In one of our latest blog posts, we discussed the impact that the Baby Boomer Generation has and will continue to have on our economy. This is especially true when it comes to their retirement. A study from Lindquist shows that since 2011, 10,000 Baby Boomers are turning 65 every day. This trend is set to continue for 12 years.
Baby Boomers own 65% of all privately held companies, and although many of them are delaying retirement for financial reasons, the overall increase in their rate of retirement will lead to a related increase in the sale of small businesses.
If you’re a Baby Boomer with a privately-held company, it’s imperative that you create a sound exit strategy for your retirement, particularly if you plan to sell. Here’s what you need to know.
The Businesses
There are approximately 4,000,000 businesses owned and operated by Baby Boomers. Nearly all of them are identified as small businesses (fewer than 500 employees) and are sole proprietorships or small corporations. These businesses are considered to be in the lower middle market with annual revenue anywhere from one million to one hundred million dollars.
Baby Boomers’ Business Sales
While some Baby Boomer-owned businesses will close their doors when their owners retire, an estimated 65-75 percent of them will be put up for sale over the next ten years. Research indicates that during the next 15 years, there will be the largest intergenerational transfer of private businesses in our country’s history. Some researchers have predicted that more than $10 trillion in business assets could be transferred before the year 2030. If business sales were consistently spread over the next 15-year period, that would result in almost 267,000 businesses being transferred every year.
How to Sell
If you’re likely to be retiring within the next 12 years, selling your business is a viable option to preserve its legacy and help you to turn your equity into liquidity prior to your retirement. If you choose to sell, one of the first steps you should undertake is to understand what your business is worth. You should know the best-case scenario, worst-case scenario and the path you need to pursue to get there.
For further reading, we encourage you to read our related blog posts:
Getting Ready to Sell Your Business
Now that You’re Ready – The Steps to Sell Your Business
Our team at Symmetrical Investments can help you as you prepare for the next phase of life. Contact us today to get started.
In our last blog post, we reviewed the steps you should take to prepare your business for a sale. Once you have an understanding of the prep work that goes into a sale, you are ready to think of these steps in getting your company sold:
Step 1 – Understand Your Realistic Range of Value
Understanding the realistic range of value for your business is critical to the process. You don’t to sell for too little but if you are asking too much, you are likely to scare buyers away before they even engage. So how do you figure out a realistic range of value? There are many ways to value a business, using different tools and methods that vary between businesses and industries. Common approaches include a thorough review of financial statements, recasting to EBITDA, understanding structures based upon lender criteria, leverage and ultimately comparing your company to others in your field.
Along with understating the value of your company, you’ll also want to go into the process knowing your drop-dead number and deal structure you’ll accept. This does not always mean the lowest number your business is worth, it is just the lowest number you’ll transact at. Think of it this way, everything else above that should be a bonus.
Step 2 – Pre-Marketing Value Enhancement
Based on a review of your company’s strategic and financial conditions, advisory firms can assist your business in developing changes that will make it overall more desirable before going to market. While massive changes don’t often take place due to time constraints and risk, minimal adjustments are usually enough to produce valuable improvements to your business.
Step 3 – Gather Data and Populate Your Virtual Deal Room
In preparing your company’s financial and business history, an honest and trustful relationship between you and your M&A advisor is crucial. Make sure you start with a detailed due diligence list and build your data from the ground up. While you will not need all of this information to get the process rolling, you will save yourself time in the long run because you will be more organized and your data will be available upon request.
Step 4 – Prepare Marketing Materials
After years of establishing your brand, you have most likely acquired an immense amount of collateral, including executive summaries and confidential information. Having these materials in order will not only increase your confidence but also increase the likelihood of a successful sale. In essence, you want to make sure that your story is in order so that you can relay your message to potential buyers. How you started, where you’re at today, where you could take the business if you had another 10-20 years in you…
Step 5 – Buyer Research and Outreach Strategy
Whether you’re a multi-billion-dollar company or a part of the lower middle market, you will most likely have multiple potential buyers. While it may be impossible to know every little detail about each potential buyer, you should invest time and money in the tools and resources that can assist you in researching and accessing data about these individuals. Utilize a push/pull strategy, in which you push out marketing materials to strategic buyers proactively, and pull information from “business for sale” websites (such as Axial and Merger Network). It is likely that your M&A advisor is a member of industry associations, such as AM&AA, which can be valuable networks to utilize in your outreach strategy.
Step 6 – Qualification of Potential Buyers
As stated previously, you may have multiple potential buyers; however, that does not mean that all of these buyers are qualified. Your advisor and banker can help you identify companies who are ‘tire-kickers’ so that you do not waste time communicating and increasing the confidentiality risk with unqualified buyers. Have these buyers completed any transactions before, how much equity do they typically put down in each deal and where is that money coming from, what type of capital structure are they going to use and what lenders do they typically work with, etc.?
Step 7 – Negotiation Process
While some businesses enter a negotiation process with only one highly targeted buyer, it is in the best interest of most business owners to enter the process with multiple qualified buyers. The competition created with this strategy has the potential to drive up the purchase price and make buyers act more quickly. On the same note, sellers need to keep in mind that too much competition could make buyers question the sale in regards to overpaying. An advisory firm, such as ourselves, can help you identify how many buyers to include in the negotiation process. For lower middle market companies, it is often more relevant to have an arranged-marriage type transaction vs. a broad auction.
Step 8 – Appropriate Structure
There is more to a business sale than the purchase price. Other financial and professional considerations that must be taken into account include stock sale versus asset sale, earn-out, terms and interest rate on financing, stock ownership and equity options packages, relocation, and more. To ignore these factors during the transaction process can be detrimental to the overall result of your sale.
Step 9 – IOIs, LOIs, APA and Closing
There are three steps that allow buyers to express interest in your company – Indication of Interest (IOI), Letter of Intent (LOI), and Asset Purchase Agreement (APA). An Indication of Interest outlines the terms and conditions expected of the transaction. If this is approved by the seller, the buyer continues to submit a Letter of Intent which can take the form of a firm bid or offer. Once the LOI is reviewed, final agreements can be defined in an APA, including purchase price, escrow, warranties, and more. Note: over 90% of middle market transactions are asset deals, hence the reference to the APA above.
Step 10 – Post-Closing Issues & Business Transition
While the sale may be over, there remains vital last steps in the process. The seller and buyer must work together to transition the company from one hand to the next. This post-closing commitment often includes transferring customer relationships and management dynamics, as well as any other necessary information needed for the business to operate successfully.
If you’re interested in learning more about the process of selling a business, reach out to a member of our team.
Middle-market business owners, investors, and their advisors turn to Symmetrical to address the complex transactional requirements that drive real value in today’s competitive world. Our experienced professionals have a track record of innovation and transactional expertise and help our clients achieve their desired outcome.
A common question business owners and investors ask is “When is the right time to refinance my business?”
Refinancing your business will open the door for many of your future endeavors. Consolidating existing loans can be used to lower monthly payments, pay off existing debt at a faster rate, or to allow for an increase in cash flow. Our team has put together a list of reasons why you now may be a good time to consider refinancing your business.
Lower monthly payments
In refinancing your business, you may find that a better interest rate will allow for lower monthly payments on a loan. Especially if your business is planning on staying around for many years to come, a change in interest rates by even the smallest percentage can save your business thousands of dollars in the long run.
Secure interest rates
If you have a variable interest rate loan, refinancing can bring you the security of knowing that the rate won’t change by locking in a fixed rate. With the Federal Reserve contemplating rate increases in the coming months, now might be the opportune time to refinance. While many companies think the impact of increased rates will be manageable, some economists highlight that the interest payments for companies who have issued low-grade debt could rise more quickly.
Increased capital
With the savings you will acquire from lower monthly payments, you will have the freedom to use the extra money in many different ways. Whether you wish to use the savings to pay down other high interest balances or put it back into your company to grow your business, the extra capital can only be seen as a positive gain.
Take equity out of your business
In many cases, businesses are financed by an owner’s equity. Refinancing may provide the opportunity for you to replace some of your equity with debt, while still maintaining the same monthly payment. See dividend recapitalization.
Adjust your timeframe
Many people also decide to refinance to either reduce their loan term or increase it to buy them time. While reducing your loan term from a 10-year loan to 3-, 5-, or 7-year loan will allow you to pay it off in full faster and decrease your interest paid; some businesses refinance for a longer period of time to lower the payment.
Whether you’re looking to save money and increase your balance sheet, aggregate and pay-off other loans or you’re just hoping to use the capital to grow your business … refinancing may be the right move. If your business is considering refinancing as an option to achieve strategic goals, our team is available to assist you with evaluating this option.