In Fall 2019, Barnes Dennig’s Transaction Advisory Services group presented an expert panel discussion tasked with solving the puzzle of buying, selling and valuing a business. The panel was led by moderator Dino Lucarelli, CPA, director and leader of Barnes Dennig’s Transaction Advisory Services group, who has been leading successful business acquisitions and divestitures for middle-market companies for over 30 years. Barnes Dennig cordially invited Cheryl Strom, Origination Principal of The Riverside Company; Bill Watkins, Managing Director of Harris Williams; Geoff Kuzio, CEO of Universal Transportation Systems; Matt Miller Esq., Attorney at Law for Katz Teller; and Scott Cress CPA, CVA, CM&AA, Director of Barnes Dennig’s Tax group.
Selling a business is one of the most important decisions a business owner can make. Timing, price and accounting accuracy are highlighted as a few of the most significant factors when beginning the process. Panelists called market conditions the “best seller’s market,” but acknowledged it’s very good for investors as well due to low interest rates. In today’s mergers and acquisitions market, Matt Miller noted he is seeing a lot of sell-side activity stating, “It’s the ‘right here, right now’ mentality.” Multiples have been at their highest in the past five years. “If you know you want to sell in the next nine months, do it now, advisors and investors know where debt rates are, and multiples are now,” said Bill Watkins. Although, even if we enter a slower growth environment, the better prepared companies will still get the premium multiples because there will still be a significant amount of capital chasing deals.
When beginning the process of buying or selling a business, Geoff Kuzio pointed out that, “There is no such thing as a typical deal; they are all different. But it is crucial to understand how to be prepared.”
Although no transaction is the same, the same processes commonly take place:
- Data gathering / projections
- Teaser page / outreach
- Preparation of Confidential Information Memorandum (the “book”)
- Letter of Intent
- Due Diligence – financial / legal / HR / Risk Management / Operational / IT
- Purchase Agreement
- Representations and Warranties
- Definitive Purchase Agreement
- Seller consulting or employment contracts
From the issuance of the engagement letter to the closing of the transaction, the timeframe can vary. In general, buyers and sellers aim to close within 60 – 90 days after a Letter of Intent has been signed. One of the most common variables that affects the timing of transactions is the accuracy of financial statements. The panelists would suggest sellers engage a 3rd-party to do a Quality of Earnings report. However, Quality of Earnings reports can be pricey and having an outside accounting firm provide an official review of financial statements can be equally sufficient. These procedures instantly impart credibility to your company long-term, and when the time comes to sell your business, it streamlines the process when buyers start requesting specific documents.
Bill Watkins emphasized preparation is everything, “From the day you buy a business, from the day you start a business, from the day you inherit a business, you need to think about selling the business.” In the course of succession and sale preparation, business owners naturally uncover ways to make their businesses better. By taking a step back and looking at their company with ‘eyes wide open’ owners start to realize the connection. For example, some companies haven’t invested in technology in 15 years or remodeled their pricing strategy in six years, which has led to missed value-added opportunities. Understanding how to capitalize on these opportunities will help you maximize margins, EBITDA growth, and your company’s value today.
There are many ways to maximize value. The most common strategy is determining and then optimizing how much revenue is recurring, how much is a onetime sale, and what percentage of total revenue belongs to the top five customers. Companies are valued higher when they have a substantial amount of recurring revenue and the top customer is less than 20% of total revenue.
In finance, we use two types of valuation methods to help determine the value of a business: the multiples approach and the discounted cash flows approach. Both methods will help to portray the market value of your company. The multiples method values the company from the historical cash flows and the discounted cash flows approach values the company looking forward. Scott Cress explained, “There are three pillars to valuation that help dictate value: 1) growth, 2) profitability and 3) size.” Although multiples have been higher than ever in recent years, they do vary based on industry. The panelists explained that, regardless of industry, establishing recurring revenues and proving a high EBITDA helps companies earn a higher multiple.
The panel emphasized that bringing in a professional, such as an advisory firm or investment bank, instantly adds validity to your company, telling sellers that you are serious about this process. Leaning on a trusted partner along the way helps alleviate uncertainties as well as helps with tax planning and maximizing your take-home money.
When assessing your options, it’s essential to partner with an advisor who can help you navigate the process. If you have questions about the funding sources, what it means for your business, or need assistance with mergers, acquisitions, audit or accounting issues, Barnes Dennig can help! For additional information call us at 513-241-8313 or click here to contact us. We look forward to speaking with you soon.