Bottom-line: Deals are still getting done in the lower middle market – you simply have to be prepared for some of the new realities AND have professional representation guide you through them.
Despite recent economic uncertainty, the market for the sale of private businesses has not dried up. Many private business sale transactions continue to move forward, though at a slower pace, and private equity firms in the U.S. have a significant amount of investor capital that they still need to invest in private enterprises.
This is a critical point that business owners need to realize: The motivation of buyers in the lower middle market is radically different than that of the billion-dollar deal buyers that get all the press (and which most now have deals on hold).
Because financial and strategic buyers that operate in the lower middle market have a much longer time horizon than simply the quarterly profit goals that the billion-dollar club must justify. Even in the lower middle market an ROI (return on investment) is necessary. However, for buyers in the lower middle market (generally deals valued below $100 million), the timeline is much longer, making COVID-19 recasting simply another hurdle to overcome (among the many in lower middle market deals during normal economic times).
We also expect to see buyers paying a greater portion of the purchase price in the form of an “earn-out.” This results in the business owner being paid over the course of several years, but only if the firm achieves certain predetermined performance targets. We believe sellers who adjust their mindset, show a willingness to be more flexible on deal terms, and who recognize that the transaction process is going to take longer in this new environment are likely to be at a competitive advantage.
Now earn-outs have been a deal making option since literally the beginning of the M&A industry decades ago. However, it is VITAL that the earn-out be crafted in such a way to benefit YOU in the long term, not just the buyer. An experienced M&A advisor will help prevent situations where the earn-out is based on items you have no control over and the buyer has 100% control (especially if you have very little management of operations post-sale).
Also, an M&A advisor like Generational Equity will guide you to determine which deal terms to be more flexible on than others. This is really key. For example, in many cases a structured deal with an earn-out can actually provide you with more cash in the longer-term.
However, again, you will need professional help to determine this. I cannot overstate this fact! This is one of the key reasons why exit planning professionals exist.
Finally, we come to the 900-pound Gorilla in the room: How to address a massive business interruption like COVID-19 in relation to business valuations. Northern Trust has some valuable input on this topic:
Moving forward, we expect the due diligence process to include questions that help buyers better understand the specific impact of COVID-19 on the business, and its general level of preparedness for a global pandemic. Review your business continuity plans now, so that in the event you decide to sell your business, you and your management team have anticipated buyers’ diligence questions. Buyers will expect responses that offer reassurance that your company is prepared for these contingencies.
As we mentioned a few weeks ago, a new accounting term has been created in the last few weeks:
Most business owners are familiar with the definition of EBITDA, the “C” has been added to address the impact on revenue/earnings by the Coronavirus. Ultimately, this all relates to a term known as “recasting”. If you can document how your business has been affected by and, even more importantly, how your team has effectively addressed the impact of COVID-19 on your operations, you will be well-prepared for questions that will arise during due diligence.
Since this is all new territory for most business owners (but not so for experienced dealmakers who have literally seen every possible business reversal under the sun), it really is crucial to hire a professional to guide you.
Let’s be honest: Professional business buyers are always looking for the best deal they can get with a seller. That is totally ethical and honest. However, for the next 6-12 months, buyers will be looking hard for any loophole which will help them get a greater ROI than ever.
The reason Generational Equity has developed such a solid reputation in the market over the years is that our dealmakers have the experience of closing deals in all economic cycles and, while doing so, PROTECTING THE FINANCIAL INTERESTS OF OUR CLIENTS!
This is so clear when you listen to what our clients have to say about our services:
And that is what it really all boils down to in the long run: How we can help you protect the generational wealth you have built in your business and allow you to maximize it upon exit, NO MATTER WHAT THE EXTERNAL CIRCUMSTANCES MAY BE!
So thank you again to our friends from Northern Trust for providing us with a fantastic overview of what business owners contemplating an exit need to be aware of for the next few months. What is clear is that entrepreneurs need help now with exit planning like never before.
Fortunately, as the leading lower middle market M&A firm in North America, we are here to guide you. If you would like to learn more about how we can, please call us at 972-232-1121 or provide us with your contact information and we will be in touch.
Remember that there is no wrong time to begin exit planning; the sooner you start the better. There are two types of business owners:
Those that PLAN to exit
Those that HAVE to exit
Which are you?
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2021 Generational Equity, LLC All Rights Reserved
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.Shenille Engelhart, Owner – CLS Technology
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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