Quite a few of the business owners that attend our exit planning workshops are not there to sell 100% of their companies. Many are there because they need capital for growth and are interested in learning about some of their options for doing so. Essentially each owner wants to attract investors to acquire a percentage of his or her company’s stock and re-capitalize the business for expansion.
Although Generational Equity generally focuses on finding buyers that want 100% of a target’s business, we do provide partial sale services. This is where a buyer acquires 51% (or more) of our client’s stock and retains existing management to help grow the business. Normally the types of buyers who create these deal structures are private equity firms.
This arrangement can be quite lucrative for all parties involved; in fact around 26% of our deals closed in 2014 were with private equity groups (PEGS).
However, throughout the years we have cautioned business owners that are interested in this type of investor to make sure that they are realistic and do their research prior to approaching PEGs, especially if they are going to do so without professional assistance and guidance. Here are some issues to be aware of if you, too, are thinking of approaching this group:
Since many of these are self-explanatory, I will only highlight a couple of the most important ones for you here. To learn more, attend a Generational Equity M&A seminar. These educational meetings cover a full range of buyer types, including equity firms, and how deals like this can be structured.
One of the most important issues you will face is your expectation of the value of the business. All too often business owners are approached by Larry at the country club, who 20 years ago owned a business. After a couple of cocktails Larry tells you that your business is worth XXX millions and that you shouldn’t accept a dime less. Over time in the business owner’s mind, Larry’s napkin valuation typically grows to the point where reality is far off the horizon.
Don’t let this happen to you. If you expect to sell 60% of your company to an equity firm and retain 40% of the new entity, you need to know what 100% of the company is truly worth in today’s market.
On the flip side, some business owners undervalue their businesses because they focus on the negative issues that take up most of their time to control and maintain.
You need to avoid both of these scenarios by having your company valued by a professional business valuation firm (and not an appraiser of equipment, your company is most likely worth more than the depreciated value of your equipment). A professional valuation firm will use a variety of methods to determine the most accurate range of value for your company.
On a side note, Generational Equity’s valuation team was named Valuation Firm of the Year in 2020 by The M&A Advisor. Quite frankly, no M&A team in the lower middle-market has evaluated more businesses than our group. You need to find a company that can provide this type of service as well.
One last thing about valuations: Your accountant may be able to do this, however, chances are good he is not an expert in valuation methodologies and his/her value conclusion will probably be torn apart by an equity firm.
OK, assuming that you now have an accurate value range for your business in hand, you need to create documentation that equity investors want to see. You have to keep this in mind: Professional buyers with these firms will look at literally HUNDREDS of opportunities every year. This means that you need to create information and provide it so that they can quickly decide if you merit further review.
Two key pieces of documentation you will need are:
Note: Both of these need to be based on “recast” financials.
The CBR is a one- or two-page summary of your OM, only it is written in such a way to disclose just enough information to attract interest WITHOUT letting folks know who you are. What you need to do is provide top and bottom-line financial data for three historic and five projected years, explain why your buyers buy from you, what future opportunities your company provides, and generally where you are located (state and region typically).
If you are not a professional writer or an investment banker with experience, this document can be a challenge. It needs to be creative but not bombastic. Avoid terms like “industry leader,” “only one of its kind,” and “no competition” as you prepare your teaser.
The OM is your 60- to 100-page document that you provide after a target has signed your non-disclosure agreement (NDA).
Note: Your NDA needs to be drafted by an attorney. See the fifth bullet point above.
The OM should document your past and, in great detail, explain your future growth. Again, avoid hyperbole here. If your company has been growing at a 5% clip for 20 years and your net profit margin has hovered around 8%, be careful not to suddenly show 30% growth and 15% margins in your OM. It will be discounted and most likely, you won’t get a follow-up call.
If you want top dollar for your company, odds are better if you hire an M&A professional to represent you. Certainly equity firms acquire privately held companies all the time that are not represented by advisors. But they do so to their benefit, not necessarily the business owner’s. In fact, in a recent article on the Axial blog (Axial is a leading B2B website matching business owners with capital providers), their research found this:
“In the study, entitled Does Hiring M&A Advisors Matter for Private Sellers?, Agrawal et al. discovered that ‘private sellers receive significantly higher acquisition premiums when they retain M&A advisors.’ Although ‘top-tier’ intermediaries offered the highest acquisition premium, the benefit of the M&A advisor held true across all deal sizes.”
You might ask, why does this happen? Simple: Hiring an M&A professional helps you with all six of the issues listed above.
Once retained, a professional firm will perform a thorough evaluation on your company to determine value. Then, they will create documentation that will help attract buyers and close deals. They will guide you through the 12-18 months it takes to close most deals and help you understand the process.
An experienced M&A advisory firm will approach those equity firms that make sense based on relationships they have developed with them. And finally, in conjunction with your legal counsel, they will help to ensure that any deal created protects your interests while getting you the most value in both the short and long term.
So it is a good idea to spend some money to make some money!
As mentioned, Generational Equity holds educational seminars on these topics since we know that most business owners may have a vague idea of their options and what they want to do; however, they have never formally created an exit plan. We are here to help. If you would like to learn how, give us a call at 972-232-1121 or fill out a contact form and we will give you all the details.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2021 Generational Equity, LLC. All Rights Reserved.
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
Generational Equity, LLC’s affiliates are all part of one corporate family, they work with one another and may work together to provide services to you. The sharing of your information among affiliates enables Generational Equity to serve you more efficiently and makes it more convenient for you to do business with Generational Group. Generational Equity is permitted by law to share information with its affiliates. All of our affiliates follow similar privacy policies.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.
Honored to win 4-time winner of Investment Banking Firm of the Year.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team