Most businesses would rather grow their companies organically, but when growth is not occurring as quickly as they would like, many turn to merging with or acquiring other firms.
The factors that drive mergers and acquisitions were discussed on February 23 during MBE BizTalk, the conference call series launched last year by SCMSDC and its Minority Business Enterprise Input Committee (MBEIC). The one-hour call features subject matter experts sharing information on topics that affect how certified and non-certified minority business enterprises (MBEs) run, grow and scale their businesses.
More than 100 MBEs throughout the National Minority Supplier Development Council’s (NMSDC) network participated on the recent call, where Mark Herbick, founder and CEO of Pursant LLC, provided insights into the “M&A” world and how business owners can effectively grow their enterprise value.
Pursant helps mid-market business owners grow the value of their companies and maximize that value in a liquidity event, partial sale or complete exit. Herbick, who has bought, sold and operated dozens of companies, says the main reason for selling a business today is retirement.
“There’s a steady stream of businesses available for sale because of retiring Baby Boomers,” he says, noting they are retiring at a rate of 10,000 a day. “For businesses under $1 million, there are more buyers than sellers right now than in the past 10 years. It’s an awesome time to be a seller.”
Herbick says that MBEs contemplating a sale should focus on “drivers of enterprise value. Do you have customers? Do you have talent concentrations? When planning an exit, think about it through the eyes of buyers. What type of risk would they see? Focus on elements that will be a risk and improvements to make the business more valuable.”
He noted it can take six to eight months to complete deals valued at under $500,000 and up to $2 million. The most common reasons for deals not closing include price gap, lack of capital, insufficient cash flow and seller misrepresentations.
MBEIC Chair Sanjay Kucheria, who led the call, asked if MBE status had any impact on valuations. Herbick says, “We work with a lot of parties that have MBE status. You need to look at how many contracts are tied to that status. Plenty of people get certified, bring in new business and often they’re not leveraging the MBE status. If they are, and it’s a significant percentage of revenue, it’s a challenge that needs to be managed in a strategic transaction.”
When preparing a firm for sale, he advised business owners to have a thorough understanding of the process. “Talk through what you need to do to get ready for the market, like selling a house. Meet with an investment banker that will give you a visual through the eyes of a buyer. There are things that will help or weaken your value. Challenge your investment banker to give you a SWOT analysis so you have things you can work with.”
For MBEs that missed the call, there will be another opportunity to hear it. The call was recorded and will soon be available via podcast. Look for details in future Connections.