Photo Credit: Andrea De Santis

As a sell-side (meaning we only represent business owners) M&A advisor, ASA meets with many business owners, founders, and CEOs throughout the year and in doing so, we’re asked many questions about M&A and the process of selling or recapitalizing a company. In gathering this data over the years, we thought it’d be helpful if we shared some of the common questions we’ve run across and our general answers to those questions. This might especially be helpful to business owners in the lower-middle market who have never sold a business or taken on any institutional capital in their current business.

Please note that these are some of our most common or general responses but understand that every deal has unique factors that can drastically vary the answers on a deal-by-deal basis.

Questions and ASA Common Responses:

1. Q: What are the market EBITDA multiples for companies like mine?

a. ASA’s Common Response: Multiples vary by industry but really come down to company specific factors, such as:

i. Revenue Structure: Is revenue recurring, a membership model, repeat revenue from long time customers, what is the length of these relationships? More predictable and recurring revenue will drive multiples up, where sporadic and “one-off job” type revenue will not be viewed as favorably. Capital hates uncertainty.

ii. Patient Cohort Dynamics: What is patient or customer turnover/trends? Longer average tenures and low turnover/high renewal drive patient lifetime value. High lifetime value driven by a “sticky” model is a tail wind for EBITDA multiples.

iii. Employee Tenure: Stickiness and long tenures of providers and staff aids in painting a picture of a sturdy, highly desired asset.

iv. Growth: Are you seeing steady, constant growth through the years? Is growth flat or declining? This will play into what the ultimate multiple will be.

b. There are other factors that come into play depending on the company, industry, owner goals etc. But ultimately, the EBITDA multiple won’t be truly known until it’s taken through an extensive process to the conceivable universe of buyers/investors. At the end of the day, the multiple and value will reflect what the final suitor agrees to pay for the company.

2. Q: How much is my company worth?

a. ASA’s Common Response: a typical valuation involves multiplying a company’s adjusted EBITDA by a market multiple. Like question 1, we won’t 100% certainly know the value of the company until we take it through a competitive facilitation process, where buyers bid to win making the investment in the target company.

3. Q: How long will an M&A process take?

a. ASA’s Common Response: A deal typically takes 6-9 months from start to close, but this can vary from deal-to-deal.

4. Q: How will you work with us through the process?

a. ASA’s Common Response: ASA works with our clients from cradle to grave (and beyond) running point on the transaction, specifically leading:

i. Building Marketing Materials: We build the financial model, draft the marketing materials (the teaser and confidential information memorandum [CIM]), and take our client through every step.

ii. Investor Sourcing, Outreach, and Process Management: We handle everything from outreach, scheduling & coordinating with all parties, explaining & negotiating offers, and leading all teams through due diligence and closing.

iii. Deal Team Alignment & Management: We work closely with our client’s deal team (legal & CPA) to ensure we achieve the optimal outcome. We also help with the typical 90-day post close working capital true up.

iv. Post Close Involvement: In many cases, we end up helping clients down the road by helping them negotiate terms and sell their retained equity; we’ve also helped with many other various matters. We typically remain involved without any additional fees needed from the client simply because of the strong relationship we’ve built over the course of the process.

5. Q: Is this a good time to get started on an M&A process?

a. ASA’s Common Response: From a value maximization perspective, the best time to get started with an M&A process is when your business is performing great and on an upward path, specifically:

i. When Financial Performance is Scaling: You want to take the company to market in a position of strength, ideally experiencing revenue and income growth.

ii. When Special, Case-by-Case Need from Owners Arise: Other cases of capital and exit needs vary from owner-to-owner and come down to their specific needs and business stage.

iii. Other factors like market conditions and capital availability come into play, but we always believe that quality assets performing well will always command a premium valuation despite macro or monetary backdrops.

6. Q: Do buyers buy 100% of my company? Do I need to stay on after a transaction is completed? What does life after close look like?

a. ASA’s Common Response: This depends on investor/buyer type and varies between individual groups within each type. A quick explanation of common investor/buyer types and typical preferences (but there are no hard and fast rules):

i. Private Equity (PE)/Financial: Typically, private equity or other financial buyers will prefer business owners to keep 10% to 49% of the equity. On the short end, they like the business owner to stick around for at least a transition of 6 to 24 months. On the longer end, in the case of partnering with business owners who are trying to aggressively grow the business to the next level, owners tend to stay on longer and focus on maximizing the value of their remaining equity in a second liquidity event.

ii. Strategic: A strategic investor/buyer is a similar company in a common or adjacent industry that is interested in acquisition. They typically buy 100% and have a management bench they can plug in, so a transition is typically minimal and in some rare cases, not required at all.

iii. Family Office: A family office investor functions like a financial buyer but is investing the funds of a high net worth (HNW) family (or group of families). Family offices tend to be flexible in what an owner retains and what length of transition they require. We’ve seen them behave more like PE, wanting more “stickiness” in equity & transition time and we’ve also seen them buy 100% and let owners walk after a very brief transition.

iv. Search Fund: Search funds are operators that are backed by a group of financial investors who are searching for a company to come in and run themselves. Like a family office, they are flexible in equity roll % and tend to be on the shorter end of the transition spectrum, as their intention is to come in and run the company themselves.

If there are any common questions I missed or questions you would like answered, please comment on the post or message me. I’d also welcome discussing any point in more detail.