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Tip of the Spear Ventures

A Family Office that behaves like Venture Capital | Private Equity | Business Consulting

30 days to eta

30 Days to ETA | Day #27 – ETA Capital

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #26 post I shared as an Entrepreneur Through Acquisition (ETA), finding, researching, conducting preliminary due diligence — as well as interviews — are all precursor to what is considered by most to be the first step in the formal business sale, the ETA Letter of Intent – LOI (You can read the previous post by CLICKING HERE). Now that you have the found the business and the ownership vision is in sight, how are you going to fund it to make it a reality? So, in today’s 30 Days to ETA post, we’re going to explore ETA Capital… Enjoy!

30 Days to ETA - ETA Capital

ETA Capital – 5 Sources

When I think about our Mergers & Acquisitions practice at Tip of the Spear Ventures, the decisions that we make when it comes time to purchase a business generally fall within the confines of a financial decision. One of the mentors that I have in the capital space told me years ago that in order to successfully acquire a business, you have to bring capital. I couldn’t agree with him more! But how much and in what form?

The following represents five sources of ETA Capital that you should consider as an Acquisition Entrepreneur. These five sources fit regardless of whether or not you are breaking-off a piece of your Balance Sheet or going out and securing a debt instrument. NOTE – Entrepreneurship Through Acquisition is risky. Don’t believe for a second that because the business you are exploring has provided an income for the previous owner that the business under your new leadership will continue to do so — Especially in the early goings. Why do I share this? See the SUMMARY at the conclusion…

There has never been a time when capital is so inexpensive… Leverage your cash position accordingly!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

ETA Capital Source #1 – Cash

The first way to acquire a business is to buy it with cash. Most likely, this is the way you expect to get paid when you sell your company when that time comes, right? However, this is the least likely ETA Capital sourcing event to occur. Why, I mean after all isn’t cash king? Of course cash is king, but with the cost of money so inexpensive, why would you want to put all of your cash to work in one place?

I have a capital mentor who is famous for telling me that with all those benjamins in the bank, the goal is to get those benjamins out into the economy and make little baby benjamins! It’s a good visual way of saying put your money to work for you, and I’ve grasped the concept since the day he shared it with me.

So while cash is king, it also like a king needs a heredity line of offspring to go forward with. So the ETA Capital Source of Cash should be your least likely way of funding your ETA Mergers & Acquisitions.

ETA Capital Source #2 – Stocks

Secondly, buyers and sellers can use one of two types of stock buy-out methods to pay for a business upon the sale. For these stock methods to work, the business must operate as a C Corporation or an S Corporation (technically an LLC taxed as a C or S is also allowed) that can buy, sell, and trade company stock. Remember our discussion about business operations and entities back in 30 Days to ETA post #11 – Entity Formation (You can read the post by CLICKING HERE)? This is where your chosen entity can affect your future sellability. If you’re not sure which business entity to choose or you’re not sure how your business operations affect your sellability, go back to that post.

Before we leave the ETA Capital Source topic of Stocks, let’s take a deeper dive into Employee Stock Ownership Plans (ESOP) and Stock Buy-Outs:

An Employee Stock Ownership Plan (ESOP)

What if you want to leverage the employees of the organization and make all of you owners of the business you are acquiring? Enter the Employee Stock Ownership Plan (ESOP). To buy a business through an ESOP in its simplest terms, you must hire an independent evaluator to place a value on the company’s stock. Once the value is determined, you hire a trustee to set up and operate an independent trust. At that point, the trust buys stock shares from you based on the purchase price the evaluator set. Employees, then, have the option to purchase company stock from the trust, which will hold the stock as long as the employee works for the company. When an employee leaves or retires, he can sell the stock back to the trust at a fair market value.

While the ESOP can get very complicated, it has a lot of advantages. Essentially, this is a way an owner can remain with the company while taking the capital out of the company. If the owner doesn’t want to retire in the immediate future, they can set up an ESOP. Then, they continue to partially run the organization until they’re fully paid or have sold all of their stock shares back to the trust.

Another good thing about an ESOP is that it benefits and rewards long-term employees. The ESOP creates a long-term initiative and loyalty program that rewards employee commitment and hard work. It incentivizes employees to drive the company towards success because they own portions of it. The more valuable your stock in the company becomes, the more money they get when they sell!

An ESOP is not for every corporation, though. Some entrepreneurs don’t like having a third party evaluate company shares. Many feel that the valuation is lower than what they would receive for their stocks on the open market. Another disadvantage of the ESOP is that the company has to have cash. You have to keep a fair amount of cash on hand so that when an employee leaves, you can convert their stocks to cash and pay-out that particular person’s shares.

Stock Buy-Outs

The second method of stocks as an ETA Capital source is stock buy-outs. These stock buy-outs can get complicated, so I’ll try to make it as simple as possible. To generate additional capital or to retire from the business, the owner of the company can sell their company stock. As in an ESOP, you’ll want to hire an independent valuator to place a value on those stocks. As the ETA, you can then purchase the majority of their shares, all of their shares, or portions of them. In doing so, you become shareholders/owners in the company and have rights to elect directors and vote on company policies. However, the previous owner may have the option to keep some of the company’s stock, depending on how you set the stock buy-out up. Thus, they can maintain some control of the business and receive immediate cash capital.

Let’s assume as the ETA you buy the company and as the majority shareholder drive the business to unprecedented success. Consequently, all shares increase in value, making everyone who owns stock lots and lots of money. With hopes this will happen, you want to add a provision into the stock sale agreement that allows you to buy additional shares at set terms, such as at the price the shares were valued upon the sale of the business.

Conversely, what if as the Acquisition Entrepreneur you drive the company into the ground? What if the value of your stocks plummet? You must have provisions written into the sales agreement which allows you to purchase additional shares at the same value majority owners can or sell them to other owners at a predetermined set price.

Another provision you want to address in stock buy-outs is a tag-along right. In other words, if as the buyer you purchase the majority of the company shares for $10 and then find a buyer to pay $20 for them, make sure you can include your shares in that deal. You want to “tag-along” on that sale and get that $20 per share.

Lastly, make sure you address piggyback rights in a stock buy-out. If as the buyer you ultimately make the shares public, you’ll want to address the right to publicly register shares. Most sellers will want the right to “piggyback” on your success.

ETA Capital Source #3 –  EarnOut

Here is a definition of ETA Capital Source #3 – Earnout from Investopedia:

“An earnout is a contractual provision stating that the seller of a business is to obtain additional compensation in the future if the business achieves certain financial goals, which are usually stated as a percentage of gross sales or earnings.”

Essentially, this allows you as the buyer to give the seller a fair price for their company now, but gives the seller the bonus if they think it’s worth more later on if/when the business does well. For example, say the company has $5,000,000 in sales and $500,000 in earnings. As the ETA you identify that you wants to pay $2,500,000 for the company, but the seller think that’s too low (Of course). The seller counters that the company will drastically increase in sales because of some groundwork they have laid (Perhaps a robust sales pipeline or backlog of their book of business). For both parties to agree, you enter into an earnout or a compromise. In this example, you pay the $2.5 Million up front as a deposit on the business. Then, you agree to give an additional $2.5 Million IF the company reaches $10,000,000 in sales over a three year period. If the company doesn’t reach a certain amount of sales, you don’t have to pay the seller any additional money. Or, you can add in a provision that you will owe the seller “$X” more at the end of three years dependent on a predetermined earnout scale for growth.

Using the same $5,000,000 and $500,000 from our example, let’s say you pay the seller $2,500,000 up front. Instead of asking for an additional $2,5000,000 IF the company reaches a certain amount of sales, the seller asks for a guaranteed 5% of the company’s gross sales over the next three years. Then, and only then, if the business makes $10,000,000 in three years, you owe the seller an additional $500,000 per year for the 3-year term.  If the business makes $20,000,000, the seller earns another million per year of the 3-year earnout term.

An earnout can offer the seller a handsome reward if the company is who they say that it is. We’ve gone through LOI and typically identified that there is no way the business’ sales pipeline is anything but fiction. If we had gone through with the Purchase Agreement, it would have left the seller with nothing other than the down payment and us with the debt associated with structuring that down payment. So be wary, and protect yourself. Know the seller’s nonfiction reality before you choose to exercise an earnout option.

ETA Capital Source #4 – Seller Carried Note

A great option for buyers, Owner Financing may be the best option for sellers.

Different than an earnout, you and the seller agree on the company’s worth. You cannot or will not come up with the cash to cover the entire purchase price or even the down payment.  Typically, you offer to pay 65% – 80% of the company’s value, but ask the seller to carry a promissory note for the remaining 20%-35%. In this case, then, you expect the seller to carry some of the risks with him.

If you’re going to do a seller-carry, take a few factors into consideration:

  • Is the company well seasoned? In other words, is it strong enough to withstand transitions within the market? Is their product or service adaptable if technology advances or the economic market crashes? You may be investing in a market fad. Maybe the company is one of 20 stores in a small town. You know, because of economic circumstance, the majority of those stores will close their doors. If you doubt the future longevity of the company for any reason, then you may want to choose a different buy-out option.
  • Skin in the game! You are asking the seller to put “skin in the game” here, even as they exit the business. They must trust you enough to carry a note. What happens if you liquidate the company assets or spend all the company cash? Does the seller trust you enough to make consistent, long-term payments? Essentially, you’re asking the seller to leave you their greatest asset — the company’s assets — and risk it in your hands. At Tip of the Spear, we love owners who want to partner with us for the long term. Even though they are looking to exit their business, we still value them as a valuable resource and want to create an environment of trust.

ETA Capital Source #5 – Offer of Employment

In this last option, you may offer the seller some form of employment as part of the buy-out. If you’d like the seller to continue working within the business, this option might work for you. In those instances where you are acquiring a business where you don’t know enough/everything about the industry, ask the current owner to remain in the company at a certain level for a set amount of time so as to teach you how to operate the business. In my experience, I’ve seen the offer of employment buy-out work well, and I’ve unfortunately seen it work really bad. Here are a few examples of Offers of Employment gone right/wrong:

  • Leadership preferences. Sometimes, sellers stay to fulfill an employment contract and get frustrated. Usually, this happens when there’s a significant difference present (Difference in leadership styles, operational preferences, etc.)
  • It’s personal. Other times, buyers and sellers may encounter personality conflicts. Remember, sellers have poured years of blood, sweat, and spears into this business. They have made it their “baby” and if as the ETA buyer you come in and start making all kinds of changes, these actions could create resentment, angst, and animosity in the relationship.
  • It’s business. I’ve worked with over 1,000 organizations and an exponential number of leaders therein. I recognize that while there are similarities in style, no two businesses are operated the same and no two business situations are alike for a leader to apply the same principle. If buyers and sellers recognize that conflict can arise in this buy-out option, they can build protective provisions into the employment contract and make the arrangement simply business. For example, as an ETA you intend to become the President/CEO of the company and want the seller to report to you directly. Make sure you spell-out the specific roles/responsibilities, job description, even work location for the exiting owner. Try to get every card face-up on the table. The last thing the previous owner will want to do is go from being the President/CEO of the company to cleaning toilets. Make certain you add/consider exit clauses, such as: What if they get fed up? Is there a fall-back provision where they pay back some money, or do they get to leave and just keep some unearned compensation? What if you get tired of the exiting owner? Can you terminate them with/without pay?

SUMMARY

So, in today’s 30 Days to ETA post, we explored the concept of ETA Capital. Once you have the found the business and the ownership vision is in sight, how you are going to fund it to make it a reality is crucial. As such, we’ve explored 5 sources of ETA Capital for you to explore and select the best option to make your ETA dreams come closer to reality. Don’t forget, every business acquisition is different… Rely on your ETA Professional Team for counsel/advice.

Sam Palazzolo

30 Days to ETA | Day #26 – The ETA Letter of Intent (LOI)

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #25 post I shared that your ability to analyze reports, or the CIM will not be enough as an Entrepreneur Through Acquisition (ETA). You’re going to have to conduct interviews with key parties on the seller’s side of the equation successfully. The ETA Owner Interview needs to be done so that you gather all of the missing pieces of information you need to proceed — if justified (You can read the previous post by CLICKING HERE). Finding, researching, conducting preliminary due diligence — as well as interviews — are all precursor to what is considered by most to be the first step in the formal business sale, the Letter of Intent (LOI). So, in today’s 30 Days to ETA post, we’re going to explore The ETA Letter of Intent (LOI)… Enjoy!

30 Days to ETA - The ETA Letter of Intent (LOI)

The ETA Letter of Intent (LOI)

Sometimes called a Memorandum of Understanding or an LOI, the Letter of Intent alerts a business seller that a buyer “intends” to purchase their company. Usually, the LOI is non-binding, but many courts uphold its provisions as contractual and binding. Therefore, whenever you provide a Letter of Intent, make certain your attorney and your transition team have created/reviewed it respectively.

At Tip of the Spear Ventures, when we create an ETA Letter of Intent (LOI) we want to convey the purpose this potentially binding document serves In its most basic form, the ETA LOI is an agreement to agree or to reach an agreement. The ETA Letter of Intent (LOI) sets the stage for the business sale. It can effectively do one or more of the following things:

  1. Lay out the expectations and essential terms of the business sale.
  2. Serve as preliminary documentation for lenders or governmental boards.
  3. Put the public on notice that there will be a sales transaction.
  4. Determine which party or which team member will draft certain documents.
  5. Set a time frame for negotiations, periods of purchasing exclusivity, purchase agreements, and closings.

Elements of The ETA LOI

Whether the ETA Letter of Intent (LOI) shows a basic commitment between the buyer and seller or publicizes the trading of a company’s stock, it will inevitably contain a number of elements. While not exhaustive, here is a list of details typically contained therein:

  • A list of the assets to be sold in the transaction.
  • The purchase price for the business and all its stated assets
  • A good faith, or earnest money, deposit
  • Exclusivity period parameters
  • Expected length of time for due-diligence to occur
  • Signed Confidentiality Agreements
  • Definitions of important terms that might be used during the transaction
  • A target date for the execution of the Purchase Agreement (PA)
  • Allocation of expenses for both parties
  • Identification of sale’s jurisdiction and governing entities
  • Any provisions intended to be binding

The ETA LOI Excitement Blunder

Since the ETA LOI signals the start of the formal business sales process, you must be more cautious than ever before. As the Buyer, you have the opportunity to make many demands which the Seller has the choice to accept or refuse. Adding restrictions or limits to your Buyer demands can protect you during the approaching due-diligence period. I can’t say this enough; lean on your ETA Professional Team. The ETA Professionals you’ve assembled have hopefully walked down this road before and will know how to advise you accordingly.

The ETA LOI Guidelines

The following are a few ETA LOI Guidelines that I have created/compiled from the Tip of the Spear Ventures Mergers & Acquisitions practice:

  • Limit the exclusivity period to 90 days – If you’ve been properly preparing to acquire the business, you should have most of the data the seller will provide already. By limiting the time you give this particular exclusive right to buy the business, you prevent the seller from dragging out the process so long that the seller loses potential interest in selling to you.
  • Request the delivery of a purchase agreement within 60 days – Dragging out the sales process could keep you from effectively managing the company, which could cause the value of the company to decrease over the short-term. The seller will inevitably check-out from leading the business the moment they decide to sell the business. Time is not your ally.
  • Publicize other Letters of Intent received – If the seller receives other Letters of Intent (LOIs) during the due-diligence process, I’m a firm believe in wanting to know that they are receiving them. Therefore, they should be public record. It shows transparency, trust, and good faith to share this information. Any withholding of an LOI approach could/should be grounds for termination of LOI.
  • Don’t take responsibility for any fees – Don’t give the seller everything they desire and the kitchen sink! Share that you will not be responsible for legal fees and professional fees incurred during this time.
  • List everything that is not included in the sale – Just as you list everything that is included in the sale, be sure to list everything the seller should plan on taking with them. If they want to keep a piece of equipment or a plaque on the wall, list it. Don’t be afraid to keep things you will need for the business, but let them have those family heirloom items. Just be sure to clarify what you’re keeping versus what you’re having them take.
  • Address what will happen to cash on hand and Accounts Receivable – Clarify whether the seller is buying any, some, or all rights to the cash on hand and accounts receivable. Have a plan in place to purchase the 30 day, 60 day, or 90 day + accounts. Maybe buy the current accounts at a dollar-for-dollar rate. Then, maybe acquire the outstanding 60 day+ accounts for 50 cents on the dollar and the 90 day+ accounts for 10 cents on the dollar. Spell out what will be done with those open accounts and excess cash. I’ve had sellers desire to not include any accounts receivable as a part of the sale. The reason why you are an ETA, and not a startup entrepreneur, is that there is a business in place with associated customers/revenue streams. Not having access to this revenue stream is startup-equivalent, and therefore should be avoided.
  • Employ formula pricing – Also known as cap pricing, formula pricing places a set cap on the sales price. Formula pricing usually keeps a seller from negotiating a higher sales price as the buyer finds more value in the company.
  • Don’t text or email without attorney approval – Since this is the beginning of a FORMAL business sale, any and all written communication can affect the terms of your Letter of Intent and subsequent Purchase Agreement. Don’t send out a “quick text” or an emotional email without consulting your ETA Professional Team because that “quick text” or emotional email could alter the course of your sale and your legal responsibility therein.
  • Don’t offer IOU’s – If you agree to a promissory note for the cash on hand or the accounts receivable, the seller could receive it all, spend it all, and leave town without giving you a dime. Don’t trust them and don’t offer to write IOU’s.

SUMMARY

In today’s ’30 Days to ETA’ post, we explored The ETA Letter of Intent (LOI). Finding, researching, conducting preliminary due diligence — as well as interviews — are all precursor to what is considered by most to be the first step in the formal business sale, the Letter of Intent (LOI). A sharp seller is going to try to get everything they can for their bsuiness (You will too when it comes time to sell the business!) So when you’re dealing with the ETA Letter of Intent (LOI) to buy your business, listen to your ETA Professional Team.

Sam Palazzolo

30 Days to ETA | Day #23 – ETA Industry / Business ID

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #22 post I discussed how as Acquisition Entrepreneurs there is one mistake that I see time and again made by Entrepreneurs Through Acquisition (ETA), that being not having enough opportunities in the Mergers & Acquisitions pipeline. So, in yesterday’s 30 Days to ETA post, we explored ETA Deal Flow | Brokers (You can read the previous post by CLICKING HERE). I believe that if you fill your Mergers & Acquisitions pipeline with qualified companies to explore acquiring, life will become easier for you. But how will you know which businesses are right and which businesses are wrong to begin the filtering process on? So, in today’s 30 Days to ETA post, we’re going to explore ETA Industry / Business ID… Enjoy!

30 Days to ETA - ETA Industry / Business ID

ETA Industry / Business ID

Business — and therefore life — would be boring if we were all the same, right? I mean, I know that the “like” attracts “like,” or we enjoy things in life that are similar to what we like or enjoy. But isn’t diversity the key to success? How many times have you heard “Don’t put all your eggs in one basket” told to you by your parents probably? While on the one hand, I’m glad we’re not all the same. On the other hand, I’d like there to be greater similarity. I know, a catch-22, right? We all have different likes and dislikes, different preferences and tastes. It takes all of us to make the world go around.

Similarly, Acquisition Entrepreneurs come in all different shapes and sizes. Some of us who pursue Entrepreneurship Through Acquisition (ETA) have a little bit of money while others have a lot. Frugality rules some while “spend it if you have it” are the rules for others. Some may want an instant return on their investment while others don’t really care about getting a return. And what about those that are looking to sell their business? Some look at the potential long-term capital gain from selling their business, while others just want to concede to their competition.

So who are the sellers? What type of person or company sells their business? Well, there are a couple of different categories into which sellers fall, and by going through the following exercise with me you’ll identify your potential seller persona. Once you understand who your seller is, then you can design, shape, and create your ETA strategy to appeal to that particular type of business seller.

I believe that if you fill your Mergers & Acquisitions pipeline with qualified companies to explore acquiring, life will become easier for you.

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

The Low-Risk Sellers

The first major category of sellers consists of two very different types of business owners who both desire low-risk Mergers & Acquisitions.

1. The Financial Seller

First, we have the individuals who trade businesses like they trade stock. These owners will crunch numbers to estimate their return on investment in every type of detailed scenario. Oftentimes, these sellers are looking to hold the business for less than 5 years. Thus, they’ll want to know all of the ins and outs of their business so as to put it in the best light when it comes time to sell the business. They are NOT taking any risk that they won’t make a return on their investment within a very short time period.

Not all Financial Sellers are number crunchers or business traders, though. Some Financial Sellers come in the form of family members or employees who sell the company. They may want to go “5 and out” so that they won’t be taking risks and gambling with their investments. They’ll look to earn a sizable living by continuing the legacy of the company you buy. Most will hope to sell it for profit when they’re ready to retire.

2. The Strategic Seller

Now, the Strategic Seller is just a slight bit different. This individual is not looking to flip a business, per se. Rather, they’re looking to sell their business to enhance their life. They may want to add a cog to his business wheel that will work in harmony with other current lifestyle events.

But not all Strategic Seller want to divulge of harmonious pieces to their existing business. Some may be your competitors in some other form or fashion, looking to take over your customer base or market niche right out from under you. They want harmony in the sales process, but beware their underlying intentions.

The High-Risk Sellers

The second category of business sellers breaks into three different high-risk takers. These are the gamblers of the business selling world!

1. Angel Investors

Angel Investors typically work with start-up companies that show promise but have no proven track-record. Therefore, they take the most risk. These investors come in, buy part or all of the company, and help drive its success. Whenever they purchase or buy-in to a business, they usually don’t take all of the assets or buy all of the stock. However, they’ll take a majority of the interest equity in the company. This seller may look for similar high-risk, high-reward payouts from the sale of their business.

2. Venture Capitalists

Venture Capitalists are not going to sell companies at ground level. Think multi-millionaires who buy a company or take ownership of a company that has a proven track record of success but needs connections that only the venture capitalist can provide. The Venture Capitalists hope that their high-level affiliations will drive the company to exponential success, making them even more money. When it comes time to sell, they want the earth, moon, and sky!

3. Private Equity Firms

Private Equity firms are a bit different from the other business sellers because they typically only purchase the best of the best companies. Consequently, they pay the most and typically deal with the largest companies worth over $100 Million. These firms are looking to buy the next Google or Amazon. When it comes time to sell while less aggressive than Venture Capitalists, will still want a healthy return on their investment.

Business ID (Identification)

So we’ve categorized the types of low-risk and high-risk sellers looking to sell their business. Besides identifying the type of risk-taker you want to buy your particular company from, you have to look at the rest of the Business ID (Identification) demographics. What I mean is the local, regional, national, or global size of the business that often determines which types of business sellers will be attracted to your Mergers & Acquistions ETA pitch.

Those companies that operate in a small, localized area will normally seek “mom-and-pop” purchasers. These seller’s goal is to go out and get a return on their investment within about three to five years. They’re really not interested in spending a long time getting a company off the ground, so they seek an established business they can then sell for hundreds of thousands or a few million dollars. Then, they expect to recoup their investment in a short amount of time.

Regional sellers will typically sell companies that operate in larger areas that have mastered the art of scalability. These sellers will purchase companies with multiple storefronts in multiple cities or states. Because of the bigger investment and the larger marketplace, regional sellers expect to wait about five to ten years before they see a return on their initial investment.

National and/or international sellers will purchase the publicly traded or globally based companies. These sellers/investors look for companies that are the “best of the best.” Expecting to be paid more than local and regional sellers, they want everything the company has to offer and then some. With such a large investments taking place and hanging in the balance, these sellers will insist on solid profits from the very beginning. So they’ll look at selling companies that show reliable trends and steady customers.

SUMMARY

In today’s 30 Days to ETA post, we explored the concept of ETA Industry / Business ID (Identification). This post should help you identify the types of business sellers most likely to sell their business based on risk and location. If you can determine the specific seller for your future ETA company, you have an idea of which location to search for the company during the ETA search phase. If you’re ready to buy, identifying your seller persona — or at least knowing who they could be — will help clarify where and how to reach a seller that will agree to your desired acquisition price.

Sam Palazzolo

30 Days to ETA | Day #22 – ETA Deal Flow | Brokers

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #21 post I discussed how as Acquisition Entrepreneurs you can bet that there will be mistakes made, something I call ETA Mistakes. You can make one mistake, or you can make one million! Regardless of how many mistakes you make, how you recover from them will make a massive difference (You can read the previous post by CLICKING HERE). One mistake that I see time and again made by Entrepreneurs Through Acquisition (ETA) is not having enough opportunities in the Mergers & Acquisitions pipeline. So, in today’s 30 Days to ETA post, we’re going to explore ETA Deal Flow | Brokers… Enjoy!

30 Days to ETA - ETA Deal Flow | Brokers

ETA Deal Flow | Brokers

At Tip of the Spear Ventures, we’re often asked our opinion on broker utilization. A Broker can help you more than you might be thinking in an acquisition. On the one side — The Sell Side Broker — they represent the seller of the business. On the other side, and this one is often more rare — The Buy Side Broker — represents the buyer (you, the ETA or Acquisition Entrepreneur) with the purchase of a business. We mostly think of brokers as only representing the seller — Sell Side Broker. Mostly, they initiate and mediate the interactions between the buyers and sellers. In fairness, each one provides a similar service. However, each has a different skill set that provides different advantages and disadvantages for particular buyers and sellers. So let’s identify the players, look at their skills sets, and decide how you will work with each broker as you look to conduct ETA in 30 Days!

#1. The Sell Side Broker

Also known as a business transfer agent, or intermediary, a Sell Side Broker acts as a mediator between buyers and sellers.

Who Do They Serve?

Typically, the Sell Side Broker serves smaller, local or regional “mom-and-pop” companies that gross less than five million dollars in yearly sales. According to the Exit Planning Institute (EPI), around five million companies fall into this small business category. Those companies usually sell for less than five million dollars and sell to individual buyers. For the most part, they also have less than one million dollars in EBITDA, or Earnings Before Interest, Tax, Depreciation, and Amortization.

How Do They Get Paid?

Sell Side Brokers do not tend to charge sellers an upfront fee for services. If they have to clean up a huge mess to get the seller positioned to sell, however, they may charge an initial set-up fee. But most of the time, they don’t. Instead, they often charge a commission that funds and pays them at the time the business sells. So no fee for you as the Acquisition Entrepreneur!

What Do They Expect?

The Sell Side Broker requires the seller to compile a multitude of materials to prepare for the sale. Those could include marketing materials used, past and present financial reports, or financial forecasts. In medical fields, a business broker might ask for total patient counts and demographics. Sellers may even have to list what types of procedures, services, or products they offer and how many they provide or sell on an average day. Although sellers will have to provide quite a bit of documentation to the broker, they don’t usually have to go to an accountant for help or additional compilations. What are they looking for the Buyer to do? You probably guessed it, the higher their commission is a direct relative of the sale price of the business. So, they want you to show up at closing with bags of cash!

What Benefit Do They Provide?

Similar to a realtor, the Sell Side Broker walks sellers, and sometimes buyers, through the sales process. The facilitating broker can list the business for sale, develop marketing strategies to attract buyers, arrange business walk-throughs, meet with buyers’ agents, answer questions, and help negotiate sales terms and conditions if issues arise. Essentially, he puts polish on the business to make it look better to attract a buyer. He also acts as a cushion, or an emotional barrier if you will, between the buyer and the seller. His objectivity and creativity repairs hurt pride and dampens fiery tempers if the sales process does not go according to plan. For the buyer, they can also be a pollyannaish resource and their advice/counsel should be seen as such.

#2. Buy Side Broker

The converse of the Sell Side Broker is that of a Buy Side Broker, who acts as a mediator between buyers and sellers but acts in the best interest of the buyer who hires them.

Who Do They Serve?

As stated above, the Buy Side Broker represents you — the Acquisition Entrepreneur — throughout the Mergers & Acquisitions process. You find them and hire them, they then work for you.

How Do They Get Paid?

Buy Side Brokers charge buyers an upfront fee for services. Think of them as a key member of your ETA Professional Team, and unlike the Sell Side Broker who works for the seller and their best interest, they work for you and your best interest.

What Do They Expect?

I’m often asked why would an ETA want a Buy Side Broker? Simple — Most ETA or Acquisition Entrepreneurs are likely buying their first business. With this heading into often unknown spaces, a Buy Side Broker can help explain what the process is and act as a Sherpa if you will. They expect you to follow their guidance (and you hired them, so why wouldn’t you?)

What Benefit Do They Provide?

With this first business comes much upheaval! Think of an acquisition as an ocean with several highs and lows of the wave — or the waves trough and crest. A good Buy Side Broker will help calm those waves, making the acquisition a more expensive one for the buyer, but a better one with less frayed nerves!

SUMMARY

Iin today’s 30 Days to ETA post, we’re going to explore ETA Deal Flow | Brokers. Having a broker may be vital whenever you’re getting ready to acquire a business. Whether to walk you through the entire process and make the business look good to you as the potential buyers or to guide and direct your actions and temper emotions on both parties — Buyer and Seller. Just like the importance of having a sharp attorney when creating a Letter of Intent (LOI) or Purchase Agreement (PA) contract, you will want sharp brokers when implementing those contracts.

Sam Palazzolo

30 Days to ETA | Day #21 – ETA Mistakes

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #20 post I discussed how as Acquisition Entrepreneurs you can identify and hire the most vital part of your Professional ETA Team — ETA Business Law. No matter how many jokes you’ve heard about lawyers, good attorneys can save you hundreds of thousands — or even millions — of dollars when it comes time for you to acquire a business (You can read the previous post by CLICKING HERE). Another ETA difficulty is the opportunity to make mistakes. You are going to make mistakes, but how you recover from them will make a massive difference. So, in today’s 30 Days to ETA post, we’re going to explore ETA Mistakes… Enjoy!

30 Days to ETA - ETA Mistakes

ETA Mistakes

At Tip of the Spear Ventures’ Mergers & Acquisitions practice, we have a quality goal – “No Mistakes!” While it’s a great goal to have, as Managing Director I know that it is 100% unrealistic. We are going to make mistakes when we set out to look for businesses to merge or acquire. I like that it’s a high goal, so we’ve kept it from the inception of the practice area.

Mistakes are a part of business. Your ability to risk mitigate, or go into damage recovery after you identify that you have made a mistake, will make all the difference. We also make a habit of backing up and identifying how we don’t make similar mistakes in the future if at all possible.

So if mistakes are a matter of “if” and not “when” for the Acquisition Entrepreneur, I wanted to share in this 30 Days to ETA post some of my most proud mistakes.

You’re going to make mistakes. Your ability to recover from them is the part to focus on.

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

Emotional ETA Mistakes

The seller of a business, be they an individual or a group, is not and does not personally care about your business goals and aspirations, but you do and can often be mislead to believe that they do too. Come time to sign the Purchase Agreement (PA), you’ve put years of blood, sweat, and spears into buying a business based on their value. The majority of your personal worth will most likely be tied up in the new company after acquisition. So, buying it will be hard, scary, and emotionally exhausting. You don’t want the seller to interpret your emotional ups/downs as weakness. Demonstrating a halfhearted attempt to buy a company at your valuation-derived asking price could prove devastating. If you’ve assessed the Minimum Viable Acquisition (MVA) price, you need to stay strong and fight for the price you identified regardless of your emotional state.

The ETA Mistake of Going All-In

Once you provide a buyer’s offer, you can do several things to exude an air of confidence you may not feel. You don’t want to walk into a sale with weakness and work from anywhere but a position of strength. So, what can you do to ensure a successful purchase happens?

  1. Have courage. – Pull yourself up by the bootstraps, and man up! The minute you decide to sell, jump in or stay out.
  2. Assemble your Professional ETA Team. – Now is the time to bring in your ETA Professional Team in for some much needed counsel. A well-rounded team will help you stay strong and vigilant during the ETA process.
  3. Build the Exit Plan. – Choose one of your four professional players to oversee the ETA process with precision.

A Rookie ETA Mistake

As you prepare to show a strong, united front in the face of your potential seller, you don’t want to make rookie ETA mistakes, such as:

  1. Don’t stop working on other Mergers & Acquisitions deal flow.
  2. Don’t take any counter-offer just because it’s their first business sale.
  3. Reign in your eagerness to buy.
  4. Don’t quit in the middle.

SUMMARY

I’ve heard it said that buying a business is 80% emotional and 20% business. As we’ve identified in this 30 Days to ETA post, the largest hurdles you face will be ETA Mistakes that derive from emotional errors. You are going to make mistakes, but how you recover from them will make a massive difference. While you won’t be able to avoid making ETA Mistakes, your ability to plan for the recovery afterwards will be beneficial.

Sam Palazzolo