Blog | Dr. John Binkley Generational Equity Chairman

A New Dawn for Deal Making?

June 5, 2020 By John Binkley

Back in April, I was delighted to learn that our team at Generational Group had closed our 900th transaction in company history. At any time this would be considered a fantastic milestone to pass, and I am of course incredibly grateful to the continued hard work of our associates and the wonderful support of our clients.

For us, every one of these 900 (and counting) transactions represents a business owner that we have helped secure their financial legacy, so that they can reap the rewards of their investment into their company and enjoy life beyond business.

Yet, considering the life-altering circumstances of the last few months, this achievement has a whole different meaning to me. It demonstrated that, even in these times of hardship, where families, communities and businesses have been changed forever, the resilience and commitment of entrepreneurs continues to hold firm.

Of course, the COVID-19 pandemic has changed deal making at least temporarily, which I will explore in this article. But, it is the perseverance of the entrepreneurial spirit, particularly within the middle market, that gives me a great deal of confidence for life beyond this crisis.

Optimism for the Future of Middle Market M&A

In my previous article, I highlighted several reasons why I remain confident in the foundations of our economy and the bullishness of buyers in the face of this unprecedented challenge. And I’m happy to report that a couple of months later, nothing has dampened this feeling. If anything, it’s grown even stronger!

The robustness of our banking system continues to be a source of comfort in these hard times for individuals, families and businesses, with central banks offering reassurance that they will be introducing measures to stimulate economic growth and protect incomes.

But beyond that, I’m encouraged by the attitudes of middle market entrepreneurs and their prospects for M&A activity after this pandemic. A survey of SME owners conducted by Permanent Equity recently revealed some reassuring statistics, including:

32% of owners surveyed said their companies’ revenue had remained stable or even expanded during the pandemic
40% expect their revenue will be back to 2019 levels within 6 months of life returning to some form of normality
76% believe their business will emerge from the COVID-19 crisis stronger than before

These are great signs for the resilience of the middle market, and indicates that these companies are not statically waiting for this all to blow over – they’re adapting to the “new normal” with changes like remote working and investments in technology, which will then benefit them once we have overcome this challenge.

That’s an attitude we’ve also taken at Generational, changing our practices to protect the health and wellbeing of our associates across the country while continuing to meet the needs of our clients in these unique circumstances.

Because, particularly in the lower middle market, transactions are still moving forward. While the press will often focus on the decline in billion-dollar deals due to the uncertainty COVID-19 has caused, the timeline to deliver ROI for smaller deals is significantly longer, meaning there’s less risk associated.

But how has deal making changed in the face of this new landscape? How could this affect a business owner’s approach to planning their exit?

Exit Planning in the COVID-19 Era

When discussing how COVID-19 has adjusted the deal making process, I think it’s vital to start with how we should determine a company’s value.

Regular readers of Generational Equity’s insights will likely be familiar with recasting. That is when a professional M&A firm will examine your financials to account for any one-time expenses that would not impact on its new owners. These can include:

Losses due to fire
Losses due to employee embezzlement
Other business disruptions beyond your control (floods, earthquakes, tsunamis)
Any of your compensation that was above fair market value
Travel and vacations for you and your family that the company expensed

This is a widely-accepted process and helps provide a more accurate picture of your company’s worth for a prospective owner. However, moving forward there will be another important element to include on this list: the loss of revenue or income as a result of COVID-19.

As Northern Trust reiterates in a recent article:

Moving forward, we expect the due diligence process to include questions that help buyers better understand the specific impact of COVID-19 on the business, and its general level of preparedness for a global pandemic.

By accounting for this unprecedented disruption when recasting your company, you can offset any concerns or doubts of buyers, and also increase the likelihood that you will maximize the value of your business sale.

Furthermore, if you are able to adapt your financial forecasts to demonstrate why your business won’t be greatly impacted by COVID-19, this can give you a significant competitive edge among potential buyers. Remember, private equity firms are still sitting on upwards of $2 trillion in dry powder – this still needs to be invested, and means a well-prepared company can still secure a premium on their business.

This recognition of COVID-19’s impact on business operations has led to the expansion of EBITDA to EBITDAC:

Earnings
Before
Interest
Taxes
Depreciation
Amortization
Coronavirus

No, this isn’t a bad joke – it is a reflection of the sizable effect that COVID-19 has left on many businesses across numerous industries.

As well as the transformation COVID-19 has had on determining business valuations, it’s important to consider how deals will be structured. We’ve spoken at length in the past about earn-outs and their prevalence in deal making, but in this new environment, they are likely to become even more sought-after.

Again, Northern Trust emphasizes this point, saying:

We also expect to see buyers paying a greater portion of the purchase price in the form of an “earn-out.” We believe sellers who adjust their mindset, show a willingness to be more flexible on deal terms, and who recognize that the transaction process is going to take longer in this new environment are likely to be at a competitive advantage.

This reinforces the need to be supported during your exit planning by a professional M&A firm, because this will help prevent any earn-out from being too heavily weighted in favor of the buyer: the deal structure also needs to benefit you (the seller).

The advice of an experienced M&A advisor will also give you a clearer picture of what deal structures are more beneficial than others. This could allow you to establish an earn-out structure that is actually more financially advantageous in the long-term than a more cut-and-dry transaction

Fundamentally, we are in challenging times when it comes to deal making and exit planning. Information seems to change every hour, and it is important that, as a seller, you are working with a true professional that has experience in closing deals no matter what the economic cycle and understands how to secure an optimal deal structure.

Maintaining Your Journey to Exit

I hope this has given you a greater understanding of how M&A activity is continuing to take place, and how deal making is evolving in order to meet the challenge.

Even in these difficult circumstances, dealmakers across the U.S. are striving to help push deals over the line, including our diligent associates at Generational, and I believe this should reassure business owners about their prospects of exiting both now and when COVID-19 has passed us by.

Above all else, I hope you take away from this the value of being supported through your exit plans by an experienced firm that has managed clients through all kinds of economic cycles. In trying times such as these, it is that experience and expertise that will keep your exit plans on track and keep you on course to an effective, satisfying exit.

If you want to keep up with the latest trends and news related to the economy and its impact on your approach to exit planning, I’d recommend subscribing to Generational’s regularly updated insights.

Until next time, I’d like to wish you, your family and your business nothing but the best as we continue to manage and overcome this challenge.

COVID-19 & Focusing on the Future for Middle Market M&A

April 17, 2020 By John Binkley

In a matter of weeks, COVID-19 has changed the world as we know it in unprecedented ways. From restrictions on travel and mobility, to employees globally working remotely to bypass the pandemic, life feels like it has been flipped upside-down.

The M&A industry has not been immune to this impact. COVID-19 has been at the heart of current economic uncertainty, and subsequently this has caused deal making activity to slow in the short-term. Fortunately, at Generational Group we have continued to safely press ahead with transactions even at this tumultuous time.

As a recent roundtable meeting hosted by Axial highlighted, many deals at the Letter of Intent (LOI) stage are either pushing forward with urgency, or left on ice for the time being. While right now it is impossible to predict how long these existing conditions will remain, I am optimistic that it is a challenge we as an industry will overcome, and return to a state of ‘business as usual’ in due course.

Here, I explore my reasons for staying positive in the face of this crisis, and why I expect the M&A landscape to return to its once-thriving state when we can put these circumstances behind us.

Our economic foundations remain strong

Firstly, while COVID-19 has unfortunately resulted in numerous businesses shuttering short-term and a steep rise in unemployment, the underlying fundamentals of our economy remain strong in the face of this extraordinary challenge.

This is different from the banking/financial crisis we endured in 2008. Corporate balance sheets remain strong, interest rates are staying low and there is capital available to support business growth and acquisitions. But perhaps most importantly of all, our banking system is stable and its reserves are well above Federal guidelines.

As a result, we can be confident that our economy will hold firm against this temporary pressure, and will over time return to a positive landscape for M&A acquisitions.

In addition, the launch of the $2 trillion CARES Act stimulus package has bolstered the prospects for businesses looking to retain and take care of their employees. By providing quick funds and relief for SMEs during this time of uncertainty, this will be critical in keeping companies operational and supporting their preparations for the recovery period.

Private equity is still sitting on a mountain of dry powder

As noted, there is undoubted turbulence in the M&A market right now, and this should be expected for a little while. However, we are still seeing substantial buyer interest in spite of these challenges, which is reinforced by the capital available to these groups.

Private equity firms are a prime example of a buyer group prepared for when the market stabilizes. As Bloomberg reports, they are sitting on a $2 trillion war-chest of dry powder, all of which can exclusively be devoted to M&A acquisitions and investments. This puts them in a strong position to actively pursue opportunities as we start to recover.

Furthermore, Bloomberg’s article also notes how companies in a variety of industries will likely prove extremely attractive prospects for business buyers on the other side of the COVID-19 crisis, due to these being largely unaffected from an economic growth standpoint.

Buyers are bullish about future acquisitions

Meanwhile, Pitchbook revealed that a recent survey conducted by Ernst & Young suggested that around 56% of executives actively plan to pursue acquisitions in the next 12 months, which, remarkably, is an increase from October’s figure of 52%.

This is excellent news for business owners considering their exit plans in this uncertain state of affairs, as this demonstrates that when the world starts returning to normal, we can expect a major uptick in deal activity. Companies who have managed these circumstances and dedicated time to planning their exit strategy stand to benefit the most from this.

Plus, this is especially true for lower middle market businesses, because as Pitchbook states:

“For now, many dealmakers are forgoing transformational mega-deals in favor of smaller, discounted acquisitions.”

While the short-term vision for M&A remains a difficult prospect as buyers and sellers seek out firmer footing, these findings fill me with confidence that there will be a flurry of activity and opportunities when there is greater clarity about this entire situation.

Use this time to perfect your exit strategy

Hopefully, this has helped you join me in believing that COVID-19 will present short-term challenges for M&A activity, but will not completely compromise the optimism both buyers and sellers entered 2020 with.

While I recognize this can be difficult to visualize considering the present environment, there are reasons to be upbeat about the future of the industry – and with it, your prospects of achieving an optimal exit.

Right now, my advice to business owners is to dedicate time to exit planning, especially if this is something you’ve not commenced with already. This anticipated slowdown of deal activity in the short-term gives you the opportunity to consider your next steps and build a buyer-ready business to coincide with when the world starts its recovery.

Remember, it will take 90-120 days to complete the critical first step in your exit journey – an initial business evaluation. Starting early with your exit strategy puts you in a strong position to effectively market to buyers preparing for normalcy to resume, and will help you secure an offer that accurately reflects the value of your company.

Our team at Generational Group can support you throughout this journey, even during these challenging times. Our associates continue to operate at their typically high standards, working remotely to ensure their safety while we continue to communicate with clients digitally. These include virtual versions of our informative exit planning meetings, where our experienced advisors break down the steps to maximizing the sale of a company.

I’d urge anyone to get in touch with our team to get a head start on their exit plans while activity is on a temporary slowdown – I’ve never met someone who regretted beginning this process earlier than they needed to.
Also, for more up-to-date information on how COVID-19 is affecting the M&A landscape – and what this means for prospective sellers – make sure you’re subscribed to Generational’s insights. With news fluctuating all the time on this topic, staying informed has never been more crucial.

Managing the Difficulties of Due Diligence in M&A

February 10, 2020 By John Binkley

There’s no doubting that 2019 was a strong year for M&A activity.

Our team at Generational Group benefited from the strength of the current seller’s market, once again ranking #1 for deals closed worth up to $25 million, and #2 for deals up to $100 million. And more insights into this active year have been spotlighted in Deloitte’s U.S. M&A Trends 2020 report.

Taking insight from 1,000 executives across the U.S., Deloitte’s report presented several important points about the current M&A landscape and what we can expect moving forward, including:

63% of respondents believe transaction activity will rise in 2020
Dealmakers are shifting their attention primarily to the domestic market due to concerns over trade instability
Corporations and private equity firms have access to record-setting capital reserves
Focus is changing from large (mega) deals and is more interested in deals within the middle market

All of these factors should give business owners contemplating their exit plans confidence that they can secure an optimal offer for their company in 2020. At the same time, it reminds us that this market won’t last forever, so it pays dividends to start planning while the market is still in favor of sellers.

Due Diligence Delays?

Private%20Equity%20Add-Ons%20Record%20Pace.jpg

But, the area of Deloitte’s report I’d like to focus on in this article is the insight they offered into due diligence. Their findings revealed that 47% of executives believe the due diligence process is now longer compared to five years ago.

According to Deloitte:

“Gartner says the average time to close an M&A deal has risen more than 30 percent in the past decade.” This development may be related to the greater complexity of deals, or it may be rooted in where we are, well into a long M&A cycle, which makes it harder to find good deals. Regulatory and policy uncertainties, along with information security concerns, may also play roles in extending the due diligence phase.

If you’ve never been through M&A due diligence before, in some ways I envy you. This is the 2-3 month period where prospective buyers meticulously assess a company that they’re interested in, to reassure them that:

The information the seller presented to them in their Offering Memorandum was correct; and
There is no great risk involved in acquiring/investing into the company in question.

Risk is a word buyers want to avoid in all circumstances. Due diligence is there to uncover and evaluate any areas where this is present. And, naturally, this means this is the period of the exit journey where negotiations are most likely to collapse for a variety of reasons.

The seller may become fatigued about the unceasing questions and discussions with the potential buyers. Or a buyer could find inconsistencies in their findings from the documentation they were provided by the seller, leading to a break down in trust.

In Deloitte’s report, they have highlighted that the increased complexity of deals and trying to juggle multiple buyers at once have caused the speed of this process to falter in recent years. But why exactly is due diligence such a marathon to contend with?

The Due Diligence Checklist

When discussing due diligence, I’m always reminded of a long-established turn of phrase:

A deal isn’t really a deal until it falls apart at least twice!

At Generational Equity, navigating the potentially treacherous waters of due diligence is something we’ve become adept to over the years. While no two M&A transactions are alike, this experience is invaluable to anticipating what issues a prospective buyer may have and how to respond to these to keep a deal on track.

Still, without a clear understanding of where the typical 200-300 due diligence questions will come from, exiting business owners can easily find themselves at loggerheads with buyers.

Areas that will be interrogated during due diligence include:

General Company Information – what is your company all about?
Financial Matters – how healthy is your business financially?
Products & Services – what is your company’s offering?
Property – what property does your organization own or lease?
Customers & Revenue Streams – how diverse and wide is your customer base?
Technology & Intellectual Property – what tangible and intangible assets do you have rights to?
Strategic & Cultural Fits – are your strategies in line with the buyer?
Employee Information – what are the skills and overall quality of your existing team?
Material Contracts – what contracts and other commitments do your company hold?
Tax Matters – is your company at risk of litigation or liabilities related to tax?
Insurance Coverage – how protected is your company through its insurance?
Antitrust & Regulatory Issues – has your company been under investigation for any antitrust problems in the past?
Cybersecurity – does your business have robust IT defenses and support?
Environmental Factors – is your company’s impact on the environment positive or negative?

This is just an overview of what you can anticipate from due diligence, which makes it no wonder that this already exhaustive process has gotten longer and longer over the years. So, when you want to ensure your exit is as smooth and streamlined as possible, what steps can you take to minimize the time it takes to complete this task?

Ways to Streamline the Due Diligence Process

Don’t mislead buyers in your documentation

First and foremost, be honest and accurate in the documentation you present your potential buyers.

While it is encouraged to recast your financials to provide a true reflection of your potential to buyers, flat out lying or subverting details is a real deal-breaker – buyers will find the discrepancies and call you out. This may lead to a loss in trust, resulting in a reduced offer from the buyer, or negotiations coming to a halt altogether.

Stay organized with documents and checklists

Collating and updating your core information in your Offering Memorandum is a painstaking process, but it saves a lot of time and headaches during due diligence.

If information is incomplete or missing, buyers won’t simply shrug and move on – they’ll do what they must to get a clear picture of your company. So starting early in collecting this data will likely reduce the time a buyer takes to understand your proposition.

Be prepared to answer and address risks

No matter how thoroughly and organized you have been in the build-up to this part of the exit process, due diligence will raise questions that you will need to answer about your company.

Preparation is everything at this stage of exiting a company – undergo internal checks to get a clearer idea of what queries your company might inspire, and identify any areas of risk so they can be addressed and remedied before potential buyers bring them to the table.

Work with a professional M&A firm

Finally and arguably most importantly, don’t go into the due diligence process alone. Our team at Generational Equity have estimated it can take at least 1,000 hours of your time to go from marketing your company to closing a transaction – much of it spent in due diligence.

Working with an M&A firm will mean you’re backed by people experienced in navigating this process, so you avoid any pitfalls, are kept focused during testing periods, and ensure any areas of risk are dealt with prior to buyers conducting their checks. It’s a tough road, but it’s easier to walk with someone alongside you.

In addition, the first phase in the Generational process is a thorough and complete evaluation of your business – a “mini” due diligence. This step is critical because we ferret out many issues that need to be addressed long before due diligence is started. This is one reason why we are one of the leading middle market M&A firms; buyers have confidence that when we bring them deals that we have done our own due diligence.

Approach Due Diligence with Confidence

As the due diligence process becomes more in-depth and comprehensive, knowing what to expect and having an experienced team by your side is crucial to making this difficult portion of the exit process as efficient and well-managed as possible.

Hopefully this has provided a deeper understanding so you can approach your exit with more assurance. If you’d like to learn more about what’s involved in due diligence, there are numerous articles on this topic in Generational Equity’s regularly updated insights.

A Memorable Year in M&A – My 2019 Retrospective

December 17, 2019 By John Binkley

The end of the year is always a great time for reflection. What did you achieve in that time? What would you have done differently? What lessons can you take into the next 12 months?

When I look back on 2019 (and the end of the decade in general), words that spring immediately to mind are change. Progress. Growth. In 2010 we were still picking up the pieces following the global financial crisis, with the global M&A industry beginning to show signs of recovery.

As we approach 2020, things have almost come full circle, as we are still enjoying one of the most robust and sustained M&A seller’s markets in the past several decades. For both middle market M&A as a whole, and for our team at Generational Equity, it has been a decade of development, one that I’m deeply proud of.

Focusing back in on 2019, I’d like to use this article as an opportunity to highlight what we achieved at Generational and what these experiences have meant to me personally, as well as my thoughts on another interesting year in M&A.

Different Places, Same Goal

One of the biggest changes we faced as a company in 2019 was moving home for the first time in many years.

In August, Generational Group officially moved its corporate headquarters to the exciting, dynamic CityLine area in Richardson, Texas. Making such a major shift was not a decision we took lightly, but the additional space and its forward-thinking technology ensured it would prove an ideal environment to support our plans for growth.

Among our other ambitions for our new HQ was to create an atmosphere that would allow for effective team-building and give our associates room to develop. As a firm, we have always placed a high priority in providing an education in M&A, and the tools our team members need to reach their potential. In our fast-paced industry and the responsibility to our clients, this aim is critical.

I can safely say that the transition has been very successful so far. While getting used to a new environment over the last few months offers plenty of challenges, we’ve met these together while maintaining the same duty of care to our clients. After all, it is their commitment to our techniques and approaches that has allowed us to continue our growth.

Alongside this significant development, Generational Group expanded in other directions as well. Our offices in Southern California relocated to again offer more room for growth and support for our clients on the West Coast. And later in the year, we were delighted to welcome two new regional offices in Canada, in Toronto and Vancouver respectively.

Finally, in my 2018 recap I discussed our excitement at welcoming the former Talis Advisors to the Generational Family. In April we officially announced their rebrand as Generational Wealth Advisors, dedicated to developing personalized strategies that help people grow, protect and transfer their wealth.

It has been wonderful to expand our offering to clients by bringing an award-winning team into the fold, and working with their specialists in wealth management.

New Milestones & Accomplishments

Another reason why 2019 will stay with me for a while is the fantastic achievements our team received throughout the year. While our sole focus at Generational Equity has always been supporting our clients on the journey to exiting their business, I believe it’s important to acknowledge and celebrate these accomplishments because:

They indicate that you’re working to an exceptional standard;
They represent recognition from your peers; and
They can be a powerful boost to team morale and motivation.

One milestone in particular stands out in my mind from the past 12 months. Generational Group surpassed $5 billion in wealth transferred to clients. With our work dedicated exclusively to transactions in the middle market, this landmark was an outstanding achievement, and a testament to our talented associates.

What means so much to me personally about that number is that every cent of it went some way to supporting our clients in departing their business. Helping them achieve their goals. Find their freedom. Secure their legacy. It is also a signal of the sustained strength of the seller’s market across this year, as this comes barely a year after we surpassed the $4 billion mark.

As well as this milestone, Generational Group received a great deal of recognition throughout 2019 from organizations I have the utmost respect for. At the 18^th annual M&A Advisor Awards that took place in November, our firm was honored with several awards, including:

Private Equity Deal of the Year $75MM to $100MM
M&A Deal of the Year $50MM-$75MM
Corporate/Strategic Deal of the Year $25MM to $50MM

Furthermore Phil Pizzurro, Managing Director Mergers & Acquisitions at Generational Capital Markets, was named an Emerging Leader by The M&A Advisor. It means a lot to me that we are giving the next generation of M&A leaders a platform to hone their skills and practice their trade at a high level.

Earlier in the year, Generational Group won 2 International M&A Awards:

Cross Border Deal Of The Year ($10MM To $25MM)
M&A Deal of the Year (Over $50MM To $100MM)

And, last but certainly not least, my son Ryan was honored by Hugh O’Brian Youth Leadership, an organization dedicated to the development of our next young leaders, with their highest accolade – the Albert Schweitzer Leadership Award. As both his colleague and his father, I am deeply proud of Ryan for this latest accomplishment.

Every achievement was a moment for our team to savor, and their tireless hard work continues to be recognized in 2020 and beyond.

M&A Activity in 2019

So that’s a glimpse into what 2019 was like at Generational Equity. But what has been happening in the wider world of M&A in the past 12 months?

As I noted earlier, the theme of the year for M&A in my eyes is one of durability. At the start of the year, a big question that many were looking to answer was how long will the seller’s market last after a stellar 2018. The fact that we’re still waiting to find out is a testament to how robust M&A activity has remained throughout 2019, and some predict this to remain the case for the foreseeable future.

This strength and stability of M&A activity across the year has been bolstered by several key trends. Private equity investment undoubtedly played a key role. It is anticipated by many that when the final figures are released in the new year that 2019 will be a record year for PE fundraising.

In a time of relatively tepid economic expansion in the U.S., investors are increasingly turning to private equity as it continues to generate great returns. This has been supported by a continued rise in add-on acquisitions, where PE firms focus on acquiring a range of smaller, middle market companies to reinforce the development of a larger platform company.

Another prevailing trend has been the continuation of cross-border M&A activity. in their 2019 report, Baker Tilly International discussed the rising value of cross-border transactions for business owners looking to maximize their exit plans.

They also look forward to the future, with 54% predicting a rise in M&A activity, predictions that middle market deals will account for 67% of deal volume in 2020, and 71% expecting to increase their cross-border activity. I anticipate we’ll see even more deals that transcend borders in the new year, despite heightened geopolitical risks.

2020 Vision

2019 provided a terrific end to the 2010s for myself and our team at Generational Equity. And while it has been great looking back on this year’s successes and developments, in the M&A industry we always need an eye to the future.

The sustained strength of this seller’s market should continue to inspire business owners considering their exit plans for the early stages of 2020. But while we can enjoy this for the time being, a hard truth about seller’s markets is that they don’t last forever.

My advice to anyone reading this who is considering the future for themselves and their company is to at least put an exit strategy in place – even make it a New Year’s Resolution if you must! Because even during the most robust seller’s market imaginable, if you are not prepared to exit, you won’t achieve an optimal offer when you do decide to leave.

So here’s to a new year and a new decade, and I hope that this one will be just as memorable, both for us at Generational Equity, and for you in your own endeavors.

The Advantages of the Add-On Acquisition Strategy

November 1, 2019 By John Binkley

In September 2019, Presidium Network Services, a client of our team at Generational Equity, was acquired by Baymark Partners. A successful transaction in the active business services sector – is there anything missing here?

Well, what makes this deal stand out is it being an example of an add-on acquisition. The goal of Baymark in purchasing Presidium was to support the development of their existing platform company, Slappey Communications.

Baymark identified the compatibility between both their platform and this new acquisition, and believed these similarities alongside the skills, services and location of Presidium would effectively accelerate the growth of Slappey, and subsequently secure them a greater return on investment.

This is just a first-hand example of where I’ve encountered add-on acquisitions, a topic I’ve covered on this blog in the past. However, since then, this M&A strategy has become even more prevalent among private equity firms worldwide. And, therefore, they represent a very viable option for business owners looking to exit for an optimal offer.

In this piece, I want to outline the purpose of add-on acquisitions and the ‘buy and build strategy’, assesses the popularity of these transactions, and offers some advice for sellers before pursuing this path.

Add-On Acquisitions and Buy-and-Build – An Overview

Divestopedia defines an add-on acquisition as a company added by a private equity firm to one of its established platform companies.

It is a technique many PE firms apply in order to spur the development of a company that they have interest in growing and increasing the value of, with a typical end-goal of selling it for a greater return on their investment or taking it public. The value of the add-on or ‘bolt-on’ company almost comes secondary to how it synergizes with the platform company.

Simply put, if a PE firm sees potential in a target to benefit a platform they’ve invested into, they’re more likely now to pursue the opportunity. And that can be incredibly lucrative to middle market business owners.

Take the approach of Audax Private Equity: In their 20-year history, they’ve invested over $5 billion into 126 platform companies and 774 add-ons. That breaks down to an astonishing 39 add-on acquisitions per year! This demonstrates that for many working in M&A, this is THE approach for them.

This technique is also often referred to as a ‘buy-and-build strategy’. As opposed to the financial engineering strategies I saw widely employed in the 1980s and 90s, this approach is designed to improve the operations of platform companies, while simultaneously growing the separate business units strategically.

As Bain & Company’s annual Global Private Equity Report illustrates:

“Buy-and-build can offer a clear path to value at a time when deal multiples are at record levels and GPs are under heavy pressure to find strategies that don’t rely on traditional tailwinds like falling interest rates and stable GDP growth.”

And this isn’t just gradually bolting on one or two companies to a platform over the course of several years – Bain defines buy-and-build as “building value by using a well-positioned platform company to make at least four sequential add-on acquisitions of smaller companies.”

The prevalence of the buy-and-build strategy offers an effective avenue for PE firms to accelerate the development of their platforms, and potentially make companies in the middle market much more attractive propositions.

So, why are they not more widely considered by those looking to exit their company?

In my experience, I’ve noted a lack of awareness among clients about this type of buyer. This isn’t surprising, as they tend to fly under the radar to deflect any publicity – you often don’t see these transactions front-and-center on the Wall Street Journal!

But, for owners of middle market businesses, this is now a solid path to achieving an optimal offer, provided you are working with experienced M&A professionals. Especially now, with add-on acquisitions arguably more prevalent than ever before.

The Rise in Add-On Acquisitions

In their 3Q 2019 US PE Breakdown Report, Pitchbook identified that add-on acquisitions now constitute 68% of all PE buyouts. So far in 2019, the number of reported add-ons is in excess of 1,700, with Pitchbook anticipating that this year will see a record number of these transactions completed.

Through my personal insight and Pitchbook’s findings, there appear to be three key factors in this growing predominance:

The amount of dry powder available to PE firms
Heightened focus on the buy-and-build model
The rising buyout multiples

Firstly, the level of dry powder accessible to private equity firms is at its highest since the lead-in to the global financial crisis, sitting at around $2.5 trillion. This capital can only be used to invest in companies and, with this extraordinary seller’s market still holding strong, there is a race to invest while the timing is right.

On top of this, as I’ve alluded to earlier, the buy-and-build strategy is being employed more and more often to help a platform company reach the next level. The more this is turned to, the better investors are becoming at spotting opportunities and applying it effectively.

Finally, US PE buyout multiples are at a very high level. This potential to develop an investment and make substantial returns is high right now, and may continue that way for the foreseeable future. And while that remains the case, add-on acquisitions will remain an attractive proposition, both to buyers and, as I will now discuss, sellers.

Why Sellers Should Consider Add-On Buyers

Now it’s been established what add-on acquisitions are and how prevalent they have become among prospective buyers, why do they present such a viable option for those considering their exit plans?

As I’ve covered throughout this piece so far, the advantage of an add-on acquisition strategy is it places smaller middle market companies in the crosshairs of significant investors looking to grow a platform.

Whether this is achieved by harnessing the add-ons skilled workforce, introducing new products and services, or expanding into previously unexplored markets, add-ons represent a strategic answer to the question “how can we grow X company?”

PE firms will devote a lot of time and resources to finding targets that fit what they’re looking for. And, consequently, they will be more willing to pay a premium for those in that bracket.

This should be encouraging middle market business owners contemplating their exit plans to throw their net further in a bid to find the right buyer. Reaching these firms looking for companies that synergize with their platform could prove a lucrative investment, as firms hope to make the turnaround on their initial investment as profitable as possible.

Furthermore, the art of the add-on acquisition for sellers is that in many cases, the PE firm will retain the management team under a newly capitalized format. So not only does that allow you as a business owner an opportunity to continue to build your legacy into your business with access to new resources and strategic support – it allows you to participate in a second bite of the apple when the larger entity is sold or taken public.

Sounds more intriguing now, doesn’t it? Fundamentally, your success in securing an optimal offer from a PE firm interested in add-on acquisitions will depend on two key factors:

How well your company aligns with the platform entity; and
How effectively you can locate and market to these buyers.

The first of these will very much depend on the buyer and what their objectives are. The second is the real challenge – as mentioned earlier, these buyers work under wraps and do not often publicize their dealings.

Therefore, it’s essential to work with an experienced, well-connected M&A advisory firm who can help put you in front of the firms that are searching for a company with your qualities, like Generational Equity. They will understand how to negotiate with these groups and highlight the intangible assets your company possesses that will encourage them to pay a premium for your company.

In Summary

To conclude, if you take anything away from this article, it’s to consider all available buyers when acting on your exit plans. The growth of add-on acquisitions is just one of numerous factors in how you can pursue an exit for maximum value.

But, without the expertise, connections and support of a highly-skilled M&A firm, you are likely to miss out on the potential these buyers offer your business, which could mean you leave money on the table when your exit is finalized.

If you’d like to learn more about add-on acquisitions and the value they can offer to your exit plans, Generational Equity’s insights provide useful knowledge and guidance across the entire M&A process.

Alternatively, if you would like to read more from me, check out my blog for further articles on M&A, business, personal development and more.

Knowing The Motivations Behind Your Exit Strategy

September 5, 2019 By John Binkley

The M&A process is only half the story when guiding a client to exit. This is one of the great lessons Dr. John Binkley’s decades at Generational Equity has taught him. What often goes underappreciated is the emotional aspect of an exit strategy.

What does Dr. Binkley mean by this? Well, when you dedicate years to nurturing your business, especially if you started from the ground up or it has been in your family for generations, making the decision to exit can be incredibly difficult.

The timing might be perfect, the offer could be ideal, the buyer the right fit… but you still find yourself not ready to let go.

Dr. Binkley’s son Ryan explored the emotional journey to selling a business in a recent article on LinkedIn, which covers this experience in greater depth. With many years working in the M&A industry behind them, they’re familiar with phrases from business owners such as:

“I’m just not ready to exit.”
“I will miss my employees.”
“I have no hobbies or interests outside of the business.”
“I am worried about the legacy I am leaving behind.”
“No one can run the business as well as I do.”
“What am I going to do when I leave?”

The final statement has been highlighted as it leads to the subject of this piece: knowing your motivation behind your exit strategy.

Understanding Your Incentive to Exit Your Business

Most people exit their business with a motivation in mind, whether it’s an offer too good to refuse, they’ve taken their company as far as it will go, or they’re ready to retire and take back time for themselves.

However, that motivation to exit can easily find itself buried under the emotions that can hinder any sale – the doubt, the grief, the fear. In Dr. Binkley’s experience, losing sight of this reasoning can make it more likely for sales to fall apart at the 11^th hour and you potentially walk away from an optimal deal.

What is the consequence of this? Not only do you lose out on the time and resources you’ve devoted to valuing your company, sourcing a buyer and negotiating this deal, but it can also lead to greater issues later on, including:

A host of confidentiality issues between you and the other party, which may lead to legal difficulties
Issues forming between your loved ones, employees and partners over the uncertainty surrounding your business
You develop a negative reputation among potential buyers, who will be more apprehensive about entering negotiations with you when you next decide to exit, likely hurting the value you receive

Furthermore, holding off on exiting because you are unclear regarding your personal motivations means you may one day find yourself forced to sell. Dr. Binkley often says there are two types of business owners:

Those that PLAN to sell
Those that HAVE to sell

It is far more beneficial to find yourself in the former group than the latter. So it is essential to make sure you’re mentally ready to exit early in your journey to keep you on course for a well-planned, successful outcome.

What is Your Reason to Sell?

As alluded to earlier, there are a host of reasons why you might be motivated to exit your business. But how do you find yours? Obviously, the answer to that can only come from you and your inner circle, but addressing this should take time and plenty of thought.

A decision of this magnitude should not be taken lightly, especially if you hope to achieve the optimal exit strategy. Rash decisions are the ones most likely to be reconsidered down the road, so it should take a lot of rationalizing and deliberation both internally and with those closest to you, be it your family, other shareholders or trusted advisors.

Indeed, talking to an experienced M&A advisor can be a huge help in reinforcing your motivations to exit. At Generational Equity, Dr. John Binkley places a strong emphasis on dealmakers getting to know their clients closely, understanding their background, needs and ambitions before proceeding any further in the process.

This focus has helped many of Generational’s clients understand their incentive to exit their business in pursuit of the maximum value. No two clients’ goals are exactly the same, which is why it’s crucial to work with an M&A professional that treats you as an individual, rather than taking a cookie-cutter, one-size-fits-all approach.

If finding and sticking to your motivations to exit are proving difficult, Dr. Binkley would like to share some of these clients’ stories, helping you understand:

How diverse reasons for exiting a business can be; and
How working with a professional keeps those motivations top of the agenda throughout the journey to exit.

Security for the Future – Mike Aman

*“I would have been doing my wife and my children a disservice had I not had a plan in place for when the time came for me to sell the business.”*

We can’t predict the future. For Mike Aman, it took a wake-up call to fully appreciate this when a close friend suffered an unexpected stroke. Mike used this as motivation to talk to his family and reach the conclusion that selling his business in order to secure their financial future, so they were ready for any eventuality.

Freedom to Explore – Bobby & Stacy Evans

*“My wife and I love to travel, and we’ve got the time available to us now to be able to do more travelling than we have in the past.”*

Being tied to their company restricted the time Bobby and Stacy Evans had to travel and experience different cultures. This vision was a big motivator for them in their exit strategy, giving them the time, resources and freedom to spread their wings and journey around the world.

Explore Your Passions – Tommy Barker

*“I learned in business that time is money. I’ve changed this in the time since I’ve sold my company – right now time is more valuable than money.”*

When you’re a serious business owner, your other passions often take a backseat. When the time was right, Tommy Barker decided he was ready to dedicate more time to his love of restoring classic muscle cars. This motivation carried him through the process, keeping him on the road to his optimal exit.

Partner for Growth – Debbie Ritchey

*“You’ve really got to ask yourself do I want to just get out, or do I want somebody that has the capital that I don’t to grow this thing?”*

Sometimes exiting the business outright isn’t the motivation, but instead selling part of it to a partner to help it continue to grow. That was the case for Debbie Ritchey, who sought out an investor to support her company’s development, with the goal of reaching its full potential.

Enjoy Retirement – Michael & Rebecca Baker

*“We wanted to get out while we could still walk and still enjoy, have time to play with the kids and not have to worry about things*.”

Often, the goal of an exit strategy is to reap the rewards following years of hard work and perseverance. Having taken their company as far as they could, Michael and Rebecca Baker’s motivation changed to selling for the maximum value, giving them the freedom to enjoy life on their terms.

Finding Your Motivation to Exit

Dr. Binkley hopes this dive into the importance of keeping your motivations for exiting in the forefront of your mind has proved useful, as well as the stories of real business owners’ exit journeys. The psychological side of selling a business is in many ways just as important as the steps to achieving a deal, so it is important to take this into consideration.

Again, how your M&A advisor approaches the emotional aspect of the exit planning process should be a key consideration in who you work with. Make sure you choose an individual or team that prioritizes your goals as much as you do, helping these stay fresh in your thoughts during the difficult moments along the way to your exit.

You can discover more about both the psychological and practical aspects of exiting a business in many of Generational Equity’s in-depth insights. Alternatively, explore Dr. John Binkley’s blog for more articles on M&A, business, ministry, and more.