Are You Dealing With a Serious Buyer?

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serious buyerOne of the reasons people enjoy working with us is knowing that the buyers we bring to the table are financially qualified.  We’ve done our part to make sure that we aren’t going to introduce you to people who just want to kick tires.

But being financially qualified is only part of a successful transaction.  Buyers also need to be mentally serious about buying your company, and there are some clear indicators you should keep in mind when meeting prospective buyers.

Interest

Serious buyers will have at least some level of interest in your industry.  They will seek not just to understand the industry as a whole but will look at the specifics of your business, be it your existing customers or prospective ones.  

They’ll also be interested in a SWOT analysis, particularly in O – Opportunities and T – Threats quadrants – to help them contextualize whether what they bring to the table can help accelerate where the company is already going.  Serious buyers will go beyond the basic financial questions and get to the why of your business.

Discretionary Spending

Discretionary costs refer to spending on things like advertising, research and development, and public relations.  Mature businesses may be on cruise control and have scaled back or even eliminated some of these costs, but serious buyers will be concerned to not see some level of spending in all of these categories.  

In today’s marketplace especially, clients and customers aren’t to be taken for granted, and these discretionary costs are seen by serious buyers as ways to stay ahead of the curve and not be complacent.  R&D, in particular, can help firms not just wait for the next innovation, but create it themselves.

Staff and Wages

A serious buyer will want to speak to your senior staff, if possible, to find out how invested they are in staying with the firm if you leave.  Most times the need for confidentiality won’t allow for those conversations, but what a serious buyer will be looking for in those cases are:

Wages – are they at a market rate and what expectation do your staff have that they will grow?
What about benefits?
What is morale like in general?
What is the culture that drives that morale?
If people are there due to the social capital you’ve earned with them, and you leave, does that mean they will too?

Inventory

This last point only applies to companies that have inventory, but it’s important to make sure that you have a realistic and detailed inventory.  Serious buyers will target old and unusable/unsellable items and ask for them to be removed from the value of the business.

This gives you an opportunity to do some preventative maintenance and get rid of that stuff yourself before it’s time for a sale.  It will only give more confidence to buyers that they’re dealing with a business that has something as basic as inventory handled.

We know what serious buyers look like and can save you the time from having to try to identify them yourself while running your company.  Give us a call to see if we can help you with your exit strategy.

Case Study #21: Confidentiality Rules

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confidentialityScott Miller started Miller Restoration, a firm in the property damage industry, in 2005.  

He managed to sell his company after 12 years for 3.5 times earnings, but only after two failed attempts.  If we pay attention, we can benefit from his hard-earned lessons.

Building to Sell

Scott had always assumed that he would sell the company at some point. He had a passion for growing businesses and honestly just wanted to see how far he could go.

After five years and hitting $1M in annual revenue, he thought it was a good time to explore the possibility of a sale. He hired a broker, but even with a 1-year listing engagement, the broker didn’t bring in a single buyer.  

During that time, as he grappled with the idea of letting go, he realized that with a 20% margin on his revenues, as well as a great team, he had a great business.

So while he was surprised not to get any looks, he was also somewhat relieved and therefore went back to building the business.

A few more years down the road, a friend of a friend approached him via casual conversations about the possibility of selling.  This time, Scott chose to deal directly with the buyer without a broker, and 15 months later, the deal fell apart.

Scott noted that it felt very much like an emotional rollercoaster, with the end often in sight, only for it to be taken away at the last moment.  Finally, a week before the expected closing date, the buyer said that the financing had fallen apart and asked if he could he have another month or two.

Scott firmly said no, but again, with a sense of relief: “Why am I selling?” he wondered, “I’ve got a great team and a great business!”

Third Time’s the Charm?

With two failures to sell behind him, Scott instead started a second business in a related industry (again, that love of “growing things” inspired him).  But some of his senior management at Miller Restoration respectfully pointed out that this looked to be “shiny object syndrome” and that if he wasn’t careful, the restoration business could pay the price.  

Rightfully chastised, Scott put a manager in place of the new business and stayed focused on the restoration business. And yet, the second business continued to grow on its own, without his being involved full time.  He saw the second business for the subconscious message it was: it was time to move on.

Scott hired a broker he felt really understood his type of business and within a few months had a couple of serious buyers competing for the sale.  The first one began the process but dropped out three months into due diligence, and Scott could feel that deja vu creeping up.

But the second buyer ended up being the one who went to the finish line with him, and Scott got the exit he had long craved.

Telling Employees (Don’t)

Scott confessed that the most difficult part of this process was not telling his staff.  Many of them had been with him for a decade or more and felt like family. In fact, right after the wire hit his account, he went to personally meet or call every single member of the team individually, so he could tell them in person and do what he could to soften the blow.  

The overwhelming majority of the team took it well, but two relationships were strained as a result, one temporarily, and one permanently. As difficult as it was to keep the secret from them (and here at Apex, it’s an industry standard we abide by and always recommend), he knew it was the best thing: “if the sale didn’t go through,” he pondered, “and I told them, I may have lost them.”  

There was a tough period of adjustment to the new owners at first, but most of the team is still there, and continuing to grow and develop the business.

Key Takeaways

Scott wasn’t bothered by a failure to get any nibbles the first time he listed.  He took solace in the fact that he had a good business and kept trucking on.

When he tried to go on his own, his personal involvement in the deal (instead of enlisting a broker) dragged him through a process that was three times longer than it should have been and ended in failure anyway.

When he did finally sell, he used a broker and he followed his broker’s advice and didn’t tell his staff, as much as it went against his instincts and desires, because he saw the greater good and the necessity of confidentiality.  

Trust the professionals: we’re speaking from experience.

Whether you’ve listed with other brokers in the past or you’ve tried on your own, we’re here to help you if you’ve decided it’s time to list your business.  We have brokers experienced in selling all kinds of companies.  See if one of us can help you!

Alternative Financing for Growing Businesses

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FinancingWe’ve said before how important it is to cultivate a relationship with your banker.  

Such a relationship will be important not just throughout the lifespan of your business but particularly when you want to craft an exit.  

That said, sometimes market conditions, or the conditions of your business, call for alternative forms of finance, and in this article we will discuss just three of the many possibilities in this growing space.

Lending Club

Of the many options in the fintech space, Lending Club is the most like a traditional bank.  They will require that you’ve been in business at least two years, with annual revenues of at least $75,000.

They will also make sure that the borrower has a minimum 620 credit score, with no recent bankruptcies, and at least 20% ownership of the business.  

All these factors get put into their internal rating system, and then once approved, your loan gets put into their marketplace, where various people can buy part of your loan. Once the note is fully funded, which can take as few as three days or as many as 21, the money is disbursed and you’re held to regular payments across terms like 36 months.

They don’t offer revolving credit and the rates can vary from 7.77% – 35.11%.  Depending on how good your credit profile is, it’s an interesting alternative if conditions don’t allow for a traditional bank loan.

Kabbage

If Lending Club is most like a bank, Kabbage is most like our future powered by artificial intelligence.  The platform is entirely algorithm-based, assisted by machine learning. There are no human parts in its credit decision process.  

You create an account and give Kabbage access to various accounts you use as a business owner, be it your credit card processor, your bank account, your email software, your social media accounts, and using all these different factors they will create a revolving offer against a 6-month repayment window.  

The effective interest rates can range from 15 – 50%, again depending on your business, rather than your personal credit, profile. There are no minimum revenue requirements, no personal guarantees, and with over $3B loaned since 2009, there is clearly a need for this type of financing.

PayPal Loans/PayPal Working Capital

The most specialized of the options we’re discussing in this article is Paypal Loans, which has also been called Paypal Working Capital.  This option is only available to you if any part of your business accepts payments via PayPal, because the funding mechanism examines your PayPal activity in the past 12 months and will allow you to borrow as much as 18% of topline revenue processed through PayPal (up to $97,000).  

Repayment is made as a percentage (which you can determine, depending on how quick/slow you want the repayment horizon to be) of each incoming sale, so repayments can be made daily if you’re processing payments at such a rate. PayPal provides the capital for a fixed fee, so there’s technically no interest charge, though you can calculate effective APRs to vary between 15 – 30%.

We also have access to some local resources that may be able to help you. Give us a call and let us see if we can help!

Apex Success Stories #1: The Long Game

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the long gameThis is the first in a new series for the blog: stories from our own clients about their experiences selling with us. We hope you enjoy them!

Roger was the third generation owner of a contracting business that had been operating since 1954.  He entered management of the company in 1997.

In 2006 he took over as owner, moving it from a home-based operation with three employees to an office building which (at the time of the sale last month) housed 30 employees.

Why sell?

“I grew up in this business, turning wrenches,” Roger shared.  “It’s all I’ve ever known, and I’m ready to try something new.”  

But more importantly, Roger had surrounded himself with good business advisors over the years, who all encouraged him to have an exit plan, even if he didn’t plan to use it immediately.  

He also remembered the pain of the mid-2000s, when the industry was hit hard and the company had to lay off staff and considered closing the doors.  

As they climbed out of that challenging time he made sure the books and records were clean and spotless (no personal expenses within the business) so that if an opportunity came to sell he would be able to explore it.

The opportunity came with some encouragement in the form of Apex’s Valerie Vaughn.  She’d been calling him twice a year for the past four years to check in and see what his state of mind was.  

When her most recent call came in, Roger didn’t put her off for another six months, and in the wake of the company’s best year ever, thought it was worth a deeper conversation or two.  

That started parallel discussions with his accountants and financial planners. Before too long, the decision was made to put the business on the market.

Because Roger had worked hard to put systems into place, when he asked his staff to do an extensive inventory of equipment (including serial numbers), there wasn’t too much fuss.

Valerie herself noted how attractive it was to buyers that, when the business was listed, it had the financials from the previous month…despite the fact that the month had only ended 24 hours before.  

She also noted how responsive Roger was to requests for information and paperwork – often things were turned around in a day or less. This is transparency and speed that buyers (and we as brokers!) really appreciate – and chase!

Sale

“We got two offers within 48 hours; I was shocked,” said Roger, with a bit of laughter in his voice.  

At Apex, we certainly can’t promise those results to all of our clients, but we can say that when a business is solid, we aren’t ever that surprised when buyers move quickly.  

But moving quickly wasn’t Roger’s primary aim. He was ready to walk away if the buyer wasn’t right.

“I was interviewing (the eventual buyer) as much as he was interviewing me.  I wanted to make sure he was the right guy to take care of my people.”

The buyer came from a business development background and, apart from being a good cultural fit for the company, had the long-term vision to complement what Roger had accomplished so well over the years: good systems through an intimate on-the-ground working knowledge of the business.

Roger was originally tabbed to spend 30 days in the firm “as is” and then move to 10-20 hours a week for another 30 days, allowing him to be completely out within 60 days. But the early working relationship has been even better than he expected, and it looks like he may be sitting on an Advisory Board for the company in a paid capacity.

What’s next

When we asked Roger if he’d treated himself, he was a bit coy.  

“Look, I’ve been able to show up to work at 8 a.m. instead of 6:15 a.m. for the last couple weeks.  And no ‘business owner stress.’ That’s awesome.”

While the reward for himself may be in the future, he did buy his wife a new car as a way to enjoy the exit. He also hasn’t wasted any time getting into a new venture: a drone photography business with both his kids, who have full-time jobs of their own.

While it’s a side hustle for now, Roger sees a lot of potential in the industry and sees every possibility of building another business to sell.

While Roger had managed the purchase of the business from his father in 2006 without a broker, he said he wouldn’t even have considered doing that this time around.  More than anything, he was worried about confidentiality, as he had seen others in his industry over the years try to go to market on their own and shortly found themselves without employees, who panicked and got other jobs (which are almost always on offer) at other firms.  While we’re proud of the confidentiality we bring to all our transactions, it’s only one of the many advantages we bring to the table. Give us a call to see if it might be time to explore buying or selling a business yourself!