Understanding M&A Purchasing Agreements
M&A purchasing agreements can have a lot of moving parts. A recent article from Meghan Daniels entitled, “The Makings of the M&A Purchase Agreement” serves to outline a range of facts including that every M&A deal is different. The article, which serves as a general overview, raises a range of good points.
Components of the Deal
It should come as no surprise that M&A purchase agreements have various components. Everything from definitions and executive provisions to representatives, warranties and schedules, indemnifications and interim and post-closing covenants are all covered in these purchase agreements. Other key factors included in M&A purchase agreements are closing conditions and break-up fees.
Advice for Sellers
In her article, Daniels includes a range of tips for sellers. She correctly points out that negotiating a purchase agreement (as well as the different stages involved in finalizing that agreement) can be both time consuming and stressful.
As any good business broker will tell you, business owners have to be careful not to let their businesses suffer while they are going through the complex process of selling. Selling a business is hard work, and this fact underscores the importance of working with a proven broker.
Likewise, Daniels observes that any serious buyer is likely to look quite closely at your business’s financials, which is yet another reason to work with key professionals during the process. Additionally, you don’t want to wait until the last moment to get your “financial house in order.”
You can be completely certain that prospective buyers will want to examine your finances closely before making an offer. The sooner you begin working on getting your finances together, the better off you’ll be.
Use Trusted Pros
Another key point Daniels makes is that there will be tension, as every party is looking to protect their own best interests. Having an experienced negotiator in your corner is a must. Make sure your negotiator has bought and sold businesses in the past, and he or she will understand what pitfalls and potential problems may be lurking on the horizon. Daniel’s view is that the sale price isn’t the only variable of importance. Factors such as the terms of the deal must be taken into consideration.
The bottom line is that there are many reasons to work with a business broker. A business broker understands the diverse complexities of an M&A purchase agreement. They also have experience helping business owners organize their financial information and can prove invaluable during negotiations. For most business owners, selling their business is the single most important business decision they will ever make. Find someone who understands the process and can act as a guide through the process.
Copyright: Business Brokerage Press, Inc.
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Key Mistakes that Could Impact Your Sale
The old saying, “an ounce of prevention is worth a pound of cure,” most definitely applies to any business owner that believes he or she will someday want to sell his or her business. The bottom line is that every business owner has to transition out of ownership at some point. In a recent Inc. article, “Four Mistakes That Could Lower Your Business’s Value and Weaken Its Salability,” author Bob House explores 4 mistakes that could spell trouble for business owners looking to sell.
No doubt House explores some excellent points in his article, such as that you should always have what he calls, “a selling mindset.” The reason this mindset is potentially invaluable for a business owner is that when operating in this way, sellers are essentially forced to stay on their toes.
Or as House writes, “a selling mindset encourages continual innovation, growth, and investment, helping your business stay ahead of the competition and at the top of its potential.” Having a “selling mindset” means that business owners have no choice but to perform periodic reality checks and access the strengths and weaknesses of their businesses.
Mistake #1 Poor Record Keeping
For House, poor record-keeping tops the list of big mistakes that business owners need to address. As House points out, both potential buyers and brokers will want to examine your books for the last few years. The odds are excellent that before anyone buys your business, they will look very closely at every aspect of your financials, ranging from your sales history to your operating costs.
Mistake #2 Failure to Innovate
The next potential mistake that business owners need to avoid is a failure to innovate. House notes that a lack of tech-savviness could make your business less attractive to prospective buyers. The simple fact is that virtually every business is now impacted in some way by its online presence, whether it is the quality of that presence or lack of it altogether.
For House, a failure to maintain an active online presence could be associated with a failure to innovate. Even if your company is innovative, if you do not maintain a coherent and robust online presence, this could portray your company in a negative light.
Mistake #3 Unstable Workforce
House also feels that having an unstable workforce could spell trouble for your business’s value and negatively impact its salability. Most prospective buyers will not be very eager to buy a business that they know has a lot of employee turnover. In general, new business owners crave stability. Attracting and keeping great employees could make all the difference when it comes time to sell your business.
Mistake #4 Delayed Investments
The final factor that House notes as a potential issue for those looking to sell their business is delaying investments and improvements. House states that it is important for owners to continue to invest even if they know they are going to sell. Investing in your business can help it expand, grow and showcase its potential future growth.
Another excellent way to prevent making mistakes that could interfere with your ability to sell your business is to begin working with a business broker. A top-notch broker knows what mistakes you should avoid. This experience will not only save you countless headaches but also help you preserve the value of your business.
Copyright: Business Brokerage Press, Inc.
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Exploring the Offering Memorandum
Are you a business owner who is interested in selling? If so, there are some strategies you should undoubtedly use. At the top of the list is the all-important offering memorandum. The offering memorandum, often referred to as a selling memorandum, is a straightforward but highly effective way to help you obtain the highest possible selling price.
Shaping the Executive Summary
The offering memorandum must be factual. However, at the same time, this memorandum allows for a bit of business promotion and selling, which can be included in the executive summary portion of the document. After all, potential buyers will want to know more about your business and why buying it would be a savvy decision.
In short, the executive summary section of the offering memorandum goes over the highlights of your company. It should include an outline of several key factors. Everything from an outline of the ownership and management structure, description of the business and financial highlights to a general review of your company’s products and/or services should all be covered. Additional points to include would be variables, such as information about your market, and the reason that the business is for sale.
Your executive summary, simply stated, is extremely important. A coherent and compelling executive summary will motivate prospective buyers to learn more. In short, you want the executive summary of your offering memorandum to shine. It should capture the attention and the imagination of anyone that reads it.
Other Essential Elements to Include
Some elements are absolutely a must to have in your offering memorandum. An overview of your company and its history as well as its markets and products are all good places to begin your offering memorandum. Other key elements ranging from distribution, customers or clients and the competition should also be included.
Factors such as management, financials and growth strategies should not be overlooked, as many prospective investors may flip to those sections first. Finally, be sure to include any competitive advantages you may have as well as a well-written conclusion and exhibits. The more polished and professional your offering memorandum, the better off you’ll be.
An easy way to improve the overall quality of your offering memorandum is to work with a seasoned business broker. A professional business broker knows what information should be included in your offering memorandum. He or she will also know what not to include. Remember that your offering memorandum may be the first point of contact between you and many prospective buyers. You’ll only get one chance to make a first impression.
Copyright: Business Brokerage Press, Inc.
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Effectively Utilizing Confidentiality Agreements
Every year countless great deals, deals that would have otherwise gone through, are undone due to a failure to properly utilize and follow confidentiality agreements. A failure to adhere to this essential contract can lead to a myriad of problems. These issues range from employees discovering that a business is going to be sold and quitting to key customers learning of the potential sale and taking their business elsewhere. Needless to say, issues such as these can stand in the way of a sale successfully going through. Maintaining confidentiality throughout the sales process is of paramount importance.
Utilizing a confidentiality agreement, often referred to as a non-disclosure agreement, is a common practice and one that you should fully embrace. There are many and diverse benefits to working with a business broker; one of those benefits is that business brokers know how to properly use confidentiality agreements and what should be contained within them.
By using a confidentiality agreement, the seller gains protection from a prospective buyer disclosing confidential information during the sales process. Originally, confidentiality agreements were utilized to prevent prospective buyers from letting the world at large know that a business was for sale.
Today, these contracts have evolved and now cover an array of potential seller concerns. A good confidentiality agreement will help to ensure that a prospective buyer doesn’t disclose proprietary information, trade secrets or key information learned about the business during the sales process.
Creating a solid confidentiality agreement is serious business and should not be rushed into. They should include, first and foremost, what areas are to be covered by the agreement, or in other words what is, and is not confidential. Additional areas of concern, such as how confidential information will be shared and marked, the remedy for breaches of confidentiality and the terms of the agreement, for example, how long the agreement is to remain enforced, should also be addressed.
A key area that should not be overlooked when creating a confidentiality agreement is that the prospective buyer will not hire any key people away from the selling company. Every business and every situation is different. As a result, confidentiality agreements must be tailored to each business and each situation.
When it comes to selling a business, few factors are as critical as establishing and maintaining confidentiality. The last thing any business wants is for its confidential information to land in the hands of a key competitor. Business brokers understand the value of maintaining confidentiality and know what steps to take to ensure that it is maintained throughout the sales process.
The Hidden Benefits of Planning Your Succession Strategy
Succession planning is something that many business owners fail to think about; however, it turns out there are benefits to succession planning that might not be immediately obvious upon first glance. In this article, we’ll explore a recent Accountancy Daily article, “Succession Planning for Business Owners,” which details the wisdom and benefits of succession planning.
Accountancy Daily polled 500 SME owners and uncovered a variety of interesting facts. At the top of the list is that one-third of owners felt more confident about the future of their businesses when they had a coherent succession strategy.
In what can only be deemed a surprising finding, the poll discovered that 17% of respondents noted that succession planning actually brought them closer to their families. In short, the Accountancy Daily poll found that succession planning came with a variety of unexpected benefits. In other words, it is about more than preparing to hand one’s business over to a new party.
Author Glen Foster makes the point that business owners frequently underestimate the level of effort and time needed to sell a business. The fact is that selling a business is usually a layered process that can even take years to complete. Importantly, business owners must understand that in the time it takes to sell, the market may have changed or their own financial or personal situations may have changed as well. Additionally, selling can be an emotional and stressful process which further complicates the entire matter.
For most business owners, selling a business represents the single greatest financial move of their lives. As such, it is often accompanied with significant stress and anxiety. It is essential not to underestimate the emotional and psychological side of the sales equation. Properly planning years in advance for the sale of a business will help business owners prepare for the emotional and psychological stress that can result from both the sales process and the eventual sale itself.
A key part of the stress of selling a business is that business owners are often left wondering “what comes next?” after selling. Developing a succession strategy is a way to think through such issues well in advance.
Another key aspect of succession planning is to take the steps necessary to make sure that your business is ready to be sold. As Foster points out, you wouldn’t put a home on the market with significant problems, and the same holds true for your business. If you want to receive the optimal price for your business, then your business should be in tip-top shape. This means diving into your books and records and getting everything in order. Working with an accountant or an experienced business broker can be invaluable in this process.
Copyright: Business Brokerage Press, Inc.
Business Owners Can’t Always Sell When They Wish
A recent article in Forbes called , “Study Shows Why Many Business Owners Can’t Sell When They Want To” written by Mary Ellen Biery, provides some thought-provoking ideas. The article takes a look at an Exit Planning Institute (EPI) study that outlined shows that many business owners are not able to control when they can sell their businesses. Most business owners believe they can sell whenever they like, but the reality is that selling is often easier said than done.
In the article, Christopher Snider, the President & CEO of the Exit Planning Institute, noted that a large percentage of business owners have no exit plan in place. This fact is made all the more striking when you note that most owners have up to 90% of their personal assets tied up in their businesses. EPI’s study indicates that most business owners are interested in selling within the next 10 to 15 years, but most are unprepared to do so. According to the EPI only 20% to 30% of businesses that go on the market will actually sell. The reason for this is that most businesses have not been groomed and prepared for sale.
As of 2016, Baby Boomer business owners, who were expected to begin selling in record numbers, are waiting to sell. As stated in the Fortune article, “Baby Boomers don’t really want to leave their businesses, and they’re not going to move the business until they have to, which is probably when they are in their early 70s.”
The EPI survey of 200+ San Diego business owners found that 53% had paid little or no attention to developing an exit plan, 88% had no written transition plan in the event they were “hit by a bus”, and a whopping 80% had never consulted their lawyer, CPA or financial advisor about how and when to exit their business. Further, only 58% of surveyed business owners had done any type of formal estate planning.
The biggest concern according to the studey is that most surveyed business owners don’t know the value of their business. Viewed another way, most business owners don’t have a clear idea of how much their business is worth and if it will be adequate to fund their needs during retirement.
The survey suggests that many business owners are not “maximizing the transferable value of their business,” and are not “in a position to successfully sell their businesses so they can harvest the wealth locked in their business.”
All business owners should be thinking about the day when they will have to sell their business. Now is the time to begin working with a broker to formulate your strategy so as to maximize your business’s value.
In the interest of full disclosure, Richard Jackim, the managing partner at Sports Club Advisors, Inc. is the founder of the Exit Planning Institute and created the Certified Exit Planning Advisor (CEPA) program and designation. He sold EPI to Chris Snider in 2012.
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Equity Recapitalization for Private, Member-Owned Golf Clubs
Private golf clubs have felt the pinch from on-going economic turmoil and uncertainty. Over the last 15 years membership rosters have shrunk considerably. The majority of private clubs has fewer members today than a decade ago. Changing demographics, combined with fierce competition and changing lifestyles have made attracting and retaining members increasingly difficult.
Of the 14,000 golf facilities in the US, our research suggests that approximately 4,500 are private clubs. Of these, approximately 60% or 2,700 are “equity” clubs that are owned and operated by the club’s members themselves. For a variety of reasons, the number of private member-owned clubs has declined by over 20% since 1990.
For certain clubs serving the very affluent, i.e., those with initiation fees of $100,000+ and annual dues of $15,000 or more, being a member owned club will always be the preferred structure. This ownership structure allows them to be highly selective when admitting new members and they will always have enough highly affluent members who can afford to pay for this type of exclusivity.
However, for the majority of clubs, i.e., those with initiation fees of less than $100,000 and annual dues below $15,000, the member-owned business model may not be a good fit. Members at these clubs often report that it is difficult to actually sell their membership so for these members their “equity” in the club has little real value.
Why is this the case? These clubs are usually competing with several similar clubs in the same geographic market that all have comparable features and amenities. This means families interested in joining a club have several options to choose from. For these clubs to succeed they need to actively compete for new members based on service, amenities, and price. In short, they need to be run like any other premier fitness or hospitality business – they need to be run like a five star hotels or restaurant. This typically means the best ownership structure is for the club to be owned and operated by a professional manager who has their own capital at risk. This makes them focused on delivering an outstanding membership experience.
The process of transitioning a member-owned equity club to a professionally owned and managed club is called an recapitalization. It’s not complicated, has been done hundreds of times, and it usually provides significant benefits to the club’s members.
What makes a club a good candidate for a recapitalization?
Consider the following questions about the member-owned club:
· Is membership below its cap with no wait list to join the club?
· Does the club have a lot of debt with little to no long-term capital reserves on hand?
· Are capital improvements being deferred because of lack of capital?
· Are members getting regular assessments to fund capital improvements or operating losses?
· Are members complaining because the club isn’t offering modern, well maintained facilities, or amenities?
· Do members have difficulty selling their memberships at their original cost?
· Does the club have gross revenue of at least $4 million?
If a club responded “yes” to most of these questions, the club’s board should consider whether an equity recapitalization could be an effective solution to the challenges facing the club. In most cases it can be.
The Benefits of Recapitalization.
Some of the benefits of recapitalization include:
· The club becomes debt-free with fully funded capital improvements.
· The club is professional managed, with input from a member advisory board.
· Member dues and privileges remain the same.
· Members are guaranteed there will be no more assessments—ever.
· Members are not burdened with management or oversight, they can simply enjoy being members of their club
· Members often receive reciprocal memberships at other clubs owned and operated by the management company.
While an equity recapitalization is not the only solution to a club’s problems, it is a viable, well-tested solution that can lead to sustainability with tremendous benefits to a club’s members.
How does a recapitalization work?
The basic elements of an equity recapitalization are as follows:
· The new owner (typically the management company) forms a new corporate entity.
· The existing club (often a 501(c)3 non-profit entity) transfers the real estate assets to the new corporate entity.
· Any debt the club owes is paid off by the management company so the club is debt-free and unburdened by debt service payments.
· The club’s members sign new membership documents with the same privileges, dues and virtually identical by-laws. Membership dues are typically frozen for a period of time, usually several years.
· Covenants are put in place to ensure that the club remains private and there will be no assessments—ever.
· All needed capital improvements are funded up front by the management company. This is in lieu of paying the members for their equity—in effect, all of the member’s equity is reinvested into the club allowing the club to upgrade its amenities and significantly improving the member experience.
· A member advisory board is elected by the members. This board advises and guides the management company on capital improvements, service issues and long-term planning.
· Members receive reciprocal club privileges at other clubs owned and operated by the management company.
Once the club’s board decides to move forward, the management company prepares documents and completes due diligence; then, the membership votes to approve the equity recapitalization. The whole process can be completed in two to three months with little to no disruption to the members or the operations of the club. To learn more download our white paper on the value of member-equity recaps for private country clubs.
If you would like to explore whether an equity recapitalization is right for your club Contact Us or give us a call at (888) 270-0028
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Leading Clubs report 5.3% revenue growth and 2.8% membership growth
According to the 2018 IHRSA Profiles of Success report, the health & fitness club segment posted revenue growth of 5.8% and membership growth of 2.8%.
A total of 115 firms, representing 12,289 clubs, participated in the IDS. As this report will show, club performance results varied by segment. Clubs part of a chain reported greater revenue growth (+7%) than independent clubs (+2.8%). On the other hand, independent facilities posted a retention rate of 72.4%, while clubs part of a chain indicated a retention rate of 66.7%. The smallest segment of clubs generated significantly less revenue per individual member ($479.70) in comparison with larger clubs ($975.30).
Based on data gathered in the annual Industry Data Survey (IDS), the 2018 IHRSA Profiles of Success provides benchmarks and other operational and financial data for select leading clubs. Included are key metrics such as revenue, membership growth and retention, traffic, payroll, non-dues revenue, and EBITDA. Club reinvestment and profit center analysis as well as income statement and balance sheet data are also provided.
For a copy of the complete report visit the IHRSA Store.
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Study Shows Retirement is No. 1 Reason Owners Sell
Joint research conducted by Jackim Woods & Co. and Sports Club Advisors indicates that retirement is the number one reason why business owners sell their companies. The study also found that the size of the business has a big impact on who the most likely buyers are and the strategy that must be used to ensure a successful transaction.
For small companies (businesses valued at under $1 million) local entrepreneurs and first-time buyers accounted for the largest buyer segment at approximately 50%. More than half of buyers in the small company segment were motivated by a desire to buy a job. That is, the buyer has left corporate America and is interested in owning and running a business and being his or her own boss. It is important to determine if these buyers understand what it takes to run the business, how much working capital is required, and the current owner’s lifestyle. Being an entrepreneur is very different than being a manager in a large corporation.
On the other hand, buyers in the lower middle market (companies valued at between $1 million and $100 million) are more often expanding an existing business through a horizontal or vertical add-on or acquisition. In the largest deal category (businesses valued between $5 million to $50 million), private equity firms comprised the largest buyer group representing 43% of buyers. Larger businesses are typically purchased by educated and professional buyers who are interested in acquiring the company’s current labor force, property, and customer base.
“As the economy improves and more people come to market to sell their businesses, it’s critical that sellers have the right strategy,” said Rich Jackim, Managing Partner at Jackim Woods & Co. and co-founder of Sports Club Advisors. “Smaller businesses should always come to market with a purchase price whereas larger businesses should not. Instead they should focus on ensuring that all of their records and financials clearly show their profit and margins.”
In a Market Pulse Survey – comparing the conditions for businesses being sold in Main Street (values $0-$2 million) versus the Lower Middle Market (values $2 million-$50 million) – was completed by 370 business brokers and M&A advisors representing 40 states.
The quarterly survey also found that as the deal size increases, buyers are sourced from a wider geographic area. For example, 62% of buyers of companies valued between $5-50 million were located more than 100 miles away. Among smaller businesses, 68% were highly localized buyers meaning they were located within 20 miles of the company they bought.
“Across the board, the biggest reason deals fail is because sellers have unrealistic expectations about valuation and the M&A process,” said Jackim. “Sellers that have had their businesses appraised by an M&A advisor and that have learned about the M&A process are more likely to successfully sell their company and realize their goals. Implementing the right strategy based on the size and type of company will have a big impact on the success of the sales effort.”
Other key findings:
- The average time it takes to sell a company has stayed relatively flat, averaging 6.5 months in the Main Street market and 9 months in the lower middle market. Of that timetable, roughly 60 to 90 days is spent in due diligence, after the seller accepts a purchase offer or letter of intent.
- After retirement the leading reasons for selling a business include owner burnout and family issues.
- In the Main Street sector, restaurants represented 22% of all reported deals followed by personal services (includes health and fitness clubs and sports related businesses) at 18%, and consumer goods at 13%. In the lower middle market, manufacturing led the number of transactions, representing 37% of all reported deals in that sector.
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Selling Your Fitness Studio or CrossFit Gym: The Hard Truth About Selling
I was recently approached by the owner of a fitness studio/CrossFit affiliate who was interested in selling. When we prepared a Market Assessment for her I could tell she was shocked that our estimate of the fair market value of her gym was so different from what she was expecting.
I won’t speculate as to how she determined the value of her gym, but I thought it would be helpful to summarize how small format fitness studios and CrossFit gyms are valued so you can have realistic expectations before you decided to either buy a gym or sell one.
The hard and simple truth is that 80% or more of the of gyms we evaluate are not set up to be saleable. That means that 80% of the time no buyers will be willing to submit an offer or if they do sell, they will sell for much less that what the owner was expecting.
The number one reason gyms are not saleable is they are founder centric, i.e., the gym owner or founder does all the work. She teaches the classes, runs the books, handles the admin, does the social media, and builds the membership base.
In the simplest terms, gyms like this are basically offering a buyer an opportunity to buy a job.
If you own a fitness studio or CrossFit gym and want to receive anything beyond the book value of your business, you’ll need to make sure it can run smoothly without you. I mean this literally. You need to be able to hang up the phone, turn on your vacation auto-responder, and leave for a 1-2 month vacation without the business missing a beat. If your gym or studio cannot run without you, make sure it can before you think about selling.
Once your gym can run on its own, a buyer is going to be looking at two things: your bottom-line cash-flow and year-over-year earnings growth. This means they want to see the business is profitable, and they want to see those profits are growing.
The more money the gym makes and the faster that number is growing, the more a buyer will pay. This is because buyers are investors who are seeking a return on their investment. Buyers are investing in the future cash flow or profits of your gym or studio. The expected amount of those future profits determines how much they’re going to be willing to pay today.
To determine the value of your gym, buyers will apply what is referred to as a “capitalization of earnings” or an “earnings multiple” approach. You’ll often hear gym owners referring to a “2x” or “3x” or “5x” earnings multiple when they acquire a business. What that means is they are paying two times, three times or five times, the yearly cash flow of the gym to buy the business. Buyers tend to pay a lower multiple for gyms with profits that bounce around from year-to-year and that have a record of low historic growth. On the flip side, they tend to pay higher multiples for gyms with steady profits and above average growth prospects.
To be candid, the growth prospects for most individual yoga or fitness studios or CrossFit gyms are limited. You can only have so many clients before you need to invest more money to expand your physical space or open a new location.
Because the earnings potential of most gyms is limited by the number of people that you can fit in your gym and the number or classes or programs you can offer, the earnings multiple buyers will pay for a gym is also limited. Most likely, you’d receive something in the realm of a 2x or 3x earnings multiple, provided your gym can run without you and generates more than $100k a year in profit.
What does this mean?
Your gym certainly has value, but it is important to realize that your gym is probably not the golden retirement nest egg you were hoping it would be.
If you are still committed to selling, focus on building a solid, self-operating business. Focus on developing a good management team and trainers and being a good boss. Work hard to acquire and develop loyal clients and introduce new initiatives to help make your business unique. Then focus on improving your earnings each year. When you have completed these tasks you will have something to sell, but by then you may just decide that if the business can operate without you, you may want to simply retire and manage your gym as an investment and not exit at all.
Click here for your Free Opinion of Value or give us a call at (888) 270-0028
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