Preparing Your Business for Sale

“Prepare My Business for Sale”: How Owners Build Value Before an Exit

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As M&A advisors, one of the most common questions we hear from business owners is deceptively simple: How do I prepare my business for sale? The question usually comes with urgency, but effective preparation is rarely urgent work. In fact, the most successful exits are the result of deliberate decisions made well before a transaction is on the horizon.

At its core, preparing a business for sale means understanding one fundamental truth: the value of your company is in the eyes of the buyer. Buyers do not pay for effort or personal sacrifice. They pay for future, transferable cash flow, and they discount that cash flow when risk is unclear or poorly managed.

For most family-owned companies, meaningful preparation should begin at least 18 to 24 months before going to market. This timeline allows owners to improve performance, correct structural weaknesses, and demonstrate consistency. Waiting until a deal is imminent usually results in missed opportunities and avoidable valuation discounts.

Below are the primary areas buyers consistently evaluate when determining value. Rather than viewing them as rigid categories, think of them as interconnected pillars that collectively shape a buyer’s perception of quality, risk, and upside.

Financial Transparency and Earnings Quality

Financial transparency is one of the most important factors buyers evaluate. Buyers place the highest value on companies with GAAP-compliant financial statements prepared by an independent CPA, because those statements establish credibility and reduce underwriting risk.

The level of trust a buyer places on financials depends heavily on the level of CPA involvement. Audited financial statements provide the highest level of assurance and are viewed as the gold standard, particularly for larger or more complex businesses. Reviewed financials offer a meaningful level of comfort through analytical procedures and inquiries, while compiled financials provide basic organization of results but limited assurance. Buyers will price risk accordingly when audited or reviewed statements are not available.

Regardless of the level of review, financial statements must be clean, consistent, and defensible. This includes cleaning up the balance sheet by removing excess cash and non-operating assets, writing off uncollectible receivables and obsolete inventory, eliminating shareholder or employee loans, and properly recording all liabilities such as accrued vacation, bonuses, and employee benefits.

Equally important is normalizing earnings. Owner compensation, personal expenses, and non-recurring or one-time items should be clearly identified and adjusted to reflect true operating performance. Credible financials build trust, accelerate diligence, reduce valuation disputes, and materially strengthen a seller’s negotiating leverage.

Management Depth and Owner Independence

Another significant valuation factor in the middle market is the extent to which a business depends on its owner. Companies that require the owner’s constant involvement to function are inherently riskier to buyers.

Preparing for a sale often means shifting from a founder-centric model to a management-driven one. Buyers look for capable leaders in key functions, clear decision-making authority, and accountability that extends beyond the owner. When leadership depth exists, buyers gain confidence that the business will continue to perform after the transition.

Retention is equally important. Incentive compensation, long-term rewards, and change-of-control arrangements for key managers help ensure continuity and preserve value through and beyond the transaction.

Revenue Quality and Customer Relationships

Not all revenue is valued equally. Buyers favor companies with predictable, diversified, and repeatable revenue streams.

Customer concentration is a common concern. When a small number of customers represent a large percentage of revenue, buyers perceive heightened risk. Sellers should work to diversify relationships where possible and formalize key accounts through contracts or long-standing agreements.

Equally important is how sales are generated. Businesses that rely heavily on the owner’s personal relationships or intuition-driven selling are less attractive than those with documented processes, pipelines, and measurable performance metrics. Predictability almost always outweighs short-term spikes in revenue.

Operational Discipline and Scalability

Operational strength reflects how well a business converts strategy into execution.

Companies that have documented processes, reliable systems, and consistent performance are easier to underwrite and easier to scale. Buyers look for operational clarity: how work gets done, how quality is maintained, and how issues are resolved.

Physical assets and facilities matter as well. Equipment should be maintained, suppliers diversified, and leases structured in ways that do not restrict future flexibility. Operational improvements often enhance both profitability and buyer confidence at the same time.

Strategic Direction and Forward Visibility

Buyers are not acquiring your past performance. They are acquiring your future potential. Companies that can clearly articulate where they are going, and why they are positioned to succeed, consistently command stronger valuations.

This does not require a glossy business plan, but it does require thoughtful preparation. Buyers want to see that management understands what drives growth, where opportunities exist, and what resources are required to capture them. Clear strategic priorities, supported by realistic assumptions, signal discipline and credibility.

Financial projections play an important role here. Strong projections are grounded in historical results and explain how growth will occur. When sellers cannot articulate their future strategy, buyers are forced to make assumptions, and those assumptions are rarely generous.

Market Positioning and Demand Generation

Buyers want to understand why customers choose your company and whether that choice is sustainable.

Strong market positioning includes a clear value proposition, well-defined target customers, and evidence that demand is systematic rather than accidental. Effective marketing does not need to be flashy, but it should be intentional and measurable. Buyers look for lead generation processes, conversion metrics, and a reasonable understanding of customer acquisition costs.

When a company can demonstrate consistent demand and explain how marketing efforts translate into revenue, it reduces buyer uncertainty and supports higher valuation multiples.

Workforce Stability and Organizational Health

A company’s people are often its most valuable, and most vulnerable, asset in a transaction.

Buyers assess whether the workforce is stable, appropriately compensated, and aligned with company goals. High turnover, misaligned incentives, or cultural dysfunction increase perceived integration risk. Identifying critical employees and implementing retention strategies well ahead of a sale can materially protect value.

Clear roles, performance expectations, and communication structures also signal organizational maturity. Buyers place a premium on businesses that operate cohesively rather than relying on informal knowledge or individual heroics.

Structural and Legal Readiness

Legal and structural matters rarely create upside, but they frequently create downside. From a buyer’s perspective, unresolved legal issues represent uncertainty, and uncertainty is always priced against the seller.

Well-prepared companies ensure that their corporate structure is clean, consistent, and defensible. This includes up-to-date formation documents, clear ownership records, and properly documented governance. Buyers will also examine customer and supplier contracts for assignability, termination rights, and change-of-control provisions. Informal agreements, handshake deals, or contracts tied personally to the owner raise red flags.

Intellectual property is another common issue. Proprietary processes, trademarks, software, and trade secrets should be clearly owned by the company and not the individual owner. Addressing these matters early prevents costly delays and last-minute concessions during diligence.

Final Thoughts

Preparing a company for sale is not a cosmetic exercise. It is a process of building value by improving performance, reducing risk, and increasing transferability. Owners who approach preparation thoughtfully, and early, gain control over timing, pricing, and deal structure.

The most successful exits are achieved by sellers who think like buyers long before they meet one. When preparation is intentional and disciplined, valuation becomes an outcome, not a surprise.

Considering a Sale?

If you are thinking about selling your business in the next two to three years, now is the time to start preparing. Early planning creates optionality, strengthens negotiating leverage, and often results in meaningfully better outcomes.

As M&A advisors to middle-market business owners, we work with sellers well before a transaction to identify value drivers, address risk, and position companies for a successful exit.

If you would like a confidential conversation about how prepared your business is for a future sale, or what steps you should be taking now, feel free to reach out.

Selling Your Business? How an M&A Advisor Adds Real Value

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For most business owners, selling their business represents the largest and most consequential financial transaction of their lives. It’s the culmination of years, or even decades, of effort, sacrifice, and risk-taking. Given what’s at stake, it’s essential that the sale process is managed with precision, professionalism, and discretion.

That’s where a sell-side M&A advisor plays a critical role.

When a business owner engages an M&A advisor to lead the sale of their business, they’re not just hiring someone to find a buyer. They’re hiring a strategic advisor, negotiator, project manager, and market expert whose singular mission is to deliver the best possible outcome – maximum value, optimal terms, and minimal disruption.

Here’s a breakdown of the comprehensive services an M&A advisor provides to a business owner preparing to sell:

1.  Establishing a Realistic and Data-Driven Business Valuation

The first step in preparing a business for sale is understanding its market value. While many owners have a rough idea of what they believe their business is worth, it’s the M&A advisor’s job to validate, or reset, those expectations based on data and real market dynamics.

A proper valuation considers:

  • Historical financial performance
  • Forward-looking earnings potential
  • Industry trends and comparable transactions
  • Customer and revenue concentration
  • Profit margins, scalability, and working capital requirements
  • Company-specific strengths and risks

Beyond just providing a number, a skilled M&A advisor explains how buyers will perceive value and what adjustments (such as EBITDA normalization or working capital targets) are likely to be made. This sets a realistic foundation for negotiations and avoids costly surprises down the road.

2. Crafting the Confidential Information Memorandum (CIM)

Once the business is market-ready, the next step is building a compelling story; one that will resonate with qualified buyers. This comes in the form of a Confidential Information Memorandum (CIM), a detailed document that outlines the company’s operations, financials, market positioning, and growth prospects.

The CIM typically includes:

  • Executive summary
  • Company history and ownership structure
  • Product or service overview
  • Customer base and revenue breakdown
  • Supply chain and operations overview
  • Management team profiles
  • Financial statements and performance analysis
  • Industry trends and competitive landscape
  • Strategic growth opportunities and projections

M&A advisors specialize in presenting this information in a way that is clear, credible, and buyer-friendly. A well-written CIM doesn’t just inform, it persuades.

3.  Designing a Targeted Go-to-Market Strategy

With the CIM in hand, the M&A advisor develops a customized marketing strategy to take the company to market. The objective is to generate interest from the right buyers, not just any buyer.

This involves identifying:

  • Strategic buyers – typically competitors, suppliers, customers, or adjacent businesses that could achieve synergies post-acquisition
  • Private equity groups – financial sponsors seeking platform or add-on acquisitions
  • Family offices and independent sponsors – increasingly active players in the lower middle market
  • Search funds and individual investors – often backed by institutional capital

Each process is tailored to the seller’s objectives. For some, a broad, competitive auction may be appropriate. For others, a more limited, confidential outreach to a select group of buyers may be preferable. In either case, confidentiality is paramount, and all buyer contact is conducted under strict non-disclosure agreements (NDAs).

4.  Managing Confidential Buyer Outreach and Qualification

Buyer outreach is conducted discreetly, often starting with a blind summary (“Teaser”) that highlights the company’s value proposition without revealing its identity. Interested buyers are vetted through a screening process before they receive the CIM.

This screening includes:

  • Verifying financial capacity to complete a transaction
  • Assessing strategic interest and cultural alignment
  • Reviewing acquisition history and credibility
  • Confirming source of funds (especially important for private buyers)

M&A advisors act as a filter, ensuring that only serious, qualified parties move forward in the process. This protects the seller’s time, reputation, and internal confidentiality.

5.  Hosting Buyer Meetings and Managing the Diligence Process

After initial expressions of interest (Indications of Interest or IOIs), the M&A advisor coordinates management presentations where buyers meet the leadership team and get a deeper understanding of the business.

At this stage, the advisor:

  • Prepares the seller for presentations and Q&A
  • Facilitates logistics and buyer communication
  • Manages expectations and timelines
  • Oversees the secure virtual data room for due diligence

This is where buyer interest becomes more tangible. M&A advisors maintain process discipline to keep multiple parties engaged, avoid deal fatigue, and build competitive tension.

6.  Negotiating Offers and Structuring the Deal

As buyers move from preliminary interest to formal offers (Letters of Intent or LOIs), the advisor takes the lead in evaluating, negotiating, and improving deal terms.

An LOI typically outlines:

  • Purchase price and structure (cash, stock, earnout, seller note, etc.)
  • Working capital targets
  • Post-close roles for the seller or management
  • Exclusivity period
  • Timeline to closing

The advisor helps the seller assess not just the headline price, but the full economic and legal picture. Is the offer fully financed? Is there a potential earnout? Are there indemnification caps? What’s the tax impact?

By managing negotiations, the advisor ensures the seller doesn’t leave money on the table or accept risky or overly complex deal structures. Competitive tension is often leveraged to improve terms, increase valuation, or accelerate timelines.

7.  Managing the Process Through to Closing

Even after an LOI is signed, there’s a long road to closing. Due diligence becomes more intense, attorneys begin drafting definitive agreements, and third-party approvals may be required.

The M&A advisor remains actively involved to:

  • Coordinate diligence checklists and timelines
  • Work alongside the seller’s legal and accounting teams
  • Resolve deal issues and manage surprises
  • Serve as a buffer between buyer and seller when needed
  • Keep all parties aligned and moving toward closing

Deals can be emotionally and logistically complex. Having a dedicated deal quarterback is invaluable to protect the seller’s interests and reduce the risk of a broken deal.

8.  Preserving Confidentiality and Business Focus

One of the most underappreciated but vital roles an M&A advisor plays is protecting confidentiality throughout the sale process. Premature leaks can create uncertainty among employees, customers, suppliers, and competitors, potentially damaging the business.

By managing communications, enforcing NDAs, and controlling access to sensitive information, the advisor allows the business to continue operating without distraction or disruption.

Just as importantly, they free up the seller to remain focused on performance. Deals can take 6–9 months (or more), and any decline in financial performance during that time can materially affect valuation or jeopardize the transaction. The advisor absorbs the burden so the business owner can continue to lead effectively.

Final Thoughts: A Partner for the Most Important Transaction of Your Life

Engaging an M&A advisor is not an expense; it’s an investment in the outcome of your life’s work. From strategic preparation to deal execution, an experienced advisor brings clarity, confidence, and results to what is often a complex and emotionally charged process.

If you’re considering selling your business in the near future, or even several years out, having an early conversation with a qualified M&A advisor can help you understand your company’s value drivers, address potential risks, and ensure you’re in the strongest position when the time is right to go to market.

After all, you only sell your business once!

volatility; uncertainty

COVID-19 Pandemic: This Too Shall Pass

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After two months of a global economic shutdown caused by the COVID-19 pandemic, the outlook for lower middle market mergers and acquisitions remains uncertain. Buyers, sellers, lenders, and advisors continue assessing the long-term economic impact, making it difficult to predict when transaction activity will recover.

Many strategic buyers have adopted a wait-and-see approach to acquisitions. Rather than pursuing growth opportunities, they are preserving liquidity, stabilizing operations, and protecting their core businesses. Financial buyers, including private equity firms, have also shifted their attention inward. They are supporting existing portfolio companies, strengthening balance sheets, and ensuring those businesses have sufficient capital to weather the economic disruption.

Potential sellers should not despair. According to PwC’s report, Succeeding through M&A in Uncertain Economic Times, U.S. public companies now hold more than four times as much cash as they did a quarter-century ago. Additionally, private equity firms control record levels of undeployed capital, commonly referred to as “dry powder.” Although many investors have temporarily paused acquisitions, they must eventually deploy that capital when market conditions stabilize and confidence returns.

Business owners contemplating a liquidity event should begin planning now instead of waiting for conditions to improve. Early preparation allows owners to strengthen financial reporting, improve operations, and identify opportunities to maximize value before entering the market. Additionally, they should consult with an experienced M&A advisory team to develop a thoughtful exit strategy and prepare for buyer scrutiny.

A decline in financial performance resulting from the COVID-19 pandemic is both expected and understandable. Buyers will recognize these temporary disruptions, but they will closely evaluate how your company and management team respond to adversity. Companies that preserve customer relationships, control costs, adapt operations, and maintain profitability will stand out in the marketplace. Those actions will strengthen buyer confidence and help maximize value when M&A activity resumes.

COVID-19 Impact on M&A

COVID-19’s Impact on M&A

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Many merger and acquisition processes are on hold while buyers and sellers seek greater clarity on COVID-19’s health and economic effects. COVID-19’s impact on M&A continues to reshape transaction planning, buyer expectations, and deal execution. Although transaction activity has slowed, companies continue preparing for future opportunities as markets adjust to rapidly changing conditions.

Business owners considering a sale should expect the pandemic to influence nearly every stage of the acquisition process. Buyers, lenders, and advisors are reassessing risk, valuation, and transaction structures. As a result, successful transactions will require greater planning, flexibility, and collaboration than before.

Several areas now deserve increased attention.

Preparing for Sale. Business owners should determine whether now is the right time to pursue a transaction. They should also evaluate current valuations and consider whether buyers will recognize the company’s long-term value despite recent disruptions.

Timing. Transactions will likely require additional time to complete. Travel restrictions, remote work, lender requirements, and extended due diligence may delay the closing process.

Due Diligence. Buyers will conduct more extensive due diligence across financial, legal, operational, and commercial matters. They will closely examine force majeure provisions, supply chain risks, emergency preparedness, employee matters, and insurance coverage.

Acquisition Agreements. Buyers and sellers should expect increased negotiation over risk allocation. Acquisition agreements may include expanded representations and warranties, interim operating covenants, earn-outs, additional closing conditions, termination rights, and special indemnification provisions addressing COVID-19-related findings.

Financing. Buyers should confirm that attractive long-term financing remains available before committing to a transaction. Lenders may impose additional underwriting requirements or modify financing terms as market conditions evolve.

Business owners should work closely with experienced M&A advisors throughout this period. Professional guidance can help navigate market volatility, manage transaction risk, and position a company for a successful sale when conditions improve.

The Doomsday Ratio

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Is your company prepared to survive a doomsday scenario? Economic uncertainty can emerge quickly and challenge even well-managed businesses. Without meaningful financial measurements, business owners may struggle to understand how their companies are truly performing.

Financial ratios provide objective benchmarks for evaluating a company’s financial health. They convert information from the income statement and balance sheet into standardized measurements. Owners can compare those measurements over time, against competitors, or across the broader industry. These comparisons often reveal strengths, weaknesses, and trends that traditional financial statements may not immediately identify.

Liquidity ratios deserve special attention during periods of economic uncertainty. These ratios measure a company’s ability to satisfy short-term obligations without raising additional capital. Strong liquidity provides flexibility, supports daily operations, and helps businesses withstand unexpected disruptions.

Common liquidity ratios include the current ratio, quick ratio, days sales outstanding, and the Doomsday Ratio. Each ratio measures liquidity from a different perspective and provides valuable insight into financial stability.

The Doomsday Ratio offers the most conservative measure of liquidity. It assumes the worst possible operating environment and ignores every current asset except cash and cash equivalents. The ratio is calculated by dividing cash and cash equivalents by current liabilities. The result indicates whether available cash can satisfy short-term obligations without relying on receivables, inventory, or external financing.

The Doomsday Ratio becomes even more valuable when tracked over time. A declining ratio may signal increasing financial pressure before more serious problems develop. An improving ratio may indicate stronger cash management and greater financial resilience.

No single financial ratio tells the entire story. Business owners should evaluate multiple ratios together and consider industry benchmarks when assessing financial performance. An experienced M&A advisory team can help interpret these measurements, identify potential risks, and recommend strategies that strengthen financial performance before a crisis occurs.

Private Capital Markets: Is Now the Time to Sell?

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The private capital markets are experiencing strong transaction activity, favorable valuations, and significant demand for quality middle market companies. For business owners considering an exit, current conditions deserve careful attention. Robert T. Slee, an investment banker and influential author, examines private market cycles in Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests. Slee’s research suggests that U.S. private markets operate within approximately ten-year transfer cycles.

According to this framework, the market currently favors sellers. Strong earnings, available financing, and significant buyer demand continue to support attractive valuations for quality businesses. However, favorable market conditions rarely continue indefinitely. Slee’s market-cycle analysis suggests this seller’s market may begin weakening toward the end of 2017. Thereafter, the market could enter a period of uncertainty through approximately 2020. The framework anticipates a buyer’s market following that neutral period. Under this scenario, weaker conditions could continue through approximately 2023 before the cycle begins strengthening again.

Meanwhile, several factors continue supporting today’s active M&A environment.

Private equity groups maintain substantial capital (“dry powder”) available for acquisitions and continue pursuing quality companies. In particular, they seek businesses with sustainable cash flows, strong management teams, defensible market positions, and meaningful growth opportunities. At the same time, strategic buyers continue using acquisitions to supplement organic growth. Acquisitions may provide immediate access to customers, geographic markets, products, technologies, employees, and other strategic capabilities. Demographic trends create another important consideration within the private capital markets. A significant population of middle market business owners are approaching traditional retirement age. Consequently, more owners may pursue liquidity and succession strategies during the coming years.

An increasing supply of businesses for sale could eventually affect market dynamics. More sellers competing for buyer attention may place pressure on valuations, particularly if economic conditions or financing markets weaken. For business owners, these trends reinforce the importance of early exit planning. Preparing a company for sale may require several years of deliberate work. Owners should strengthen earnings, develop management, diversify customers, improve financial reporting, and address identifiable business risks. They should also establish realistic valuation expectations and clearly define their personal and financial objectives.

No business owner can perfectly predict the next market cycle. Nevertheless, understanding conditions within the private capital markets will help owners make informed decisions about timing. For owners considering an exit within the next several years, 2016 provides an important opportunity to evaluate their alternatives. Early preparation creates flexibility and positions owners to act while market conditions remain favorable. Whether it’s selling to a private equity group, a strategic, or watching your “baby” flourish, Allston Advisory Group has the experience to assist you with the desired transaction for your business.

NACVA’S 2015 40 UNDER 40 HONOREES!

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Allston Advisory Group is pleased to announce that Senior Managing Director Nolan K. Kapp has received national professional recognition. Specifically, the National Association of Certified Valuators and Analysts, (“NACVA”) has selected Kapp as a 2015 NACVA 40 Under 40 Honoree.

NACVA recognizes emerging leaders throughout the business valuation and financial consulting professions. The program identifies professionals who demonstrate achievement, leadership, professional expertise, and a commitment to advancing their respective fields.

In particular, the NACVA 40 Under 40 program highlights professionals who have established themselves as emerging leaders before the age of 40. Honorees represent different areas within valuation, financial consulting, litigation support, accounting, mergers and acquisitions, and related advisory services.

ABOUT NOLAN K. KAPP

Kapp serves as Senior Managing Director of Allston Advisory Group, an independent mergers and acquisitions advisory firm. In this capacity, he advises privately held companies on mergers and acquisitions, business valuations, and exit strategies. At Allston, Kapp works closely with business owners preparing for significant financial and ownership transitions. His responsibilities include financial analysis, business valuation, transaction preparation, buyer identification, negotiations, due diligence, and transaction execution. Beyond technical expertise, successful advisory work requires an understanding of each business owner’s individual objectives. Accordingly, Kapp focuses on developing transaction strategies that reflect both financial considerations and the owner’s broader goals.

ABOUT ALLSTON ADVISORY GROUP:

At the same time, the recognition reflects Allston Advisory Group’s commitment to providing disciplined financial and transaction advisory services. The firm serves privately held, lower middle market companies across numerous industries throughout the United States.

Notably, NACVA and the Consultants’ Training Institute emphasize professional excellence, technical quality, leadership, and innovation within the financial consulting profession. Through these efforts, the organizations bring together professionals from across the valuation and advisory communities. Throughout 2015, NACVA will recognize the honorees through several of its professional publications and communications. Among them, featured outlets will include The Value Examiner, QuickReadBuzz, Association News, and other NACVA distributions.

Taken together, NACVA 40 Under 40 recognition represents a significant professional achievement for Kapp and Allston Advisory Group. Moreover, it reinforces the firm’s continued commitment to serving business owners through complex valuation and M&A decisions.

2014 M&A Market: What Deal Multiples Reveal About Business Value

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The 2014 M&A market continued to provide favorable conditions for many middle market business owners considering a transaction. Transaction activity remained strong, while reported valuation multiples increased during the second half of the year.

The Alliance of Merger & Acquisition Advisors (“AM&AA”) represents professionals serving the middle market mergers and acquisitions industry. Each year, AM&AA surveys its membership regarding completed transactions and prevailing market conditions. Through its Deal Stats Transaction Survey, AM&AA gathered information about sell-side transactions completed during the second half of 2014. The survey examined transaction volume and multiples of earnings before interest, taxes, depreciation, and amortization (“EBITDA”).

Encouragingly, both average and median EBITDA multiples increased during the survey period. The average multiple increased from 5.52 times EBITDA to 5.64 times EBITDA. Similarly, the median transaction multiple increased from 5.12 times EBITDA to 5.37 times EBITDA. Deal activity also increased, while overall transaction dollar volume remained above historical levels.

The survey reported the following average EBITDA multiples by industry:

  • Construction – 4.87x
  • Manufacturing – 5.68x
  • Wholesale Trade – 6.54x
  • Retail Trade – 6.02x
  • Professional Services – 5.32x

Of note, these industry averages provide useful market observations rather than predetermined valuation benchmarks. Individual companies may transact above or below these multiples based on their specific characteristics. The survey also identified a positive relationship between transaction size and EBITDA multiples. Generally, larger companies attracted higher valuation multiples than smaller companies.

Furthermore, company revenue showed a similar relationship with transaction multiples. These findings reflect the advantages that buyers may associate with greater scale, market position, and organizational depth. More revealingly, AM&AA members identified growth opportunities and buyer synergies as principal reasons for higher EBITDA multiples. Those findings demonstrate why buyers evaluate much more than historical earnings when determining value. A strategic buyer may identify opportunities to expand products, eliminate overlapping costs, or enter new markets through an acquisition. Correspondingly, those opportunities may allow the buyer to justify a higher valuation than another prospective purchaser.

For business owners, the 2014 M&A market reinforces a fundamental principle of preparing for a sale. Strong EBITDA matters, but the quality and future potential of those earnings also influence buyer interest. Owners should focus on sustainable growth, scalable operations, strong management, and defensible competitive advantages. An experienced M&A advisor will then position those attributes effectively within a competitive sale process.

Babson College’s 2013 Middle Market/Small Business M&A Survey

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Babson College recently examined the conditions shaping mergers and acquisitions for small and middle market businesses. Professor Kevin J. Mulvaney directed the research with participation from M&A advisors, bankers, and other transaction professionals. The survey evaluated trends affecting buyers, sellers, financing, valuations, and transaction execution.

The 2013 Middle Market M&A Survey described a market that had improved considerably following the recession. However, economic uncertainty continued to influence transaction activity. For business owners considering a sale, several findings stood out.

First, the survey characterized the environment as a seller’s market for quality companies. Strong businesses could attract buyer interest, but preparation remained essential. The same conditions did not apply equally to underperforming companies. Buyers remained selective and placed greater emphasis on sustainable earnings, growth prospects, and business quality.

Deal execution also required patience. The survey reported that transactions commonly required six to nine months from serious negotiations through closing. Some respondents expected timelines to extend another month or two. Buyer due diligence contributed to these longer timelines. Buyers increasingly used experienced teams to examine financial performance, revenue trends, and future growth potential.

Another finding involved seller participation in smaller transaction. As company size decreased, buyers generally demanded greater seller assistance. That assistance could include earnouts, deferred consideration, employment, consulting, or other continuing involvement. At the time, deferred consideration averaged approximately 20 percent of the purchase price in surveyed transactions.

Financing conditions were also improving. The survey identified greater middle market lending availability and a rebound in SBA-guaranteed acquisition financing. Meanwhile, mezzanine debt yields had declined to approximately 12% – 14%. Historical averages had previously ranged from approximately 15% – 20%.

Taken as a whole, the 2013 Middle Market M&A Survey delivered a straightforward message for business owners. Favorable conditions alone did not guarantee a successful transaction. Quality companies still required careful preparation, realistic expectations, and experienced transaction guidance. Sellers also needed the information and responsiveness necessary to withstand increasingly thorough buyer due diligence.

For owners considering a future capital event, the survey supported planning well before entering the market. Preparation allowed sellers to evaluate alternatives and approach potential buyers from a stronger position.

UNDERSTANDING CAPEX & MULTIPLES?

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Currently, in the M&A community, discussions regarding the purchase price of a target company are most often expressed as a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization). If EBITDA is the benchmark, what is the justification for such a wide range of transaction multiples from 3-4-5 to 8-9-10 in the same or different industries? It is particularly important that buyers and sellers understand the concept of actual free-cash flow. The most accepted measure of free-cash flow is EBITDA less Capital Expenditures (EBITDA-CAPEX).

When considering an acquisition, the analysis of CAPEX is essential. CAPEX may be separated into two categories:

  • Immediate expenditures required to bring the operating assets into good working order; and
  • Ongoing annual, recurring reinvestments for existing operations or for revenue and earnings growth.

The choice of multiple(s) depends on the nature of the business. Service companies normally require very little capital re-investment, and as such, EBIT (Earnings Before Interest & Taxes) is an appropriate cash flow metric. For capital intensive businesses, EBITDA-CAPEX is more appropriate, since it accounts for the necessary capital reinvestment to maintain and grow the business.

Allston Advisory Group is an experienced boutique M&A advisory firm providing a variety of services to lower middle market companies. See our footer for contact information.

(502) 742-2933
[email protected]
P.O. Box 21266, Louisville, KY 40221

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