Middle Market Company

The biggest difference in middle market companies from either the smaller “main street” business and the larger “wall street” firms is that there are literally thousands of buyers if you count private equity, strategic buyers, international buyers, etc. The sales process for middle market companies is about a structured process that engages as many buyers as possible.

Many buyers limit their searches to companies with more than a $1 million in earnings so that is somewhat of a magic threshold, above which a competitive fervor helps drive up multiples and the number of qualified buyers.

Characteristics of middle market business sales:

• Requires a “book” (Confidential Descriptive Memorandum, Prospectus, etc.)
• Requires a nominal amount of working capital (inventory, AR less AP) be left in the business after a sale
• Requires a serious, well planned marketing and/or auction process
• Measures earnings using EBITDA, a measure of how much an investor/owner receives
• Typically asking price is not published, pricing is determined by market
• Requires an upfront fee to be paid to an M&A firm

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization, meaning your earnings are higher than net income when you “add back” depreciation, etc.  EBITDA includes an expense for management salary (could be the owner) at fair market wages.  We’ll go into this in more detail of course in the full program as we want to be able to enhance EBITDA in the year or two before a sale, but for now you can probably get a good estimate so you know which video to watch and which program to subscribe to.

Small Businesses

Small businesses are at the heart of the economy and literally thousands change hand every year. The key to a smooth small business sales transaction with a business broker is good buyer qualification and the ability to manage a complex and multi-faceted process. Most brokers handle up to 10 clients simultaneously so they may not have much time for education, which is where my program comes in – you’ll know what to expect and when to expect it.

Characteristics of small business sales:

• Typically one to five page summary is sufficient to describe the business
• An individual, perhaps with an SBA loan, is likely buyer
• Individual buyers find business on business-for-sale websites – serious marketing isn’t required
• Measures earnings using SDE, a measure of how much an owner/operator receives
• Asking price is usually published
• Requires little ($5-15K max) or no upfront fee to be paid to a business brokerage
• Usually working capital (e.g. AR) is not required to be left in the buiness

SDE (Seller’s Discretionary Earnings) is everything the owner/operator takes home – salary, benefits, perks, dividends, profits, etc. We’ll go into this in more detail of course in the full program as we want to be able to enhance SDE in the year or two before a sale, but for now you can probably get a good estimate so you know which video to watch and which program to subscribe to.

Unfortunately I haven’t had one of these.  I’m waiting though – it’s bound to happen.

One of the things preventing this is something I’ve written about in the past – the axiom that there are “no stupid buyers”.   Moreover, if you do happen upon one, they typically have some advisors such as attorneys and CPAs that will set them straight – which typically means stringent due diligence, a few issues and no quick and easy deal.

But they do happen, just not for me yet.  Here are some true (not rumor) examples I’ve witnessed that happened in the last year.  I did change some of the facts because of confidentiality.

A business owner decided to sell and engaged with an M&A broker.  The broker estimated the business value at $1.2 million and the real estate at $800K for a total of $2 million.  The following week a real estate agent walked into the business and said he was acting on behalf of a large national firm looking for regional offices and they wanted to buy the real estate in an expedited deal.  For $2 million dollars.  Done.

A company that has a highly recurring subscription based model was preparing to sell and had received advice that because of their high level of recurring revenue they would likely sell at a premium, well above the typical 5X EBITDA for a company that size.  However they were not yet at $1 million in EBITDA which was the goal before selling.  Well, they were processing a very large amount of credit card charges each month based on their subscription model – and a credit card processing company saw great value in securing that revenue through their platform.  They paid over 20x EBITDA in a quick deal, with absolutely no synergy at all except for the credit card processing.  That is great for the business owners, but the failed conglomerates of the 1960s has shown that true synergy is typically required for a successful acquisition.  I guess we’ll see on that one.

If you have a quick and easy deal you need done, please let me know.  I’m still waiting.