Sellers' FAQ

How does the process of selling my business work?

The sellside process typically has six phases, some of those phases taking place in parallel with each other while others have a linear relationship. Each phase has numerous deliverables and key risks that need to be avoided. Click here to see a macro level overview of the six phases of the process.

What is the one misperception that I should be aware of when thinking about selling my business?

The most common misperception that we come across is that an investment bank’s primary/sole role is to find a buyer. Identifying potential buyers is simply just one aspect of many milestones that need to be met in order to achieve a successful liquidity event. Using the 80/20 rule, identifying potential buyers is just 20% of the value an investment bank should add.

If you have the resources we do, identifying the buyers is the (relatively) easy part. After the buyers are identified, every deal is at risk of falling apart depending upon how an investment bank positions the company within its marketing collateral, how the diligence process is managed, how the deal is structured, which of the different valuation methodologies are utilized, how the deal is ultimately funded, and how the negotiation of the closing documents unfold.

Whether you work with us or some other investment bank, we would strongly encourage you to invest in the process and avoid the landmines by engaging a credible investment bank. There are a number of other investment banks out there that will brag about their ability to reach a broad number of potential buyers. We agree that is important and we have invested the necessary resources to offer global reach to our clients. However, it is just as important for a business owner to have faith in their investment banking team’s ability to navigate around the all too common pitfalls that cause deals in the lower-middle market to fail well after those buyers have been identified.

How do I know if this is the right time to sell my business?

There are several specific considerations that we discuss with prospective clients in order to help determine whether or not the timing is right for them to pursue a liquidity event. These considerations include certain items that have to do with (i) macro-level market considerations, (ii) micro-level business considerations, and (iii) personal goals.

In order to help determine if your personal goals are aligned with where the market is today, we will build a custom M&A Activity Report that is specifically designed for your business. This M&A Activity Report analyzes what other companies (comparable to yours) have recently sold for, who the buyers were, how the deals were structured, how large a buyer universe exists for your business, how buyer activity is trending, how the sellside process works, various diligence points buyers will be interested in, and much, much more. With this data at your fingertips, it allows you to make an informed and calculated decision on what you can expect if you were to go to market over the near-term.

We then will discuss certain micro-level considerations that have to do more with your business. There are certain characteristics that lower-middle market buyers want to see and we can help you determine if you currently meet those criteria, or if there are certain business-related initiatives you should consider implementing before going to market.

Finally, and in light of the first two steps above, we will conduct a deeper dive into the financials and sensitize various analyses to determine how your personal goals compare to the macro-level data from the M&A Activity Report and the micro-level drivers of your business (e.g. revenue growth, future backlog, margins, management bench strength, proprietary processes, etc.). If all of these considerations are aligned, it could make good sense to pursue a liquidity event. In the case where there is any misalignment, we can help you identify those specific areas of opportunity and advise you on what we would suggest you consider changing prior to going to market.

It is not uncommon for us to advise companies to push off their go-to-market strategy. We are in the relationship business and we have found the longest lasting relationships are ones that are founded on transparency. We will shoot you straight and tell you what we believe you need to hear, versus what we think you may want to hear.

The first step is getting to know each other a little better and that begins with exploring whether or not an M&A Activity Report makes sense. For companies who meet certain criteria that we look for in a client, we will not charge them a dime for this report. If you are interested in exploring whether or not  the time is right to sell your company, we could assemble a custom M&A Activity Report for you. To determine if you qualify for this free report please click here.

What makes The Capital Corporation unique?

We have 13 unique differentiators over other investment banks that also provide their services to companies with $10 million to $100 million in revenue. These differentiators have driven meaningful value into the transactions for the benefit of our clients. Click here to see these 13 differentiators.

What makes it so complicated to get deals done in the lower-middle market?

Over the last 20 years, we have found that it requires a specific skill-set, network, and approach to successfully close M&A transactions with companies that have $10 million to $100 million in revenue.  

There are often two kinds of challenges that an investment bank needs to avoid in order to drive its clients’ transactions to a successful close. These challenges often include (i) company-specific and (ii) process-specific challenges.

Many companies of this size represent fantastic businesses that are often transitioning into a new phase of growth. However, this growth and opportunity associated with the lower-middle market is often accompanied with certain challenging characteristics that many larger companies do not have. Thus, with respect to the company-specific challenges, some examples of these characteristics that are common in the lower-middle market might be customer concentration issues, supplier concentration risk, non-audited financials, limited bench strength at the management level, and so on. Through decades of experience specializing in the lower-middle market space, we have identified the best practices in how to mitigate these risks as well as the buyers that are comfortable with them.

With respect to the process-specific challenges, our typical sell-side process in the lower-middle market takes 9 or so months, requires 72 unique steps, and results in dozens of deliverables. Within this process there are over a dozen common pitfalls that can derail the process. Not only have we identified these process-related landmines, but we have designed our proprietary, 72-step process in order to avoid these risks. With a time-tested process and a deal team consisting of investment bankers with blue chip backgrounds, our clients are positioned to have a higher probability of close than they may have elsewhere.  

The results speak for themselves, with our close rate believed to rank in the top quartile of all investment banks in the country.

How do I maintain confidentiality when selling my business?

In our business, maintaining confidentiality is of the utmost importance. We take numerous precautions in order to minimize any risk of your competitors, employees, customers, etc. discovering that one of our clients is pursuing an exit strategy.  

These precautions include everything from establishing certain communication protocols (e.g. private emails, cell phone priority, etc.) to executing binding confidentiality agreements to using the most technologically advanced datarooms that leverage encryption technology, unique identifier watermarks, the ability to disable the print and/or email functionality of posted documents, etc.  

Our ability to preserve confidential information is the backbone to our business, so we are highly sensitive to this dynamic. Our current clients, past clients, and 20-year track record can speak to our ability to maintain confidentiality. 

What kind of buyers might be interested in my company?

There are generally three categories of buyers: (i) financial buyers, and (ii) strategic buyers, and (iii) individual buyers. For each of these three buyer groups it is important to explore both domestic and international buyer prospects.

Financial buyers typically refer to private equity funds that have raised a significant amount of capital for the sole purpose of acquiring private businesses, such as yours. There is currently over $400 billion of capital that has been raised by private equity funds in the U.S. that has not yet been used to acquire private businesses. This is a record amount of capital that hasn’t yet found a home. From an international private equity perspective, there is a meaningful amount of capital residing in Europe and Asia. Among financial buyers, there are a number of different subcategories, each of which has its own implications on how our client’s business will be treated post-transaction. Within the private equity landscape are domestic funds, international funds, search funds, family offices, and angel networks. Members within our team have been private equity buyers, which offers us excellent insight into their valuation, diligence, structuring, and negotiating methodologies as well as a robust network of contacts within the industry.

Strategic buyers refer to other operating companies, that provide either products or services, like you. They are referred to as “strategic” buyers in that their acquisition of your company would offer them certain strategic value to their business (e.g. cross-selling opportunities, the acquisition of key customer accounts, a new geographic footprint, an enhanced brand, etc.).  Members of our team have also been strategic buyers, which affords us a first-hand appreciation of how strategic buyers will conduct their buy-vs-build analyses, how integration plans can affect valuations and structures of deals, and so on.

Individual buyers refer to individuals who have an appetite to acquire a business. These may be individuals who recently sold their business and are now looking for another business. Members of our team have also been individual business owners, with over 30 current/past owner/operator positions in private companies, providing us with an excellent network of entrepreneurs who have an appetite to acquire lower middle-market businesses.

In order to maximize access to all three buyer categories above, it is important to have an investment bank that has cross-border reach and expertise. Our team offers this global M&A experience having been involved in transactions in the U.S., Canada, Mexico, Europe, and Asia.

In order to help determine what specific buyers may be interested in your company, please contact us and ask about our M&A Report that we can provide your company.

How long does the process of selling my company typically take?

If executed correctly, a typical sellside process takes roughly nine months from start to finish. It can take as little as six months, if certain measures are taken. With that said and for strategic planning purposes, we ask our clients to assume it will take 12 months and then we aim to beat that timeline.

Selling a company is a process, not an event. It takes time. As a point of comparison, when launching a business it required you to initially invest weeks into strategic planning and then subsequently months into executing your business plan. Along those same lines, it merits the same approach when exiting your business and creating a liquidity event…Weeks of strategic planning and then months of executing that plan.  We encourage our prospective clients to allow us to invest the same level of strategic thinking and effort into their exit as they did years ago during their initial entry.

Selling your business will likely be one of, if not the, most important financial transaction of your life. We would encourage you to do it right and not cut corners and we would welcome the opportunity to help you appreciate some of the key considerations you should be aware of.

What are some of the structural considerations that we could encounter in a transaction?

There are various structural considerations that we have seen come to fruition in past transactions. Each transaction is unique and requires the flexibility and resources to adapt accordingly. However, several structural considerations that are not uncommon in the lower-middle market industry are provided below:

Asset vs Stock Sale:
There are a number of tax- and liability-related implications behind how the acquisition of our client’s business will be structured, with respect to it being either an “asset purchase” or a “stock purchase." In short, most buyers will likely prefer to pursue an asset purchase when acquiring our client’s businesses, versus a stock purchase. The structuring of a transaction is a point of negotiation and, if executed properly, the economic trade-offs/implications between these two structural options will be reflected in the adjusted consideration for the company. If you’d like us to get you greater detail on this structural consideration, and its tax and liability impacts, please contact us.

Retrospective C-Corp Taxation: When a C-corp is converted into an S-corp, there is a 10-year window from the time of conversion where that entity will continue to be taxed as a C-corp for any “built in gains." All other non-built in gains items will be taxed as an S-corp following the conversion. If one of our clients recently converted into an S-corp, they should consider the trade-offs of postponing the sale of their company if they were interested in avoiding this incremental, “double” tax.

Earn-Outs: Some buyers will offer to acquire our clients’ businesses with 100% of the consideration paid in cash, upfront at the time of closing. On the other end of the spectrum, some buyers will prefer to offer a portion of the total consideration for our clients’ businesses upfront while deferring the balance of the consideration, often in the form of an “earn-out” (and sometimes a seller note or another deferred method). As with an asset versus stock sale, this earn-out vehicle also remains a point of negotiation and there are various tactics we can take to help mitigate this approach by buyers. Earn-outs are designed to lower the level of execution risk for buyers (e.g. due to a number of possible reasons, including customer concentration risk, new market risk, overall performance risk, the risk of key personnel turnover, etc.) by paying the seller a portion of the consideration to the owners of our clients over time, as the company achieves certain milestones in the future. One of the key considerations when analyzing earn-outs are the mechanics of how the earn-outs are structured, with respect to term and triggers. From a term perspective, earn-outs are not typically longer than three years. From a trigger perspective, there are certain mechanics you want to avoid in order to increase the probability of reward/collection. Based on these mechanics, how earn-outs are documented and tracked is highly important. It’s also worth noting that the use of earn-outs are more common with financial buyers than strategic buyers, so the probability of our offers including earn-outs will differ, depending upon the buyer type and our go-to-market strategy. The percent of the consideration that is ultimately allocated to an earn-out is on a case-by-case basis and is largely dependent upon the buyer’s perceived risk in the transaction.

Escrow Account:
It’s not uncommon for a buyer to request an escrow account, perhaps for 5%-10% or so, of the consideration in order to ensure there are no surprises post-closing. These funds typically are not locked up for long, but it’s something to be aware of.

Cash vs Stock Proceeds:
On occasion, strategic buyers will include equity and/or options as a component of the consideration for our clients’ businesses. The strategies behind this approach can be several fold, including your alignment of future interests with a seller, a vehicle to help incent the seller’s management to remain with the buyer, etc. If options are included in an offer, we’ll run a Black-Scholes model to determine their projected value. If equity is included, we’ll want to take a hard look at some of the terms, such as the lock-up period, drag along rights, tag along rights, etc.

Valuation:
When it comes to buyers valuing our clients’ businesses, we will be in a position to run various discounted cash flow analyses to validate/invalidate buyers’ offers. Before going to market, we will reverse engineer how buyers will likely value our clients’ businesses, based on the projections we decide to eventually provide. This approach allows us to sanity check our projections, before we provide them to buyers, and to make sure they are aligned with your exit goals (i.e. it helps us indirectly drive offers towards our goals). As buyer dialogue unfolds and offers are received, we will aim towards quantifying any cost synergies, cross-selling synergies, etc. that might increase a buyer’s ability to pay a premium for our clients’ businesses. Given our deal experience as well as our previous experience of serving as buyers of private companies in the past, we are in an advantageous position to keep the buyer’s offers honest, as we’ll have a good sense of how they will have arrived at those values. As we get into the negotiations with buyers, maintaining a sense of competitive tension in the process (via utilizing the best practices from our Wall Street background) will help drive up the values resulting in two phases of offers (initial Indications of Interest and then Letters of Intent).

Equity Roll-Over:
If the buyer of our clients’ businesses is a financial buyer (i.e. a private equity fund), it is not uncommon for them to ask  key members of management to “roll over” a portion of their proceeds into equity of the Newco going forward. The strategy behind this equity roll-over approach is to allow you to monetize a significant amount of your equity via the sale of your company, but to not take all of your chips off of the table. By asking you to retain a portion of your proceeds in the Newco, the private equity buyer helps align your interests with theirs. It wouldn’t be uncommon for a financial buyer to ask you to roll over 10% or so of your equity into Newco. It’s also worth noting that you could be awarded additional options on top of that roll-over and/or in absence of any roll-over (as not all private equity funds will ask for this). For those owners willing to stay on board post-transaction, it can afford them a nice opportunity to monetize their equity in their company now and then “double dip” by securing additional upside with Newco via an option award. The option/ownership pool for management is typically 10%-20% for private equity-backed companies.

Bahamas or Drive Growth Forward:
Some buyers will strongly prefer you to stay post-transaction and help take your company to the next level with their backing – In this case, we will make sure we structure certain language in your employment agreements (such as severance compensation being commensurate with whatever non-competition period they request, etc.). Other buyers will be comfortable with freeing you up to pursue other entrepreneurial interests (albeit you will be required to sign a non-compete/non-solicitation agreement, etc.). And some buyers will prefer a “hybrid” approach where you may be asked to serve as a consultant, versus an employee, for a certain time. Regardless, it is not uncommon for buyers asking you to help in some form during a transition period, which could range from 12 months to 18 months.

These high-level thoughts are not intended to be, nor should it be utilized by you, or your company or anyone, as legal, tax, or accounting advice or services from The Capital Corporation.