There are seven million private companies in the US with owners over age 55, and there is $2 Trillion of investor capital available to purchase those companies. In the next 15 years, $16 Trillion of assets will change hands as the baby boomer generation comes to an end, which will mark an unprecedented transfer of wealth to the next generation. The graying of the restoration industry continues and for those interested in an exit there are many options to explore.
Regardless of the industry, it is my belief that a properly managed business succession plan is critical to monetizing one’s life’s work. In restoration, a large portion of the acquisitions are made to the same handful of private equity-backed brands, which severely limits seller leverage. We are now seeing those same private equity-backed businesses being flipped to larger PE firms, so the consolidation trend is heating up. Many of our clients are starting to see larger PE-backed brands enter their markets, fueling competition. For those considering an exit while the market is hot, a properly managed process with many bidders is key to getting a deal that results in the best price, structure, and cultural fit.
The first step is “succession planning,” a complex effort to best prepare for a business transition. It involves investment bankers, attorneys, wealth managers, accountants and most importantly, owners. A few things to consider as you prepare for a company sale:
- The potential buyers of your business fall into two groups: strategic and financial acquirers. Each has different incentives and motives for acquisition. To achieve the best outcome in a sale, you should get to know both groups and what attracts them to acquire. It can be overwhelming to identify the appropriate relationships to cultivate, so finding a well-informed M&A advisor with industry knowledge and established relationships in each group is prudent.
- Each industry has key metrics that investors use to assess the value of a business. Understanding key metrics, including what baselines to expect and how to improve them, will help you achieve a premium valuation for your business. Seeking an early understanding of these metrics allows you to set a culture and incentive structure that motivates your management team to achieve specific goals. In restoration, a full stack offering, including construction services, drives the highest multiples. Buyers want to see companies own the consumer from start to finish.
- Many exit scenarios exist for business owners, including some they may never have considered. Sellers can choose to sell their whole business or retain a percentage of ownership and sell a minority or majority stake. They could choose to sell to a larger company in their industry in a strategic sale or to a financial company, such as a private equity firm, in a financial sale. There are often opportunities for sellers to “roll” their own equity into the new, combined entity post-transaction. There are many options that can provide you with the solution you are seeking based on your end goal.
- Investment bankers/brokers are important advocates for exploring your options. However, make sure you find someone you trust and who has your best interest in mind. To the right investment banker, your life’s work will not be “just another transaction.”
- Asset sale vs. stock sale – which is best? Generally, buyers prefer asset sales and sellers prefer stock sales. When a company is sold via an asset sale, the buyer purchases individual assets, while the seller frequently maintains longer-term liability obligations. When a company is sold via a stock sale, the seller typically experiences tax advantages and no longer maintains liabilities. Prior to considering an offer under either scenario, you should have a tax professional calculate your net proceeds and any potential long-term liabilities.
- Cash-free/debt-free – not as simple as it sounds. Most M&A transactions are negotiated on a cash-free and debt-free basis. This means that the seller keeps all cash and pays off all debt at the time of the sale. However, it is never that simple. Cash and debt issues are often identified later in the transaction and negotiated in the purchase agreement. It is important to have competent M&A attorneys and investment bankers negotiating on your behalf.
- Working capital can become a negotiation sticking point. While sellers intend to sweep excess cash from their business at the time of close, they must leave enough money in the company’s bank account to allow the business to operate normally. This amount is called the working capital peg, and the precise amount is negotiated between the buyer and seller, preferably with the assistance of a competent advisory team. The peg is typically determined by taking an average of normalized or adjusted net working capital for the last twelve months or, in some cases, a shorter period. A higher or lower working capital peg has a direct impact on the amount of cash a seller takes home.
- It’s important that your financials will withstand due diligence. Clients frequently ask us if we think their financials are in good enough shape for their company to sell. “Do I need reviewed or audited financials?” “How sophisticated must my accounting team be?” “How quickly should we close out each month?” Initiating a sale process without credible financials can be a quick path to a disappointing result. A trustworthy M&A advisor will analyze your financials and determine if they simply need fine tuning before your business goes to market, or if they need a full review by a reputable accounting firm.
- The M&A process is complex and time consuming. Speak to an advisor and find out what you don’t know. Is your business ready? Could some small tweaks significantly improve your company’s value to potential buyers? Are there other buyers that should be included in the process to make it more competitive and increase offer prices? A reliable M&A advisor will guide you through the process and ensure that you procure the best outcome for yourself and your business.
James Thompson
James Thompson, Managing Director at Alexander Hutton, a Seattle based Investment Banking Firm. James holds an MBA from the University of Washington and is a former CEO, CFO and SVP of UK-Listed HaloSource. He is a board member at Brown Strauss, Inc. Alexander Hutton has sold 223 companies since its inception including many HVAC, plumbing, and restoration brands.
For questions related to the content of this article you may contact James at [email protected] or at +1.206.852.6359
Related Posts
