By Axial | April 7, 2016

For the owner of any small business, deciding to bring in an M&A advisor or investment banker is a big decision.

For family businesses, the decision can bring additional trepidation around questions of ownership, legacy, family leadership dynamics, and more.

Says Mark Kincannon of Confidential Business Intermediaries, which works primarily with family-owned businesses, family business owners “want to make sure that this business that has been their baby for many years, sometimes even generations, is placed in someone’s hands that will represent it the way that they desire.”

Here are a few questions to ask when evaluating advisors for a sale or capital raise.

1) “In what specific ways will working with you add value?”
This question gets at the heart of every advisor’s sales pitch. To some extent, you should be able to predict an advisor’s answer — think increased ROI, an expedited process, more time to focus on your business, market/industry expertise, etc. However, the more detail an advisor provides off the bat, the better. You may uncover potential value-adds, like specific relationships or experience, that set one potential advisor apart.

2) “What does success look like for you?”
Frame this question broadly and pay attention to how the advisor answers. Do they talk only about achieving a certain return on investment? If you’re like most family business owners, you’re probably interested in financialsand fit. Listen carefully to see if the advisor frames success stories in the context of each owner’s unique goals for the business and his or her family, as opposed to merely earning returns that meet industry standards.

3) “What work have you done with companies like mine?”
This question does triple duty — it should help you identify advisors who are well-versed with a) companies in your industry, b) companies of your size, and c) companies with similar goals. If you’re looking to raise debt, for example, that’s a lot different than looking to be acquired by a corporation — so make sure you engage an advisor who is poised to help you succeed.

4)“What issues have you encountered when working with family businesses in the past?”
This is a great way to understand the advisor’s approach and attitude when it comes to balancing family dynamics and business priorities, without necessarily airing your own business’s dirty laundry on an initial call. You may even get some free advice out of it!

5) “What do you see as the biggest challenges for my company in this process?”
This question can help you evaluate whether an advisor understands your business model and the unique factors impacting the road ahead. It will also show you whether they have done their research on your organization ahead of time. Their answer should also give you a sense of the advisor’s attitude toward conflict — will they be more likely to try to smooth things over or are they willing to voice and confront potential challenges head-on?


Understanding How External Factors like Interest Rates Affect the Sale Price in an M&A Transaction

By Dirk Armbrust

Sellers often have a number of factors to consider in selling their business… What’s my business worth? Am I ready? Is the team ready? Is this a good time to sell? The list goes on. The plain truth is that it is often all too easy for a business owner to decide to focus on the day-to-day aspects of running their business, and delay important strategic decisions… like planning and executing a business EXIT.

But… external factors often have a significant impact on M&A transactions and the values of individual businesses. Ask any baby-boomer at the helm of an oil & gas exploration company who was considering selling back in 2013. Back then, crude was over $100 per barrel. Now, with sub-$40 oil, their EBITDA is severely reduced… which has directly impacted their enterprise value. How many years past their planned retirement date are they going to have to keep working… all in the hopes of “waiting-out” the oil market?

That’s the oil patch. What about the rest of the marketplace? This is where interest rates come into the discussion. It appears that historically-low rates are behind us. The truth is, interest rates absolutely impact the sale price of a business.

“The Three People”

“There are three people in every transaction… the seller, the buyer… and the banker.”

I’ve been in multiple seller meetings with our founder Alex Vantarakis. I often hear him say the following when helping sellers understand their valuation: “There are three people in every transaction… the seller, the buyer… and the banker.” You see, nearly every M&A transaction is funded, at least partially, with bank debt. And for the bankers, the numbers must absolutely make sense.

The main number that any lender will look at is the debt coverage ratio. The debt coverage ratio simply measures a business’ ability to pay, or cover, debt servicing costs… namely principal and interest. To an SBA lender, a debt coverage ratio of about 1.25 is their likely minimum threshold.

chart 1The annual interest rate associated with the debt in any M&A transaction is driven by the prevailing market interest rate… measured as the Prime Rate.

How the Math Works
A lender will typically review the past three years of operating performance to determine the annual cash flow they will use to measure debt coverage ratio… the numerator. The denominator, cost of servicing debt, is more straightforward. It’s the simple math of principal and interest payments associated with the loan.
The interest payments are determined by the principal amount, and the interest rate on the loan. The interest rate is typically based upon the Prime Rate and some form of Premium. While Premiums tend to stay relatively flat, the Prime Rate is subject to moves like the December rate hike.

Let’s take a typical SBA-funded M&A transaction as an example:

  • A business doing between $300,000 and $350,000 in cash flow.
  • Seller and buyer have agreed to a purchase price of $1,200,000.
  • Buyer will pay 10% down, the seller has agreed to carry 20%, and the bank will fund the rest.
  • New owner will require a $75,000 annual minimum salary.

chart 2

Here’s the problem. When considering debt flow coverage when compared to the business’ 2012 results, the lender will balk at the 1.20 debt flow coverage ratio. Remember, 1.25 is the magic number.

chartrev
So what happens? The seller and buyer have to go back to the negotiating table to see if they can agree on a new purchase price that meets the 1.25 number. In this case, the number is $1,147,585… about a $52,000 haircut to the seller. Buyer will probably be fine with that. What if the Prime Rate goes up another half point? Well, that would be an $82,720 impact. If the Prime Rate returns to its 2006 level (just before the Great Recession), the seller will have to swallow a transaction price of $896,971. Over $300,000 less than the original $1,200,000!

Conclusion
Yes. External factors like interest rates do matter. No one knows when the next interest rate hike will come… but it likely will. If you are a potential seller and are asking yourself if this is the right time to sell, you should talk to someone at The Vant Group today. We can perform the detailed analysis necessary for you to know what your business will likely sell for (and be financed for) today. Then, we can help you build and execute the best exit strategy possible. We are passionate about helping business owners realize the value they have built into their business. Converting that value into cash may be the best strategy in a rising-interest-rate environment.


Selling your business to employees or partners can maximize its value.

Selling to your partners or employees is a viable and highly-profitable exit strategy that can maximize the value of your sale.

Your partners and employees work in the business daily and understand the value proposition of the business—much better than anyone else. By using the Vant Funding Advantage, a Partner / Employee buyout can easily be an easily structured transaction to finance—assuming the Partner / Employee acquires 100% of the company. TVG will guide you through the process to initiate the transaction with a 0% – 10% down payment—based on the equity currently held in the business.

TVG offers the following support functions:

  • Provide an independent business valuation to understand and execute goals of seller
  • Consultation on the process
  • Development of a marketing plan and marketing package
  • Determine deal structure and asking price
  • Facilitate buyer/seller meetings
  • Assist buyer with structure preparation that meets the seller’s objectives
  • Act as an intermediary between buyer/seller to ensure successful transaction
  • Offer follow-up with buyer/seller
  • Buyer due diligence
  • Bring in outside expert counsel when necessary
  • Arrange financing
  • Coordination of closing and other documentation with attorneys
  • Ensure completion of all legal documents, transfer of licenses, utilities, etc.
  • Detailed closing checklist

Our specialized business expertise defines The Vant Group. We provide effective and actionable business transfer intelligence to our client partners—as we exercise the highest standards of professional competence and ethics. Whether you need representation for Buying or Selling a company, Business Valuations, Business Debt Funding or Advisory Services to build a business; TVG has you covered by our Five-Point Advantage.

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The Vant Group Advantage

Our Company
• Experienced M&A firm since 1999
• Specialize in transactions for businesses with revenues up to $100 Million
• Focused on the Southwest U.S. with a national footprint
• Motivated staff of MBAs and prior business owners
• Authority on Business Transfer having authored two books: Exit and Entrance
• Innovative Five-Point Advantage

Our Difference
• Experienced in the Art of the Business Transfer
– TVG longevity and high number of closed transactions
• Entrepreneurial Mindset
– Buying and selling for our own portfolio for over 20 years
• Proactive Approach
– Anticipating and eliminating “deal killers” before they happen
• Proven Methodology
– Systematic approach throughout the entire process
• Relationship Driven
– Extensive relationships with buyers, bankers, and professional service providers

Our Numbers
• 1999 one of the oldest M&A firms in the DFW area
• 80% of our listings sold vs. the industry average of 38%
• 97% of the appraised price was obtained consistently
• 500+ closed business transaction sales
• $600 Million in combined business transaction value
• 300+ completed loans
• $250 Million in completed loan value
• 20+ years of buying and selling businesses for our own portfolio
• 10,000+ active buyers in our database; both individual and investments groups


Understanding Owner’s Discretionary Cash Flow – Part I

Let the numbers do the talking

We cannot stress enough the importance of hones and verifiable cash flow on the sale price of a small business. Many buyers and business brokers go as far as stating that cash flow is everything. Over 70% of small business buyers are first time buyers coming out of corporate America.  These people have one primary goal – to replace the income stream they lost coming out of their former jobs.  For these buyers, the owner’s discretionary cash flow secured through a small business acquisition is their salvation and their main decision point on company value.


BUYER PROFILES – Part II


Turnaround Specialist

In buyer classifications, there also exists a somewhat rare species known as the turnaround specialist.   This buyer is usually an experienced consultant looking for a bargain or diamond in the rough that he can transform from an under performing business to a profitable status. This type of buyer usually concentrates in the larger or mid market arenas where deals have the resources to justify his time.  Smaller business offerings generally are not of interest to these buyers because of limited operational scope and lack of customer base.  For similar reasons, most intermediaries will not work with companies that are in trouble in the small arena.



BUYER PROFILES

At first glance, it can be a bit overwhelming for buyers to acknowledge the many types of buyer groups that are active in the marketplace.  In reality, the different classes of buyers will be concentrated on distinct types of acquisition strategies at any one time.  It is our contention that an analysis of the types of buyers and their buying parameters can aid the acquirer to focus on deals that are most suited to their needs and buying capabilities.  By being more focused, buyers will not jump from deal to deal as frequently and can concentrate on offerings that they are better positioned to acquire.