Case Study #1: Build, Acquire, Roll-up, and Sell Out

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Case Studies is a new series here at the APEX blog.  We study business exits and break down a few key points for you to keep in mind.  This month’s selection comes from the sale of Appletree Answers.

Appletree AnswersHow it started

John Ratliff started Appletree Answers in 1995 in a spare bedroom in his house, eventually grew it to over 600 employees and over $5M in annual EBITDA before selling to a strategic acquirer.  Appletree was (and is) an inbound high-touch customer service call answering service.  

From 2003-2011 John, in concert with his CPA and the bank that his CPA had a relationship with, completed 24 total acquisitions.  A lot of times acquisitions can be a mask for real growth, but John and his team wanted organic growth within existing locations as well as ongoing growth for new locations.  

Deal Structure

John arranged for the bank to put up no more than 80% of the total amount of the sale price, while convincing the sellers to put up 20% in a seller-financed note.  They were able to do these deals because they built and maintained a sterling reputation in the industry.  They were also very disciplined in their execution and after-action of the sales.

They would routinely pay between 3 and 3.5 times EBITDA for an acquisition.  In every deal, they stipulated that it could not be a turnaround, that no employees would be fired as a result of the deal, and ensured that tweaks were done in the first 60 days that freed up cash flow to cover the loan payment.

Time to go

By 2012 John had been at it for 18 years.  All his assets were tied up in the business, and because they had been so acquisitive there wasn’t a lot of cash coming out of the business, so he was thinking about going to market anyway.  At the same time, an S&P 500 publicly traded company stated to pursue a roll-up in the same industry and so there was an opportunity for a strategic rather than financial valuation of the business.

Despite having personally done 24 buy-side acquisitions, and having acquired a possible buyer on his own, John still hired an M&A firm because, in his words, “we were emotional” and he wanted “space and perspective,” in doing the deal, which a third party gives.  While he admits he paid plenty in fees, he is certain that it was far more than recouped in the added value that firm brought to the table.

Moral of the story?  No matter how many business transactions you’ve been through, you can always benefit from the objective view of a 3rd party who isn’t emotional about the valuation or the sale.  And often, they’ll get you far more than you could have gotten on your own.

Obviously, we know a few people who can help you sell your business or buy one you will love.  Schedule an appointment with us today.

The information in this case study was taken from here.

For True Value, Get an Independent Business Valuation

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business valuationWhat’s my business worth?  

This is a question any owner might ask himself when he/she is ready to sell.  You close your eyes and think of all those long hours, sleepless nights, times you personally covered payroll (or didn’t take a paycheck), and struggle to put a number on what any of those sacrifices could possibly add up to.  

“Well, it better be big!” you think.  This is the precise moment you need an independent business valuation.

Why?  Simple.  You’re not objective.  Yes, you can go through the cold hard numbers yourself.  You can calculate what we refer to as “Total Owner Benefit” (sometimes called SDE – “Seller’s Discretionary Earnings”) and then attach some multiple you find meaningful.  

You might even have relationships with people in your industry who have successfully exited and could give you a number.  You could do some internet research.  And after all that, you might have a value and stick it on the side of your business and say, “This is the price I want.”

A buyer could shrug his/her shoulders after finding out you were the one who came up with this number, and then proceed to due diligence the heck out of you to find out if this number is accurate.  Or you could do it the easy way: slide a professional business valuation across the table.  A reputable 3rd party valuation is not just a key component of an SBA loan, but it’s also required by many banks for financing.  

Often these valuations will contain useful information as to why a particular multiple has been used, which can include factors like growth, how many years you have been in business, how proprietary what you do is, your particular geographical territory, and what the competitive landscape looks like.  

Getting a valuation is a lot like getting peace of mind.  Of course, it’s important to remember that your business is ultimately worth whatever someone is willing to pay, but having a valuation means you have an objective opinion grounded in fact, and it’s going to be hard for a buyer to poke holes in a valuation if it’s been done by someone professional.

Need a professional business valuation done?  We can recommend some reputable firms for you.  Just ask!

With Delays, Deals Die.

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delayEvery business sale is a minor miracle.  Just as the skydiver gently times his pirouettes and turns in his parachute to land precisely within the giant X of his landing zone, so too do all parties aim at completing what needs to be done from the time an LOI is signed to the date a deal is set to close. Think about all the people involved.

Buyer/Seller

The seller has been given a great deal of paperwork to complete for the buyer’s due diligence.  If he/she has been preparing well to sell a business, this may simply be a matter of looking things up and filling in blanks.  

But, if those systems aren’t in place, there’s going to be a lot to do.  The seller has to form a company and work out contracts with new employees and/or investors.  He has to line up the money, which may involve both the SBA and a bank.  Speaking of which…

Bank

Loan committees don’t meet every day.  They meet every couple weeks – sometimes more frequently, sometimes less, but at those meetings, the banker representing you needs to have a substantial amount of paperwork in order to represent you well.  And who is going to get all that paperwork done?  You, the buyer.

Attorneys

The seller and the buyer will both be working with attorneys in order to make sure deal points are handled in a thoughtful and diplomatic way so as to preserve amity and keep the process moving forward.  These meetings may be contingent on items mentioned above.  Did we mention paperwork?

This is all to say that if everyone is aiming towards a date, and then there’s suddenly a delay, it’s a lot like a sudden stop in traffic when you’re driving a car.  Your muscles tighten up and your senses are on high alert.  In the case of a closing sale delay, the question immediately posed is: Why is there a delay?  If you don’t have a good answer to this question, a deal could go away.  Why?

For the seller, the concern might be, “Hang on, this person wants to buy my business, and he/she can’t get the paperwork done?  Is this deal even real?”

For the buyer, the concern might be, “Whoa, is this person hiding something from me?  Can I trust the documentation I’ve gotten so far?”

Honesty

The best course, as always in this business, is disclosure.  Be upfront about why there is a delay, explain what you are doing to correct it, and then hit the target.  The minor miracle of hitting a business closing date?  That miracle is enclosed in a bubble of trust.  The bubble might be able to take a hit – even two – but, you know what they say about third strikes…

Here at Apex we always ask you to keep your lines of communication open with us.  Whatever is on your mind throughout the process feel free to share.  We want to cross that closing date finish line with you, so you can move on to what’s next!