Knowing when to sell your business is like knowing when the stock market is at its peak.
Each business owner wanting to sell their business, as a separate list of factors- from personal health to the strength of a specific industry, etc. The perfect time to sell is not determined by a date but an understanding of factors that affect business valuation. Generally, an owner works for 1-2 years to implement the identified business valuation factors. Even if all the M&A environmental factors were optimal, if your business is not ready to sell, then you could miss out on a strong selling time. In this article, the author does an outstanding job answering the question. The Vant Group is here to help guide you through the steps of buying or selling a business.
What happens when cash flow doesn’t match the work?
The Vant Group was representing husband and wife owners of a residential/commercial paint company. Like many construction trade-related businesses, our clients had projects that spanned different financial months and fiscal year. But unlike other project-based businesses, our clients were using the Cash Accounting method.
Our mandate was to find a motivated and qualified buyer so our client could transition to the next venture. As always, we assisted both sides with the overall process including obtaining an SBA Business Acquisition Loan.
Almost immediately, we were able to find a great buyer and negotiate a favorable Letter Of Intent; and the buyer proceeded with the SBA loan process. As the bank was in the process of approving the loan application, the paint company closed its first fiscal quarter, so the bank asked the buyer for Q1 financials.
First Quarter results indicated that this year’s cash flow would be significantly lower than the previous year!:
- Revenue for January was significantly lower than the previous year.
- It is normal in a seasonal business like this for the winter months to be softer, but that did not fully account for the change.
- Fixed Expenses were on par with any given month in the year.
- But Variable Expenses, when compared to Revenue, were significantly out of line.
- The previous year’s cash flow seemed much stronger than the current year-to-date results indicated.
- This perceived fall-off in performance caused the bank to express doubt in the loan, and the buyer called us in a panic.
Where expert intermediaries add critical value:
- Transaction and Industry experience
- Our intermediaries have lived through countless transactions, and are experts in spotting potential deal-killers like this.
- Construction trade businesses often execute large projects with multiple stages of cash receipts and expense disbursements.
- Different client companies use different methods for matching these flows to financial periods.
- What we discovered
- Near the end of the previous year, our client had landed a large paint project.
- Their customer made a large down payment to our client, and our client booked it as revenue that year (as would be expected in the Cash Accounting method).
- As our client began working on the project in January, they started incurring costs. These costs were booked in the current year.
- So the revenue was in last year, and the costs were in this year!
- How we responded
- We conducted a detailed analysis of the large paint job, and other smaller jobs that had the same impact.
- We gathered documentation including invoices and receipts.
- We conducted detailed analysis to match the revenue, expenses, and work completed to the appropriate financial period. This showed that the business was still performing strongly.
- We packaged that analysis in a straightforward document that the buyer could present to the bank, and made ourselves available for follow-up questions.
The loan was approved soon thereafter, and the transaction closed at the agreed price! Both sides were happy and were glad The Vant Group was there to keep the process moving forward even when a potential “deal killer” arose.
And Distinct Types Of Acquisition Strategies?
Analyzing your buyer type and buying parameters can aid in focusing on acquisitions suited to your needs and buying capabilities. Knowing your acquisition strategy, allows you to focus on each deal more confidently, concentrating on offerings you are best positioned to acquire.
The Employed Corporate Executive
The most common buyer in a small business acquisition is the corporate executive. An employed corporate executive, as the income stream, to wait for the opportunity to acquire an “ideal” business. The employed corporate executive buyer may slow the buying process by over analyzing the deal, anxious about giving up the security of a corporate position for the uncertainty of being a business owner.
The Displaced Executive
A displaced executive is often the most motivated buyer type; ready to act and quick to meet with intermediaries and sellers. Like the employed executive, the displaced executive tends to overanalyze deals, bogging themselves down with analysis and ratios. Often acquisition opportunities are lost to more sophisticated buyers because of their inexperience.
Former Business Owners
Former business owners represent tough competition for the executive or displaced executive. More experienced and knowing what to analyze, they quickly come to the buying decision and have banking connections for loans and lines of credit. From the intermediary’s perspective, former business owners tend to be choosy, passing up deals because they can, and may not see the value in acquiring an existing business over starting their own.
Buyer groups come in all shapes and sizes have an advantage of pooling assets, for more working capital, thus enabling larger purchases. Looking for a rate of return on investment, buying groups may want to operate as absentee owners, putting the seller in a good position to stay on as an employee or consultant. Other buying groups bring in their own infrastructure to run the business themselves.
The turnaround specialist is rare and classified as an experienced consultant focused on large to midmarket underperforming businesses with enough resources to justify his time in transforming them to a profitable status. Turnaround specialist and most intermediaries will not work with small arena companies that have limited operational scope, no customer base, and are in financial trouble.
An individual buyer has substantial financial resources and experience in a familiar operation. The individual buyer looks for a financially healthy business that will yield a sound return on the investment of both money and time. In many of these cases, seller financing is an essential element in the acquisition, and in the long run, benefits both parties. The individual buyer will require a strong bottom line when it comes to acquisition price and will usually limit themselves to transactions that are highly leveraged.
The Strategic Buyer
This strategic buyer is most often a company whose long-term plan is to enter new markets, increase market share, gain new technology, or eliminate competition. Strategic buyers look at businesses with sales over $1 million, a proprietary product and/or unique market share, and an effective management that is willing to remain in place.
The Synergistic Buyer
The synergistic buyer, like the strategic type, is usually a company. The Synergistic buyer looks to acquire two companies, that together will produce more or be worth more than they are separately. This acquisition type is successful merging companies, making them more competitive and profitable
The acquisition market can be compared to a rifle range. There are many different shooters at any one time, but they are concentrated on their own targets. The more knowledgeable buyers are about their competition, the better focused they are on their own target
At the end of the day, the biggest failure in business is not having the proper policies and procedures in place.
Operating a business without proper policies and procedures would be like going out into the wild, wild west without any instructions. The startup costs may be less than an acquisition, the cost of not having a business model or infrastructure is a cost not often factored into the cost of starting a business. When you calculate all costs, it’s less expensive and less risky to buy a business than it is to start your own business.
The Vant Group is here to help guide you through the steps of buying or selling a business. Here’s a great article we would love to share.
Challenge: Close the buyer deal in 5 weeks from the receipt of Letter of Intent.
Buyer and his wife had 3 kids and were living in Houston. The buyer was currently employed and looking to purchase a business in Dallas. He and his wife had found a business in Dallas, and were preparing to move to Dallas before the beginning of the school year and start their new business. As they were negotiating the deal, they learned about the business we had for sell through a personal connection with our firm. At first, they were reluctant to look at our deal as they had already made their minds up about their current target acquisition. The business TVG had for sale was the same type of business they were trying to purchase. He conceded to look at the business TVG had for sale and decided quickly that this was a better deal for him and his family. It was in a better location, more cash flow, and served an upscale clientele that he was hoping to have. He and his wife flew that weekend to tour the location and meet the business owners. He quickly informed us that he would be submitting a Letter of Intent. The closing date in the LOI was scheduled to transpire in just 5 weeks.
- The marketing package was so comprehensive that the Due Diligence item request was manageable. Most of the significant questions had been disclosed prior to the LOI. The Due Diligence items requested were more of a matter of items needed to make the transition smooth and they were delivered in a timely manner to the Buyer.
- The deal had already been pre-approved by an SBA preferred lender. The SBA department of this bank was experienced and nimble. The bank was ready to make the deal happen as soon as TVG could introduce to them a qualified buyer. The buyer had the financial strength and the perfect background for the business acquisition. The banker had no problem approving the buyer.
- Both the Seller and Buyer were extremely motived to get the deal done. Each side responded quickly to the questions and requests. The negotiating was done carefully yet swiftly.
- The Seller was most accommodating to the Buyer. It is not uncommon for a Buyer to get very nervous about the decision they are making and the debt they are incurring. As we got closer to the closing table, the Buyer was juggling the packing of their home, quitting a job, closing on the purchase of a new home in Dallas, and getting their kids registered for school. The Buyer at times would be stressed and nervous and we worked to accommodate their requests and keep all the moving parts moving on track.
As we all sat around the table at the Escrow Agents office, the Escrow attorney said she had to double check the date of the LOI. She thought it had read the prior year, and not the current year. She thought it couldn’t have been dated this year as it was only about one month ago. She doubled checked and certainly, the LOI was dated only a month earlier. She said she had never seen a deal go from LOI to close in one month. With the extensive preparation done before the business was put on the market, the comprehensive information shared in the marketing package, the experienced SBA preferred lender, the motivated Buyer, and Seller, we did, indeed, close in just 5 weeks.