FREQUENTLY ASKED QUESTIONS

When the external environment (the economy and your industry) are doing well, and the internal environment (your company’s historical and projected performance) is good and improving.

Create a team of trusted advisors including an investment banker, an accountant (or CFO) skilled in M&A/financing and an M&A attorney to discuss strategy, timing and steps to prepare for the ultimate transaction.  It is never too early to engage in these discussions, even if you are years away from a transaction.

There are a number of ways an investment banker can help you create value.

• The price you will receive for your company can be significantly improved if there is competition for your business.  Investment bankers are uniquely equipped to create a competitive environment.
• Confidentiality throughout your transaction is vitally important.  Typically, investment bankers can ensure confidentiality better than company owners can.
• Investment bankers do transactions all the time and know where the pitfalls lie. 
• Transactions take a lot of time and effort.  Investment bankers can shield you from much of the effort so you can continue to operate your company at a high level of performance.  Many transactions have failed when the company’s owner lost focus on operations to focus on the efforts required by the transaction.
• If there are hard line positions to be negotiated, it is better to have an investment banker take the tough positions so that you can preserve your relationship with the buyer.

Strategic buyers are typically companies in a similar or related business who have a strategic motive for doing a deal.  They have the ability to take advantage of synergies between the two companies, and as a result, they can often can pay more to acquire a business.  Financial buyers are private equity and similar groups who have raised capital for acquisitions and look to acquire businesses.  They usually look at the acquisition entirely from a financial perspective and most often would like current management to continue. 

The most important issues that influence valuation are the size of the business (bigger is better), growth of the business (faster growing businesses command a premium), margins earned in the business (the more profitable the business the better), and a catch all we throw into a bucket called “What’s Special About This Company” (this will vary by company and industry but could include intellectual property, competitive advantages, manufacturing capabilities, etc.)

Companies typically sell for a multiple of annual cash flow which is often measured by EBITDA (earnings before interest, taxes, depreciation and amortization).  Buyers pay a multiple of cash flow or EBIDTA.  In the middle market, companies typically are valued in the range of 4-8 times EBITDA, but multiples in the double digit range are not uncommon for companies performing well that are being pursued by strategic buyers. 

The enterprise value of the business is the value of the business irrespective of how it is capitalized.   The equity value of the business is the enterprise value of the business less any funded debt plus any cash.  Buyers typically purchase a business on a cash free debt free basis with a target level of working capital.

Hiring a banker to assist you with the process, preparing the marketing materials, contacting targeted buyers, negotiating a letter of intent, due diligence and closing.

The typical process takes 6 to 9 months, but it could be shorter or longer depending upon the circumstances.

This is a complicated issue which is dependent on the form of ownership of your business (C Corp, S Corp, LLC, etc.) as well as the needs of the buyer.  It is important to understand these issues on the front end of a process as it may dictate how the process is structured and managed.  Also, estate planning issues of the sellers should be addressed at the outset of the process.

When buyers and sellers have different perceptions on the value of a business, an earn out is a mechanism that can be used to bridge the gap by paying the seller additional consideration based on the performance of the company after the closing.

The amount of capital you should raise should be enough to achieve a significant milestone in your company’s future that will allow you to raise additional capital at a higher valuation.  The valuation today is typically based upon the investor’s perspective of the future value of the business adjusted for the risk of not achieving that future value.  Unlike financial investors, strategic investors often will have different perspectives on future value allowing them to invest at higher valuations. 

Investors will often attempt to include provisions such as a right of first refusal or right of first offer when they make investments.  It is always best to eliminate any investment provision that could limit the attractiveness of your business in the future.