Connect with us

Business Entrepreneur

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.

Published

on

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.

Continue Reading
Advertisement
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Business Entrepreneur

Reclaim your precious time as a burnt out freelancer or entrepreneur

(ENTREPRENEUR) Being your own boss comes with great reward, but one major risk is time inefficiencies – let’s discuss how you can streamline productivity.

Published

on

Man working on laptop representing time well-spent.

As we all know too well, entrepreneurs are time-poor.

Changing the world of technology, developing a life-changing product, or finding a new process to a complicated, lengthy task, entrepreneurs are continually moving, shaping, and evolving their world around them, but frequently run out of time at the end of their day.

Now many modern entrepreneurs have some form of productivity in place. Whether this is an A3 piece of paper with jottings of what needs to be done next or a manageable to-do list provided by their smartphone where they can brain dump all of their ideas and to-dos into one space.

Working smarter, and harder is usually the object of all those looking to create a new business. But respecting the value of productivity applications can play into the hands of those building the next Facebook or Amazon.

By all means, this doesn’t mean you need the correct productivity tools to become the next prominent entrepreneur, if that’s the case we’d have much fewer businesses than we have now thriving, the thesis of this is for entrepreneurs and business owners to begin embracing productivity apps to help them scale and capture essential parts of their day to help get more done.

So where does an entrepreneur start?

It’s straightforward. Begin with three core tools.

* A to-do list application.
* A note-taking tool.
* A calendar application.

These three resources will provide you with the fundamental pillars of productivity in your hectic schedule. Let’s examine how that is the case for each one.

A to-do list application can be a primary list of actionable items for the next 30-days. Think of a to-do list application as your day planner, an actionable set of tasks to get done on the workday.

This window of to-dos will determine your ground-level work and checklist for the day. Traditionally they are prioritized allowing you to accomplish the most critical tasks first or get them done by the end of the day so that you can help progress forward.

This is a potential master tool for the entrepreneur. A to-do list app can help you capture, deter and plan things to do helping to reduce stress and reliability in your brain to remember critical tasks and actions. A proactive theory from the book Getting Things Done by David Allen helps to define this as “open loops” a process that highlights a need to reduce active to-do’s in your head and to capture them on paper or another form of capture method to relieve your brain’s activity focusing on this.

A note-taking tool provides you with a way to capture essential data or information. Unlike a to-do list application, the information you’ll be capturing is static. This means it isn’t necessarily actionable but provides value for reference or planning. Notes are handy for planning and reference purposes. When it comes to planning your projects and high-level work (like clients, product updates, accounting, etc.) using notes will help you to collect everything into one hub to help you to complete all your major projects and tasks.

And finally, a calendar application works as how you’d expect. A way to capture events and activities. Not to be confused with a to-do list application, the calendar application should solely include events and activities, not tasks. Feel free to use the calendar layout to block out time but don’t get into the habit of adding tasks to your calendar application, it’ll make things very messy!

So what productivity apps should I start with?! Let’s give you some recommendations.

For a to-do list application, an entrepreneur should look for flexibility to scale with the application but the patience to stick with an application to help them get more done. To-do list applications perfect for entrepreneurs include Todoist, TickTick, Asana, Nozbe, or Trello. They are strong starting points and will provide you with all the features you’ll need to start capturing and sorting those important to-dos.

Note-taking tools come highly recommended. To help the scale-driven entrepreneur, there are two tools that stand out as the resources entrepreneurs should consider when looking at note-taking applications. They would be Evernote and OneNote. Both provide you with functional experiences for bringing notes in from email, documents, and other files helping you to free up time and space. Avoid Apple Notes as your default and sole way of the organization as due to the lack of folders/notebooks you struggle to keep things as organized as you would with the likes of Evernote and OneNote.

Calendar resources are rare to find. Entrepreneurs will discover themselves freeing up a lot of stress by using a calendar tool, by being able to see all the activities coming up, and help free up your calendar for important meetings. The features within the calendar tools like “invite a guest” will provide a way to connect with your invitee and avoid any miss-capture of time/date for the meeting.

Try Fantastical 2 (Mac/iOS), Google Calendar, Kin Calendar, or Calendars 5 (iOS). These are more advanced calendar tools, so if you are concerned, it’s okay to try Apple Calendar or Outlook Calendar, just make sure you solely use one calendar and not multiple to avoid missing those meetings.

In essence, entrepreneurs should consider productivity app to help control their time. Helping to implement a system might take a few weeks to get used to and a few tweaks along the way, but it’ll undoubtedly free up time from stress and worry, helping you to do the more valuable things like communicating with your customers, chatting with your clients or growing your team.

Continue Reading

Business Entrepreneur

‘Small’ business is a point of pride in the US, no longer a stigma

(BUSINESS ENTREPRENEUR) Small businesses make up the majority of companies, employers, and money makers of the American economy, that’s something to be proud of.

Published

on

American small business

Prior to the Industrial Revolution, all businesses were small businesses. Independent craftsmen served communities with vital services. Small merchants opened shops to provide the community with goods. Lawyers, doctors, and other professionals hung out a shingle to offer their services to neighbors. Small businesses were the norm. Some of the most beloved American companies started out local. John Deere, Harley Davidson, and King Arthur Flour, all got their start as small businesses.

Business changes led to a attitude change

It wasn’t until manufacturing allowed businesses to scale and produce more efficiently that the idea of big business became more important. Post-World War II, the idea of a small business became derogatory. It was the age of big government. Media was growing. Everyone wanted to be on top. Small businesses took a back seat as people moved from rural to urban communities. Small business growth plateaued for a number of years in the mid-20th century. Fortunately, the stigma of small business is fading.

Small businesses are the backbone of the economy

According to the Small Business & Entrepreneurship Council, the “American business is overwhelmingly small business.” In 2016, 99.7% of firms in American had fewer than 500 workers. Firms with 20 workers or less accounted for 89.0% of the 5.6 million employer firms. The SBE also reports that “Small businesses accounted for 61.8% of net new jobs from the first quarter of 1993 until the third quarter of 2016.” Small businesses account for a huge portion of innovation and growth in today’s economy.

Modern consumers support small businesses

According to a Guidant Financial survey, the most common reason for opening a small business is to be your own boss. Small business owners are also dissatisfied with corporate America. Consumers also want to support small businesses. SCORE reports that 91% of Americans patronize a small business at least once a week. Almost half of Americans (47%) frequent small businesses 2 to 4 times a week.

Be proud of small business status

Small businesses are the innovators of tomorrow. Your neighbors want to support small businesses, knowing that their tax dollars stay in the community, and that they’re creating opportunities within their own city. Your small business status isn’t a slight. It’s a source of pride in today’s economy. Celebrate the fact that you’ve stepped out on your own in uncertain times. Celebrate the dirt under your fingernails, literally, or figuratively, that made you take a risk to do what mattered to you.

Continue Reading

Business Entrepreneur

Positive self-talk can improve your performance

(ENTREPRENEUR) Speaking to others can be scary, but speaking to yourself is normal and can actually improve your speech performance overall.

Published

on

Performance mirror

Do you talk to yourself? Don’t worry, this is a no-judgment zone. I probably talk to myself more than I talk to other people – especially when considering the inner monologue.

I once read that people who talk to themselves are likely to be more intelligent. Whether or not this is factual I don’t know, but I do know that it’s important that you’re smart about the way you talk to yourself.

I’m a fairly self-deprecating person, so when I’m talking to myself about myself, it’s usually some sort of insult. About a year or so ago, I realized how often I was doing this, and made a conscious effort to be a little bit nicer. In that time, my mood has been a bit more positive.

This experience fits well into the research efforts of psychologist Ethan Kross, who has examined the differences in life success based off of how people talk to themselves. “Talk to yourself with the pronoun I, for instance, and you’re likely to fluster and perform poorly in stressful circumstances,” said Kross. “Address yourself by your name and your chances of acing a host of tasks, from speech making to self-advocacy, suddenly soar.”

This can be simplified as: Talk to yourself the way you would (or maybe, should) talk to someone else, and respond in the way you would want them to respond. Act with kindness, and receive kindness back – as a result, things are more cohesive, copacetic, and successful.

After working with participants in his study, Kross found a number of performance benefits to this self-talk method, including: better performance, higher well-being, and greater wisdom.

To demonstrate better performance, judges were brought in to listen to five-minute speeches prepared by participants about why they should be hired for their dream job. Half of the participants used “I” statements, while the other half referred to themselves by their own name. The judges found that the latter half performed better, and were found to have experienced less depression and felt less shame.

In regards to higher well-being, Jason Moser, a neuroscientist and clinical psychologist, measured electrical activity in the brain during participants’ usage of the different types of self-talk. During stressful situations, those who used their names instead of personal pronouns were found to have a significant decrease in anxiety levels, which positively correlated with a major decrease in energy use by the frontal lobe (talk about a win-win!)

With greater wisdom, the research found that people who use their names instead of pronouns are able to think things through more wisely and more rational and balanced way. “The psychologically distanced perspective allowed people to transcend their egocentric viewpoints and take the big picture into account,” Kross said of this piece of the research.

Well, Taylor is now ready to wrap up this article, and she hopes that you’ll give name-first self-talk a try, as The American Genius only wants what is best for their readers! Additionally, encourage people around you and those on your team to give this self-talk, first name idea a try – circle back after a week of trying it and share the results.

Continue Reading
Advertisement

Our Great Partners

The
American Genius
news neatly in your inbox

Subscribe to our mailing list for news sent straight to your email inbox.

Emerging Stories

Get The American Genius
neatly in your inbox

Subscribe to get business and tech updates, breaking stories, and more!