Mergers, Sales, & Acquisitions Demystified in a Post-Pandemic World
A quick guide to M&A in the post-COVID world and what to look for in today’s transactions
It is impossible to downplay the fears that arose once the Coronavirus pandemic hit. Almost every country in the world experienced lockdowns, and it became difficult to travel even to a neighboring state. Some businesses did not survive the challenges that COVID-19 presented as they closed shop or furloughed their employees.
In the HVAC world, things did not seem as bleak as they were in other industries. One of the main reasons for this was that people were staying home more and needed HVAC and plumbing services.
Companies that invested in rigorous marketing during this period got quick results as people were watching more media and responded to their advertising. In turn, the financial resiliency of plumbing and HVAC firms began to attract several investors and potential buyers. An industry that was historically considered non-attractive was proving to be sexy overnight.
Your firm may be buoyed by those same forces and either in the marketing to grow or be acquired. This article will help guide you through mergers, sales, and acquisition in a post-pandemic world.
5 things to look out for in a business sale or transaction
If you have worked on building your business for a significant portion of your life and think it’s time to sell, it is important to get the right price and terms in exchange. Selling a successful business is not as simple as selling some land or building. You may have a friend that got a nice offer, but that does not mean that you will automatically get one too. Here are a few things to consider when looking to relinquish control or sell your business.
1. Know what your business is worth
One of the most important things you should keep in mind is the value of your business. A lot of businesspeople have no clue what their business is worth. It can be difficult to keep track of the value of your business, especially if it grew pretty quickly. This is dangerous when you look to sell because trusting the value private equity investors offer you will always get your business undervalued.
Brian Cohen, a business strategist at SF&P Advisors, talked about the complexities of business valuation in a recent podcast: “There is a set of rules that private equity plays by. And they're asking us, as an HVAC contractor, to play by those same set of rules. Well, the difference is, I play by the HVAC contractor set of rules, not the private equity side rules. So, if you don't understand what that means, you can get hurt in some of these deals.”
Knowing the worth of your business protects it and allows you to get full value in a sale.
2. Define your EBITDA
It is equally important to understand your business’s financial performance, as that will contribute to your final price, too. Simply put, EBITDA is an acronym that stands for Earnings Before Income, Taxes, Depreciation, and Amortization. This metric helps define performance, and buyers use it to determine if the business is well-run. Starting without an EBITDA or with a wrong figure will often mean you get a raw deal. Considering bringing in the services of professional M&A advisors if you are unsure how to calculate this metric or other key performance indicators.
3. Watch out for add-back expenses and earn-out deals
If you do not have someone to guide you in business sale negotiations, you can easily forget about add-back expenses. Add-back expenses are those that only occur once, and the buyer of the business will not have to incur them. However, these investments should be part of the valuation when selling your business.
Similarly, you should be careful about earn-out deals. These are conditional considerations that a private equity firm may choose to pay you if you hit a certain EBITDA. While these considerations may seem attractive or even lucrative, they will put a chokehold on you. For example, you may get an $8 million deal and an earn-out of $1million each year for the next three years. What you don’t know is that your business value may be higher than what they are offering. It also puts golden handcuffs on you, which may not be suitable if you wish to be free to pursue other activities after selling your business.
4. Recruit a deep management team
In the event of a merger, sale, or acquisition you will need to set up a deep management team. This team will ensure that things run smoothly even when you are not around. According to Cohen, “One of the ways you [make sure the business runs smoothly after a sale] is by having a deep management team in place, so the business is not purely dependent upon you. There are managers in place. [Buyers] love to see a scenario where the owner is in there 20 hours a week. He's taken a lot of vacations, which means the business is not dependent upon the owner. They'll pay that owner handsomely.”
5. Consult professional advisors
Selling a business is a complicated affair. Anyone that tells you otherwise is trying to pull a fast one on you. A trusted advisor will be the voice of reason amid all the emotions you will be going through when selling your company. In fact, it is not uncommon for buyers to wine and dine you as they convince you to sell to them and see things their way. Professional advisors will save you lots of time and money on deals by bringing objective expertise into your negotiation. They will ensure you do not have any regrets, even if you decide to sell whole or part of your business.
SF&P Advisors are all you need in mergers, sales, and acquisitions
Selling your business will take months, and may even take years before a deal is complete. You must get the right team of professionals on your side during this period. This will save you time, effort, and get you a better deal for you in the end. At SF&P Advisors, we have helped hundreds of businesses get the best deals during mergers or acquisitions. You do not have to walk alone when selling your business. Simply contact us for a quick consultation.