Frequently Asked Questions

Buyers generally fall into one of three categories. These are: 

1. Strategic buyers – Strategic buyers are usually other operating companies. They buy for assorted reasons including accelerating growth, acquiring new products, gaining quick entry to new markets, or eliminating or preventing competition.  Strategic buyers rarely buy Main Street (small) businesses.  We think of Main Street businesses as those having less than $5,000,000 in annual revenue.
2. Financial buyers – Most financial buyers are institutional in nature. They may be a private equity firm or a family office.  Traditional private equity firms (aka funds) buy for the purpose of making money when they sell the company in the future, often in three to five years.  In the interim, they plan to enhance the value of the company by improving management, eliminating waste, providing growth capital, or merging the company with another.  Family offices manage the assets of very wealthy families.  They generally seek to profit by owning well-performing companies for the long haul.  A family office’s investment strategy is less likely to focus on selling the company for profit in a few years.  Like strategic buyers, financial buyers are unlikely to buy Main Street businesses.
3. Individuals – Individuals are most likely to buy Main Street businesses. This is simply because most individuals do not possess the ability to fund larger acquisitions.

M&A advisors, also referred to as M&A intermediaries or business intermediaries, try to match businesses for sale with possible buyers.  M&A advisors typically deal with “lower middle market” or “middle market” companies.  Although there are no hard and fast definitions, we think of lower middle market companies as those having $5,000,0000 to $75,000,000 of annual revenue and middle-market companies having annual revenues between $75,000,000 and $500,000,000. Transactions involving these companies are often more complex than those involving Main Street companies. A more sophisticated approach to marketing, valuation, and transaction structuring may be required for a lower middle market or middle-market transaction.

M&A advisors provide a variety of services to buyers and sellers. These services can include:

• Valuing the business
• Preparing the pitch book or confidential information memorandum
• Identifying and approaching prospective buyers or sellers
• Controlling access to a seller’s proprietary information and data
• Arranging, moderating, and leading discussions between buyers and sellers
• Negotiating purchase and sale agreements (and other deal-related agreements)
• Performing or assisting with due diligence
• Resolving transaction issues that inevitably arise throughout the process.

A basic definition of a business broker is an individual that helps people buy and sell Main Street businesses, those with revenues less than $5,000,000. The majority of Main Street businesses have annual revenues of less than $1,000,000.  Business brokers are often compared to real estate agents. In nineteen states, business brokers are required to have a real estate license.  Florida is one of these states.  Just as real estate agents estimate the value of a property to help establish a listing price; business brokers estimate the value of a business to establish a listing price. Real estate agents advertise properties on MLS (multiple listing service) or in print media; business brokers advertise companies and business opportunities online or in print media.  Further, both usually work for a commission.

A merger is the combining of two companies into a new company.  The owners of the combining companies receive stock in the new company.  An acquisition is the purchase of one company by another.  A new company is not formed.  The owners of the purchased company may or may not receive stock in the acquiring company as part of the sales price.

What you receive for your company is called “consideration”. Consideration can be anything to which you ascribe value.  Although most people would like to receive 100% of their consideration in cash at closing, it often doesn’t happen.  Rather, sellers are often paid with a combination of some or all of the following: cash, notes, buyer’s stock, earn outs, and consulting agreements. There are legitimate reasons for each of these, and some combination of some or all of them can often satisfy both buyers and sellers. 

The reality is that unless your buyer is named Amazon, Google, or Apple they probably won’t have sufficient cash to simply write a check. Even if they do, it might not be prudent to do so because, for example, doing so might strain working capital resources needed to meet day to day business needs.

There are several reasons you might agree to accept notes from your buyer.  Depending on how the notes are structured, you might qualify for installment sale treatment and defer payment of some taxes.  The notes can also pay you interest at regularly scheduled intervals.  Accepting notes might allow your buyer to avoid bank financing.  Sometimes involving a bank complicates a transaction because of the bank’s own requirements.  Further, agreeing to accept notes may provide an opportunity to negotiate a higher sales price.  Regardless, if you accept notes, try to have them collateralized or guaranteed.

If you receive stock in the buyer in as payment for your company, you won’t owe tax on the stock received until it is sold. Before agreeing to accept stock, you should consider whether the buyer is a publicly-traded company or a privately held company.  Stock in a public company liquid, it can be easily converted to cash.  Stock in private companies is usually far less liquid or even illiquid.  It is not easy to convert to cash. Therefore, if you accept private stock as consideration require a put option. A put option allows you to require the buyer to redeem your stock at a defined price at some point in the future.  This is called exercising the option. Your risk is whether the buyer will be able to meet the obligation when you exercise the option.  You may also agree to accept stock if you believe the buyer will thrive and succeed in the future and you want to participate in the success.

An earnout is a mechanism that makes additional or future payments dependent on the buyer achieving defined goals in the future. Earnouts are often used to bridge gaps between buyer’s and seller’s opinions of value. An earnout might also motivate a seller to continue working in the business post-sale to help in the transition period. For example, if the business makes at least $5,000,000 of net income in the next fiscal year, you receive 20% of the net income.  If the business makes less than $5,000,000 you do not earn 20% of net income. This is a very simplistic illustration.  You should consult with your advisors before accepting an earnout as part of your deal.

Consulting agreements are another way of receiving consideration over time. The buyer will pay you a fee in exchange for consulting on matters related to the business.  The fee is typically paid on a regular basis, i.e. monthly or quarterly, for a pre-determined period of time.

EBITDA is a very common acronym in corporate finance. It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is a measure of the cash generated from the company’s core business; it is an illustration of a company’s ability to generate cash flow for its owners. EBITDA = Net Income – Interest Income + Interest Expense + Taxes + Depreciation + Amortization.

Adjusted EBITDA is often referred to as normalized EBITDA. It is EBITDA adjusted for unusual or nonrecurring expenses that are included in the income statement. Examples of expenses that should be added back to EBITDA to arrive at adjusted EBITDA include the one time cost of settling a lawsuit, costs related to operating facilities that will not be incurred post-acquisition, excessive owner compensation, and owner’s personal expenses that are buried in the income statement.  Examples of the latter include country club dues, automobile expenses, and premiums for key man life insurance.

M&A advisors and brokers typically earn all or most of their compensation through success fees. If they succeed in finding a buyer and closing a sale, they earn a percentage of the sales price.  The success fee can range from 3% to 10% and is dependent on a number of things.   While this may sound like quite a spread, it is important to understand that it can easily take the same effort to sell a $5,000,000 company as it takes to sell a $30,000,000 company.  The ability of your staff to meaningfully contribute to preparing and presenting due diligence materials, assembling deal books, and responding to prospective buyers’ questions impacts the fee.  A distressed business or a company in a declining or out of favor industry may demand a higher fee than a highly profitable business in a hot industry.  In addition to success fees, you might also pay a retainer.  The retainer may be paid upfront or monthly.  Depending on the assignment, the broker may agree to apply the retainer to any commission earned. 

In addition to fees and commissions, other costs may be incurred.  These include attorney’s and accountant’s fees, plus the cost of appraisals, environmental testing, and IT exams.