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Selling your business: strategic vs. financial buyers

There is no right or wrong buyer in the strategic verses financial discussion, but it may be helpful to understand the nuances on both sides. The bottom line is that any exit can be a good exit.

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Different types of entrepreneurs and investors

Most small business owners will sell or attempt to sell their business. Lifestyle entrepreneurs eventually want to retire and serial entrepreneurs want to cash out and fund their next venture(s). There are many iterations to the types of deals that can be done to exit a business, but two major categories of buyers exist: strategic and financial.

Strategic buyers are companies in a similar, competing, or collaborative industry. They are buying a supply chain, distribution, intellectual property, a brand name, or another business function that will enhance their own business… or all of the above. Financial buyers are basically private equity firms that want free cash flow and profitability.

What category of buyers is right for you?

Much of the same processes and pressures exist with both types of buyers, but there are some trends that entrepreneurs will want to consider when determining what category of buyers is right for them.

Management: In both cases, it is likely that key management will be required to sign employment contracts for one or more years. With strategic purchases, the buyers often absorb the old company, and management along with employees end up working for the new company (in management’s case, this usually means in a reduced capacity). Financial buyers will usually bring in a new board of directors, and sometimes top executives, but the company will likely continue to operate as a stand alone entity with basically the same team. Management may be asked to roll over some or all of their financial gain into the new company when a private equity firm is the buyer. This can be good (with a large upside for the management team) but it also isn’t a true “exit” from the business.

Employees: When a strategic buyer comes in, the companies are usually merged and the buyer dominates. Redundant positions in the sold company may be eliminated. Financial buyers will look for efficiencies, but usually the staff will stay intact to preserve operations.

Lawyers: Be prepared for significant legal work in either scenario. There are a lot of liability issues which need to be accurately documented in addition to all the business issues, and remember that lawyers get paid hourly (and like to get paid) so it will not be a quick process. In financial buyer cases, the legal jockeying can be especially long and expensive. Sometimes in strategic deals, the buyer focuses primarily on business synergies, and the deal-making aspects aren’t such a priority, but this doesn’t mean the legal isn’t important and won’t be significant.

Purchase price: This is one of the major differences. While it varies by industry, most deals will be valued at some multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). In most cases, strategic deals will command a larger multiple. For example, a financial buyer might offer a company 6 times EBITDA as a purchase price. With a strategic buyer, the same company might command 8 to 12 times EBITDA. This means that a small business making $5 million in annual profits might see its exit price grow from $30 million to $40-60 million, varying between financial and strategic buyers. This is not a “set-in-stone” rule by any means, but it is a well-established trend. While private equity firms are buying cash flow, strategic buyers get that same cash flow AND hope to achieve efficiency, expanded growth and/or added value with a merger. This explains the increased multiples.

Earn-out: With both buyer categories, a portion of the purchase price will likely be an earn-out. This means that either certain benchmarks must be met to get some of the money out of the deal, or that a portion of the money is tied as a percentage to revenue, profits or other metrics. In financial deals, the earn-out time period is usually shorter and is a smaller percentage of the total purchase price. Strategic deals often have a longer earn-out period (2 to 5 years is not uncommon), and the earn-out is often a larger percentage of the total deal value.

Financing: Strategic deals may or may not involve some sort of financing. Many deals these days do, but there are also a lot of cash-rich companies that will not use a bank to close their acquisitions. In nearly all private equity deals, there will be bank financing. This doesn’t have a significant impact on the end result exit, but it is an extra step in the process of a sale. It is also an additional hurdle (i.e. if the business has a hard time qualifying for the financing needed, the PE firm may walk away from the deal). Financial buyers put up their own capital in these deals, but only for a percentage of the total acquisition price. This mitigates risk for them, and it also increases their expected return on investment (if they put up less money, any gains on the deal are larger percentage-wise and look better for the buyer’s investors).

A major accomplishment

Any exit is a huge accomplishment for an entrepreneur. It is an important validation of work well done, and it is an open door for future projects. And yes, it is often a significant financial windfall. There is no right or wrong buyer in the strategic verses financial discussion, but it may be helpful to understand the nuances on both sides. The bottom line is that any exit can be a good exit, and all good exits should be celebrated!

Hoyt David Morgan is an entrepreneur, angel investor and business strategy leader. He is an investor and/or adviser to a handful of exciting and high growth companies, and has been a part of several high-value exits. He is passionate about customer experience, smart business and helping innovative companies grow... and sailing.

Business Entrepreneur

If you’re easily distracted, you’re more likely to thrive as an entrepreneur

(ENTREPRENEUR) If monotony and boredom at work- well bores you, it’s possible you may fit with the other entrepreneurs with a quick and constantly changing career.

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When Bill Gates was a kid, he knew he liked messing around with code. He couldn’t have known how it might evolve, but he was willing to live in the distraction, focusing on details when needed, but always learning, moving on, taking risks and growing in the process.

Some of the most successful folks among us are not content to sit and make widgets every day. They cannot thrive in a detail and focused work environment. So, it may come as no surprise to know that people who are more easily distracted are also more likely to thrive as entrepreneurs.

According to this study, if you are intelligent and get distracted more easily, those two qualities combined will likely enhance your creativity. And, that creativity and ability to use distraction as an advantage can be channeled to create new things, jobs, companies, etc.

For those of us who are more easily distracted, who enjoy doing different things every day, and who like learning, a recent article in the Harvard Business Review suggests a good option is to find a career path that provides the right amount of distraction and which is a great fit for your personality. If you do that your talent is more likely to be apparent because you are playing to your strengths. Also, if you are working in your sweet spot you will be more productive and motivated.

Maybe not surprisingly, the top job for those who live in distraction is entrepreneur. The term “easily distracted” often comes with a negative connotation, but considering an entrepreneur is taking risks, making things happen and creating companies, ideas, products that may have never existed, this spins that idea on its head. Entrepreneurs are the chief cooks and bottle washers of the world. They ideate, create, hire and inspire. None of that is possible in a monotonous work environment.

“Unsurprisingly, meta-analyses indicate that entrepreneurs tend to have higher levels of ‘openness to experience,’ so they differ from managers and leaders in that they are more curious, interested in variety and novelty, and are more prone to boredom — as well as less likely to tolerate routine and predictability,” according to the HBR story.

Other careers that are great fits for those of us (me included) who enjoy distraction are PR/Media Production, Journalism and Consultant. What these fields all have in common is, there is never a dull moment, switching from task to task is pretty commonplace, and you will do well if you can be a generalist – synthesizing information and weeding out the unnecessary.

Not sure where your strengths lie? Here’s a quick quiz to give you some feedback on how curious you really are.

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Business Entrepreneur

How can a small business beat a large competitor moving in next door?

(BUSINESS) How do you stand out when a big competitor moves to your neighborhood? Reddit has a few suggestions – some obvious, some not so much.

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Small businesses, especially restaurants have been hit hard by lockdowns. Many closed for good this year, and those that are still hanging on are in a precarious position as their local economies shift.

Last week, a user on r/smallbusiness asked a timeless question that is especially relevant right now. Reddit user longbottomjr writes: “We have a strong competitor moving in next door in a few months. Our restaurant is one that pays the bills but […] I feel that if this new competitor takes up enough market share we will lose our restaurant. Can anyone chime in with resources/ideas I can use to help put together our plan of action?”

Comments quickly pointed out what common sense would dictate.

First, ensure the basics are covered. Being clean, quick, friendly, and high quality will take you far, no matter what competition you’re up against. And as u/horsemullet said, “Customer service also happens before someone walks through the door!” So make sure that your online hours, contact info, menus and social media accounts are up to date and accurate.

Another point emerged that is less intuitive: Competing businesses will naturally gravitate towards similar locations. This is a well-established phenomenon known within game theory as Nash’s Equilibrium. In the restaurant industry, this is actually a good thing. It brings entirely new customers to the area and ultimately benefits all the other nearby businesses, too.

Take advantage of the attention by offering something other spots don’t, like loyalty rewards, specials, unique offerings, or meal deals.

Speaking of the area, a great way to stand out from larger competitors is to build relationships with the community you serve, as u/sugarface2134 emphasized. “In my city there are two Italian restaurants in the same location – just across the parking lot from each other. We always pick the smaller one because the owner truly makes you feel like a member of the family.”

That’s an advantage of being a small, local business that all the money in the world couldn’t buy. Get to know your customers personally and you will not only create loyal regulars, but friends as well.

One of the top rated responses, from u/seefooddiet2200, made an often overlooked but critically important point.

“Talk to your staff and see if they have any ideas. These are the people that are working every single day and may know one or two ‘annoying’ things that if they were switched would make things easier. Or maybe they see that there’s specific things people ask for that you don’t serve. Every single [one] of your employees is a gold mine of insight, you just need to be open to listening to them.”

That is applicable to any business owner who wants to improve their practices.

Ask employees what they think, especially the ones who have stuck around a long time. Not only do they know the ins-and-outs of their jobs, but this builds rapport and trust with your staff. A good boss realizes that employees are more than their job descriptions. They have valuable thoughts about what’s working and not working, and direct access to customer’s opinions.

Good luck, u/longbottomjr! We’ll be rooting for you.

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Business Entrepreneur

How a newly funded coffee delivery startup is thriving during COVID

(REAL ESTATE MARKETING) Seattle’s Joe Coffee finds successful funding in hyper specific clientele and operations even mid-pandemic. But how did they do it?

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Joe Coffee delivery

Amidst a pandemic, you might not expect a small company with limited clientele to thrive. Yet, Joe Coffee, a Seattle-based delivery service, is doing just that.

Joe Coffee, an aptly named coffee runner, has received millions in funding, a large chunk of which was raised mid-pandemic. Their mission is simple: to bring coffee from smaller shops to local consumers, especially without endangering either party.

There’s a lot to be said about Joe Coffee’s valuation and mission, but what’s more intriguing is their unlikely success.

A food delivery service that focuses on coffee may not seem that niche, but when you look at Joe Coffee’s determination to stick to the Seattle area, coupled with its staunch resolve for frequenting smaller shops (e.g., not Starbucks), the service begins to look pretty specific–and, in an economy that honors sweeping solutions, this is a welcome change of pace.

The way their service works is fairly simple: Joe Coffee provides shops with signs and information on how to order through the Joe network, then consumers are able to download and order through a mobile app on all of the usual platforms. Joe Coffee takes a nine percent cut of the order total, credit card fees included.

In return, customers are able to order from their favorite, local, non-chain coffee shops, both supporting them and sustaining their caffeine addiction at a time where alertness is paramount and grouchiness is all too common.

What’s truly interesting about Joe Coffee’s example is that it demonstrates an availability for small services with extreme specificity in terms of operating capacity. By sticking to unique businesses in a relatively small metropolitan area (as opposed to, say, multiple cities), the service is more likely to be successful in execution and delivery, thereby solidifying its relevance to both consumers and businesses alike.

And, by playing into the need for curbside pickup or home delivery these days, Joe Coffee only furthers the perception that its service is necessary.

If the country begins to reopen–whenever that happens–it will be no surprise to see Joe Coffee maintain a relationship between consumers and smaller businesses in the Seattle area. For anyone offering a similarly niche service, this is a perfect example of a company to which you should pay attention.

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