Why to Consider Selling to a Young Entrepreneur

Over half of today’s small business owners are baby boomers and many of them are now nearing retirement without a tangible plan regarding who will take over the business. An increasingly popular choice is entrepreneurship through acquisition (EtA) or search funds, through which an individual or group works with investors to evaluate, negotiate, and close on the purchase of a business that they will own and manage, without using any of their own money.

Search funds have increased in popularity because they offer young and energetic entrepreneurs the unique opportunity to have a more involved CEO role, rather than the more traditional positions available post-MBA. Essentially, search funds offer aspiring entrepreneurs the opportunity to step into a CEO role at an early age and have partial ownership of a business. That being said, however, there is a risk-return tradeoff to consider as the searcher faces the opportunity cost of losing two to three years of professional development while they look for a business to purchase. There is also the chance that the entrepreneur won’t find any business to acquire at all and will then have to change their career path again.

For business owners, there are benefits to selling your business to a young entrepreneur. Entrepreneurs commit to moving to and operating that one business that they acquire for the long term. These entrepreneurs understand the financial opportunity that comes with owning a business, but also the risk; that is why they look for strong businesses where they can rely on the employees, culture, and practices. These entrepreneurs carry on an owner’s legacy, bringing their passion and energy to the business they acquire.

EtA creates an exciting opportunity for both entrepreneurs and owners. It allows owners to leave behind their company and its legacy in the hands of a young entrepreneur ready to take on a new leadership role.

Hiring a Broker When Selling Your Company

Once a business owner has decided to sell their business, there are a number of factors to consider. One of the biggest questions is whether to hire a broker to assist with the sale. There are pros and cons to using a broker, but ultimately the answer is situation-dependent. A broker is a professional who normally specializes in valuing and selling businesses.Most business owners are experts in their industry, but they know very little about mergers and acquisitions.

Not all brokers are qualified or certified like a lawyer or an accountant. The best brokers and Investment Bankers focus on deals around $5M EBITDA and up; the brokers who focus on deals smaller than that can be less sophisticated. Also, brokers typically get paid a percentage of the selling price, so they may ruin a deal by giving bad advice to a business owner just because they are looking for the highest possible payout on the sale and not necessarily on the happiest outcome for the seller.

Owners often hire brokers because selling a business requires a sustained effort, one that brokers can assist with, allowing the owner to remain focused on running the business. The most effective brokers will be willing to provide work samples and client referrals and will take the time to learn about the business for sale and give owners a realistic idea of the valuation. They will also ask detailed questions about the business so they are prepared to answer interested buyers’ questions.

Our suggestion is for owners to meet with and compare multiple brokers, accountants, and lawyers and ask them about their prior experiences in order to find a good fit for the type and size of their company. Working with a trusted intermediary can help owners logically work through an often emotional process and secure the highest payout, while also maintaining the legacy and continuity of the business.

EBITDA Multiples

Selling a business is difficult on an emotional and financial level. Not only do business owners have to find a good match in terms of meeting a buyer who will continue their legacy, but they must also use appropriate metrics to value their company. There are many factors to consider including competitive advantages, growth opportunities, and historical financial performance.

Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a great starting point to understand how to measure financial performance. It is calculated by adding non-cash expenses back to the operating income and is used as a proxy for evaluating a business’ earning potential. Essentially, EBITDA creates a standard measure of performance, making it possible to compare similar companies across industries or in different tax brackets.

Typically companies with EBITDA of $3M and under are considered to be in a 3-5x multiple range. For example, a $1M EBITDA company would be valued at $3M - $5M dependent upon a number of other factors. Some examples of common factors are key person risk, cyclicality, and customer concentration, among others. The higher the EBITDA gets the higher the multiple range gets, so a $5M EBITDA company would be more likely to sell in the 5-7x multiple range.

Business owners should work to boost their overall financial performance, create consistent earnings, prepare high-quality financial statements. Working with an accountant and your financial team now can help your value when you are ready to sell down the road. If businesses are typically value based on EBITDA, it is important to understand the metric and how you can prepare to increase your value by using it.

Staying on Top of the Estate Planning Process


The article from the Financial Review details the importance of establishing a finalized estate plan. This legal document details the process for how an individual’s assets will be preserved, managed, and distributed after death. Whether you are a homeowner or a small business owner, the creation of a thoughtful plan is crucial to the protection of your financial portfolio. Much of the estate planning process is needed to help avoid sticky legal and family issues that could potentially arise from an unforeseen death. For many business owners, creating an estate plan is an important piece of preserving wealth for future generations.

The estate planning process can potentially become a very complex situation when the transfer of a business is involved. This effort to create a plan for the future can be derailed from severe infighting between trustees.A potential solution to this problem is the creation of a will. This legal document is a set of instructions that details the individuals whom are responsible for assuming control of the business. Despite many of these troubles, owners should recognize the need to properly forge out a plan that best prepares the transfer of their business on to the next generation. 

Another consideration many owners should take when creating an estate plan is how much control they wish to retain after death. The desire to maintain control of the business requires a formal legal plan to be laid out with an attorney. Owners must decide which restrictions to place upon the important decisions of the enterprise. Such limitations are required to prevent the occurrence of dangerous risk factors such as marriage breakdowns, bankruptcy, and spendthrift beneficiaries. Some of these dangerous elements can be mitigated through electing an independent advisor to the oversight of the estate plan. These succession efforts are the best avenues towards preserving the longevity of your business.


Seven Value Creation Lessons from Private Equity

Private equity firms enjoy a number of advantages when it comes to building high-growth businesses and they can implement the following strategies to build a value creation regimen.

First, for continuous investment from partners, private equity firms must focus on value creation that extends beyond simple financial engineering and cost-cutting. PE firms focus on investing in core operations to reduce extraneous costs, and carefully choose, and exit, companies based on the available potential to create value. 

The next strategy is to understand the importance of cash. PE firms typically finance 60 to 80% of an acquisition with debt, creating a sense of urgency to generate cash. To improve cash flow, firms tightly manage receivables/payables, reduce inventories, and scrutinize discretionary expenses. To preserve cash, they invest only in opportunities that contribute significant value and delay the other options. 

Third is to operate as though time is money. PE firms must be proactive and deliberate in their actions during the first few months of ownership of portfolio companies. 

The fourth tip is to apply a long-term lens. The best PE firms not only cut costs but also invest in the highest-potential ideas for creating core value in their portfolio companies. These decisions come only after rigorous analysis and thoughtful debate. 

Another key suggestion is to work with the right team. PE partners understand that strong, effective leadership is critical to their investment’s success. A third of portfolio company CEOs exit in the first 100 days and two-thirds are replaced during the first four years. To put the right CEO and management team in place, PE firms may draw on their own in-house experts or external network.

Sixth is to link pay with performance. Companies can foster a high-performance culture by strengthening individual performance measures and incentives to align them with value creation. They must first reform the performance review process so it distinguishes and rewards talent.

Finally, firms must set clear, optimistic goals in critical areas and tie them directly to compensation. Long-term aspirations should drive specific initiatives with explicit objectives, and, in turn, the financial implications of these initiations should drive annual plans and budgets.

The Rise of Alternative Private Equity Fund Structures

Private equity is one of the fastest growing investment classes today. Private equity firms operate by acquiring businesses and increasing those business’ cash flows. If the private equity firm can increase a business’ cash flows enough, it can sell the business for a higher price and turn a profit. According to McKinsey & Co, private equity’s net asset value has increased by more than seven times in the last 17 years, which is twice as fast as in the public sector. Private equity is growing so quickly because private equity’s success is dependent on operational knowledge, rather than financial engineering. Essentially, growing and then selling a business is typically easier and more lucrative than investing in the stock market.

With private equity’s popularity, we have seen alternative fund structures emerge. GTE is a search fund accelerator, which is an example of an alternative private equity fund structure. A search fund consists of a searcher, usually an MBA graduate, who looks for a business to acquire and then run as CEO. Search fund accelerators allow searchers to work together and share resources such as investments and leads. Like in traditional private equity, the new CEO will try to increase the business’ cash flows, so they can sell the business for a higher price and turn a profit. Unlike traditional private equity, search funds typically acquire one business, rather than own a portfolio of companies, and keep the original CEO’s company vision alive.

Another example of an alternative fund structure is the private equity secondary market, or secondaries. This market is based entirely around trading investor commitments in private equity. This market ultimately makes investing in private equity more liquid, or less of a long-term investment. Secondaries make private equity more accessible for everyone, as someone can sell their private equity investments if they need to raise capital or avoid future commitments to the fund. Buying secondaries is also advantageous for investors, as the prices are relatively low, and the investment has a short duration. These alternative fund structures make private equity more accessible for all, and with increased accessibility, the private equity industry will continue to grow. 

For more information on private equity fund structures, read the following article from Forbes: 

https://www.forbes.com/sites/antoinedrean/2016/11/08/private-equity-is-set-to-grow-much-bigger/#18cbc94e75f5


Why You Should Sell Your Business to an MBA Graduate

This article from Entrepreneur explains what the search fund model is, and why selling to a recent MBA graduate, or young entrepreneur, can be beneficial to business owners. A search fund backs MBA graduates with the support, both in terms of finances and mentorship, to conduct a one-time search to find, acquire, and then run an established business. For business owners, this model can be the perfect solution because it allows them to find a new owner while keeping the business intact. 

A search fund allows the current business owners to step out of the role of CEO, as the MBA graduate (searcher) will take over that position. While the searcher will take over, he/she will often want to keep the foundation and original vision that the company was built on. Considering searchers are looking for companies to buy that fit their own interests, have strong financials, solid operations, and hardworking employees, much of the integrity of the company will remain the same as the searcher takes over. For this reason, selling a business to a searcher can be good for business owners who do not want to see their company upended. Unlike selling to a competitor, vendor, or other strategic buyer, a search fund typically only has one searcher and a few passive financial backers, so a successful transition often includes a buy-in of existing management and employee base. By selling to a search fund, current owners will not give their management team’s jobs away in the sale. 

Search funds are typically only looking to buy companies that are valued under $50 million. Search funds are a good option to sell to if your business falls into this category because often private equity firms or other strategic buyers are not interested in purchasing companies in this smaller size range. This can leave businesses with fewer options if they have not identified a successor for the business but still want to keep the company in operation, which is another reason to sell your business to a searcher, where an owner will not have to just close their doors.

Finally, by selling your business to a search fund, specifically an aspiring entrepreneur, you are putting your faith into the next generation of business owners. You are favoring the person who has a true passion and ambition to succeed over someone who simply has knowledge and experience in your particular industry. Maybe you were once the young entrepreneur, and now you want to see the next generation have a similar experience with your company. While it is often an overlooked option, selling your business to a recent MBA graduate through a search fund has many benefits that more traditional routes do not offer. 

For more information on this exit strategy, check out the Entrepreneur article listed below:

https://www.entrepreneur.com/article/239471



Quick Guide to Finance Career Opportunities

Corporate finance is an intricate place with a great variety of job opportunities. At GTE, many of our employees will soon be entering the workforce. One of the main dilemmas they will face is whether to enter the coveted investment banking field or join the dynamic private equity industry. Both these career paths hold exciting opportunities, each presenting their own unique dynamics.

These two industries are core components to the global financial system. In investment banking, large firms assume the role of financial advisor for their clients. They offer solutions with challenging tasks such as mergers and acquisitions, portfolio management, and security underwriting. Investment bankers are involved with the task of constructing heavily detailed financial models. These processes are stressful endeavors that require the devotion of a large amount of time to be spent on the completion of tedious projects for clients. In contrast, private equity is a line of business that looks to pool capital from wealthy investors and deploy it within the management of other entities. The analysts who work in private equity enjoy the presence of a more relaxed workplace environment. They formulate a series of financial models that look to confirm a particular investment thesis around a leveraged buyout structure. Despite a collection of differences, both of these positions hold a collection of dynamic features that make their roles so interesting.

The popular job opportunities in the I.B. and P.E. space will confront some of the folks at GTE in the near future. They will have to decide which specific field of finance they would like to delve into. With some people holding certain preferences over their potential careers, there is no right or wrong decision, a bright future lies ahead for the people involved with GT Entrepreneurs.

For more information on these two financial sectors, read the following article from Wall Street Prep:
 https://www.wallstreetprep.com/knowledge/investment-banking-vs-private-equity/

Understanding EBITDA; How To Calculate Earnings Before Interest, Taxes, Depreciation & Amortization

The article below is written by Viking M&A, and it goes over EBITDA. EBITDA is the primary metric for determining a business’ true profitability and cash flow. We see most good businesses in the lower middle market selling between 3-5x EBITDA. This is known as a multiple, and it can be adjusted up and down based on specific factors of each individual business. Some positive multiple increases occur when a business has strong recurring revenue, consistent annual EBITDA, or good opportunities to grow. Some factors that would hurt a multiple would be keyman risk, customer concentration, or a cycle business model.

WHAT IS EBITDA? WHAT IS IT USED FOR?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is one of the indicators our firm uses in determining the value of a business, as well as its future financial performance and earning potential. EBITDA is net income with interest, taxes, depreciation and amortization added back, and is used as a calculation for determining the cash flow of the business. At Viking M&A, our experienced financial analysts use this proxy in calculating the value of a business. An EBITDA analysis is essential when comparing similar companies within a single industry during the valuation process.

Let’s look at the aspects involved in an EBITDA calculation:

INTEREST

Interest expense is found on a company’s income statement or profit and loss statement and is added back in our valuations. Interest is a non-operating expense and will differ between individuals. The interest expense line item can consist of interest from loans, lines of credit, or other forms of debt. In order to perform an accurate valuation, we always ask business owners to provide us with appropriate financial statements which will include interest expense. These include the last two years of federal tax returns, two years of Profit & Loss Statements (P&L) including balance sheet, and interim financials.

TAXES

At Viking, we use the net income on the first page of the tax return and only add back items that have been expensed from that net income. This includes the expenses listed on the first page and expenses on the Other Deductions Statement. The tax portion of EBITDA rarely comes into play in our valuations because of this. However, when looking at a P&L, estimated tax payments to the State or Federal Government will be part of EBITDA.

DEPRECIATION

To understand depreciation, you must first recognize the importance of fixed assets. Fixed assets are tangible assets, meaning that they have a physical form and can be touched. Tangible assets include equipment, machinery, land, etc. Depreciation involves the expensing of fixed assets over its useful life. Useful life is the predicted lifespan of a depreciable fixed asset. Depreciation is a non-cash expense that restores the cost of a fixed asset.

AMORTIZATION

Amortization involves the expensing of intangible assets rather than tangible assets. Intangible assets are non-physical assets that include goodwill, copyrights, patents, trade names, customer lists, franchise agreements, etc. These assets are included on a company’s balance sheet and have a multi-period useful life. Intangible assets are typically difficult to evaluate compared to fixed assets.

CALCULATING EBITDA

Calculating EBITDA involves reviewing a business’s income statement and can be expressed in two different ways:

  • EBITDA = Earnings + Interest + Taxes + Depreciation + Amortization

  • EBITDA = Operating Profit + Depreciation + Amortization

Both calculations result in the arriving of EBITDA.

Please visit Viking M&A for more information on business valuation and other M&A topics.

Pittsburgh Named Best City for Small Businesses

Not Boston, not Chicago, but Pittsburgh was named the best city for startups and small business per an evaluation by Citymart that assessed public procurement experience and innovation in 56 U.S. cities and counties. “Pittsburgh scored highest on the Small Business Accessibility Score (SBAS), providing the best discovery and decision-making experience.” Per the Pittsburgh Business Times article, “The scores range from zero to five. Pittsburgh led the way with a score of 4.30, followed by San Antonio, Texas at 4.15 and San Diego, California at 4.07.”

Member Login
Welcome, (First Name)!

Forgot? Show
Log In
Enter Member Area
My Profile Log Out