It is a seller’s market. Buyers are paying top dollar; they are willing to look beyond issues they may previously have asked to have addressed; and they’re moving quickly to close deals.
While this description applies to the real estate market in many areas, it also applies to the market for businesses. The mergers and acquisitions market roared back to life after a brief pause at the onset of the COVID-19 pandemic. Activity has generally remained at a high level with low interest rates, buyers with available money and looming tax changes pushing sellers into the market.
Even though the market favors sellers, that doesn’t mean there aren’t important questions for business owners to consider if they are looking for a buyer. Unlike the housing market, where a seller may look to maximize price and an ability for a deal to close, a business seller may stay on through an earnout period or give consideration to what will happen to employees who helped build the value the owner realizes in a deal.
“If somebody overpays for the business, they’re going to have a lot of different decisions once they close to try to get their return that might not be in the best interest of the employees or the business long-term,” said Sequoya Borgman, managing director of Milwaukee-based private equity firm Borgman Capital.
The BizTimes M&A Forum, taking place from 2 to 6:30 p.m. on July 21 at the Brookfield Conference Center, will explore those questions with two panel discussions and three breakout sessions. The event is sponsored by Old National Bank, Reinhart Boerner Van Deuren s.c. and Taureau Group with supporting sponsor Vistage. Click here to register.
Borgman will be part of a panel focused on integration and value creation after a deal. The panel will feature buy-side perspectives from Karen Hung, chief executive officer of Silver Rock Consulting; Al Orr, CEO and shareholder at Reinhart Boerner Van Deuren; and Terry Schneider, president of Welcome Dairy Holdings. Inge Plautz, senior vice president at Old National Bank, will serve as moderator.
Ann Hanna, managing director and owner of Taureau Group, will serve as moderator for a panel featuring sell-side perspectives from Dan Cahalane, president of American Roller and Plasma Coatings; Rob Dillon, executive vice president of OwnersEdge; and Michael Malatesta, leader of ERC Midwest LLC.
The breakout sessions will address key factors driving the value of a company, a candid conversation on capital stacks and funding a transaction, and tax considerations for deal structures.
As for questions for sellers to consider, Orr said he often suggests clients look at their business through the eyes of a potential buyer. This process can include a quality of earnings review, a survey of legal compliance issues or an assessment of agreements with key employees.
“Buyers don’t like surprises and may re-trade on price if they discover that the company isn’t quite what it was presented to be,” Orr said. “Understanding your business’s vulnerabilities will allow you to address them before the sale process begins.”
Malatesta said preparation is the most important part of the sale process.
“You should always have your business prepared to sell, even if you have no intention of selling. Reliable financials, defined systems and processes and an identifiable path for succession are the keys to running and selling a successful business,” Malatesta said.
Hung said sellers should think about four areas: What is the company’s key strategic advantage? What are the scale or growth opportunities? What are the key risks for growth? And what are the enduring qualities of the business?
“I think the seller should be upfront about it,” she said of addressing risks, noting it helps to create credibility and can lead to conversations about how best to mitigate the risks.
Orr said he also asks clients to consider their own goals in the sale process. Whether a seller wants to retain a management role or roll over a portion of proceeds as a continuing investor in the business can influence who the ideal buyer will be.
Dillon, who sold his company to OwnersEdge in 2017, said he had limited knowledge of employee stock ownership plans when he started the sale process, but it quickly became an attractive option for him.
“I was seeking a way to take some personal risk off the table while honoring my commitment to the wellbeing of my employees,” Dillon said. “Selling to an ESOP company proved to be a fantastic way to thread that needle.”
He saw two types of buyers emerge in the sale process: “buy and flip” and “buy and hold” types.
“Private equity-backed buyers, in general, did not seem to prioritize the long-term sustainability and prosperity of the business, which was an immediate red flag for me as a seller,” Dillon said.
Of course, there are a variety of private equity firms, each with their own approach and culture. Cahalane, who led American Roller’s sale from one group to another, said that makes having a good broker to find the right private equity partner important.
“I’ve seen good, and I’ve seen bad,” Cahalane said of private equity firms. “The good private equity we’re with right now is fabulous. Some of what we’re doing, if it wasn’t for their help and their ideas, we wouldn’t be where we are today.”