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.