given the chance to have better work results and more life satisfaction. It is a gift that owners make to themselves. If you know an owner who’d like to think more deeply about this, you can send them to the What’s Next? Self-Assessment (see link below), and give them this coupon code to save 50% : save50. They can also email me at paul@theplatinumyears.com
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