I recently met with a former client who had travelled from Australia to visit his daughter at a local college. We reflected on the sale of his accounting software business back in 2006. Trek had helped him successfully demonstrate the value of the business to the buyers.  We also talked about the differences between 2006 (also known as 'the good old days' for middle market M&A) and today for selling one's business. 

For one thing, much less bank financing is available today because banks are much more averse to risk and borrowers know it. Other sources of funding are available, but they are more expensive - which then raises the hurdle to achieve a profitable deal. While there is lots of reported M&A activity these days, it's mostly large corporate buyers writing a check for an acquisition without having to go to the banks for deal financing.  While this is fine, there is clearly a gap in middle market activity, unless the buyer (strategic or financial) is prepared to inject more cash/equity into the transaction.

But this will change, the market for middle market M&A will improve in the near future and offering prices will once again rise for quality companies.  So, for those companies who are a candidate for transfer, now is the time for owners to start thinking about it and preparing for it.  For those who successfully prepare, they too can sit back one day and reflect on their successful transfer.

The last three years have been tough on businesses - that's no secret.  In order to survive, businesses were forced to lay off many workers and cut back all discretionary spending. Most businesses delayed investment in expansion and new equipment in order to preserve cash in the face of banks cutting credit lines and other creditors tightening standards.  Indications, however, are that the bottleneck will soon loosen and business conditions will turn around.

In anticipation of the turnaround, and corresponding increases in confidence and risk-taking (and it is starting to happen), baby boomer owners should know their exit options and be ready.  They need to ask themselves these questions:

• Is my company salable? 
• If so, what are the ownership transfer options?
• Is my family OK with the decision to sell?
• What will I do after I sell?
• Have I built the value in my company so the sale proceeds will finance my lifestyle?  If not, what can I do to improve its value?
• Do I have the right advisors for the process?
• Is my company ready for a thorough (and exhaustive) due diligence process?

As proponents of intangible capital, we urge owners to document systems and processes and take other important steps so potential buyers know more of what they're buying - especially with that premium over book value of a company. 

Valuation for M&A - Building Value in Private Companies by Chris M. Mellen and Frank C. Evans

Chris Mellen (XPX Boston member) took on an aggressive assignment when he agreed to update the first edition of Valuation for M&A, written years earlier by Frank Evans and David Bishop.  What he created is a valuable resource forowners and advisors.  Valuation for M&A combines the tools for valuing companies, along with accounting process, strategy for value creation and exit planning advice.  While this may not be the type of book you would sit down to read for pleasure, I can certainly recommend that participants in the value creation and M&A space familiarize themselves with the concepts and practice within.  This is a business course in itself.  Very dense and rich in content.