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Robert Knauer
- 2 min read

Can You Sell A Business in Times Like These?

The answer is yes — but with certain caveats.

As of this writing in early-May, the length and ultimate severity of the current public health crisis remain unknowable. However, the impact that it has had on our economy over the past two months leaves no doubt that it will continue to have a major impact on business transactions, just as it has impacted everything else.

For owners interested in selling their business, there the prospects are not as grim as they may seem. For one, many long-term investors such as those backing Eagle Peak Capital Partners take solace in the track record of the American economy, which has its ups and downs but has proven to be resilient over time. Warren Buffett spoke to this point during his virtual annual meeting this past weekend. Additionally, there is still a large amount of capital that has yet to be invested, including almost $1 trillion available for buyouts. This distinguishes the current crisis from the 2008-09 Global Financial Crisis, as does the continued availability of debt. That's the good news.

Yet there have been relatively few business transactions of late as many buyers take a "wait and see" approach. Here are some of the reasons why things have slowed down:

It's not easy to determine a fair value — This is a challenge in the most 'normal' of times (see related post), but it is particularly challenging right now given the wide range of potential economic outcomes, which range from a fairly quick recovery to a prolonged depression. Values from earlier this year are no longer valid, as they do not account for the increased risk present today. Additionally, buyers will be sizing up businesses in a different way than they had previously, focusing more of their attention on metrics such as cash reserves than on growth potential than they had prior to the crisis. Over time, the process of price discovery will unfold, and the market will shed light on reasonable valuations. This happens quickly in the stock market but will likely take a period measured in months when it comes to private companies, and in the interim will make it more challenging (though not impossible) for sellers and buyers to agree on a price.

Risk — Just as sellers must agree to a reasonable price, they will also face the additional challenge of agreeing on how to share risk, so the terms of deals in this new environment may be different from those involving deals that occurred just a few months ago. These largely come in the form of downside protection for buyers and take the form of provisions like earn-outs and seller notes.

Mindshare — Many investors and banks are spending much of their energy managing the businesses and loans they currently oversee. This alone does not preclude a deal from occurring — after all, deals are how they make money — but it means that the transaction will have to be that much more appealing to gain their attention.

Eagle Peak Capital Partners and its investors remain committed to acquiring and managing a single, great business, just as it was prior to the crisis. Please visit eaglepeakcap.com/resources for additional seller resources and feel free to reach out to rknauer@eaglepeakcap.com or fill out the form below if we can be of help. Thanks, and stay well!

Robert Knauer
- 2 min read

Five Questions to Ask a Business Broker

Business owners interested in selling their companies often turn to business brokers, investment banks, and other intermediaries for help. These middlemen can provide valuable advice and can guide you through the process, but in return they charge substantial fees. If you are considering enlisting a broker or other intermediary to help you sell your company, here are five important questions to ask them:

What is your fee structure? This typically depends on the size of the company. Brokers typically charge smaller, main street businesses with under $1MM in revenue a commission of about 8-12%. Larger firms sometime charge commissions based on the “Double Lehman” formula — 10% on the first million, 8% on the second, 6% on the third, 4% on the fourth, and 2% on the remainder. This means that a company that sells for $8 million would be charged $360,000 in brokerage fees, a 4.5% commission. There is usually a minimum commission, and some firms charge a retainer.
Who are your references? A professional, experienced business broker should have testimonials and references that you should be able to call.
How many listings do you have? The average business broker will have 15-20 listings at any given time. If the broker is representing too few listings, it could be a sign that they aren't experienced, motivated or capable. Conversely, if the broker represents too many, you run the risk that your sale may not receive the attention it deserves.
What do you know about my business? Brokers often have expertise in certain industries. Those that lack expertise should manifest an interest in learning about your company and your situation so they can negotiate a deal that accommodates your desired financial and non-financial outcomes.
How do we maintain alignment of interests? Sure, both you and your broker will want to sell your company. But you should do your best to determine whether the broker is interested in selling your company at the right price and to the right buyer. The more businesses a broker sells, the more commissions that broker earns — variations in sales price and quality of buyers will have little impact on the livelihood of a broker.

Eagle Peak Capital Partners does not require you to hire a broker to sell your company, allowing you to retain more of the sales price. While you would benefit from using your own accountant and legal counsel, we are able to guide you through the process, enlisting the help of an experienced team of investors and professions. For more information, please send me an e-mail at rknauer@eaglepeakcap.com, and you can also view our guide to the business transaction process here.

How Much Could You Sell Your Company For?

UPDATE (January 1, 2021): Linked new Pepperdine Private Capital Markets report and updates to the text.

Business owners often wonder how much they would be able to sell their business for. Beyond the simple answer of "whatever a buyer is willing to pay for it," the answer is not easy to come by. For this reason, accounting and advisory firms are able to charge a premium for providing an estimated valuation of a firm. These professional services firms evaluate factors such as a company’s performance, review the strength of the industry, and use detailed financial analytics to produce 100-page reports with a very simple punch line: the company’s fair market value. But a full-blown valuation is not required to get a general sense for how much your company might be worth. Here are a number of key factors that buyers will be examining to determine how much they would be willing to pay:

Cash Flow — In most cases, buyers acquire firms to get access to future cash flows, so this is the starting place for determining a firm’s valuation. Adjusted EBITDA (net income + interest, tax, depreciation, amortization, and other add-backs such as above-market salary and one-time expenses) is most commonly used as a proxy for cash flow, though it is a less accurate reflection in asset-intensive businesses. The data is not typically from just one year or the last 12 months but instead a weighted average of Adjusted EBITDA over a period of time. One can arrive at a ballpark valuation by applying a multiple to Adjusted EBITDA that varies based on the size of the firm and its industry.
Revenue Quality — Quality revenue helps to safeguard continued cash flows well into the future, and the plain truth is that there are certain characteristics of revenue that make it more or less appealing to buyers. Revenue from a large number of subscribers is generally preferable to that coming from a few large projects, which is why software-as-a-service (SaaS) companies can command such high multiples on their earnings. But a SaaS model is not required for high-quality revenue, which can also come from companies that receive a large percentage of their revenue from repeat business. Buyers are often more interested in companies that show slow but steady growth than those experiencing rapid growth because it makes future earnings easier to reliably predict.
Customers — A large number of longstanding customers is ideal. This is an indication that a company is not overly reliant upon a few customers — who might take their business elsewhere or undergo financial hardships that interfere with their ability to continue to be a reliable source of revenue.
Competitive Position — Buyers will be keen to understand the degree to which a company has a competitive advantage, which can come in the form of brands, patents, technology, cost advantages, or other factors that increase the likelihood of that the company will be enduringly profitable
Industry Growth — Industry growth has been shown to have an outsize impact on the growth of companies within a given industry, so buyers will be paying close attention to industry trends and projections.
Track Record — The longer a company has been around, the longer it is likely to stay around, so buyers will place a premium on established businesses. This also provides them with additional data points, such as their performance through past economic downturns.

For a free, no-obligation, and confidential discussion about how these factors apply to your business, please send an e-mail to rknauer@eaglepeakcap.com or fill out the form below — I would be glad to give you a call at a time convenient for you. Thanks.