Terms of 735 Actual Middle Market Deals To Help You Negotiate The Best Exit Possible
Every business owner, preparing for his or her eventual exit, would love to have close friends who’re willing to share the most intimate elements of their business sales – how the deals were structured, pricing, what went wrong and what they’d do differently if they had the chance.
Even better would be 735 such friends, helpfully offering up deal parameters and terms, and organizing their results into a state-of-the-middle-market-M&A-landscape document, and that is what our friends at SRS/Acquiom provide in their latest deal terms study: an analysis of private-target acquisitions closing from 2012 through 2015. (SRS/Acquiom serves as escrow agent and otherwise assists sellers of businesses, giving it intimate knowledge of hundreds of deals.)
The results aren’t shocking in any sense, but provide valuable (as in crucial negotiating data points) information on trends we’re all mostly aware of. Checking in on M&A activity is one of the crucial ways founder/owner/CEOs can prepare for an exit – and make adjustments to maximize outcomes — that may be years away.
As I’ve written, waiting to the last minute, or even the last few years, to prepare for your exit can be a big mistake. Wise estate and tax planning years in advance can add more to your family’s eventual wealth than even a well-run sale of your business. And the mundane and ongoing work of corporate housekeeping is a must to ultimately maximize your company’s value.
Among SRS/Acquiom’s latest findings:
—As we all know, larger companies attract higher multiples when they’re sold. But how much higher? After all, there’s risk in making acquisitions and following other paths to higher growth. Using invested capital (instead of, say, EBITDA), SRS finds that publicly-traded buyers during the study period paid a multiple of 8.9 times invested capital, and the target companies’ transaction value averaged $186.9 million. Financial buyers (largely private equity) paid a 7.7 multiple for companies priced at $158.2 million, on average. And private buyers, acquiring significantly smaller companies, with an average price of $80.8 million, paid just 3.0 times invested capital. The sample size is small enough to be skewed, certainly, and as a seller you’d rather see EBITDA multiples, but the breakdown adds to our understanding of size and value.
—The median hold time for a business owner before selling lengthened to 9 years in 2015, versus 8 years in 2013 and just 7 years in 2012, SRS reports. Clearly, additional patience may be required for a founder’s exit. But that’s also a window for you to (see above) get your estate planning and corporate housekeeping in order.
—In deal terms, buyers are taking a hard line on no-shop/no-talk provisions. In 2015 deals, SRS said, 90% included a provision that the seller couldn’t continue shopping his or her company after an agreement, or respond to suitors who make an approach. And for 94% of those agreements, there was no exception for fiduciary duties of the owner. Clearly, running an inclusive and market-savvy sale process is more important than ever.
SRS drills down into seeming minutia, and one item that sticks out is the inclusion of so-called “sandbagging” clauses in deal terms. A majority of deals in recent years have included “pro-sandbagging” clauses. That means, roughly, that should the buyer acquire knowledge of some flaw in the seller’s representations and warranties, even if the flaw isn’t called out before the deal, the buyer can seek financial remedies. A seller may have comfort on contingent payments in a sale agreement, only to learn the buyer will seek to withhold them.
The potential battles between buyer and seller after the business is sold are another topic for study by owners well before seeking an exit. I’ve written in the past about how best to avoid post-closing disputes and how to anticipate them.
We’ve advised owners on hundreds of exits, with cumulative value in the billions of dollars. Nobody likes a surprise. And the best way to avoid unpleasant surprises is to be an ongoing student of exit conditions and requirements. After-tax returns for these owners are generally higher and aggravation is lower.