M&A FAQ’s

1. What is my business worth, and how is it valued?

There are a number of ways to value a business. With service businesses, we use the “Market” approach to derive what we call the “enterprise value”. As this approach is more art than science, it involves looking at several factors, both quantitative and qualitative, that will impact the value of your firm. Once ascertained, we use this information to “load” into our valuation model. Factors affecting the value of your firm include:

OPERATIONAL:

  • Length of time in business
  • Type of service offerings
  • Quality of infrastructure
  • Corporate structure (“S” vs. “C” vs. LLC )
  • Client diversity and concentration
  • Insurance and Legal history

FINANCIAL:

  • Revenue run rate
  • Revenue growth rate
  • Rate of gross & net profits
  • Sector appropriate billing rates

MARKETS SERVED:

  • Type and size of market
  • Long history with client –
  • Client references
  • Growth industries
  • Mix of contract and perm

HUMAN RESOURCES:

  • Strong management
  • Well-trained sales and service staff
  • Solid recruiting
  • High retention and low staff turnover
  • W-2’s versus 1099’s

The higher your value in these factors the greater the purchase price of your company. Contact us to see how you rate in the market place.

Today’s IT Services and staffing specialty buyers are looking for ways to grow their businesses through acquisition. Many buyers view acquisitions as an alternative means to acquire hard-to-find IT consultants. Just as importantly, buyers are seeking to acquire high quality, competent and entrepreneurial management. Combining these two essential elements to any M&A deal drives both value and transaction desirability.

2. What can I expect once I merge or sell my business? What can my employees expect?

In the past, many mergers involved machinery, equipment, inventories and physical plants, “hard assets” as they are called. Today, a business combination, in particular with service businesses, involves people, skills, systems, processes, methodologies or “soft assets”. The game suddenly became more complex as the things being merged are things that cannot be seen.

The fact is, mergers and acquisitions are one route to corporate growth. And as with most growth in one’s lifetime, there will be “growing pains”. The important thing to remember is to keep a proper perspective and to embrace the challenges that lay ahead. The weeks and months after a merger should be viewed with a positive outlook, as there will be ample new opportunities for all involved.

More than likely, there will also be stressful times. Mergers can be difficult for some people. Many experts in this field have compared mergers to a young married couple who have recently had a baby. When the new child arrives, there are bound to be problems, worries, frustrations, disappointments and new stresses. These are some of the changes that just go along with the territory.

These “problems” are to be expected and to a large extent, are predictable. The key to smoothing the road for you and your employees is to be realistic, to remain calm and focused and to prepare all involved for some bumps in the road. In time, most of us adjust. It is easier if integration is done thoughtfully and with great sensitivity.  Remember that effective communications with both the buyer’s and seller’s staff just prior to the sale and after are critical

3. How can I build value into my firm to prepare it for eventual sale?

There are many keys to building value in your firm prior to its sale. Here are some of the most important value builders:

Building Value:

  • SIZE: Bigger is generally better, larger firms with multiple offices are in greater demand as there are always fewer of them, strength is perceived to exist in numbers
  • HIGH GROWTH RATES: This allows buyers to recoup their investment faster, so they can pay you more.
  • SPECIALIZED SERVICES: Niches usually command a premium, as buyer needs your expertise to grow this sector. And they often have higher margins.
  • HIGH GROSS MARGINS: This gives the buyer more to work with.
  • DIVERSE CUSTOMER BASE: Your business is not dependent on 1 or 2 customers.
  • GOOD MANAGEMENT: This helps with transition and growth issues.
  • SOLID INFRASTRUCTURE: This can lower investment costs for buyer.
  • EMPLOYEES: This is always preferable to independent contractors.
  • SUB CHAPTER “S” or LLC CORPORATE STRUCTURE: This makes it easier to acquire assets.

4. What can I expect in the way of transaction structure and payment terms?

There are four types of currencies used in some combination in every transaction:

CASH ON CLOSING
The down payment:. Most often we see the cash component of a transaction that is in the range of 40%-60% of the total valuation. Occasionally we see 100% Cash on closing from buyers–however the seller will typically have to accept a lower valuation since all of the risk has been accepted by the Buyer post-closing.  Generally the more cash down, the lower the overall valuation. There are cash buyers who use Notes and Earn Outs in addition to the Cash on Closing, in other words no stock is used as currency in that transaction.

STOCK
Shares of a public or private buyer: Privately held companies and newer public companies sometimes want to use stock in today’s market place. Depending on the needs of a buyer and seller the percentage of stock as a percentage of the total valuation varies widely. How much, if any, stock is acceptable to a seller is highly dependent on the sellers’ risk tolerance and the percentage of the total valuation that is in stock.

NOTES
Corporate commitments to pay set amounts in future periods with interest: These are corporate promises to pay the seller pre-determined amounts at pre-determined times, typically with a fixed or a prime + interest rate. When used as transaction currency notes are often 10-25% of the total valuation.

Buyers’ like to include notes for several reasons. Notes allow buyers to leverage their available funds and stretch their resources further. Another reason is to provide readily available funds to offset unknown liabilities of the seller or those rare breaches of a sellers’ representation or warranty provided to the buyer.

EARN OUTS or CONTINGENT PAYMENTS
Variable payments based on future performance: These are funds the buyer agrees to pay to the seller based on the business’s future performance. Earn Outs may be 20-35% of the total valuation. Earn Outs are used very often by today’s buyers. Earn Outs typically run for one – three years and are most often based on achieving pre- determined Revenue, EBITDA or Gross Margin Dollar targets.   We prefer to see Earn Outs structured on revenue or gross margin stability or growth since they are less complicated to monitor than EBITDA earn outs.

5. I’m concerned about maintaining confidentiality. Can the fact that my firm is for sale become public knowledge? How can R. A. Cohen Consulting protect my confidentiality?

We are very aware of the harm that can be done if word of your sale is known before you are ready to inform your staff in a positive manner. Everything that RACC does in the M & A process puts confidentiality first.

Before any prospective buyers are contacted you will approve a list of potential buyers. Each buyer is then sent a Blind Overview describing the key elements of your company without identifying the company by name. Interested buyers are told the name of your company only after they sign a Confidentiality Agreement that outlines their legal responsibilities for their entire acquisition team.

RACC and the client sign a separate Confidentiality Agreement before any financial information is transferred. We determine the security of scanners, email and voice mail before any M&A communications are sent by these methods.

Since all our buyers are pre-qualified before being introduced to your company they are very aware of what a breach of confidentiality will mean to their reputation and future ability to acquire companies. Our representation enables you to shield your employees and customers from the activities related to marketing your business until the time that is appropriate. It is important to note that RACC has never had a breach of confidentiality with any client since inception.

6. How long does it take to complete a sale?

Once the seller has provided us with the material to market the company, it takes about 10 days to start the marketing process.  We first produce a Blind Overview, Potential Buyers List, Confidential Offering Memorandum and Trailing Twelve Month financials which are all approved by the client.

It could take anywhere from two weeks to several months before a suitable buyer is located depending on the uniqueness and marketability of the company.  Once a buyer is located there is a week or so spent getting a Letter of Intent (LOI) or Term Sheet negotiated and signed by both sides. 

The next period of the process is called the due diligence period where the buyer thoroughly examines all aspects of the company being purchased.  Depending on the size of the selling company this process could take anywhere from two weeks to two months.

The last part of the transaction involves the production and negotiation of the Purchase Agreement, Bill of Sale, Schedules, Employment and Lease Agreements, etc.  This process could take two to four weeks depending on the experience levels of the lawyers involved on both sides.

In summary, the sale can take anywhere from three to nine months and sometimes longer to complete depending on many of the factors and procedures described above.