Friday, December 20, 2013

Finding a strategic buyer

While everyone agrees it’s a good idea to “spit and polish” your business before presenting to potential buyers, not everyone understands why each buyer will view your business beyond the obvious. 

Enter a strategic buyer into the sale of business process and the scope of assessment evolves from the basic numbers and look of your business to include the “what if” scenarios. The “what ifs” can materially up tick the value of your business - a strategic buyer could be willing to pay more for your business. The challenge for the advisor is to determine which “what if” are going to drive the deal over the goal line. 

To understand the process better, you need to change your view of your business to the buyer’s “what if” perspective. While each buyer has their own priority you can be proactive by trying to understand what the buyer is looking for.
The baseline value of your business as it stands now is reasonably straightforward. Synergies going forward that increase value: 

What are the financial impacts from combining the operations? Share one facility instead of two? Share administration? Keep best personnel for each task and release needless duplication? Does the new model keep existing expertise involved and excited about the future? Can you attract higher profile skill sets? Does this lead to effective consolidation of manufacturing or packaging or assemblies or servicing? What are the impacts on distribution or supply and service models?

What are the financial impacts from combining business names and market presence? Qualify for larger projects for greater opportunities?  Maintaining only the best sales and business development team? Consolidating client lists and contact regimes for increased revenues with less time and cost? Focusing on business offerings with best margins? Refining the consolidated brand to move towards best in class image? Does this assist you to develop a dominant position within the market?

While everything suggested so far may improve financial results, what about the combined cash flows, asset backing, access to capital, access to investors, and enabling a higher rate of return for the new consolidated enterprises eventual divestiture? Increase buying power to reduce costs? Reduce operation cost by only maintaining the facilities, equipment, insurance, and services that contribute the most to the bottom line?

The list can be somewhat speculative and “touchy-feely” but as a business owner it’s worth the time spent preparing for a potential buyer to easily develop their “what if” models – you will attract strategic buyers and ultimately get a better deal.

Friday, December 13, 2013

When is the best time to sell my business?

Mr. & Mrs. X sat attentively listening to our presentation demonstrating the fair market value of their oilfield services business.

After working through the CCF and the DCF versus comparable transactions and an asset-plus-goodwill calculation they were both smiling and even a little giddy to see the $6.7M-$7.3M estimate of fair market value. We agreed to test the market for a buyer with a transaction in the $7M or better range.

We have witnessed this process a number of times before. The typical business owner seems to be so wrapped up in the day-to-day operations they only occasionally pause to mentally juggle ideas about what their business might truly be worth.

Mr. X was already processing different comments and factors we had identified in our calculations. He was looking for assurances we were confident in those calculations.

Mrs. X was almost overjoyed. When we asked her what she thought of all this she genuinely shared the reality of their last 14 years. They had survived a serious downturn, struggled to keep on the positive side of debt, put up their home as collateral (something that kept her awake at night), and all the times Mr. X had to stay in the field working or spend weekends away with clients curling or golfing or whatever it took to keep the work coming in. She shared her personal challenges with taking care of the home front and sometimes feeling overwhelmed with raising the kids herself. While she was never truly alone, sometimes it sure felt like it. Mr. X was only a phone call away but it seemed there was always something that just had to be done. 

Now with the reality of finally reaching the decision to cash out and have life get back to normal, she was already excited about the possibilities. Could they move to a new house closer to the city? When could they take the kids and go on an extended holiday without the cell phone constantly stirring up Mr. X? She assured Mr. X he was a good provider and she was so proud of him for making the decision to take the next step in their life. Several times she rested her hand on his shoulder and clearly was happy to the brink of tears with this moment. 

After the usual discussions on what happens next, we asked Mr. X when he would like to move forward to complete the Corporate Profile and start testing the market. Then came the awkward silence. Mrs. X must have known what that meant because her emotional walls were going up as she withdrew from the conversation and sat quietly.

Mr. X proceeded to explain: we have a client that is talking about drilling a new round of infill wells. We have this new E&P Company having us qualify for a MSA and that should mean new work ahead. And we are so close to getting orders for that new service we want to offer. On top of all that, one of their competitors had been asking questions about what it would take to buy him out! Mr. X could not see how it could be a more positive time to grow the business to the next level. 

After a careful explanation to us he simply said if we work at this another year we will be worth more. When Mrs. X asked how much would be enough, Mr. X simply dismissed the question and thanked us for our work. He told us to keep in touch and we could do this again in a year.
Fast forward 14 months: the price of oil had dropped back below $100 and new wells in southern Alberta were down 50%. Mr. & Mrs. X sat down to talk about the impact of the Year-to-Date numbers and how they impacted the range of values. We reviewed the financials and confirmed revenues were down 50%, and they were losing money every month. The bank lines were to the max, and they were at risk of being put in the penalty box. Mr. X stated clearly he was ready to sell the business right away. 

The brutal news was the enterprise value was less than $3M and with the debt they would only net about $1.2M if we were able to find a buyer. Without one word of a lie those words had barely came out of my mouth and Mrs. X slapped Mr. X so hard it seemed to stop time. She never said another word but simply sobbed and went to the waiting room. She was one of the strongest women I have ever met.

Mr. X gathered his thoughts before he said anything. Eventually he shared the competitor had won the only new work in the area and the work promised from the curling and golfing buddies had evaporated with the price of oil. He was going to see about some kind of an equipment sale to several competitors he knew over the years. Perhaps the competitors would take on his employees. He would work one of the units himself for an hourly wage and not have all the stress of running a business.

Five minutes later they were gone.

Three months later the business was finished.

The time to sell your business is when it is worth buying. That may not have anything to do with when you’re ready to sell.

Wednesday, December 4, 2013

Buying a Business to Expand an Existing Business

A strategic buyer is one who is buying a business to expand an existing business to increase their competitive advantage. These buyers have a history of appearing to be smarter than the vendors. That is a big statement but think about this: strategic buyers come to the table already knowing a big part about your business models and business realities. They typically have a business or businesses operating in a similar market sector as you do. Even before they come to the table they know the clients, the priorities, the competitors, the pricing, the future risks, the upside potential and the down side risks.

Even if they don’t manage to close a deal with you they will have learned information about your business model that will eventually make their business model better. This means you have to develop a clear strategy about how you might respond to information you provide to your competitor.  Maintaining a careful balance between disclosures for a transaction verses competitive intelligence can be a significantly complicated. Have advisor acting in your best interest. It is the advisor's job to know what and when to share information.

Another influence is strategic buyers have the ability to acquire your competitor if you’re not interested in selling or if a workable deal can’t be struck. As the business owner that risk should be contemplated before full disclosures. (We will elaborate on this in a future post.)

Strategic buyers will have a good idea what your business is generally worth but more importantly are willing to invest time and resources to confirm what your business is “worth to them”. A private buyer and the “buying a job” buyer typically don’t have synergies and leveraging the way a strategic buyer will.   

Simple synergies to increase profitability in the same market place: the buyer can consolidate both operations into one facility, combine accounting and administration, consolidate purchasing for discounts and volume pricing, optimize client lists and leverage relationships, reassign staffing for better utilization and eliminate duplication. Net margins can literally double. Between the economics and the expanded access to clients/sales this buyer is able to provide you with significant upside.

The million dollar question is how will future earnings/ROI be driven by the strategic buyer‘s business strategy? Developing an understanding of how the strategic buyer will benefit can be a critical influence in managing the negotiations and structuring the deal, which will generate the best outcome for you.  

Monday, December 2, 2013

Buying a Business to Buy Cash Flow

Buyers may buy cash flow as a return on investment (ROI). Buyers typically want a business that keeps doing what it has been doing and generating cash flow reliably, which is perceived as presenting the lowest risk model. Whether a small business or a global enterprise, this is the most popular reason to buy a business.

The business valuation is driven by looking at the financials historically and then confirming after assumptions (ex. where everything stays the same) that the business is worth buying. Some ROI buyers will value a business as worth 3 years net cash flow (3X) or 5 years net cash flow (5X) or 10 years net cash flow (10X). The multiple is driven by a many moving pieces (to be discussed in a future post).  

Private investment parties and individuals will complete due diligence on the history of financial performance. They will “smell test” the company’s ability to continue forward,  model market influences and trends, and look for least amount of variation (risk). Once the high confidence model is established the details are provided to the number crunchers that provide a multiple calculation adjusted for the foreseen variables.

Before you decide that 10X seems like an exaggeration we have completed a transaction where the private parties paid 8.5X normalized EBITDA for a private mom and pop business. The rational for the ROI buyer was based on the revenue generated from the company’s 10 year supply and service contracts. The average shelf life remaining on the existing contracts was 7-8 years and the company was signing on new clients regularly. The buyer clearly saw the advantage of reliable future cash flow reducing risk and the once they developed market knowledge of the large potential client base and low competitive pressure this transaction became very valuable to the buyer.

Business owners who manage their business cycles and cash flow for consistent results year over year will find interested buyers constantly trying to buy in. Business owners with bumpy cash flows can find it difficult to attract serious return on investment buyers to the table regardless of the unique flavor of their business model.

We will discuss buying to expand an existing business the next post.

Friday, November 29, 2013

Buying a Business to Buy a Job

Buyers have 3 primary reasons for buying a business:

1. Buying a job. Many events in life can lead a person to do some soul searching. This may lead them to wonder “why do I work for someone when I’m at least as smart as my last two bosses…” 
2. Buying cash flow as a return on investment. 
3. Buying a business to bolt on to an existing business to increase the competitive advantage. 

Buying a job is something that sounds great in theory however without access to some serious capital/collateral and an opportunity for buying a business where you already have expertise, few funders will act as your source of financial backing. We have seen deals in the $10M range ready to sign and close but the bankers backed out because the buyer had little expertise in the business. The bank reduced its risk model when they went from 80% funding to 50% funding. Not many individuals looking for a job will have access to that much cash at close. 

 A better alternative may be buying the business you work in now. The boss probably knows you and may even respect your abilities and history. The owner is your best source of funding as they know the business. They clearly understand the risks involved and the real strength and weaknesses of the business. Many owners will perceive a serious offer from someone they know with less of a critical eye than an offer from a total stranger. We have seen owners provide vendor notes from 20%- 50% of the agreed value, with the bank and the employee funding the balance. 

The bank views the exiting owner as a vendor with a certain amount of flexibility. The funders can easily verify you know the business which reduces their risk, and the bank tends to view employee buyouts as a special category of transaction where they literally use different rules and covenant models. 

The icing on the cake is this is also a positive process for you. As an employee you know the business model, the skeletons and history, the team of people, the client base, business cycles, and perhaps even a few key problem areas that would dramatically benefit from what you know you would do if you were in charge. When your goal is to own your own business you should take a moment and honestly assess the potential for where you work. If the business you’re working in has no potential for equity then you may decide to find another place to work. But this time you’re working with a plan and a deliberate agenda; the outcome could change your life. 

We will discuss buying cash flow in the next post.

Tuesday, November 26, 2013

The deal is not done until it’s done.

After 20 months of working with a vendor client to achieve a transaction that accomplished most of the owner’s priorities and the target values ($9M), the vendor walked away from signing the purchase and sale agreement 2 days before closing. At first this seemed like a ridiculous outcome. In debriefing the client later, the client confirmed he agreed to how and why the deal was structured the way it was.  So why not close?

The client eventually shared he walked away because he was not able to overcome the anxiety about what he would do after the deal closed including what he would do with the money. He heard stories of people getting large sums of money and then a few years later having none left. This seemed to have eroded his confidence in how he would manage his future. He knew his business and could live with the ups and downs; the thought of starting out with something new overwhelmed him. After finding out his business was worth buying he started to re-evaluate his priorities. He wanted to be in charge of his destiny. The idea of handing someone the money for his 20 years of blood, sweat and tears on the basis of trusting them to protect his future simply was not comprehensible.

Bottom line: people change their minds and the deal is not done until it is done. 

Tuesday, November 5, 2013

Growth vs. Value: not all revenue is created equally

When you look ahead to next year, will your growth come from selling more to your existing customers or finding new customers for your existing products and services?

The answer may have a profound impact on the value of your business.

Take a look at the research coming from a recent analysis of owners who completed their Sellability Score questionnaire. We looked at 5,364 businesses and found that the average company that had received an overture from an acquirer was offered 3.5 times their pre-tax profit.  When we isolated just the businesses that had a historical growth rate of 20 percent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 percent more than their slower growth counterparts.

However, the real bump in multiple came when we isolated just those companies that claim to have a unique product or service for which they have a virtual monopoly. The niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 percent more than the average companies, and fully 20 percent more than the fastest growth companies.

Nurture your niche

Chasing “bad” revenue by offering a wide array of products and services is common among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines. But when a strategic acquirer buys your business, they are buying something they cannot easily replicate on their own.

A large company will place less value on the revenue derived from products and services that you have in common. They will argue that their economies of scale put them in a better position to sell the things that you both offer today.

Likewise, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation.

Focusing on your niche is one of many areas where the long-term value of your business is at odds with short-term profit. For example, if you wanted to maximize your short-term profit, you might avoid investing in new technology or hiring a head of sales, arguing that both investments would hinder short-term profit. The truly valuable company finds a way to deliver profit in the short term while simultaneously focusing their strategy on what drives up the value of the business.  


Wondering if you have a sellable business? Contact the MAXIMA Group for a consultation. We focus on privately held companies with annual revenues of $3 million to $60 million. We also advise larger public and private companies on buy-side engagements. 

Friday, November 1, 2013

The hidden goal of the smartest business owners

What are your business goals for the year? If you’re like most owners, you have a profit goal you want to hit. You may also have a top line revenue number that’s important to you. While those goals are important, there is another objective that may have an even bigger payoff: building a sellable business.

But what if you don’t want to sell? That’s irrelevant. Here are five reasons why building a sellable business should be your most important goal, regardless of when you plan to push the eject button:

1. Sellability means freedom

One of the fundamental tenants of sellability is how well your company would perform if you were unable to work for a while. As long as your business is dependent on you personally, there’s not much to sell. Making your company less dependent on you by building a management team and creating just-add-water systems for employees to follow means you have the ability to spend time away from your business. Think of the world of possibilities that would open up if you could choose not to go into the office tomorrow….

2. Sellable businesses are more fun

Running a business would be fun if you were able to spend your days on strategic thinking and big picture ideas. Instead, most business owners spend the majority of their day on the minutia: the government forms, the employee performance reviews, bank reconciliations, customer issues, auditing expenses. The boring details of company ownership suck the enjoyment out of owning a business—and it is exactly these tasks you need to get into someone else’s job description if you’re ever going to sell.

3. Sellability is financial freedom

Each month you open your brokerage statement to see how your portfolio is doing. Not because you want to sell your portfolio, but because you want to know where you stand on the journey to financial freedom. Creating a sellable business also allows you peace of mind, knowing that you’re building something that—just like your stock portfolio—has value you could choose to make liquid one day.

4. Sellability is a gift

Imagine that your first-born graduates from college and as a gift you give him your prized 1967 Shelby Ford Mustang. Your heavily indebted child takes it on the road, but after a few miles, the engine starts smoking. The mechanic takes one look under the hood and declares that the engine needs a rebuild.

You thought you were giving your child an incredible asset, but instead it’s an expensive liability he can’t afford to keep, and nor can he sell it without feeling guilty.

You may be planning to pass your business on to your kids or let your young managers buy into your company over time. These are both admirable exit options, but if your business is too dependent on you, and it hasn’t been tuned up to run without you, you may be passing along a jalopy.

5. Nine women can’t make a baby in one month

There are some things in life that take time, no matter how much you want to rush them. Making your business sellable often requires significant changes; and a prospective buyer is going to want to see how your business has performed for the three years after you have made the changes required to make your business sellable. Therefore, if you want to sell in five years, you need to start making your business sellable now so the changes have time to gestate.


Wondering if you have a sellable business? Contact the MAXIMA Group for a consultation. We focus on privately held companies with annual revenues of $3 million to $60 million. We also advise larger public and private companies on buy-side engagements. 

Thursday, August 8, 2013

Ausenco acquires PROJEX Technologies

MAXIMA provided Transaction Advisory Services to Ausenco to assist them in their acquisition of PROJEX Technologies. Congratulations to everyone involved!

From Ausenco's news release:

Ausenco Limited (ASX: AAX) today announced it had acquired Canadian oil sands business PROJEX Technologies to grow its Energy business and expand its offering in Canada’s oil sands market.

Ausenco CEO, Zimi Meka, said the acquisition provided Ausenco with broader and complementary Engineering, Procurement and Construction Management service capabilities in Canada’s high growth oil sands industry and was part of the company’s strategy to significantly grow its Energy business.

"We remain committed to growing our Energy revenues both organically and through further acquisitions that enhance our global solutions offering to our clients," he said.

"The global energy market is significantly larger than the global minerals and metals market and we are focussed on capturing a far greater share of this market.

"The acquisition of PROJEX strengthens our presence and expertise in the North American oil and gas market and complements our acquisition of Reaction Consulting in early 2012.

"Canada’s oil sands contain the third largest proven reserves of crude oil in the world and Alberta’s Energy Resources Conservation Board (ERCB) has forecast production to more than double by 2022. The ERCB estimates that capital expenditure in 2012 in the Canadian oil sands market was $20.4 billion, which is expected to increase to $23.4 billion in 2015.

"Ausenco has a strong competitive advantage, a full lifecycle service offering and a broad oil sands industry client base. We can now service all phases of oil sands projects from Evaluate phase studies through to Create phase EPCM delivery.

"PROJEX offers a complete suite of end-to-end engineering and development services, specifically tailored for in-situ oil sands recovery and heavy oil customers and has a successful track record in delivering projects of all sizes with specialist expertise in small to medium brownfield projects.

"In-situ SAGD projects are the fastest growing method of oil sands production and this growth is driving demand for experienced mid-sized contractors who can deliver small to medium size projects." PROJEX has a strong order book, a solid pipeline of tender opportunities and operates with seven of the top oil sands producers in Canada. The acquisition price of $15.2 million represents a multiple of 2.9 times anticipated 2014 full year EBITDA of $5.2 million. The acquisition will be immediately earnings per share accretive and synergies between PROJEX’s and Ausenco’s current businesses are expected to deliver significant operating cost savings."