EP 26: Frequently Asked Question Friday - Feb 28 2020

Ed Mysogland  0:00  
Please welcome please welcome welcome. This is another episode of the defenders of business value podcast, podcast where we talk about what makes a business valuable during the tips and tactics to increase your company's value that only veteran filmmakers know. And now, here's your host and meisterplan. Welcome to frequently asked question Friday, I'm your host at my sick land, I help business owners make sense of the value in their company so that one day they can sell it when they want, how they want and to whom they want. Each week, I answer three questions about business value, or selling companies that come in from the website or social media. This is a little bit shorter of an episode, but hopefully, it will be helpful in your journey to making a saleable company. Alright, so let's get to it. So this week, which is it's really interesting that we have three were two questions. So the first one is where to sell a business. And you know that that's kind of a an open ended question. So let me let me see if I can give you a little bit of guidance first, you can sell it yourself. And you can promote it in a variety of different on on a in a variety of different manners in on a variety of different venues. As far as promotion yourself, you can put an ad in the newspaper, you can put it depending on the size. If you have a business journal, you can advertise it there. There's a number of online websites you can post to biz buy, sell is probably the most active and the most well known. You can also go to businesses for sale. Another website is biz quest, those are probably the most active, one thing that you need to be really sensitive to is confidentiality. So if employees are important, you know, as far as not knowing that your business is for selling, you probably don't want them to know, you definitely want to either work through some sort of intermediary whether whether that's a broker, investment banker, accountant, attorney, somebody that can insulate you from the marketing that you're doing for the business number two, where to sell a business quickly. Again, this this one is is kind of like the last question where quick is contingent upon price, you know, obviously, the lower the price, the less decision making has to happen. When I say decision making, I'm referring dude, like due diligence and meaning the scrutiny of financial records and legal documents and things like that. So So where to sell a business quickly. Again, it's a function of price and the same same venues that I've mentioned before. So you have print publications, you know, industry publications, trade magazines, business journals, newspapers, and then your online sources like biz buy sell businesses for sale biz quest merger network, if you have a larger business, you can go to axial, a XIA l.net. That's one of the bigger sources that that we use. Obviously, from in our, in our practice, we always strongly suggest you need utilizing some sort of intermediary, and it's it's the same as the last the last question, I always believe that you should have somebody insulating you from the outside world, fielding those questions those buyers and maintaining that confidentiality. Alright, question number three. Where to sell a business for free? I'm not certain there's such a thing, because there's always expense in the disposition of an asset. And unfortunately, I don't think that you can sell it for free now, could you do it yourself? Sure. There's, there's some, say courses, but there's a lot of content out there about how to sell the business yourself. Again, the biggest challenge that anybody runs into is whether or not you can effectively maintain the confidentiality maintain, keeping the business operating as a going concern, while you're effectively performing an entirely different job serving as the broker or the investment bank. So as it relates to this question, some of the expenses that you need to consider if you are working with a broker, I mean, there is obviously a commission that's based on the purchase price I've seen anywhere from Lehman, which is a 5% of the first million 4% of the second 3% of third to one you follow, or the double even which is 10 864. Are two as a percentage of most brokerages from the industry periodicals that I follow, it's between 10 and 12% of the total purchase price. As far as other advisors legal and accounting, the rough rule of thumb is one to 3% of purchase price you can expect to pay for those professional advisors. And then obviously you have to pay the tax associated with the sale. So I hope these answered your questions. guilds are my unexpected hiatus I have a little bit of a bonus for you. Recently, the International Business Brokers Association released their year end state of dealmaking publication called the market pulse and it has a ton of information that I'm gonna go through and, and kind of summarize for you. Okay, so the m&a market pulse, or the IB BA, and m&a source market pulse, the small the main street is considered zero to $2 million in revenue and the lower middle market is considered two to 50 million. And so I wanted you to to be sensitive to when I'm talking Main Street versus middle market, that's the delineation. This is done by the IB BA or the International Business Brokers Association and the m&a source in conjunction with the Pepperdine Graziadio Business School private capital markets project. This is as a result of a questionnaire that was sent out in the fourth quarter of 2019 through the 15th of January of 2020. And there were 300 business brokers and m&a advisors that responded. So let me share with you some of the things that we found. So generally speaking, the market outlook is positive for 2020, that, that advisors expect that deal flow will continue to grow, and that multiples will remain constant. And, and as you probably heard in my deal stats episode, you know, market multiples aren't changing are and they're not all that volatile. So I don't expect I didn't expect that, that we were gonna see any kind of changes here either. So the optimism is centered around, like I said, greater deal flow, increased exit opportunities for sellers, because of capital, there's opportunities for business growth, closing rates are increasing. And then it's an election year. So we're going to have probably pretty good prevailing economic conditions to for for deal making. So as we look at the fourth quarter, under two or under half million dollars in revenue, though, the average multiple is roughly a two to two times adjusted cash between 500 and 1,000,002.8. And again, that's average across all industries. And then the one to 2 million, it's 3.3 times the adjusted cash flow. And then as you move upstream into the middle market, the two to 5 million is 4.3. And the five to 50 million is averaging about 5.8. The interesting thing is, as I look across from 2014 to 2019, there is very little change in multiples at all the the larger the businesses, the two to 5 million in revenue drops from 2014, q4 is 4.6. And then obviously in 2019, we're at 4.3. Conversely, the five to 50 million in 2014, we've got a five multiple and 2019, we're at 5.8.

So when we look at the time to close, the average is 8.6 months, which is up substantially from 2013, which was roughly 6.6 and a half months and so so the rough rule of thumb, I shouldn't say the rough rule of thumb, the rough indication is that it takes six months to get from launch to mutually agreed upon price terms and conditions or a letter of intent. And then it takes two months from there to close doing due diligence, execution of legal documentation, financing, etc. So, going through the the size of businesses the time from from launch to close, under half million dollars at seven months 500 to a million, it's seven months, a million to two whether it's nine months, two to 5 million is nine months, five to 50 million is 11 months which, which like I said The average is 8.6. Believe it or not, that's a little bit of an increase across all, all of those revenue thresholds, with the biggest one being at the half million dollar mark. So again, we're we're running to two months from offer to close. With at under half million dollars, a half million to a million is three months, a million to 2 million is three months. Two to 5 million is three months. And then five to 50 million is four months. And to be honest with you, that's not unexpected, either. I mean, I think there's a lot of people that are relying on a lot of professional advisors to give him advice, and it takes time to get that advice. So, again, I'm not not surprised at all. But if you're a business owner, and you're looking to sell in 2020, you should probably anticipate it's going to be about a nine month adventure. Okay, moving into financing, it's really interesting. Based on the poll, the smaller businesses are having some challenges securing financing, and believe it or not, we, in our practice, we haven't seen that at all credits flowing pretty good. But based on the 300 respondents from the survey, you know, here's kind of the overview. So this is, this is the, I'm gonna go again by revenue class, and I'm going to talk of the cash at close the seller financing if there's an earnout in any kind of retained equity. So, under a half million dollars in revenue, you have 83% cash at close, you have 13% financing 2% earn out, nothing as far as retained to equity from a half million to a million, it's 79%. It close 14% seller financed 2% earn out 2% retained equity. Now, let me preface that. I haven't seen anybody retaining any kind of equity one or 2%, I may have seen 20 or 25%. But I certainly have not seen you know, one and 2%. Okay, one to 2 million in purchase price 80%, cash to close 14%, seller financing 2% earn out 1% retained equity from two to 5,000,080%. Again, 15%, seller financing, 4%, earn out, and 1% retained equity, five 50,000,082%, cash, close 11%, seller financing 2%, earnout, and 3% equity retained. So, let's look at a couple things. One, for those of you that don't know what an earn out is think of it as if then financing. So if something happens, then I'm willing to pay you. So if I hit a revenue threshold, then I'm willing to pay you X number of dollars over and above what I've already paid you next, when we look at the seller financing, you know, this has been seller financing is is generally a component of almost all deals. It's a it's a way that the buyers can mitigate that risk and keep your attention should there be a challenge. post closing so that doesn't surprise me either. I take that back. The only real surprise that that I've seen that is inconsistent with what we've had in our practice is the two to 5 million. Where where the where there's 15% seller financing. I mean, we're seeing, you know, maybe five 5% seller financing, I don't know why. But But Lexa we have not seen those same numbers. Okay, this is about the seller's market. And kind of the sentiments of Is it a buyer's or seller's market, rather than than me pontificate? I'll just I'll just read you what it says. So seller market sentiment dipped slightly in the lower middle market this quarter. But advisors still indicate that sellers have a strong advantage across all but the smallest business sector, excluding those businesses valued at or less than a half million dollars. Advisors have not rated any sector as buyers market for q3, or since q3 2017. Seller sentiment for lower middle market deals remain at near record peaks, the downward trend and it's the slight trend. The downward trend can most likely be attributed to the uncertainty due to the 2020 election. auctions. So now let's talk a little bit about the top industries and what's selling, I always get that question. So in the main street category, restaurants and personal services make up roughly 33% of, of the pie chart moving in, after that retail at 14%, Business Services at 10, construction at nine, a, and again, 9% of all deals at the mainstream level 7% of manufacturing 6% of wholesale distribution 6% of healthcare, and 14%. Being others. I think the big surprise is, to me would be retail is is strong, as well as manufacturing, anything that's let's talk retail first, anything that's going up against Amazon, or that can be sold online, it seems as though there's a mass exodus away from the behemoth in the in the retail world. So that's a little surprising. The next one is manufacturing. I would. And you know, I guess as I think about I'm not certain that there, it's that much of a surprise. But I think I would have thought that the business owners would be moving more toward market. But that's not necessarily the case. So a lot of the baby boomers that are now 70 to 73 are probably it's now the eggs is probably now just reaching their radar, and they're now evaluating. So I think in the next couple of years, you'll probably see manufacturing be 10 to 15% of this pie chart. So as we look at the lower middle market, here's the surprise, you know, manufacturing is at 22% constructions at 17% Business Services. So b2b services is at 14, wholesale distributions at 12. Healthcare is at 11. Information technology is 6%. personal services at 5%. Restaurants are negligible at 1%. And then other deals are at 12%. The big surprise for me would be construction. And when I say that, it surprises me that it would be that high. Because I think buyers are more are scrutinizing deals a little bit more harshly these days. And when I say that is, you know, we all know that there's bound to be a economic downturn at some point. And to be in a spot where you have a 10 year 10 year note with with a conventional lending institution, and you know, full well that, you know, sometime during that 10 year period, that you're going to

face some sort of economic downturn. That is kind of surprising. So as we look at that, you know, we're seeing high multiples and construction selling so to me, it's that's kind of the the the big question mark, what's prompting that a lot of people believe that they're buying market share, you know, just in in anticipation that they want to be they want critical mass when the economic downturn occurs, and that there's certainly some merit to that, but like said construction here, surprised me. Moving on, this is what the composition of the buyers that are acquiring these companies look like. So with Main Street companies, not this should surprise anyone, it's first time buyers. first time buyers make up 43% of the pie chart 31% are serial entrepreneurs. So in other words, high net worth individuals that are acquiring multiple companies for their own personal portfolio 23% is company buying company or strategic acquisitions. 1% is a private equity platform. So the company served as it was acquired by a private equity group that took it and made it into a platform company. And then 12% is a private equity add on so there was a there was a platform company and the private equity group came in to Main Street bought the company and bolted it on to one of their other companies. Okay, now moving into the lower middle market. You have 18% that are first time buyers 13% that are serial entrepreneurs. This should not be a surprise to anybody but 40% makeup existing come But he's so company buying company through strategic acquisitions. 13% is private equity platforms. 12% is private equity add ons, and then 4% others. Again, there's no probably no real surprise here either. I guess if I had a little bit of question it would be, I would have thought that the private equity, the private equity acquisitions and bolt ons would have been a little bit higher, just by virtue of, you know, what we're seeing, as far as, you know, the private equity groups dipping a little bit lower into the lower middle market to find deals because they have to deploy capital, it just looks a little bit of a surprise. But again, the private equity groups may be bypassing deal guys, and going right to the business owners themselves, and this may be skewed a little bit. So moving into why business owners are selling in 2019 so this shouldn't be surprised, a roughly 48% of business owners are retiring. 14% And again, this according to the survey, 14% is because of burnout 11% due to other opportunities 7% family issues 6% relocating or moving 5% Health 2% recapitalisation and 1% an unsolicited offer, I guess the surprise that that prompts me, or the surprise in this chart, that for me would be health, I would have thought that would have been a bigger part of this pie chart. Because, you know, as business owners age, I mean, health deteriorates. I mean, there's nothing we can't we can dodge. And so that was a little bit of a surprise, I would have thought it'd been probably times three. So, you know, at least 15% of the reasons why people were selling had to do with health. But at any rate, so retirement is, is the big one, roughly 50%. And that shouldn't surprise any of us. For business owners, this is a, this is a telling chart that I'm looking at. And it has to do with planning, when do you plan so those businesses valued less than a half million dollars, three quarters of them had no plan from half a million to a million, roughly 60% had had no plan, one to 2,000,064% didn't have a plan. Two to 5,000,044% didn't have a plan. And over 5,000,025% didn't have a plan. So the bigger the companies, probably the greater the the greater number of advisors, the more people that are saying you know what you need to plan plan your sale. So that's kind of surprising that there's not more planning as much as it's prevalent these days. And you can't go anywhere without someone talking to you about Exit Planning, whether that be any advisor you're talking about. Everybody wants to talk about Exit Planning. So the moral of the story is that if you are considering selling in 2020, you may want to consider doing some formal work as far as getting an idea of what where your company is valued at. And like I said, it's it's taking nine months to sell. So plan accordingly that, you know, if you want to sell in, in three years, a third of that time is is being used up in the marketing and sale of your company. So keep that in mind. If, as always, if I can help, let me know. Well, that about wraps it up. But before you go, would you like to receive a weekly newsletter of curated articles that I've stumbled upon or am writing about regarding business value and making a company saleable? Well, if so, go to defenders business value.com and sign up for the newsletter. Now if you have a question that you would like answered, go to, again, the website defenders of business value.com and push the appropriate button. Or you can email me at ed at defenders of business value.com Or you can reach me at Twitter at Ed miso. Thank you so much for spending time with me. If I can ever be of help to you in any way please don't hesitate to reach out. Have a good weekend and I'll see you next week. This was another episode of the defenders of business value podcasts are more episodes packed with strategies to increase the value of your business visit defenders of business value.com For shownotes transcripts and free tools to start you on your journey. Subscribe now so you don't miss any In future episodes