Market Ripe For Sellers

February 14, 2003
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GRAND RAPIDS — Ready to retire but can’t find a family member who wants to take over the business you’ve worked so hard to build?

Don’t fret. It a seller’s market out there.

“This is the greatest seller’s market we have ever, ever experienced,” said Tom Williams, president and founder of The Charter Group, a local company that represents both prospective buyers and sellers of businesses.

Williams, who has been in the business since the mid-1960s, said sellers are getting more money for their businesses now than they have ever gotten before, “and I mean to extremes,” he added.

“There are more people who want to buy businesses now. Right now there are 20 times as many buyers as there are sellers.”

The first thing a seller needs to do is get his team on board.

The business owner needs to have a competent CPA who can make sure that all the balance sheets, federal tax returns and all other related documents are accurate, up to date and in a format that’s ready for due diligence.

He needs to meet with his attorney early on in the transaction process and discuss his sale plans.

Too many people wait until the tail end of the process to contact their attorney and risk making a mistake somewhere along the line that could have been avoided. The attorney will advise whether there are any issues regarding the business that need to be addressed to get the business ready for sale.

In a typical transaction the buyer’s attorney puts together all of the documents. It’s not normally a responsibility a seller has, which is good because it reduces his cost, Williams said.

The third crucial player is the seller’s investment banker.

The investment banker does all the due diligence; he analyzes all the financial information. He looks at the marketplace, the customers, the employees, the competition, etc., and advises the seller on the business’s market value.

The investment banker then puts together an offering memorandum with all the information about the business that the buyer needs in order to make an intelligent decision.

“Most business owners underestimate the value of their business,” Williams said. “They’re so involved in running their business that they really don’t have a good idea of what it’s worth.”

A number of factors influence valuation, but determining a business’s value begins by arriving at its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), which shows the business in its most favorable light.

“Then it becomes a multiple of that as to what the value of the business is. The multiple becomes more of a subjective thing,” he explained.

“Are there long-term customers? Are there loyal employees? Is there new equipment that’s state-of-the-art? Are the company’s gross margins better than the industry’s? All those factors would make the business more valuable than another business that does the same thing.”

Likewise, if a company’s business is concentrated with one customer and that customer is having financial difficulties — that factor would lower the value of the business.

If the seller tries to go through the process without advisers and just feeds the prospective buyer a little information at a time, the buyer may lose interest or become suspicious, Williams said.

That’s the second mistake sellers sometimes make, he added.

Williams said buyers fall into three categories: financial buyers, equity fund buyers and strategic buyers.

A financial buyer is someone who needs to make a reasonable living out of the business and pay for the business within a reasonable period of time, he observed.

“What we have right now is hundreds of displaced, top executives from well-known companies in the community. They’re used to high income. They’re firmly entrenched in West Michigan, they love it here, and they don’t have a job anymore. They have nice severance packages and a lot of money in their 401(k).”

They want to stay in West Michigan, so they’re looking to buy small, $3 million to $5 million businesses here. They’re usually more sophisticated and bring a lot of skills to the business. With interest rates at their lowest level since 1964, they can borrow more money with less interest. But in the case of the financial buyer, the interest rate is just a side factor, Williams said.

“The major factor is the fact that these people don’t have a job, but they have money and they have skills and they want to stay in western Michigan. And they’re paying top bucks because there are not enough businesses available.”

Then there are the private investors and retired executives from large, publicly held corporations who pool their money in private equity groups, of which there are thousands in the United States.

The typical pool is $30 million to $50 million. These investors want to buy companies or add on companies to their existing portfolio.

The equity funds buyer is “very, very aggressive in paying high multiples for companies,” Williams noted. “They’re paying way more than what we would have seen a year or year and a half ago.”

The third category, the strategic buyers, aren’t paying top dollar right now. In fact, they’re paying “terrible” right now, Williams observed.

The strategic buyer is in the seller’s same industry or a related industry. He’s interested in acquiring clients, talent, market share or new capabilities for his company.

“What we have in the strategic buyer is someone who already understands the industry. They will not pay premiums,” Williams said.

Absolute confidentiality has to be maintained when it comes to perspective buyers, he stressed.

If the seller loses control of confidentiality, the word gets out on the street that he wants to sell. Next, the employees start getting worried, the vendors start getting worried and then the customers and the bank start getting worried.

“If they want to maintain confidentiality, they need to get an investment banker involved who knows how to find the buyers; chances are the buyers are already known to them,” he said.

“The buyer is known before the seller is in most instances because there are more buyers than sellers.

“The facts are that the economic issues are the most important. That’s followed up by many things,” Williams noted. “What we find in West Michigan — most business owners are very, very concerned about their employees and their customers. We will take that into consideration when we talk to potential buyers.”

The seller can make the buyer enter into an employment agreement or compensation program to protect employees’ interests.

But most buyers wouldn’t buy a company if they knew key employees weren’t going to stay, because they need them, Williams said.

The employees are the ones who win because the new buyer comes along with more capital, more willingness to grow the company, is usually a little more aggressive and brings new skills and talents.

“If it’s done right, it’s a win-win; everybody’s happy.”           

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