Good Morning, Today’s speaker is Barry Evans, who has spent many years in the Mergers and
Acquisitions profession and is a partner in the regional M&A firm known as Acquisition Services Group.
Barry has always been in a hurry. He retired when he was 40 and found that it took him 12 years to flunk retirement, and then he had to return to an active life in finance and business. He currently devotes his full-time efforts, in addition to family, golf and tennis, to working with clients involved in Acquisition Services Group in addition to his sitting on the board of a number of West Coast companies and working with the business partners, with whom he owns five other businesses that are located on the West Coast. Today to talk to us about how to win the mergers and acquisitions game, let’s have a warm welcome for Barry Evans.
Thank you kindly. What I’d like to do is share with you an overview of our niche industry. Mergers and acquisitions is sort of a misleading topic: You think of Ford and General Motors merging and that type of thing. The niche portion of it that we deal with are privately owned companies that have market values basically between one and twenty million dollars. There are about five million companies like that in the United States. Typical profile: They were started by dad or uncle or grandpa, perhaps handed down through the family, perhaps started in the last five to ten years. Other common characteristics is the value of these businesses typically represents a high percentage of the owner’s total net worth. So you are dealing with very important dollars.
Our particular niche service that we provide is seller representation. We only represent sellers, not buyers. We represent those companies, privately owned, generally speaking in the manufacturing, service and distribution segments, and that is to the exclusion of hospitality, food and beverage, taverns, and the little single store retail operations. Another way of looking at it, we’ve talked about value ($1,000,000 – $20,000,000), we’ve talked about manufacturing, service and distribution, the third slice of the pie if you will is location. In virtually all instances, a good 80-90% of the time, they are within a two to three hour drive of our office. However, as a function of referral, over the last 23 years of our existence, in the last few years we have closed transactions in Reno, Las Vegas, Memphis, Kansas City, and so on down the line. In fact we have one closing right now in Dallas, and it happens to be an $18,000,000 dollar transaction.
Our industry is not really well known. Many people, when they have a business to sell, they have a medication that might be health, it might be age, it might be lifestyle, and so on. The number one reason we hear continuously is, “I’m burn out. I’ve been doing this for X number of years. I’ve had it with employees and customers and government and taxes” and so on down the line. So burn out is number one, but certainly age and health considerations come into play.
So with our perspective clients, when they contact us, normally they don’t know what it is we do, how much it will cost them, or how long it will take, and what results can realistically be achieved. The starting point, we believe, is that we really do not have too much input on the lifestyle portion of the decision as to when to sell. People ask us, “Geez, should I sell now?”, we think it is really a lifestyle issue, or its their health, or they want to relocate, if they’ve had it, are they not as affective in the business as they have been or could be? However, if the question gets turned around, “I’ve decided to sell, but is now a good time to go to market?”, that’s a little different equation, and we typically have some opinions.
The single most important factor that will influence whether or not you are able to maximize the transactions when you are ready to sell will be determined by market conditions when you go to sell. If it is raining out, you are going to get wet. If the sun is out, it is nice and warm and a solid environment. So that many times we will suggest to a client, just as we did after September 11, 2001, pack your tent, stay your course for the next six to nine months, let the market and the rest of the world stabilize, because going to market under these circumstances makes no sense.
Anyway, market conditions are what they are, and it also gives you the clue that many people I think miss the boat. They own their own business, they run it well, they are the masters of their own destiny, but they have totally neglected to plan their point of entry, their point of departure or their exit strategy. And pre-planning when you are ready to go to market is vitally important. It can represent a tremendous differential in the amount of dollars you end up with.
I might just share with you, if we have Company A and Company B, both in the same industry, both legitimately worth $1,000,000. You have two buyers who will come out and pay $1,000,000 in cash. What would you guess those two sellers would end up with after taxes, with cash in their pocket after the transaction? Any guesses? Half a million. $400,000. Okay. It’s an unfair question because there is a lot of data you need, okay, but I can tell you that subject to structuring, how the transaction is put together, the agreements with regards to tax allocation, and a variety of other issues, it will range anywhere from about $450,000 to up $850,000. That is an enormous difference. It represents the penalty if you are stupid and don’t plan. Okay. You want to maximize it? Plan ahead. The government has ground rules. Not all of them make a lot of sense, but they are readily available for you to understand and structure your business so when you are ready to hit the sell button you have dollar bills coming out of it rather than tax bills coming that have to be paid. So that preplanning can be very, very important.
We talked about value and I think every single perspective client we ever had had their highest priority being, “Barry, can we please sell my business for the greatest possible amount.” That kind of indicates that they don’t understand the big picture, because if your business is worth legitimately $1,000,000 and someone agrees to pay you $1,300,000 for it, human greed and emotion has you really anxious to execute that transaction, but then if you find out that you have disadvantaged tax structuring, or if that person plans on paying you $300,000 down and $1,000,000 in a note, that might be the world’s worst transaction. You might be better off with a transaction at $980,000, all cash with good tax structuring.
There is another aspect to this game, and that is it is a very litigious industry. The world is filled with people with great expectations who will buy your business and through no fault of yours, they will crash and burn and have problems with the business. Who do you think they’ll blame? You, your lawyer, your broker and everyone else on down the line, because it is never their fault. Therefore, when you go to put together a transaction for the sale of your business, it’s not only price, it’s not only tax issues and so on down the line, but it is to minimize your litigation exposure. Your walls of defense in that regard are number one, honesty. Liars tend to get clobbered. Be honest. Secondly, disclosure. I’ve never seen a business that didn’t have some negatives. Disclose them. Document them. And the last point it to document them into the legal paperwork related to the transaction. So that you take away all the things the buyer could possibly say negative about your business that you didn’t disclose. It has been disclosed and documented in the paperwork.
So out of all the things we have done as a company in the last 23-24 years, perhaps one of the proudest issues is that we have never had a client, nor have we, been sued by a buyer. That is an amazing record that covers many hundreds of different transactions. We are not Supermen from the standpoint of the big red “S” and totally invincible. We are careful, we run scared, we disclose and we document. These are the things that we do.
With respect to the value of companies, most people say, “Gee, can you tell me what my company is worth?” And generally speaking, we turn it around a little bit and say, “Bob or Mary, the value of your company is not a specific number, but it is a range of value.” Because if your company is worth $1,000,000 to a financial buyer, someone who is retired from a company and who would now like to buy another company, please stop for a moment and think about a competitor or someone else in your same industry that would like to get into your market, is your business worth $1,000,000 or $1,200,000 or $1,300,000, where they could consolidate operations, eliminate duplicity of overhead, have some economies of scale, lower the Cost of Goods Sold through purchasing power. Therefore the value of most businesses is a range; it is not a finite number.
So the task that we face continuously with every representation is to take what we are dealt, because you play the hand you are dealt, with regards to the financials and the nature of that company and the industry, and then go on out and search the horizon proactively for buyers who would most likely be the synergistic buyers, those folks for whom 2 + 2 = 6, rather than the financial buyers where they are looking to buy a job.
Therefore, an example that I’d like to share with you, an actual case history, is a company that came to us, and they came to us with a $2,000,000 offer with a large company on the East Coast. They didn’t know if they should take it or not. As we looked at their numbers, we concluded that if they completed the transaction as it had been proposed, they would end up with roughly $900,000 in cash after paying their taxes. Our recommendation was that we felt their value was far greater than that, and we went out to market. We got five different offers on exactly that same business. The transaction that eventually closed was at $4,000,000, they netted $3,300,000 after taxes, and who would you guess the buyer was? It was the original company that offered them $2,000,000.
There is an old adage in the industry, and that is “One buyer is no buyer”. You want to have activity, competition, and so on, of different people wanting to buy your business. Then you can negotiate. You can play one against the other and end up with what we believe is the real objective when we started representation, and that is the best possible overall transaction: Price, taxes, how you get paid, low litigation profile, and so on.
There is also a tail end story to transactions, and that is that it is very rare that you can sell your business and walk away because you are going to have to train, you are going to have to consult, you are going to have to sign non-compete agreements. Sometimes those terms can be more onerous than owning the business. We occasionally run across transactions where people have sold a business, and they are required to stay there for five years. Have they really sold the business? Have they really moved the ball? Yes, you put some of their money in your bank account, but the reality is that 99% of the time, it is a lifestyle reason. If staying and working another five years is really what you want to do, why not do it for your own account because the value of your business might appreciate significantly during that time period. So anyway, there are a lot of things that get involved in the process.
When we go to market, there is a benchmark that is of critical importance, and that is confidentiality. Because as the owner of a business going to market, you have everything to lose and nothing to gain by word getting out. What do you think the employees will think when they hear the rumor that the business is going to be sold? Won’t they react to the headlines in the newspaper “7500 Laid Off”? They don’t think positive thoughts. The same thing is true with competitors, vendors, customer, suppliers. The only time that you would want to make any kind of announcement that the company is contemplating sale is on the day the transaction closes. That gives you the opportunity to put a very positive spin on it, so that if I’m the seller and my wife has been involved in the business, we would stand before the group of 20, 30, 50 employees, whatever it is, and thank them for their years of loyal service. They’ve been great to work with. “My wife and I have felt guilty, however, over the last several years because if anything happened to me, drop dead, it jeopardizes the security of everyone in this room. Also, the amount of hair that I have left and the color of it indicates that I’ve slowed down in the last five to six years. I haven’t been growing the company, putting in the capital that I might have otherwise done if I were 20 years younger. Your opportunity with this company lies in the future. That is with a younger, better capitalized owner coming into this business to grow it for you. And so my wife and I have spent a good number of months, searching for that right acquirer to come into the picture, basically a partner. I’m still going to be involved for the next several months, but with that being said, I’d like to have you meet the new owners of XYZ manufacturing,” and then the new owners come in.
What do they say? “I want to compliment everyone in the room. You’ve done a great job of team building a company. We are proud to be associated with it. Just as Barry has indicated, we come with the intention of growing the company, increasing the opportunity for every person in this room.” It is the truth, and it is exactly what they want to hear. Versus the rumor mill. So the process of transition is important and needs to be carefully planned.
When we take a business to market, our record is that nine out of ten of the representations we undertake, within a four to seven month time period, there is a closed transaction. The 10% that don’t get closed are typically because the earnings of the company have stumbled along the way. If the earnings have stumbled, clearly it impacts the value of that company. That makes our task more difficult. If our client is expecting X, and the market has changed to Y, then very clearly we have a disparity that typically results in the business not getting sold.
The process of going to market needs to be done very confidentially, as indicated it takes typically four to seven months to get a completed transaction, and among the things that we bring to the process is that we have relationships with lenders who will finance these types of transactions. We don’t take any credit for it, and we don’t control the lenders, but by and large they are SBA guaranteed loans. That is where the government provides guarantees for people to buy businesses. And I will tell you candidly that they make loans that no sane person would ever make with their own money. With a $1,000,000 transaction, how much cash did the buyer have to have? Under some circumstances, only $100,000. In most cases, $150,000, and the bank or lender under the SBA guaranteed loan program will then provide the other $850,000 or $900,000, 10 year amortization, typically a couple points over prime is the floating rate.
That is dramatically good news for people who own privately held businesses, where those businesses sell for up to $2,000,000 – $3,000,000. The cap on SBA loans, the 7a program, is $2,000,000, so you can’t go get a $5,000,000 under the SBA 7a program. So that means that your probably of selling your privately owned business that has a market value of us to $2,000,000, selling it for all cash or substantially all cash, is very, very high – 85-90% probability. Then in the range from $2,000,000 to $4,000,000, you get into a dicey area because you’ve run out of SBA financing, not too many buyers running around with $2,000,000 – $3,000,000 in cash in the bank, and so your prospect of getting cashed out is probably at the 60-70% level, as opposed to what I indicated a moment ago. However, I would like to indicate that if your business is worth $5,000,000 or above, you are back in the 95-98% probability range of getting cashed out because the profile of the buyer has changed. That low range is typically private individuals, that midrange that we talked about might be other companies within your same industry, $5,000,000 and above, the profile might be an investment group, a large public company and so on, and money is a raw material, a commodity, to them. They borrow it, they have it, they have access to it. As opposed to individual buyers who have to go out and borrow it on their own based on their credit worthiness.
Well, I think what we’ve done is we’ve very, very briefly covered the complete gamut of the M&A industry, at least the niche in which we are active, seller representation. We love what we do because it is a changing scene. Every single business we handle is truly unique, the problems, the challenges that we face with it. We have formed some terrific relationships with our clients over the years. As a matter of fact, another aspect that we are very proud of is we have a number of businesses we have sold two, three or four times. We had a buyer who has come and bought it, and they then elect to go to market. They’ve seen that we’ve brought enough value to that transaction that they retain our services to go get the next guy, and they’ve grown it.
I will also tell you that the overwhelming percentage of all the businesses that we sell, the new owners do infinitely better with the business than the former owner. That is not an IQ challenge, it is a matter that most people wait a little too long to sell their businesses, they’ve mentally retired five years ago, the business has been coasting. A new owner comes in with a new level of energy and enthusiasm and commitment and up to debt right up to here, and they work a lot harder at the business.
So, I want to thank you very kindly for your kind attention today. I will also mention that if you are in a position of contemplating, either now or some point in the future, the sale of your privately owned business, that in the spring and in the fall we give a one day seminar entitled, “The Essential Steps in the Sale of a Privately Owned Business”. It will provide great insight for you and perhaps add dramatically to your net after tax dollars if you dedicate a day to one of those seminars, and they are posted on our website.
Thank you.