Offers to buy my company basically out of the blue… not sure what to do next

[Anonymous]

Anonymous wrote:I own a pretty successful business that generates $2M-$2.5M net profit annually. For the last few years I’ve had people generically approach me and ask if I would sell. I always say if the numbers were right, yes. Thus far it hadn’t gone anywhere.

Yesterday I had an ambush lunch where I was asked at what price I would sell. The deal involved my staying on board for a few years after the sale, investing some of my sale proceeds and then making more money when that company presumably sells again (classic private equity deal). Based on past conversations I through out that I would sell at a $8-$10M price, based on how long I had to stay and any earn out provisions (thresholds that had to be met for me get fully paid).

Today I got an entirely unrelated offer from a very big player at $10M or so cash at the table. 1 year commitment to stay for a small additional earn out.

I have plenty of other assets and some other businesses. Id probably still make $1M-$1.5M from those sources so I obviously it’s not a question of is it enough money for me. I don’t have to sell. I could do this another 10-20 years and would clearly make a lot more. But on the flip side it is extremely stressful and I could walk. Id probably do something else after but no clue what.

My problem is that i have no idea whether the offer is a good offer. From what I know it’s good and gut instinct say that I can push it up a bit and during due diligence they will push it back down a bit. Im Mindful of tax increases. They say that they can close by year end and the tax difference is about $1M if I close this year as opposed to next of the proposed increases go into effect.

Where do I go from here?

What kind of company, how many projects, how many employees and their experience/roles?

Then we can at least direct you.

[Anonymous]

I thought a business is supposed to sell for 15 to 20x profits.

[Anonymous]

Anonymous wrote:I thought a business is supposed to sell for 15 to 20x profits.

There is no single multiple. It is dependent on industry, growth potential, current and future pipeline....

[Anonymous]

Anonymous wrote:

Anonymous wrote:How is it possible that you have built and operated multiple successful businesses, make more than $1m per year, have the opportunity to sell one of the businesses for 8 figures, and still have absolutely no idea how to value that business, such that your come to an anonymous forum to ask, "where do I go from here?"

I'm really having trouble wrapping my head around that.

Indeed. Gob smacking.

Please. Not every successful entrepreneur has formal education and would know that there are available models for valuing a business or have existing contacts that can help them with this process. And even if they did have those acquaintances, they may feel uncomfortable involving them at this stage out of a myriad of concerns.

There are certain types of businesses where low multiples make sense - independent doctor offices, CPA accounting firms, etc, have very limited growth potential even if their profit is very substantial. But based on the OP's description, it seems like there is a chance that the company may get sold again - so I'm wondering if that's due to growth potential, or a smaller aggregator selling to a larger aggregator for a profit. The unsolicited offer gives me a strong suspicion that it's an independent practice type of business.

In any case, I recommend the OP reach out to any type of industry association that may be available to help get contacts for valuation assistance. If there are discussion groups for that industry, it may be helpful to ask there as well.

[Anonymous]

Anonymous wrote:I thought a business is supposed to sell for 15 to 20x profits.

No way a small business sells for 20x earnings (usually). The S&P 500 is currently selling for 38x earnings and you’re buying into companies like Apple and Amazon that have far more durable competitive advantages than some small business in DC earning $2.5 million per year. If you’re an investor, you need to be compensated for the risk that that small business goes bust or disappoints. Five or six times earnings is usual under normal normal circumstances, though he may get more now with interest rates being as low. Additionally, as another poster said, it depends a lot on the specifics of the business.

Also, agree that it seems dumb that someone earning $2.5 million a year can’t decide this type of thing on his own.

[Anonymous]

Most PE deals are based on an EBITDA multiple. You would be a small cap deal and depending on the industry the multiple could be variable. Let’s assume you are in the food industry and are growing at a modest rate. The multiple could be 6-7X EBITDA. I would avoid an earn out and take my money upfront and agree to stick around under a transition agreement. Some PE firms are great but many will screw you on the back end of a deal.

[Anonymous]

Anonymous wrote:You need to understand what the company is worth in such a sale transaction, which is not the same as what you are willing to accept. I strongly recommend you get an advisor to help us value the company in a sale if you are serious about moving forward.

I’m an M&A lawyer and agree with this.

[Anonymous]

You should hire an investment banker who specializes in your industry. They can put together a sale process (especially if you have had multiple interested buyers as you state). They will know the appropriate multiple for your business. And they can work with tax counsel to structure it in an advantageous way.

[Anonymous]

You need to talk to an accountant or financial advisor to get a valuation done on your company. Then you need to find out what a reasonable multiple of annual profits is a good price at which to sell.

I'd be really curious why you're getting offers. I'd want to investigate this angle before selling. Is the industry about to experience a huge upswing? Are these people seeking some sort of tax angle?

[Anonymous]

What kind of business is it?

[Anonymous]

Source: I sold my company for over $100M.

I would advise you to speak to Wilson Sonsini or Alvarez and Marsal. They’ll charge you something not insignificant, but they have experience in valuation work, etc.

Also, if the firm has less than 50M in assets (which it almost certainly does), then you would qualify for QSBS treatment, which in turn allows you (and your spouse, and kids) to each get $10M federally tax free.

Call the SF offices.

[Anonymous]

Clarifying point on above; if at no time it had $50M in assets you can grant yourself shares or equity that will have QSBS treatment.

[Anonymous]

Anonymous wrote:I don’t understand how you could be at this level of success and yet go to DCUM, a mommy forum, for advice.

Don’t you have a mentor or something?

exactly. you wonder about some of the posts on here.

[Anonymous]

Anonymous wrote:Clarifying point on above; if at no time it had $50M in assets you can grant yourself shares or equity that will have QSBS treatment.

And if the industry qualifies. Many do not.

[Anonymous]

Anonymous wrote:Clarifying point on above; if at no time it had $50M in assets you can grant yourself shares or equity that will have QSBS treatment.

You have to hold the shares for at least 5 years.