Q: Why does one company acquire another?
A: There often is more than one reason why one company acquires another but it is usually associated with a growth strategy. Buyers typically want to expand capabilities, territories, product lines, and revenue. Investors are interested in growing their portfolios and the dollars they can generate. It is important for a business owner to understand these concepts early so he/she can tailor the company either to be a good acquisition candidate or to develop a strong acquisition growth strategy.
Q: When is a good time to sell my business?
A: It is always best to sell a business when you want to do so rather than when you have to. That means you go to market when you and the company are fully prepared. In a perfect scenario, you may be able to time your exit to match the solid performance of your business with peak selling cycles in the private capital markets. The earlier you start the planning process, the more control you will have over this decision.
Q: Can I sell my business on my own?
A: Legally, the answer is yes. Rational logic though says that is probably not in your best interest. While you are most certainly an expert at running your company, you probably are not as knowledgeable about the M&A process. Selling a company is time consuming and very emotional. After all, this business most likely represents your life’s work. No doubt, you have an emotional attachment. If you normally use terms such as earn out, working capital gate, hurdle rate, and mezzanine, it is probably a good idea to call and discuss your situation with a competent intermediary. You do not want to make a mistake and leave a chunk of your hard-earned nest egg on the table at closing.
Q: How do I find out what my company is worth?
A: There are numerous methods and metrics to determine the value to your company. Sometimes we employ many at the same time. Tax value, Estate Value, Enterprise Value, Discounted Cash Flow, Multiples of EBITDA, etc. all are valid ways to tell what a company may be worth. However, the real question is to whom does the value matter, and in what context? The number your CPA gives you might be appropriate for tax planning purposes, but it does not reflect the possible selling price for your company. In an M&A scenario, the acquirer determines value. An M&A advisor will use various methods to help you understand how the market will appreciate your company and what that market may be willing to pay you for it.
Q: What is a typical sales process?
A: Kratos Capital customizes the process for each company. Typically, we start with phone calls and meetings to determine owner strategy and expectations. We then collect data and prepare marketing materials to attract potential buyers and investors. Our advisors work with those buyers and investors to answer questions, and solicit offers for your business. We work to negotiate term sheets and finalize the Letter of Intent. The next step is to assist with the management of the due diligence process, in order to ensure the buyer/investor has enough information to feel comfortable with the deal, and to secure financing. Moreover, the entire process requires an enormous amount of legal paperwork, and other forms of documentation. We work with the lawyers and accountants involved in the process, in order to ensure that they have what they need to prepare an appropriate purchase agreement. This simple summary of major tasks only highlights what is involved. Call us. We will be happy to answer any questions.
Q: What are the main mistakes business sellers make?
A: Studies show that prepared sellers generally own more satisfaction from the sale of their business. Planning for the sale of a company should begin the day you start the company, not the day you decide you want to cash out. Take the time to write out goals and objectives. Pay professionals to review your financials, and give advice on how to keep them accurate. Talk to M&A professionals to keep your finger on the pulse of the investment market your company resides within. You will gain insight into what your company may be worth, and when it makes sense to sell.
Q: How should I present my business for sale?
A: At Kratos, we know your company will fare far better when presented fully prepared for sale. A professionally packaged and presented company will generate more interest in the market, and get larger offers than those that are not. There is no one-size-fits-all template for presenting a business for sale. Each company is as unique as the individuals who own and run it. A professionally marketed company highlights strengths and mitigates risks. This begins with careful preparation, and maximized lead-time. Kratos Capital’s M&A advisors are adept at properly presenting a company for sale, but also determining when and where.
Q: What three factors reduce the value of a business deal?
A: Things that reduce the value of a company are usually tied to factors increasing the risk associated with the investment. Incomplete and/or unreliable financial records are the greatest value detractors. Customer concentration and strong owner dependence are two other issues often cited as making a potential deal less attractive.
Q: What three factors improve the value of a business deal?
A: While there are many things that can contribute to an increase in company value, overall risk to the investment has the greatest impact. Most often, we find these centered on consistent growth rates, recurring revenue streams, and strong synergies with other companies in the same industry.
Q: How long will it take to sell my business?
A: Most likely it will take longer than you think to sell your business. Actual timing depends on many factors, but the rule of thumb is that you can expect to be involved in the process for 9-12 months if your company is small and considerably longer for a larger business. Companies with clean and reliable financials, documented processes and procedures, strong management teams, etc. tend to sell more quickly and for more money than those without them. Careful preparation and competent professional advisors can shorten the timeline and increase overall seller satisfaction.
Q: Is there value in the potential of my company?
A: The short answer is, yes. Whether your company is relatively new or has been around for decades, the potential of future revenue probably determines the value of your company. However, acquirers tend to be allergic to risk, and most are hesitant to overpay for educated guesswork. Market or product exclusivity, reliable and repeatable processes, intellectual property, and long-term contracts help ensure the likelihood and reliability of the revenue potential of your company.
Q: What can a merger and acquisition advisor do to improve value?
A: M&A advisors help prepare the business and business owner for the sale process, and the sales transaction. We advise you how buyers and investors will view your company, and what steps you should take to enhance its value. Because we are members of the private capital industry, we monitor the marketplace for selling cycles in the industries we work with, and advise you when the time is right. Most importantly, we look at your company with an objective eye, and manage the transaction process. This helps you keep revenue flowing, and protects you from spooking a buyer/investor with a drop off in sales before closing.
Q: What does a merger and acquisition specialist do?
A: Merger and acquisition specialists are more than sales people. They employ years of training to help business owners and the business itself prepare for the transaction process. The M&A specialist assembles appropriate materials required to market the business, and to locate appropriate potential buyers. Once they are located, the specialist helps the seller select the right buyer from the candidates. We stay by your side through the entire transaction, offering advice and otherwise shepherding you through the conclusion of the sale. Good M&A specialists are marketing professionals, small business experts, project managers, and trusted advisors.
Q: Do I need a lawyer, and an accountant?
A: Yes! Because you have history with them, your Certified Public Accountant will be an important part of the deal team. Legal representation is another matter. You will need to supplement your regular legal counsel with one specialized in mergers and acquisitions. While Kratos cannot take the place of legal counsel, we do help manage the legal team, and this helps hold down transaction and due diligence costs.
Q: How are mid-market M&A specialists different from business brokers?
A: Though the terms Investment Banker, M&A Specialist, and Business Broker seem interchangeable to people outside that industry, insiders see clear distinctions among them. Brokers tend to focus on small deals found in their local market, and limited buyer communities. They list companies for sale, and only introduce buyers to their advertisement. Middle-market is a term used to describe companies with annual revenues between $2 million and $100 million. Most Investment Bankers and Middle Market M&A Advisors concentrate on this area. They are comfortable with high levels of transaction complexity. Their involvement in every phase of the transaction goes far beyond simply introducing the seller to a potential buyer.
Q: Should I have my financial statements audited?
A: Audited statements are the standard for reliability and credibility. They may seem expensive, but they more than pay for themselves in the transfer process. Acquirers prefer and banks require them as part of an M&A transaction. Having clean and credible books helps attract more attention from the buying community, and enhances the speed of processes normal to the transaction.
Q: How many years of financial data should I be prepared to present to a prospective buyer?
A: Buyers, investors, and lenders prefer at least three years of financial records. There are circumstances when and more extensive financial history is required. Your M&A advisor will help you to assemble appropriate material.
Q: What information is required in order facilitate an evaluation and start marketing a business?
A: The process usually starts with a review of three to five years of financial records, including tax returns, asset schedules, management profiles, photos of facilities and equipment, summaries of intellectual property (patents, copyrights, etc.) documentation, copies of deeds and leases, and organizational papers. From there we determine what else is required to market your company.
Q: Why are confidentiality agreements required?
A: A successful transaction requires the seller to maintain consistent operations and revenue generation throughout the process. Meanwhile, if your competition learns the business is for sale, they will naturally use the information against you, and your customers may stop buying from you. When employees prematurely learn about a potential sale, they often start looking for a new place to work, in order to protect themselves. Confidentiality agreements protect your business, and the integrity of the deal.
Q: What should I look for in a business intermediary?
A: The size and sophistication of your company influences whom you should hire. Experience and reputation must be verifiable components of your decision. Comfort and trust are equally important. If you need to clean up the company beforehand, it is best to include an experienced professional in the activity.
Q: I want to buy a business. How do I proceed?
A: The answer is longer than we can fit in this space! The Kratos team will work to understand your needs, and help you fulfill your acquisition goals.