30 May Around the Web: A Week in Summary
A recent article from the Axial Forum entitled “Lower Middle Market Too Hot to Touch” explores how the M&A market and the lower middle market specifically are as strong as ever. One factor that has contributed to this is the amount of capital available. There is also a sustained strength in the lending market with debt multiples reaching 3-4x EBITDA and buyers willing to over equitize transactions.
Larger buyout firms and strategic acquirers are also looking to the middle market to find add-on opportunities at a better price to average down their costs. They find companies they can use as a “buy-and-build” platform which has become one of the most common value creation tactics today.
In this competitive market, buyers have to be very focused and selective because they are paying full value for businesses. On the other hand, it’s a great time to be a seller and the demand for lower middle market companies doesn’t appear to be slowing down any time soon. Buyers are looking at purchasing smaller and smaller companies as a strategy to increase their value from 5-10 times EBITDA, which means it’s a great time to be a seller.
A recent article posted by FarrellFritz.com entitled “Selling Your Business: Baskets, Deductibles and Caps, Oh My!” explains the concept of the indemnity provisions of the purchase and sale agreement which include baskets, deductibles and caps that are often misunderstood by business owners when selling their business. The buyer will ask the seller to make several representations and warranties about the business and this basically acts as a form of insurance for the buyer in the case that anything turns out to be untrue or misrepresented.
An attorney will negotiate protections and limits on the seller’s exposure to indemnification claims and the “basket” concept requires that a certain combined amount of losses incurred by the buyer exceed a minimum dollar amount before the buyer can recover them. Sellers will want to structure this so that the basket is a “deductible,” meaning the seller is only responsible for the losses that exceed the basket amount instead of all losses starting at the first dollar.
The indemnity cap is another important item in the negotiation of the indemnity provisions. The purpose of this cap is to put a limit on the seller’s post-closing indemnity exposure so that, for example, a buyer who purchases a business for $2 million can’t seek indemnity for $3 million of losses. These factors usually involve both parties to negotiate and compromise when coming to an agreement.
A recent article from the CBB Blog entitled “Master Ten Value Drivers to Sell Your Business at the Highest Price” tells us how to look at your company from the eyes of a buyer and how to use these 10 value drivers to sell your business for the highest price.
- Stable and predictable cash flow
- Reliable financial information
- Customer diversity
- Human capital/quality of workforce
- Growth potential
- Operating systems and procedures
- Facility and equipment condition
- Barriers to competitive entry
- Product and supplier diversity