Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
1, The presence of an offer doesn’t mean a deal is done. Put the “pedal to the metal” upon receiving an offer so business results don’t slip, costing you a deal.
2, Employee retention is among the most important issues involved in sales today. Buyers often request to meet key employees. If you agree to this, have them sign confidentiality agreements. Stay bonuses paid over time can also incent them to remain with the new owner.
3, Supply chain issues are pushing current owners to increase their buys to ensure there are no shortages that would deter a potential buyer from following through.
4, Watch product pricing closely to ensure inflation isn’t shrinking product margins. Buyers won’t want to see erosion as they enter a deal.
The business selling process can be a roller coaster of highs and lows that oftentimes finds business owners questioning their decision to part with their “baby.” They will have days when business is strong and they wonder why they are selling. Other days they can’t maintain employees and they are thankful to be moving on.
I’ve found once an offer is made, usually with a non-binding letter of intent, sellers sometimes let up. They see the goal line and they don’t work their business as hard. Plus, the selling process pulls the owner away from running their business.
History has shown that 50 percent of the transactions with offers actually close. There are many reasons why a deal doesn’t go through, one of which is the business numbers drop. Business owners need to put the pedal to the metal once an offer is made. The seller should anticipate anywhere from 45 to 90 days to close on a business once an offer is made and they commit to a buyer. This is the time when you need to make sure your employees are fully intact, inventory is healthy and your financials are trending up. Buyers will demand this.
COVID-19 has added an extra element of difficulty to the challenging M&A closing process. Here are a few added obstacles selling owners are facing during the pandemic:
It used to be the first question buyers would ask is “why is the owner selling?” During COVID, the first question now is “how many key employees are there and will they be staying?” Employees are such an important part of the acquisition. Buyers are scrutinizing not only how important the key employees are to the business but also how difficult it will be to replace them should they leave.
Oftentimes the selling business owner will try to maintain confidentiality by keeping the sale quiet from the entire staff, including key employees. With today’s labor market, buyers are insisting on meeting the key employees prior to the sale. If the seller agrees to this, they will want to have the key employees sign a non-disclosure agreement to maintain confidentiality.
Stay bonuses used to come up on occasion pre-COVID. Now they seem to be a common discussion. Such a bonus is paid over time, as the key employee stays on with the new owner, and can be paid by the seller, buyer or both.
If the selling business owner has done a good job managing their key employees while providing them the opportunity to actively participate in the growth of business, then there is a good chance they will embrace new ownership if they agree with the buyer’s business philosophy and if they feel growth opportunities exist.
Every day we hear about the supply chain mess. Sellers are doing their best to maintain the inventory they’ve communicated to the buyer that they normally keep on hand. Buyers want to make sure when they take over that they have sufficient inventory to generate the revenue the seller has indicated the business can achieve.
In the current environment sellers are increasing their inventory orders and spending more to make sure the inventory is in place for the buyers. If the business owner normally orders for three to four months of inventory, they now may need to up the order to five to six months.
When a buyer analyzes a business, they pay special attention to the gross margins. They want to make sure the seller historically has been controlling costs and increasing prices as needed to maintain margins.
Inflation is the highest it’s been since 1982. The consumer price index climbed by 6.8 percent in the year through November, as stated by the Star Tribune in December 2021. Selling business owners need to watch their margins closely. I had one owner tell me they normally review their product pricing every five years. In today’s COVID world five years needs to be five months or even sooner! Buyers don’t want to buy sliding margins.
The value of a business typically includes a historical review of the previous three to five years. Including 2020, when many businesses were forced to shut down for weeks without any revenue can skew what is considered business as normal. Buyers understand that any business that was deeply affected by the 2020 shutdowns should not have as much weight put on the value of that challenging year. The key is to determine how well the business has rebounded in 2021. If the business can achieve pre-COVID levels, then it should be valued at pre-COVID values.
Now, if the business has navigated through COVID well, and actually is showing stronger numbers than pre-COVID, the buyer needs to determine if such growth will continue post-COVID. We recently sold a home design manufacturing business and we had such a discussion. The question was “will the need for home offices stay strong into the future?”
COVID has created positive opportunities for many businesses. Those businesses that have been able to pivot and adjust their model have been able to attract buyers. We are working with a wholesale stationery business. Their retail customers dried up during COVID, so they put more energy into their online direct-to-consumer market. The company more than doubled its online sales and now that retail is back up and running, they have built a much more valuable company during a very difficult time.
Another business operating as a retreat center on 76 acres found their business completely shut down during COVID. They never did re-open as a retreat center But after a nearly two-year search, a home developer emerged as an excellent alternative buyer.
The selling process is normally a challenging time for business owners. The emotional uncertainty combined with the added obstacles created by COVID can put the stress meter off the charts. Yet business owners wallow in risk and always seem to get through it.
