Preparing Your Business for Sale

Current Trends

As business advisors, we are often asked, “What do buyers of middle market companies look for when they scan the universe of selling companies?” Answer: Buyers of middle market companies usually seek businesses that 

• Fit within a pre-determined, self-defined Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) target size or range
• Demonstrate stable and strong EBITDA margins (EBITDA as a percent of Revenue)
• Command a high market share in their niche(s)
• Present opportunities for transformational growth
• Have a value-added management team
• Expand the acquirer’s service footprint

Another frequent question posed to us is, “What do buyers of these companies plan to do with these companies after the transaction closes?” Answer: Typically, buyers want to grow the acquired company’s sales and profit. These sales and profit growth efforts may focus on both organic and inorganic growth. 

What are organic and inorganic growth, you ask?

Organic growth is basically growth a company achieves by increasing revenue internally through the company's own resources. Organic revenue and profit growth can include investments in sales, marketing, and branding as well as new products, services, geographies, and markets.

Inorganic growth arises from mergers or takeovers and often includes synergistic acquisitions of add-on companies. Inorganic growth is considered a faster way for a company to grow sales, profits, and market share compared to organic growth.

We expect the supply of strong companies for sale to increase – motivated by an abundant availability of quality buyers, ample capital to spend, and strong valuations. However, our clients with strong companies are confronting an increase in speed to transaction closing and buyers’ increased focused on “getting due diligence right.” In the mergers and acquisitions world, due diligence is an examination, investigation, or review performed to confirm key financial and operational facts and details before entering into a proposed transaction with another party. 

‍

Preparation 

As a result, buyers of middle market companies are increasing their due diligence efforts. The expertise and experience of buyer due diligence teams is often materially more in depth and broader than it has been in the past. 

• For sellers, this means that the better prepared they are with information and the ability to respond to buyer data requests, etc., the higher the chance the deal closes quickly and with certainty.
• Sellers with strong legal and deal teams are better able to respond appropriately and efficiently to buyer requests, increasing the probability of an early or on-schedule closing. 
• Sellers that prepare their companies for sale thoroughly and correctly have never been more important to the universe of buyers. 

The good news is that we at GaP guide our clients through the sale process seamlessly from start to finish. Our deal teams have much more involvement than is typical of middle market advisors in the areas of due diligence and sale preparation. In addition, we seek to identify any potential “deal-breaking” risks upfront and offer appropriate risk mitigators. 

As founders and sellers of multiple businesses, we have extensive experience selling an asset that made up most of our net worth. Each time we went through this process, we felt that existing approaches to selling a privately-held business were skewed to benefit the broker, regardless of whether they accomplished our objectives or not. Large engagement deposits (used to fund sales commissions) and hourly billing practices ensured the broker was well compensated long before we, as the shareholders, had a sense that our goals would be met. At GaP, we work where our financial success is contingent upon our ability to meet or exceed the owner's stated goals. By taking a closing risk alongside our clients, we are engaged more like a partner. Our “skin in the game” approach ensures we are always incentivized to act in   the best interests of reaching clients' goals.

As a result, our sellers are better prepared to respond to buyer due diligence requests and thereby have increased probability for a successful sale. And everyone loves a success story!

Contributed by Guest Blogger: Don Owen

‍

‍__________________________________________________________________________

‍If any of this resonates with you, we encourage you to take our Sellability Assessment and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.

Gilbert & Pardue Business Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A) and through business value-growth services such as Fractional CFO, Advisory Board, Executive Coaching, and Consulting.

Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle market and middle market businesses – those businesses generally enjoying annual revenue of $5-$75 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle markets provides the quality of representation and transactional expertise that we do.