Saturday, February 27, 2021

Prepare your company to be bought

[Editor's Note: Many business owners fail to prepare their businesses for a sale either because they believe that a potential sale is far off in the future or because they are focused on current issues and do not consider preparation to be a priority. We would submit that companies need to be "prepared to be bought." Sometimes lucrative offers come unexpectedly for companies that are well-positioned. We typically recommend that a company engage an experienced investment banker to assist them in a sale - often even if they have received an offer - in order to generate a competitive environment.
Some business owners who have tried to "time the market" at some point off in the future have found that unpredictable events such as the Covid-19 pandemic, 2007-2012 recession, credit and stock market crunches, tech bust(s), 9/11, industry issues, etc. can derail their ability to sell at maximum value. We recommend to our clients to work each year to make certain that their companies are currently desirable to buyers. - DPM]
How best to position your company to be attractive to buyers:

1.   Demonstrate Strong Financial Performance
a. Historical Financials
*   Consistent revenue growth (at least upward trend)
*   Recurring revenue is a plus
*   Strong operating margins
*   Increasing profitability
*   Importance of last twelve months

b. Operating Cash Flow
*   Focus on hitting projected revenue and earnings numbers
*   Review net profitability of customers and products

2.   Maintain "clean" financials
a. Audited or "auditable" Financial Statements
*   Have your financial statements audited with a reputable firm to add    credibility
*   Use GAAP accounting. If not, identify how practices differ from GAAP
*   Understand cash vs. accrual accounting - timing differences can be material

b. Income Statement Adjustments and "Add-backs"
*   Buyers are skeptical of earnings that rely on substantial add-backs (one-time, non-recurring charges, private company expenses, etc.)

3.   Diversify your customer & supplier base
*   Diversification signifies a healthy business and reduces risk
*   Buyers will pay less for companies dominated by one or two customers
*   Examine what % of sales your top 10 customers represent?
*   How stable are your top suppliers? How stable are their terms?
*   Do you have multiple suppliers for critical components/services?
*   What % of total purchases does your top supplier represent? Top-5 combined?
*   What % of the company's sales are related to a few key employees?

4.   Develop a Strategic Growth Plan
*   Maintain a clear strategy and be able to demonstrate your history of execution
*   Be able to articulate specific future growth opportunities
*   Position your company to take advantage of them
Remember: A buyer needs to see a potential Return on Investment

5.   Build a capable Management Team
* Invest in training and key strategic hires, if needed
*  Motivate management to add value to the company through a potential sale
* Focus on building a deep management team that can thrive without your continued leadership

6.   Eliminate potential "Gotchas"(these are items that could result in significant discounts to value)
*   Maintain legal documentation (licenses, regulatory filings, contracts, intellectual property, incorporation, etc.)
*   Clear title to all assets
*   Document processes and procedures
*   Resolve legal disputes, environmental issues, etc.

7.   Build a team of Qualified Advisors
*   Minimize distractions from running your business effectively
*  Get advice from professionals who have "done it before" and 
who have expertise in areas you do not 
*   Beware of advisors that outstep their areas of expertise

Are you and your company ready if a buyer appeared on the radar?
Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED.
Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.
The Mead Consulting Group has helped over 60 clients prepare for successful sales transactions ranging from $15M to $350M in transaction value. We help companies increase the value of their businesses leading up to a transaction, minimize the things that cause potential buyers to discount the price, prepare to best position the company, and assist the owners in building a transaction team.
What successful business owners say about us:
 ...We could not have completed the sale of our business without the advice and guidance of The Mead Consulting Group. Their experience was critical in helping us prepare, and endure, the transaction process to a successful outcome. ...Charles M, President, Healthcare IT Company
A successful process is draining and stressful. The Mead Consulting Group brought the experience and expertise necessary to help our team focus on the critical issues and not get caught up in the multitude of items that can derail a transaction. Why reinvent the wheel? We chose to take advantage of individuals who could help us understand the nuances, negotiate effectively, and close the deal. ... Ken W, CEO, Behavioral Healthcare

...We missed the opportunity to sell our family business during the last upcycle. Mead Consulting helped us grow revenue and EBITDA to record levels and guided us through the selection of a transaction team. Dave Mead and his group provided great counsel throughout the sales process, removing obstacles and firmly encouraging us to a great deal with a strategic buyer that mirrored our family business values. ...Dan M, President, Building Products Company

...I do not know why anyone would attempt to sell their business without Mead Consulting. Since they have owned and sold their own businesses, they understand the challenges of continuing to run the business while trying to sell it. Their experience kept us focused on the right things and they helped keep our transaction team well-aligned during the process. They truly act as the advocate for the CEO and owner, helping to make sure that it was the best deal for the owner. ...Ron T, CEO, Software Business
 Let us your your thoughts. Call me on (303)660-8135 or Email me

Thursday, February 11, 2021

Nine reasons why 2021 could be a great time to sell your lower middle market company.


What is a lower middle market company?

Lower middle market is defined nationally as transactions between $10M and $250M in enterprise value.

When is a good time to sell?

CEOs and business owners routinely ask the question, When is the best time for me to sell? Is now a good time or should I wait? Truthfully, many of the folks that address that question (investment bankers, private equity professionals, financing sources) have a vested interest in having companies go to market. So, business owners can be skeptical when reading optimistic projections. 

The Mead Consulting Group has advised business owners for years that there are a number of factors to consider when evaluating if it is a good time to sell a business. The most important is to make sure your company is prepared, and to not wait for the "absolute best time" to sell, but to sell when the market is good. There are lots of examples of companies that have regretted not going to market in 2006-2007 because they thought the market for their company would be better in 2009 or 2010, or got caught in the early “Covid squeeze” when the stock market plummeted in March 2020.

 There are a number of factors that suggest that 2021 could be a terrific time for some lower middle market company owners to sell.

1. Company results have rebounded or stabilized. Many lower middle market companies have rebounded or at least stabilized from the early Covid downturn. Even if revenue growth in some sectors is still very moderate, many companies have done an excellent job of managing expenses and increasing cash flow. Demand in many industries has rebounded nicely.

2.  Valuations are high. With stock market at record levels, the prices (multiples of EBIDA) being paid for good companies are at high levels.

3. Potential Tax Changes. With changes in Washington, there may be an appetite for raising taxes to offset the cost of the Pandemic, and the economic stimulus packages.

4Interest rates are still historically low. This is important since the buyer of your business need to borrow for the transaction.

5.  Private equity firms have plenty of dry powder and fewer distractions from older investments. Private equity firms have raised record amounts of investment capital. With lots of capital to invest, they need to put that capital to work by buying companies. At this time of year, they can focus most of their attention on looking for new opportunities.

6. Private Equity has an increased focus on lower middle market transactions. There are many new private equity firms and family offices that specifically focus on the lower middle market.

7. Strategic buyers have lots of cash. Strategic buyers have been accumulating cash in record amounts.

8.  Strategic buyers need to find new ways to grow. Sources of organic (internal) revenue growth have been difficult for many strategics. They are under pressure to acquire companies that add new products, new customers, new geographies, and new capabilities.

9. There are still more buyers than sellers in the market. The number of baby boomer business owners who are reaching retirement age is increasing daily. In 2021 baby boomers range in age from 57-75 years old. There comes a time when these business owners need to sell and there may well be a glut of businesses on the market. Surprisingly, this has not happened yet.

 Are you and your company ready to go to market?

Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED.

 Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.

 If you would like to perform an assessment of your company's readiness to maximize value in a sales or recapitalization transactioncontact me today.