Frequently Asked Questions
Getting into an auction of one – This is a silly visual, but imagine a big auction hall at Sotheby’s occupied by an auctioneer and one guy with an auction paddle. “Do I hear $5 million? Anybody $5.5 million?’ The guy is sitting on his paddle. Pretty silly, right? And yet we hear countless stories about a competitor coming in with an unsolicited offer and after a little light negotiating the owner sells. Another common story is the owner tells his banker, lawyer, or accountant that he is considering selling. His well-meaning professional says, “I have another client that is in your business. I will introduce you.” The next thing you know the business is sold. Believe me, these folks are buying your business at a big discount. That’s not silly at all! Any business owner that believes their business is worth more than a million should hire an M&A professional.
CONTRACTUALLY RECURRING REVENUE – All revenue dollars are not created equal. Revenue dollars that are the result of a contract for annual maintenance, annual licensing fees, a recurring retainer fee, technology license, etc. are much more powerful value drivers than new sales revenue, time and materials revenue, or other non-recurring revenue streams. It’s all about risk. The higher the risk (future sales) the lower the return. The lower the risk (contracted revenue stream) the higher the return. The most extreme case of this occurs in the software industry where companies are typically sold at a multiple of recurring maintenance revenue. New license sales, historical levels of project work and projected install revenue are virtually eliminated from the valuation formula. The lesson here is that if you can turn a T&M situation into an annual contract, you will be greatly rewarded when it comes time to sell your business.
CUSTOMER CONCENTRATION – If too much of your current business is concentrated in too few customers that is perceived as a negative in the acquisition market. The concern is that if the owner exits and the major customers leave, the business could be negatively impacted. On the plus side, if none of your customers accounts for more than 5% of total sales, that is viewed as a real plus. If you find yourself with a customer concentration issue and are planning an exit, start focusing on a program to diversify. A quick fix would be to make an acquisition of a competitor with customer diversity, integrate them and then take your company to market.
We are reluctant to be the first one to move when it comes to selling price. Based on our industry experience and transaction data bases we subscribe to, we have a good idea of the relevant industry valuation metrics. We might give a broad range to a potential buyer just to establish whether the company is too large or too small for their consideration. The worse thing we can do is tell a buyer that the asking price (based on our discussions with the owner and an analysis of comps) is $8 million only to have the buyer go, “OK I’ll take it!” It is impossible to move him up from there and he was really thinking he would pay $10 million. I am very humbled by valuations when it comes to technology companies. We have sold some at multiples that were far beyond ours and our clients’ expectations. That would not have been possible had we established a price. Our goal is to have our client at closing feel totally confident that we professionally and strategically presented their opportunity to all the targeted buyers, we negotiated hard on their behalf, and we got them the highest and the best the market had to offer.
“I am pleased to recommend Dave Kauppi and MidMarket Capital for an M&A assignment. Our transaction was recently concluded and the outcome has completely met our expectations. I believe that MidMarket Capital found the best buyer for our company and facilitated realization of the best value the market had to offer.” . Jim Leineweber, President, The Systems House Des Plaines, IL
“Since this was my first business sale, I was not familiar with the complexity of the process. I am glad that MidMarket Capital was involved every step of the way.” Rod Hart, President, Flexestaff Chicago , IL
“We grow our business both organically and through strategic acquisitions. We find that when an experienced M & A advisor represents the seller it increases the likelihood that a transaction will be successfully completed.” Karl Straub, Senior VP and General Manager, PER-SE TECHNOLOGIES Resource Management Business Unit – Hospital Services Division, Alpharetta, GA (Buyer of a MidMarket Capital represented company)
“We had been looking for an M&A Partner for almost three years prior to engaging MidMarket Capital with very little result. In less than 30 days after engaging MidMarket Capital there was a letter of intent on our desk and the acquisition was completed 90 days later. We highly recommend MidMarket Capital, Dave Kauppi and Brad Kirkpatrick without any reservation.” S.C. “Bob” Austin, Jr., President A.E. Finley & Associates, Inc. Raleigh NC
“I wanted to drop you a note to congratulate you on the closing of the sale of Flexestaff to PER-SE Technologies. I had originally recommended you to Rod Hart and your results have reinforced this recommendation. You got our client a very generous deal. Your knowledge of the technology market and intelligent deal structure contributed to this positive outcome .” Craig McCrohon Partner Holland & Knight, LLP , attorney for our client.
Some unscrupulous firm in our industry discovered that this phrase was particularly alluring to unsuspecting business sellers. If your business selling price is less than $30 million, you generally will not be a candidate for foreign buyers. Ask any law firm that does transactions. Check with BV Resources, the number one database of completed transactions. You will find it a rare occurrence to have foreign buyers at the small end of the market. The transaction costs are just too high to make a small purchase economically viable. The buyer will have to fly teams of people with potential language barriers, new sets of laws, new accountants and attorneys, etc.
What is the allure of these alleged foreign buyers? Are they going to pay you a huge premium over a U.S. buyer? Are they going to be duped into a poor investment decision for your benefit? Pleasssssse! If you are a smaller business, you are not a target for a foreign buyer. If you are presented with this line, run for the exits.
Confidentiality in the business sale process is crucial. If your competitors find out, they can cause a lot of damage to your customers and prospects. It can be a big drain on employee morale and productivity. Your suppliers and bankers get nervous. Nothing good happens when the work gets out that your company is for sale. By the way, if you decide to sell your own business, by default, you have destroyed confidentiality. We take every measure to insure your confidentiality right from the beginning. We may meet off site with the owner in our initial discussions about the engagement. We establish communication procedures for information exchange. Things such as which employees are aware, how do we get information to you, i.e. can we email you, is your fax secure, can we leave a message on your office phone, etc. Next we produce a “Blind Profile” which is a 2 page document that describes the opportunity but does not reveal your identity. We do not send out a mass mailing. Our experience is that they are largely ineffective. The residual danger is that a competitor figures out that it is your company and starts attacking your customers with that information.
We put together our target list of prospective buyers and have the owner approve that list and eliminate any DO NOT CONTACT companies. We then get on the phone and start calling the presidents of the target buyers and give them a quick description of the opportunity (again without revealing your identity). If they are interested we get their email address (for our targeted industries, we most likely already have it) and email the blind profile and the Confidentiality Agreement. Once the CEO signs and returns the CA, then we can begin to share information. This process greatly reduces the possibility of competitive bad behavior.
Balance of Experience. Most corporate buyers have acquired multiple businesses while sellers usually have only one sale. In one situation we represented a first-time seller being pursued by a buyer with 26 previous acquisitions. Buyers want the lowest price and the most favorable terms. The inexperienced seller will be negotiating in the dark. To every term and condition in the buyer’s favor the buyer will respond with, “that is standard practice” or “that is the market” or “this is how we did it in ten other deals.” By engaging a business broker the seller has an advocate with a similar experience base to help preserve the seller’s transaction value and structure.
Yes, MidMarket Capital will not engage a client in anything but an exclusive agreement. We do not do “main street” businesses (i.e. convenience stores, dry cleaners, restaurants, etc.) that may be appropriate to a huge universe of individual investors/buyers. In some cases for those types of transactions, it may be appropriate to throw a broad net with many brokers that will accept this type of engagement. However, you must recognize that these brokers will match their level of commitment to you with your level of commitment to them. They might accept 50 of this type of deal, so the only way they can operate is to passively post them on Internet Business for Sale Sites or mass mail the group of 50 to their database of individual buyers.
For our type of transaction (B 2 B – selling a small mid-market company to a larger company, the universe of potential buyers is finite and very well defined. It is totally unprofessional to have M&A firms running into each other at a single buyer. The buyer will simply discount the opportunity as being amateurish and will not seriously consider it. I know I will never allow my company to be thought of in that light by a buyer that we may present 10 future opportunities to over the next several years.
The philosophy at MidMarket Capital is that we want our clients to get a superior result and become raving fans and great references. To support that philosophy, we have a 30-day cancellation clause that says if you are not happy, just give us 30 days notice and your monthly fees stop when the notice becomes effective.
We certainly have no problem with Merrill Lynch or Goldman Sachs charging their upfront fees to their fortune 1000 clients. These firms are a proven commodities with a proven process. Their clients feel confident that a liquidity event will result from their work. A monthly fee is a more accommodating approach for smaller clients whose cash flow would be strained by a large up-front payment.
We have had many prospective clients approach us after unfortunate experiences with these big up-front fees. In one recent case, we were brought into a holding company that had acquired one of our sell side clients. Another division had engaged an M&A firm to sell one of their subsidiaries. After a $40,000 up-front payment and over four months, not one prospect had been contacted. Another common result for clients of these up-front fee firms is a beautiful, bound, 40-page book of boilerplate compiled by a junior level analyst. Unless this is accompanied by a concerted sales and marketing effort, this book will become a very expensive coffee table book.
Our firm is in regular contact with the majority of our sellers. They are very valuable to us as references in our business development efforts. We absolutely protect them from frivolous contact, however. Our firm is contacted by over fifty potential sellers annually. We have to go pretty far down the mutual discovery process before we connect a potential client with our references. If we have not pre-qualified a prospect, we are not going to waste our references’ time. However, if the major issues on fees, qualifications, approach and chemistry have been satisfied, do not hire an M&A firm without talking to two references.
- No big up-front fees, but monthly fees.
- No promises of foreign buyers for companies under $30 million.
- A period of exclusivity from 12 to 24 months, not 5 years.
- A firm that actively sells your company using direct calling into targeted buyers, and not simply posting on business for sale Web Sites and mass mailings.
- A firm that tracks and reports their sales progress to you bi-weekly with a status or pipeline report.
- A firm that is a member of a professional association like IBBA or M&A Source or a local or regional business broker network like MBBI.
- A firm that at the appropriate time will introduce you telephonically to two of their reference clients whose business they successfully sold.
- A firm that has a principal that has passed their industry testing and has been issued a CBI designation.
- An Advisory firm that has experience selling companies in your industry and understands who the targeted buyers are the right contact, and the industry nomenclature. Finally, they should understand your industry’s unique valuation metrics and deal structures.