SBA Loans Tips – Do’s and Don’ts

Administrator December 20, 2016June 21, 2022 Buyers Seeking Restaurants Bars Food Service, For Sale, General, Preparing your Restaurant for Sale

SBA Loans Tips – Do’s and Don’ts

By Sherri Goodman | December 14, 2016

Ready to grow your small business?

An SBA loan can help you accomplish your goal and may result in more favorable terms, such as a longer loan life and lower equity requirements. But because it is backed by the federal government, applicants need to be ready to play by the rules so that the process goes smoothly.

Daniel Walsh, Vice President and Senior Corporate Relationship Manager with BBVA Compass, offers these do’s and don’ts when it comes to applying for an SBA loan:

Do

Seek out an SBA preferred lender. The designation means the Small Business Administration has a comfort level with the lender and that matters, Walsh says. “It allows the lender to make a final credit decision without sending the request to the SBA for a decision. SBA preferred lenders have an earned level of confidence.”
“Have your documentation in order,” says Walsh. “There can’t be anything missing.” You should be ready to hand your loan officer three years of business financial statements and tax returns, a personal financial statement, a statement of personal history, your business plan, and articles of incorporation, if applicable.
Get your financial house in order. Make sure your financial statements include a profit and loss statement, projected financial statements, ownership and affiliations, business certificate/license, loan application history, business and personal income tax returns, your business lease, and résumés for all the principals.
Proactively explain unusual events and growth projections. Did your business suffer a dip in sales one year? Spell out why and how it happened. Does your forecast include a dramatic jump of revenue? “Explain the reasoning behind your projections and your confidence level, says Walsh. “Don’t expect your banker to be able to fill in the blanks.”

Don’t

Rule out the SBA loan option. “Talk to a banker, check into it. A lot of times companies don’t realize they can qualify for it,” he says. Also some businesses may question whether the documentation requirements are worth the extra steps, even if they can qualify for a traditional loan. “If your business has been renting and you are thinking of buying, you could amortize that loan for 20 years with traditional financing. With an SBA loan, you could amortize it over 25 years, which helps improve month to month cash flow,” he says.
Balk at the request for a personal guarantee. “It’s 100 percent required,” says Walsh. “It’s reassurance that you, the business owner, are willing to assume more risk to assure your business’ success.”
Let the documentation requirements discourage you. “It’s a wonderful product that we can offer that provides much more flexibility and much less reporting requirements long term,” says Walsh. “While it may appear stringent up front, it is often well worth your while.”

This article was written by Sherri Goodman. Birmingham-based Sherri Goodman was a print journalist for 15 years, writing and editing for daily newspapers in Alabama, New Mexico, Georgia, and Utah, and The Associated Press in Texas and Georgia. She also has worked in media relations and communications for companies in the banking, energy, and automotive sectors.

For more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com

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2017 M&A Trends for Sellers

Administrator December 15, 2016 Buyers Seeking Restaurants Bars Food Service, For Sale, General, Preparing your Restaurant for Sale

2017 M&A Trends for Sellers

By Meghan Daniels, Axial | December 15, 2016

For business owners, the New Year is an ideal time to reflect on long-term goals for your organization. A banker can provide valuable insight on trends in your industry and the market as a whole.

We talked to George Shea, Managing Partner at Focus Investment Bank, and Keith Dee, Founder and President of Osage Advisors, about a few of their insights for M&A going into 2017.

For those looking to explore a transaction in 2017, “my biggest advice is to begin thinking long before you execute, whether you do it on your own or hire an investment banker,” says Shea. “Make sure you have your financial house in order and understand the key metrics of your business — you should be able to slice and dice your financial information quickly and efficiently.”

3 M&A Insights

1. “Search funds have proliferated the lower middle market.”

Search funds typically comprise individuals who are looking to buy and then operate a company (usually one smaller in size than the typical target for a private equity firm). “There were a handful of search funds five years ago, and now they’re everywhere,” says Dee. “When a business does not fit the overall objectives of either a strategic buyer or private equity fund, search funds provide a viable option for owners looking to sell their businesses.

Promoted as part of top MBA programs, “they’ve become a generational trend for young entrepreneurs who want to buy a business and who have an investor base backing them up.” He notes that search funds tend to be conservative when it comes to valuations — he estimates 90% will be below strategics or even private equity — “because they will become the owner-operator of the business and have to go back and sell the deal to their investors who write the checks for them.”

2. “Private equity is going upstream.”

“I’ve found equity investors are less interested in small add-ons unless they meet very stringent investment criteria,” says Dee, who typically works with companies between $1-$5 million in EBITDA.

“This is especially true for sub-$2 million deals, an area they were much more aggressive in a couple of years ago. With the money they’re raising now — half billion dollar funds vs. quarter billion dollar funds — it might not make sense as they are looking to deploy more capital per transaction.”

This may mean smaller companies looking to sell turn to strategic buyers, search funds, or independent sponsors (also on the rise).

3. “It’s still a seller’s market.”

We’re not at the peak of the seller’s market yet, according to Dee. “There’s so much money in the lower middle market, and even more being raised on the equity side. Equity investors and strategics alike are all looking for quality deal flow. It all comes back to supply and demand. It continues to be a seller’s market due to a short supply of quality companies, and I’m not sure when the pendulum will switch to a buyer’s market.”

“Timing is everything,” he adds. “You always want to be selling on an uptrend. You don’t have to be selling at the top of the market, but you do want to be selling on positive trends both in terms of sales and EBITDA.”

3 Industry Trends

1. “The precision machinery industry is hot.”

This is particularly true in the aerospace markets, says Dee. “We get a huge number of inquiries from buyers, both private equity and strategics, looking for aerospace-related businesses. The trend has been constant through 2017 and we expect it to continue into 2017.

“This is partly because large manufacturers like Boeing and GE are gearing up for big projects in the next 20 years. Just as important though is the human capital component — buyers are looking for talent. A highly skilled labor force is difficult to find right now. In addition, larger companies have reached capacity in their own facilities and are interested in acquiring smaller companies that may not be at full capacity.”

2. “Infrastructure, energy, and defense companies might want to wait and see on M&A.”

Dee predicts that due to the new presidential administration, “infrastructure, energy, and defense-related companies will likely see a bounce of work not next year, if not next year, certainly in 2018 or 2019. The question for sellers is, does it make sense to wait to see how it plays out? That’s a personal choice you have to make.” Dee notes that older business owners may be better off initiating a deal process rather than playing a waiting game. “If you’re a couple years older, you may find yourself in a more vulnerable position and there may be other concerns that come into play.”

3. “Buyers continue to reward recurring revenue in IT services businesses.”

“At every level of the IT services industry, buyers are rewarding recurring revenue. This is a global trend we’ve been seeing,” says Shea, who specializes in software and IT services companies. “Buyers are paying much higher premiums to companies that have shifted to recurring revenue vs. project-based.”

For more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com

Build Your Restaurant Exit Plan With Your Restaurant Buyer in Mind

Administrator November 25, 2016November 23, 2016 General, Preparing your Restaurant for Sale

Build Your Restaurant Exit Plan: Build Your Business With Your Buyer in Mind

By Emily Sackett, Axial | November 23, 2016

CEOs who have never sold a company before often take for granted that if they just focus on building value in their business, the rest will sort itself out. But even the shrewdest, most successful owner-operators can fail to realize this value if they are underprepared for the unavoidable eventuality of any business — an exit.

Investors rarely cut checks to companies when they cannot envision what an eventual exit will look like. Particularly for financial buyers (private equity firms, family offices, etc.) understanding when, how, and to whom they can sell is key in building a return profile for the business, determining a valuation, and ultimately, deciding whether or not to consummate the deal.

Gil Beyda, founder and managing partner at Genacast Ventures, a practiced entrepreneur and investor in early-stage technology companies, recently wrote what he dubbed a “love letter to CEOs,” asserting that companies — even the most promising ones — don’t simply sell themselves.

In his post, Gil suggests that CEOs should think not only about building value for their shareholders and employees but more specifically for the parties that could end up on the other side of a sale process.

Regardless of whether a sale is in the immediate horizon or several years down the road, start thinking of your eventual acquirer as a discrete entity for whom they are building value.

Thinking about the eventuality of the business is one of the first things Genacast does when considering an acquisition target. “When we do our diligence process, we ask ourselves and ask the company, who are your potential acquirers,” Gil says. If there isn’t an easy list to compile, some investors may take this as a signal that the dynamics of the business aren’t solid enough to warrant an investment.

So if investors and buyers are always thinking about the exit, even in the early stages of backing of acquiring a company, why shouldn’t an owner do the same? Here are a couple of ways to frame your thinking around building a business with a buyer in mind.

Understand the Why

The reason a company gets acquired depends on the specific buyer. Each prospective counterparty will have a unique set of characteristics they are looking for in a target company. It’s important to understand all of the different reasons your company may get acquired (for intellectual property owned by the company? For a hard to access customer base? For a highly skilled team?).

If you have a preferred buyer type in mind (based on your exit priorities) then focusing on the area of value that seems most relevant to them is one strategy to make the business increasingly attractive to that particular party.

Test the Waters

In Gil’s experience, some of the best acquisitions are born out of partnerships developed during the course of business. Conversations will evolve as a partnership becomes more successful and one company sees an opportunity to expand. “Few acquirers come from out of nowhere and make multi-million dollar offers to acquire companies with whom they have no previous relationship,” he writes.

Knowing this, you can be more proactive about developing such relationships. Which of your eventual buyers can you do business with today? If you believe your company could eventually be bought by a larger company, a distributor or supplier, or even a competitor, developing a mutually beneficial relationship before bringing your company to market may be the best way to test out synergies.

Get Your Name Out There

Many will stress the importance of engaging advisors and bankers early in the process for information on what other buyers and sellers are doing. Of course, the more intel you have, the better. But there’s another reason to strike up relationships with bankers in your space.

Helping intermediaries understand the nuances of the industry and allowing them some insight into how you are managing to take advantage of them will make it more likely that your company comes up during their conversations with other buyers and sellers in your market. The more you are talked about, the better: you never know what will pique a potential acquirer’s interest.

For more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com

Avoid Unwanted Surprises During Due Diligence

Administrator November 10, 2016November 23, 2016 General, Preparing your Restaurant for Sale

Avoid Unwanted Surprises During Due Diligence

By Chris Schumann, BKD | November 16, 2016

Potential buyers frequently uncover unwanted surprises during due diligence — resulting in downward purchase price negotiations, lower valuation multiples, lenders getting scared off, or the deal falling through.

In today’s economic climate, potential buyers are willing to search long and hard to identify the best acquisition candidate. Transparent financial and operating information is more important than ever.

For companies anticipating sale, sell-side due diligence can identify and quantify issues and exposures that could negatively impact a deal.

How Sell-Side Due Diligence Helps Sellers

According to a recent survey commissioned by BKD, 66% of closely held/family-owned businesses anticipate a change in ownership in the next 10 years. For would-be sellers looking to maximize value, it is prudent to begin preparing now.

Sell-side due diligence is a process in which a company hires a third-party expert to conduct a dry run diligence assessment. It usually covers areas such as financial statements, taxation, information systems, and operations.

The sell-side diligence process will assist companies in resolving or managing potential issues before potential buyers discover the problems on their own. To best position a company for a successful sale, we recommend beginning the sell-side diligence process one to three years in advance of the anticipated sale.

Here are a few specific ways in which sell-side due diligence can expose potential issues in advance of a transaction.

Make sure EBITDA addbacks are appropriate

To reduce the likelihood of purchase price disputes, sellers should take caution to make sure adjustments to restated EBITDA are appropriate and supported through proper documentation. For instance, a manufacturer who has leveraged process changes or purchasing practices to drive EBITDA growth needs to depict or model the actual run rate improvements that they should get full credit for. This should be supported by data that demonstrates throughput rate increases and purchase price decreases.

Avoid disputes around net working capital

Unless clearly defined early in the process, target net working capital is another area commonly disputed during transaction negotiations. Purchase agreements frequently define closing net working capital computations as “consistently applied and in accordance with generally accepted accounting principles (GAAP).” Costly disputes can arise when a company consistently applies certain accounting policies that are not in accordance with GAAP, particularly at interim period-ends.

If as the seller, you haven’t followed GAAP “to the letter,” it’s often beneficial to address this with the buyer early in the process. For example, in a recent manufacturing deal we assisted on, the seller proactively defined the accounting methods he had used around valuation of inventory. With some effort, the buyer was able to get comfortable with inventory and the deal proceeded to close. Sell-side due diligence can identify GAAP departures early on to help ensure net working capital computations are clearly defined prior to the purchase agreement.

Develop meaningful analytical information to support valuation

Sell-side due diligence can help a company produce meaningful analytical information from its accounting system (i.e., gross margin by customer, product line, market segment, etc.). This supporting detail can help substantiate changes in historical EBITDA as well as model future performance (given varying assumptions).

In one recent deal, a manufacturer combined invoice details, purchasing data, and bill of materials to illustrate material margins at a customer and product level. Even before conducting due diligence, the buyer had a clear view to the drivers of changes in performance, and was able to focus on future opportunities among customers and products.

Uncover liability issues and exposures

In nearly every buy-side due diligence engagement, we have uncovered liability issues and exposures related to state tax compliance and nexus, many of which surprised the seller. These types of exposures are common in privately held companies and can frequently be addressed and mitigated in advance of going to market. State and local tax (SALT) due diligence can also identify savings opportunities by identifying potential tax reductions. Savings generated through reduced SALT payments effectively increase EBITDA, which can lead to increased company valuations.

Identify technology improvements to increase EBITDA

Information systems sell-side diligence focuses on identifying current technology capabilities, suggested improvement opportunities and internal controls while balancing investment demands and priorities. Operations sell-side diligence is a fact-based and metric-driven analysis to provide a company with potential improvement opportunities and cost saving suggestions, both of which could generate increased EBITDA.

Other situations where sell-side due diligence in advance of a sale process are beneficial include:

When the company has made one or more recent acquisitions and is presenting financial information on a pro forma basis, as if the acquisition(s) had occurred at the beginning of the period, and wants to present meaningful trend analysis
When the company is unaudited and complex GAAP accounting requirements (i.e., multiple deliverable revenue recognition) apply to its financial information
When the company records its financial statements on the cash basis of accounting, while buyers would require GAAP basis accrual financial information

In summary, sell-side due diligence provides companies with an objective third-party view from the buyer’s perspective and helps companies resolve issues before potential buyers discover them on their own. By engaging in sell-side due diligence several years out from a transaction, companies can avoid unwanted surprises and ensure a transaction runs as smoothly as possible.

This article was co-written by Monte McKee, Managing Director – Transaction Services at BKD and Chris Schumann, Managing Director at BKDnext.

For more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com

When Selling your Business, Should You Take an Earnout

Administrator November 4, 2016November 2, 2016 General, Preparing your Restaurant for Sale

When Selling your Business, Should You Take an Earnout?

By Meghan Daniels, Axial

An earnout is a common way to bridge the gap between a seller’s expectation of business value and a buyer’s willingness to pay. Earnout structure varies, but the basic idea is that a buyer will make additional payments to a seller post-close, dependent on the business achieving certain goals.

“When properly structured, earnouts can work — and when they work, they work really well,” noted Kenneth Sanginario, Founder of Corporate Value Metrics, during a recent panel at Axial Concord. But earnouts can also turn nightmarish in the case of misaligned expectations, unfriendly terms, and hidden stipulations.

“Earnouts for sellers who are going to exit are too often a disaster,” said Scott Hakala, Principal at ValueScope Inc. “The best earnouts incentivize the people who run the business. Earnouts for CEOs who are just standing back and collecting a paycheck often aren’t good. Sellers always believe they’re going to make the earnout, then are mad if they don’t.”

Giff Constable, Axial’s VP of Product, goes even further. He recently emerged from a rollup that included multiple earnouts. “The more independent you keep an acquired company, the easier it is to put an effective earnout in place. The more tightly you want to integrate the two companies, the more troublesome they become.”

When Earnouts Go Wrong

Careful legal wording can protect against bad behavior, but even this doesn’t always work. Hakala told a story of an exited owner with a 3-year earnout who watched from afar as the “buyer changed gears six months in and basically tanked the company.” He’s also seen rollups in which buyers deliberately credited the wrong business with sales in order to avoid paying an earnout.

Henry Heinerscheid, Director of PWP Growth Equity, said he tries to avoid earnouts even in cases where the CEO is staying on. “Earnouts can change the spirit of partnership between investors and management. It creates a misalignment of interests between the management team and other shareholders, which can lead to management making short-term decisions to try and maximize the earnout rather than trying to maximize shareholder value over the life of the investment.”

Hakala agreed, especially in the case of quickly growing companies with uncertain prospects. “An earnout can be a way to bridge the gap and divide up the risk. But there’s also an S curve where the more you grow, the harder it is to keep growing. There’s a time when your natural momentum will start tailing down. That can mean that earnouts or incentives that assume continued growth at the same rate as in the recent past may be unrealistic.”

Clawbacks and Earnout Alternatives

Hakala said he tends to prefer management incentive agreements over earnouts — “they’re more long-term and sustainable.” Incentive agreements should include assurances that if the company is acquired the owner won’t be terminated (or will receive severance if they are).

Another alternative to an earnout is a clawback, noted Sanginario. “With a clawback, the seller might accept a lower valuation but agree that if the company grows to a certain level, they can ‘claw back’ equity — maybe 10-15% of what they gave up in the transaction.” He said that the clawback can foster alignment between buyer and seller on a longer term basis than an earnout, though it has to be very carefully structured to avoid misunderstandings after the deal.

Advice for Sellers

If you do consider an earnout, it’s crucial to “put in protective provisions and to make sure it’s realistic,” said Hakala. Work with an investment banker and an experienced M&A lawyer to make sure that your interests are represented.

Dexter Braff, founder of healthcare specialist investment bank The Braff Group, had a few pieces of advice for CEOs considering an earnout:

“Make sure you have a cumulative clause for multiple year earnouts. If you’re short in the first year, but way long in the second, you should still get your earnout for year one,” said Braff. “It shouldn’t be about when you earned it but about whether you earned it.”
“Be wary of buyers factoring in basic risk of the industry into the earnout.” Said Braff, “the earnout is supposed to reflect things that aren’t covered in the current valuation. You don’t want the base valuation to get sucked up in the earnout and take on more risk than you need to.”
“If possible, base the earnout on revenues, not EBITDA. The more calculations you have to do the more room there is for trouble,” said Braff.

For more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com

Top 4 Missteps That Derail a Deal

Administrator October 31, 2016October 20, 2016 Buyers Seeking Restaurants Bars Food Service, General, Preparing your Restaurant for Sale

Top 4 Missteps That Derail a Deal

By Mark Daoust, Quiet Light Brokerage

Last year, 16% of the deals my firm represented on the sell-side required more than one offer before it finally closed. Those sellers experienced both the joy and the excitement of receiving an offer, but then the bitter disappointment of seeing the offer slipping away.

Deals fall apart for a variety of reasons. Some deals fall apart through no fault of the seller, and other deals fall apart due to completely avoidable misunderstandings.

Let’s look at a few common reasons that can cause a deal to blow up before the buyer and seller can sign on the dotted line.

There’s Really Only One Reason a Deal Falls Apart

We can come up with many reasons why deals disintegrate, but in reality there is only one reason for a deal to go south – mismanaged expectations.

I’ve often said that surprises are deal killers, but this isn’t entirely true. Good surprises certainly don’t derail acquisitions. But bad surprises are most certainly deal-breakers.

If a buyer makes an offer with a certain set of expectations, but later finds the reality to be different than their expectations, this is normally the reason that causes nearly every deal to break.

So as you prepare your business for sale, or as you go through the process of selling it, understand that you are engaged in a process of “setting expectations.” If you properly manage your buyer’s expectations, you’ll increase your chances of closing the deal.

Let’s look at some specific scenarios.

Forgetting to Disclose Elements In Your History

A few years ago, one of our advisors was helping a client sell his online business. He moved our client through the process of selling smoothly and without issue. It wasn’t long before a buyer was found and started doing his due diligence.

At the end of the due diligence period, however, the buyer discovered a previously undisclosed lawsuit. A few years back, our client was on the wrong end of a lawsuit, but when the buyer discovered this omission, it caused a ripple effect that eventually unraveled the deal.

The lawsuit itself was a non-issue. It was a frivolous lawsuit that the plaintiff quickly dropped. The problem was that it had been concealed.

It is not enough to simply disclose everything you are thinking of – you need to take stock of what you may have accidentally omitted and disclose that as well. Our client did not intentionally withhold information about the lawsuit from this buyer. He legitimately forgot it even happened since it was some years back and to him was a non-issue.

Remember to disclose everything, and take the time to identify anything you may have missed.

Recent Downturns in Financial Performance

It is all too common for a business to experience its worst financial performance during the week leading up to the closing. If the process of selling your business isn’t stressful enough for both you and the buyer, your business may decide to have a hiccup in sales, leading to doubt for everyone.

A downturn in your business shouldn’t come as a major surprise, however. Many CEOs say that selling their business was more work than actually running the business.

When you sell your business, you’ll be buried in negotiations, legal document reviews, running reports, and generating statements. Not only will your time be swallowed up whole during these stages, but your mental bandwidth will be completely consumed as well.

So you should plan ahead for this downturn as much as possible. Understand that your time will be in very high demand, and plan for late nights at the office and early mornings.

Most importantly, try to avoid major life changes. It never ceases to surprise me the number of sellers who sell their business during a move, city relocation, marriage, or birth of a child. One major life event is stressful enough. If you can avoid having two at the same time, it would be good for your sanity.

Opportunistic Vendors

As I said at the beginning of this article, not every deal falls apart because of something the seller does. In fact, I would say that less than half of the deals fall apart due to seller error. Some deals fall apart because of the vendors.

Even if you think that you do not have a special relationship with your vendor, your vendor may think otherwise.

I have been party to multiple transactions (two of which I was the buyer) in which a vendor tried to change their terms for the new buyer. Their explanation is always the same – the change in these terms was coming for the seller eventually. You just happened to step in at the time the change was pending. An unlikely story but how can you disprove it?

The reality is that some vendors are opportunistic, and some vendors are hesitant to offer the same grandfathered terms to a group they do not have a history with.

For example, I bought a content website years ago whose owner employed an outside company to sell advertisements. When I tried to negotiate a similar contract with the company, they wanted stronger commissions and a minimum term commitment. To them, I was a complete unknown, so they were not inclined to offer me perks.

Opportunistic vendors are a major barrier to getting a deal done. So you may want to consider contacting the vendor in advance about your intent to sell your business. Alternatively, you may want to research a backup option should any of your vendors choose to get greedy. Having a backup option will give you leverage to negotiate the same terms for your buyer.

If you are not comfortable talking to your vendors before a sale is guaranteed, just be sure to be present during this process. Having your presence during the transition will help in ensuring a smooth transfer.

Messy Processes

Over the years of owning your business, you have unconsciously developed habits, shortcuts, and efficiencies, many of which you may not even realize you do. A buyer, however, will notice these shortcuts.

If a buyer has trouble envisioning themselves in your role, or replacing your role, you will have difficulty closing the deal. Therefore, it is essential that you take the time to document your processes as much as possible.

Around one year before you sell your business, document your processes into standard operating procedures. Then match up your actual workflow to these SOPs. Modify them as needed.

Conclusion

Obviously, we always hope for every deal to proceed smoothly and close without a hitch. Unfortunately, life can sometimes throw a series of speed bumps in your way, which can complicate matters. But with the right amount of preparation, and the right mindset going into a negotiation, silly misunderstandings can be avoided, and you can close the deal in record time.

For more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com

When Selling your Business, Run your Business as If it Was Not for Sale

Administrator October 28, 2016October 20, 2016 General, Preparing your Restaurant for Sale

Don’t Let a Sale Process Get in the Way of Selling your Business

By Giff Constable, Axial

My advice was simple: run your business as if the deal won’t happen, because most deals don’t.

That’s the truth as I saw it as an investment banker at Jefferies/Broadview. It is reflected in data by Sutton Place Strategies that says that only 25% to 30% of companies brought to market end up in a successful transaction.

So what are the reasons behind that statistic?

There is an unbridgeable gap between what the seller thinks their business is worth and what the buyers are willing to pay.
Buyers refuse to budge on deal terms that are unacceptable to the seller (and terms are often more important than the price).
There is a “showstopper” flaw in the selling company that puts off buyers (excessive revenue risk, heavy legal or financial liabilities, talent flight risk, etc).
Macroeconomic fears freeze investment activity (which clearly happened in both 2002 and 2009).

Note that just because a business is flawed does not mean that an exit is out of reach. You might have greater revenue concentration than you desire, or a complex contract that no one wants to take on, or stale technology with cash flows but no growth prospects — but you can still find potential buyers in each of those cases (although probably not if your business is facing all of those challenges at once!). It all comes down to price and terms.

To return to the original question, every owner has to account for their own level of risk, but remember this: it is painful enough to go through a sales process and come up empty handed. It is twice as painful to have that happen with material damage done to your business. So think about those risky moves. Think about when you disclose a potential sale to your management team, and how you set their expectations. Think about how you control the optics of the process to the market and to your customers (and competitors!).

Negotiate in good faith, but operate like the deal will fall through.

For more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com

Networking with Investors and Buyers to Sell your Business

Administrator October 24, 2016October 20, 2016 General, Preparing your Restaurant for Sale

Networking with Investors and Buyers to Sell your Business

First impressions can sometimes make or break a deal. Here are 3 tips for networking with investors and buyers to sell your business. Here are a few Quick Tips

Meghan Daniels
Managing Editor, Axial Forum

#1 Exude confidence.
“When speaking directly to investors, exude confidence and communicate your strong conviction of the success factors that are driving your business,” says Peter Formanek, Founder and Managing Partner at Young America Capital.
Capital providers and potential buyers “really want to understand the economic opportunity,” says Formanek. They will ask different sets of questions depending on whether your objective is to sell or raise capital. “That said, if you’re contemplating both, articulate that too. It all comes back to your clarity of messaging.”

#2 Don’t discuss price.
“We want our clients to remain pristine throughout the process,” says Dexter Braff, President of The Braff Group’s Braff. “Don’t provide buyers with any reports or exhibits” that your investment banker hasn’t reviewed (if you have already engaged a banker).

#3 Be yourself.
“Regardless of what is exchanged during the meeting, what the buyer or management team is really focused on is, ‘Do I trust this person? Do they have vision?’ It’s the soft stuff that turns a good deal into a great one,” says Braff.

For more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com

The State of Mid-Market Mergers and Acquisitions: Q4 2016

Administrator October 19, 2016October 13, 2016 Buyers Seeking Restaurants Bars Food Service, General, Preparing your Restaurant for Sale

The State of Mid-Market Mergers and Acquisitions: Q4 2016

By Meghan Daniels, Axial | October 13, 2016

After a record-breaking 2015, M&A activity is on the decline.

Worldwide M&A activity for the first nine months of 2016 is down 22% from the same period in 2015, deal-making activity is down 32%, and PE-backed deals are down more than 27%, according to data released by Thomson Reuters.

We checked in with three deal professionals to see how these trends are being felt in the middle market, and get their predictions for the months to come.

Eric Mattson is Principal at Excellere Partners, a private equity firm based in Denver, CO. Mike Richmond is Managing Director at The DAK Group, an investment bank based in New York, NJ, and PA. Arun Prakash is Managing Director at Carbon Arrow Advisors, a consulting firm based in Austin, TX.

What trends have you noticed over the past year?

“As to be expected in an election year, there’s some of the normal wait-and-see chatter, but there really has not been a discernible new trend that’s developed in the markets we track. Deal flow remains as strong as ever and the quality of the businesses we see are outstanding. Anecdotally, we are hearing from investment bankers and service providers (lawyers, accountants, etc.) that an unusually high number of transactions are failing to close. This is likely a dynamic resulting from some combination of premium pricing (perhaps we’ve hit the peak), uncertainty around the election, under-prepared businesses coming to market, and/or tighter credit markets.”
-Eric Mattson, Excellere Partners

“The deal activity we have seen has been strong all year. We expect this positive activity cycle to continue into 2017. Today, in the middle market, prospective buyers are looking for companies with very specific factors, and are willing to pay for them. Some of these factors include: that they have defensible market positions, stable historical growth, a solid plan for future growth, and that they provide added value to the existing company.”
-Mike Richmond, The DAK Group

What do you foresee for deal activity and volume in Q4?

“Post-election, we expect to see deal activity pick-up. The wildcard here for private equity is what happens in the debt markets.”
-Eric Mattson, Excellere Partners

“We see 2017 as a very strong year with transaction multiples at or near record highs. Financing will still be readily available, though borrowers may have to work harder to obtain higher leverage and the best terms. Mergers and Acquisitions volume and valuation trends are cyclical and there is no way to predict how long the favorable environment will last. Business owners considering a future exit strategy may want to begin preparing now if they hope to take advantage of the current climate.”
-Mike Richmond, The DAK Group

Is there a particular industry in which you foresee a decline in activity? Why?

“Given the concerns over a possible correction, discretionary markets and large capital goods markets could see some deal pressure in the coming quarters.”
-Eric Mattson, Excellere Partners

Is there a particular industry in which you foresee increased activity? Why?

“Business services. The uneasiness in the economy will affect these companies the most as they tend to be less sticky, so their owners may want to sell.”
-Arun Prakash, Carbon Arrow Advisors

“We are seeing a lot of activity in niche manufacturing, value added distribution and the industrial markets, particularly in the Northeast. In addition, there has been an uptick in all healthcare-related businesses.”
-Mike Richmond, The DAK Group

“There are number of ‘prognosticators’ who are predicting an economic correction in 2017-18; therefore, the safe bets are in non-cyclicals and those sub-sectors that perform well in tighter markets. In addition, given the unfortunate reality of terrorism here in the US, we see the security and safety market as having a strong tailwind. Since the recovery has not really created a bubble scenario, we’re not overly concerned with the magnitude of a potential correction.”
-Eric Mattson, Excellere Partners

In your opinion, what external forces have shaped or will most significantly shape dealflow in Q4 and 2017?

“Absent a significant geopolitical event that disrupts the global capital markets, or a severe tightening of credit, we’re not seeing anything on the horizon that’s signaling a dramatic change in the M&A markets. PE still has massive amounts of capital to deploy, the public corporations still have growth targets to hit, and mid-market business owners are approaching retirement age at an increasing rate. Therefore, Mergers and Acquisitions will remain strong for the foreseeable future.”
-Eric Mattson, Excellere Partners

“In 2016, the single factor that has helped M&A activity has been the economic stability of the United States. The economic strength is providing record high amounts of cash being used for investing in acquisitions. This stability has also continued to attract foreign buyers interested in investing here.”
-Mike Richmond, The DAK Group

“If there was one event that would have a major effect on deal flow the next few quarters, it would be whether the Fed raises rates in November or December. If rates go up, overall deal acquisition multiples may decline, which could stall some deals and deal flow. Certainly the election, especially if Trump wins, could have some impact as a result of post-election volatility and uncertainty, but interest rates, in my mind, remain a key driver of financing and multiples and trickle down to affecting deal flow.”
-Arun Prakash, Carbon Arrow Advisors

For more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com

What I Wish I Knew Before Selling My Business

Administrator October 14, 2016October 11, 2016 General, Preparing your Restaurant for Sale

“What I Wish I Knew Before Selling My Business”

By Meghan Daniels, Axial | June 29, 2016

Entrepreneur Chad Elms spent most of his childhood in Stephenville, Texas, the self-proclaimed Cowboy Capital of the World, “making things and trying to sell them for money.”

He came from a family of cowboys and business owners — his grandparents started a western wear store in the 1950s that his parents later took over. Chad got his start in business fashioning braided key chains and leather decorations for cowboy boots festooned with beads and conchos and silver — “things you’d never see anywhere but the country.”

But when he grew up, he decided to go into physical therapy, in part to keep his cowboy relatives healthy, he jokes. Still, “that entrepreneurial spirit was always there.”

When Chad was first entering the world of PT, he watched as one of his mentors started his own company. “I didn’t know until then that you could have a service-oriented business and be self-employed. I thought that was so cool. He had a number of outpatient clinics, and was able to make his own decisions and guide the company as he felt best.”

As he entered PT school, “I always had starting my own company in my mind as a goal.”

Considering Capital

Fast forward a few years, and Chad and his business partner at the time had founded Momentum Physical Therapy & Sports Rehab in a suburb outside San Antonio, Texas. Despite “not knowing anything about running a business,” they bootstrapped their way to impressive growth, taking out small lines of credit at local banks and paying them back as quickly as possible. They opened another location, then another. After the third, they started financing their growth through cash flow. Before Chad knew it, he had been running the business for a dozen years and Momentum had expanded to 10 locations in the San Antonio area.

The team started thinking about raising capital to grow more quickly. “We were exploring all the different options on the table — traditional lenders, banks, PE groups, VCs, and we weren’t finding the right fit. At the point, the idea of being purchased wasn’t on the table.” Still, people were reaching out to them, especially as they began to be recognized nationally for their success — Momentum was on the Inc. 5000 list of America’s fastest growing companies two out of three years in a row.

“We kept pushing people off, saying that we weren’t interested,” says Chad. He started using Axial with the intent to find a private equity group, but instead got in touch with a strategic acquirer that had expertise and knowledge in their field, Houston-based U.S. Physical Therapy Inc. “They could provide more robust systems, and help us grow the right way. We decided that maybe it did make sense to shift gears a bit and bring on a strategic partner to help achieve our vision.”

Eventually, U.S. Physical Therapy Inc. bought 60% of Momentum for $7.2 million.

Lessons Learned – Selling My Business

Chad acknowledges that letting go of control of the company he had worked so hard to build wasn’t easy, and says he learned a few hard lessons along the way. Here’s the advice he has for fellow CEOs considering M&A.

1. Make sure you’re emotionally ready for a change.

“When you’ve worked 12 or 13 years to build something, it’s scary to think about selling a majority share,” says Chad. “The number one piece of advice we got from mentors and people who had done it before was to make sure you’re mentally and emotionally ready for things to change, because they will change. Your role won’t be the same.”

Says Chad, before the sale, “I had a lot of involvement with our executive team, providing leadership and strategic planning, but I was also the guy that handled all the financial planning and budgeting and spreadsheets — I was basically the comptroller. That was a huge thing to give up when we were acquired — a lot of the detail stuff I was doing got rolled up under the corporate umbrella, and that was a big change.”

2. You have to have a team.

“Neither my business partner nor I had any idea how detail-oriented the process would be, how many documents we would have to compile,” says Chad. “It was very, very labor intensive.”

He says that one of the most important pieces of advice their advisor gave was to build a deal team. “You’ve got to have people on your team helping you compile this info — you can’t do it alone. You can’t take the eye off the ball of running your business this long to get things done or operations will really start to trail off.”

It’s crucial “to either have a team in place that can continue to drive the operations and growth of the business while you focus and pour yourself into all that preparation and time that goes into getting a merger done, or have a team that’s dedicated to the M&A process, so that you’re not draining from existing resources.”

Chad tells the story of a friend who was looking to sell a tech company without a deal team in place. “When he first started the conversation about M&A and potential sale, the value that they were talking about was really high — a nice value. He spent the next 12 months getting the deal to the point where they were ready to sign.

“But then the acquiring company came back to him and said, ‘We can’t pay what we first talking about because the performance of your business has gone down.’ The value had taken a nosedive because the owner was investing all his time into the transaction.”

“The value had taken a nosedive because the owner was investing all his time into the transaction.”

3. Don’t overlook culture.

“One of the things that made me want to go into business for myself in the first place was to build a culture where we were more like family, a close-knit community that delivered unparalleled care,” says Chad.

Working with an advisor helped him understand how important a cultural fit was when searching for a partner, as did watching others go through mergers. “I think we made the right decision, but I’ve seen others that have sold their companies and stayed on as an employee afterwards — they ended up having to make an ugly exit from this company that they had built and grown.”

4. Don’t underestimate the complexity of integration.

Integration can be the most difficult part of an inherently challenging process. “Knowing we were like-minded with our new partners, and sharing such similarities of culture and vision and all those things,” Chad says, may have led him to assume the transition from two companies to one would be an easy one. “It has been really good for the most part, but we did underestimate the number of changes. Even though it was mostly for the better, it’s still a change.” In particular, Chad regrets the uncertainty the changes caused for his staff.

“What I would have done differently is to communicate more with our partner. There were some things in the fog of the changeover that fell through the cracks. We thought they were taking care of it, they thought we were taking care of it.” A detailed calendar of dates and timelines and responsibilities would have allayed some of those concerns and made the transition more seamless for both sides.

5. Find an advisor you trust.

“I honestly can’t say enough about how helpful our broker was throughout the process,” says Chad. “I can’t imagine trying to go through the process on our own.”

Before engaging Martin Healthcare Advisors through Axial, he had already received a few offers for the business. “We really thought, ‘We’ve got this wrapped up, we don’t need to bring anyone in at this point.’ We thought we were standing at the 95-yard line with 5 yards to go.” After bringing in an advisor, though, “it became apparent that we were standing at the 5-yard line with 95 to go. They helped us to see that this would be a marathon, not a sprint.”

Chad says the offers the company received before engaging Martin Healthcare “were half of what we received after we brought them in.”

The offers the company received before engaging an advisor “were half of what we received after we brought them in.”

In addition to helping maximize their valuation, Chad says that Martin Healthcare’s “knowledge and experience in negotiating multitudes of previous M&A deals gave us insight on some of the other intangibles we needed to negotiate. Everyone thinks about the initial buy-out price, but not a lot of people put much thought into details like employment contracts, your specific role after the merger, earn-outs, etc. Having a trusted advisor was invaluable for us in knowing what things we should be paying attention to, as well as what things were usual and customary to ask for throughout the negotiations.”

Martin Healthcare was also crucial when it came to preparing marketing materials and preparing for meetings with potential buyers. They “coached us on the right questions we should be asking, in order to ensure we were ultimately picking in the right partner.”

Chad says his biggest piece of advice to “make sure that you’re working with a broker that represents your best interests. Bigger companies are in the mode of doing mergers and acquisitions all the time — they’re good at it. No matter how ethical they are, they’re going to work out the deal in a way that keeps their company’s best interests top of mind. You need somebody fighting for yours too.”

For more information, Contact Megabite Restaurant Brokers, LLC
Phone: (817) 467-2161
www.megabite-rb.com