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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

15 tips to spot a toxic work environment when interviewing

(BUSINESS ENTREPRENEUR) Interviewing can be tricky, but this new infographic will help you look for signs of toxicity before, during, and after the interview.

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Person in an interview

When we’re in the process of job hunting, we’re typically looking because we need a change, for multiple reasons. Any interview sparks hope. Because we’re sometimes so willing to make that change, we often put our blinders on in the hopes that whatever comes is the perfect opportunity for us.

With those blinders, however, it can be common to miss some red flags that tell you what you really need to know about the job you may be applying or interviewing for. Luckily, Resume.io is here to help.

They have developed 15 warning signs in their infographic: How to Spot a Toxic Work Environment Before You Take the Job. Let’s dive in and take a look at these.

First, the preparation before the interview. Red flags can shop up from the get-go. Here’s what to look out for before you even meet face-to-face (or over the phone/Zoom).

  1. Vague job description: If there is nothing substantial about the description of the job itself and only buzzwords like “team player,” be on alert.
  2. Negative Glassdoor reviews: These reviews on company culture are worth taking into account. If multiple people have a recurring issue, it’s something to be aware of.
  3. Arranging an interview is taking forever: If they keep you waiting, it’s typically a sign of disorganization. This may not always be the case, but pay attention to how they’re respecting you and your time.
  4. Your arrival comes as a surprise to them: Again, disorganization. This is also displaying a lack of communication in the company.
  5. The interview starts late: See the last sentence of #3. Not only are they disrespecting your time, but they’re displaying a lack of time management.

Now, for the high-pressure situation: During the interview. Here’s what you need to be keeping an eye on (while simultaneously listing your strengths and weaknesses, of course)

  1. Unpreparedness: If the interviewer is scattered and not prepared for your conversation, this may be a sign that they don’t fully understand the tasks and expectations for the job.
  2. Doesn’t get into your skill set: If they don’t ask about your skills, how can they know what you’re bringing to the table?
  3. Rudeness: If the interviewer is rude throughout the interview or is authoritative (either to you or to a panel who may be present,) be on alert. This is just a sign of what’s to come.
  4. Uncommunicative about company values: If it’s different from what’s on their website or they seem spacey about company values, this is a red flag.
  5. Your questions aren’t being answered: If they’re avoiding answering your questions, they may be hiding an aspect of the job – or the company – that they don’t want to reveal.

Finally, the waiting game. Once the interview is complete, here are some less-than-good things to be on the lookout for. Keep in mind that some of these may be hard to gauge seeing that we’re in the middle of a pandemic and many companies haven’t returned to their offices yet:

  1. Brief interview: If the interview was too short, they are either desperate or have already filled the position. Either way, bad.
  2. Quiet workplace: This may be a sign of a lack of teamwork or a tense environment.
  3. No tour: If you don’t get to see the office, again, they may be hiding something.
  4. Offer on the day of interview: Not giving you time to think may be a sign of desperation.
  5. Leaving you waiting: Again, if they leave you waiting on an answer like they did with scheduling, it’s a sign of disorganization and disrespect.

While one of these 15 things happening doesn’t necessarily mean the job is a bust, a few of these things happening may be an indicator to look elsewhere.

 

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Business Entrepreneur

This startup makes managing remote internships easier for all

(BUSINESS ENTREPRENEUR) Internships during COVID are tough to manage for many employers, but Symba aims to present a unique solution.

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Internships could be becoming easier to facilitate remotely, wherever you are.

Internships are among the innumerable practices disrupted by the COVID-19 pandemic. Some might argue that the loss of the corporate version of hazing that defines many internships is not something to be mourned. But the fact remains that internships are crucial for both employers and employees. Fortunately, a company called Symba might have a solution: Remote internships.

It’s a simple, intuitive solution for the times. That’s why big-name industries like Robinhood and Genentech are turning to Symba for help in constructing their own digital internship platforms.

Symba is, in and of itself, akin to any employee management system. Prospective employees sign into their Symba account via the landing page of the company for whom they are interning, after which point they are able to review their workload for the day. They can also see communications, feedback, other profiles, group projects, and more; they can even access onboarding resources and tutorials for the company in case they get lost along the way.

The key difference between Symba and other management tools—such as Slack—is that Symba was built from the ground up to facilitate actionable experience for interns at little to no detriment to the company in question. This means that interns have a consistent onboarding, collaborative, and working experience across the board—regardless of which company they’re representing at the time.

Symba even has a five-star ranking system that allows employers to create and quantify areas of proficiency at their discretion. For example, if an intern’s roles include following up with clients via email or scheduling meetings, an employer could quickly create categories for these tasks and rate the intern’s work on the aforementioned scale. Interns are also able to ask for feedback if they aren’t receiving it.

While Symba doesn’t facilitate communications between interns, it does include Slack integration for the purposes of collaboration and correspondence as needed.

On the managerial side, employers can do everything from the previously mentioned rating to delegating tasks and reviewing reports. All data is saved in Symba’s interface so that employers have equal access to information that might inspire a hiring.

While it’s possible that Symba will struggle to maintain relevance during non-internship months, the fact remains that it is an exceptionally viable solution to an otherwise finicky problem during these trying times—and some employers may even find it viable enough to continue using it post-pandemic.

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Business Entrepreneur

Zen, please: Demand for mental health services surges during pandemic

(BUSINESS ENTREPRENEUR) 2020 has been an exceptionally hard year for many on a mental front. How has COVID-19 changed the mental health landscape?

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Man leaning against tree, affected by mental health.

As the pandemic stretches on, it continues to affect everything from jobs to plastic bags, but one major shift has come with mental health. According to the National Council for Mental Health, while demand for mental health services is up 52%, the capacity of mental health organizations have actually diminished. So…what does this mean?

Mental health startups get a boost

From tele-health to mindfulness apps, venture capital investments for mental health startups have already surpassed what was earned in 2019. And it makes sense; as more people are isolated for long stretches of time, there has become a greater demand for digital mental wellness services.

With COVID-19 predicted to spike again in the coming months, combined with shorter spans of daylight and less welcoming weather, the desire for these sorts of businesses isn’t likely to fade. If you have an idea for a neat app or website to help with mental well-being in some way, now is prime time to release it.

Companies increase mental health options

As the pandemic rages on, many companies have started to partner with mental health solutions for their employees. For instance, Starbucks has started offering free therapy sessions to employees through the mental wellness provider Lyra, and Zoom began to offer mental health seminars.

Of course, while smaller companies might not have the means to provide specific therapy, many companies have gotten creative with how they’re looking out for employees’ mental and emotional well-being. From providing virtual meditation sessions, to increasing self-managed leave, to connecting employees through book clubs or happy hours, there are a variety of ways that any company can help employees manage their psyche during these difficult times.

Resources are more accessible

Although therapy and similar apps do cost money (many apps include a monthly fee for the services provided), there are plenty of low cost alternatives available for those having a hard time. For example, many sites are offering free trials to services. There are also plenty of free or low-cost apps available to help you do anything from track your moods to manage your breathing. Or check out YouTube for videos to help with yoga or meditation.

While these resources are not a replacement for medication or talk therapy, they can help mediate some of the increased strain on our mental state that many of us are feeling right now.

In case of an emergency, there is also the National Suicide Prevention Lifeline, which is available by phone call or chat 24 hours a day. If you or someone you know is struggling, please don’t hesitate to reach out.

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