In his role as an acquirer, Kevin McArdle, Founder of SureSwift Capital, has purchased over 45 businesses. Here are some tips he shared in a recent interview that will help Founders prepare their business for an acquisition.
“Spring 2023 is not a great time to sell. The market is down & debt is high. You won’t get the same multiples.”
Reasons Founders Sell
What he deemed to be “Good” reasons
- “I’m tired & no longer love my business.”
- “My spouse is my business partner - it’s time to put our marriage first”.
- “I have a new idea I want to work on”.
- “Founder or co-founder died”.
- In these cases, it’s more about life changes than it is about needing money. In selling a business, money is justone reason to sell but it’s not theonly reason.
What he deemed to be “Bad” reasons
- “We are running out of cash & need to sell in a month.”
- “Partners don’t get along”; fighting makes buyers assume performance is down.
- “My books aren’t done but I can guarantee my business is “doing good”. You should have a clear understanding of how your business is performing financially. Buyers love profitable businesses because it shows that your brand has a strong & healthy future.
Things That Make Investors Excited To Buy From A Seller (Founder)
- The founder has prepared the business for an exit for at least 2 years.
- The founder has the right documentation to share (when requested). This shows internal systems are organized.
- Founders have been removing themselves from the day-to-day operations of the business and have a strong team in place.
- The founder has the ability to transition over a strong team to a buyer; one that understands the business.
- The founder has done research to understand the market value to confidently ask for a fair market price.
- It’s a healthy business - Trending profitably for at least a year.
How Founders Can Understand Market Value
- Do research to compare brands in your industry (by size) in order to understand the typical multiple your business can be sold for.
- A Good Place to Start: Acquire.com, the #1 Startup Acquisition Marketplace
How Buyers Find Businesses For Purchase
- Through relationships
- Cold calling or emailing sellers
- Getting calls from sellers
- Buyers are attracted to sellers that shop around to find the best buyer suitable for their business. This shows that you are confident in your brand's value and you want to place it in the best hands.
Factors Buyers Consider When Bidding Against Other Buyers
- Do I need to buy with debt? This is when a buyer has to fund the purchase of your business with a loan.
- Can I get a multiple expansion? This is the buyer's ability to increase your multiple (ex: 3x - 9x of profit) to be competitive in winning you over if other offers are on the table.
- Will I lay off the founder's team to improve margins after the acquisition?This helps them to create efficiencies in the brand. They may want to reduce labor costs to increase margins in the brand.
- Will I incorporate a long-term hold? This is when they hold your business for a few years in a fund and then sell it to another company down the line.
- Compounding (for the future):This brand has the ability to be more valuable over time so they can buy it for less now & sell it for more in the future.
Some buyers will position from a strategic angle rather than a financial one. Each buyer will be seeing the business differently which may impact the delta in sales offer. You should understand each buyer's differences to see how they are viewing your business.
Terms Sheet Tips - Things Founders Should Consider Before Signing LOA
- Rolling Equity: For example, a buyer may offer $20m - $12m cash & $8m into equity. Making you (the founder) a minority shareholder or minority equity holder; however, if they decide to sell your business to a new owner, understand that you can lose some or all of your equity.
- Retrade:LOA w/ exclusivity (can be for 2 months to 1 year); This locks you (the founder) into an agreement that prohibits you from shopping around for other potential buyers for up to a year. For example, the buyer offers $20 million at the LOA signing, does their diligence, and when it’s time to buy they drop to the price to $16 million because they know founders may not want to go through the due diligence process again - most founders will accept the new offer.
- There are buyers who prefer to buy with cash when there is strong value in the business.
- ** DO NOT personal guarantee debt in any term sheet** -If the buyer defaults on the loan, the founder will be liable for the balance.
How Venture Capitalists and Private Equity Works
- General Partners (GP): They run the fund and get a percentage (%) of assets to administer the fund. Venture capital & private equity firms make money from fees charged per year; 20% goes to the firm after they pay investors.
- Limited Partners (LP):These are investors that have Limited downside.
- They keep raising bigger funds to get bigger fees to pay bigger teams.
Understand How Holding Periods Affect Your Sale
- This is when the buyer holds your company for 7-10 years (10 is the max) before they sell it to another company.
- This can be tricky for buyers or sellers because you never know what the market is gonna do in the future - stay up or drop.
- For example, private equity raises money from investors and has to give back funds within 7-10 years. If they have to sell the portfolio in a down market, this will be bad for them.
Questions to Ask Buyers
- Do you have cash in the bank?
- Are you buying with debt?
- What’s the plan after you buy my business?
- Do you have debt? How does your debt work?
- Do you have a funding cycle? Where are you in your fund cycle?
- If you are selling your business to a company (VC or PE) that holds funds. Ask them where they are in their cycle (since this can last up to 10 years) because your business may be sold to someone else. Someone you probably wouldn’t want to own your company. If you’re being asked to roll Equity, ask how long the buyer intends to hold your business before you sell it. This will help you understand if & when you will get a 2nd check (i.e. earn-out, etc.). For instance, 6 years into the fund means that in 4 years they will sell your brand to someone else.
- If debt is involved, meaning they need a loan to buy your business, find out how much debt is in the sale.
- For example, if you are offered a sale price of $20 million ($12m in cash & $8m rolling): if $3m is in cash & $9m is in debt (from a bank loan), the buyer now owes you $8 million (roll) & $9m to the bank. Profits from the company will be paid to the bank to clear the debt before they sell or pay off $9m first before they can sell which holds up your equity payout.
The Change That Will Happen When You Sell
- You are now a minority decision-maker.
- Your input doesn’t matter much after the sale.
- The buyer can fire teams offshore if they choose.
- A sophisticated buyer will raise prices by 20%
- Halt the creation of new products
- You will question your identity post-sale. Who are you now? What will you do next? Have a plan for yourself after you sell as it will make your career transition smoother & easier.
What Founders Should Do Next
- Know what questions to ask
- Talk to people who have done it
- Get advice from professionals
- Start the process early - even if you don’t intend to sell. Sometimes life happens and you may HAVE to sell. This is your insurance policy. Your business is an asset you can sell.
- It’s never too early to start educating yourself on how the M&A process works. This will boost your confidence in negotiations as a business owner when you are ready to sell.
- Pick a buyer you trust
May 1, 2023