What's the multiple?
When the sellers first call regarding our company representing them, an early question inevitably deals with valuation. Given that many deals either trade on or are quoted as multiples of monthly recurring revenue (MRR), the seller wants the answer to the basic question “What’s the Multiple?”. For those old enough to remember, it is the analogous to the TV commercial line “Where’s the Beef?”. It is a fair question as the seller will only sell his company if he feels he is getting a fair price. If his value expectation is too far above the marketplace, he will either keep his company and continue running it or adjust his expectations to the range that the market will pay. Thus, a seller with a low amount of MRR that says he will only sell at 50x will be one whom the marketplace will allow to continue running his company for quite a while. Although it would seem that all sellers begin above the market range, we have dealers come to us each year with their price expectation BELOW what the market will pay them. They are pleasantly surprised at their newly revised expected valuation once they learn that the market will value them at 4 to 6 multiples higher than they thought. It is not easy to know one’s value without the benefit of what the entire set of interested buyers in the country will pay. While the question of the multiple is a starting point in the conversation, it is often not the only part of the valuation, especially if one is selling his company and not just his account base. If one is selling the whole enchilada, the multiple may be the meat but the balance sheet items are the garnishes. There is value to be recognized among the assets, primarily the accounts receivable, inventory and vehicles. Here you have a variance among buyers as to how they present the purchase price. Some buyers offer a multiple for “all the assets” while others offer 1) a multiple for the accounts and then 2) value the balance sheet items separately. There have been instances when a 37x “all in” lost to a 35x + the assets. It is the total purchase price that the seller must focus on, in order to maximize his value.
Does the contract term matter?
The existence of the contract is much more important than the actual contract term. In past years the buyers were more focused on longer renewal periods (2-5 years) as they felt more comfortable that the customer wouldn’t leave. With many states either moving to or already using month to month renewals, the focus on payment history is greater than ever before. We worked with a seller that had all month-to-month contracts. In the past, that would have been the kiss of death as far as finding a buyer, given that every customer could legally cancel within a month’s time. The buyer who made the acquisition instead focused on the fact that most of the customers had been paying for over 10 years. Thus, a change in ownership was unlikely to send them scrambling to determine when they could get out of their contract. The acquisition occurred, and the buyer has been very pleased as his month to month longtime customers have stuck around.
Is there a minimum average monthly recurring revenue that buyers require?
This answer has also changed over time. In the past, buyers wanted to see $20 MRR or higher. They would mention their bank covenants and state that their banks required a certain spread between the money taken in and the monies paid out for service, monitoring, etc. That has changed as the takeover dealers have proliferated. There are many that run a lean operation and therefore the low MRR is not a deal breaker. We have done deals with the average MRR under $20 that worked out very well for each side.
Will the buyer keep my people?
A seller can sell in many ways but the two most common structures are the sale of 1) the accounts only and 2) the entire operation. If one is only selling the accounts, the issue of the buyer keeping the employees is not relevant. The seller can sell the accounts and get out or sell them and stay in. In either case, the employees are his responsibility. When the seller is selling the entire operation, the question of what happens to the employees is something that today is asked more times than not. We call the phenomenom “Rich Man, Poor Men”. In these times where unemployment is a big issue, we have had many sellers we represented tell us that we can only market their companies to a buyer who will keep the employees. The sellers tell us that their people helped grow the business that they are now reaping the benefit of, and that they see these people outside of work, whether be at the store, church or at their kids’ schools. They tell us they don’t want to be the one who reaped all the money while putting all these acquaintances out of work. When unemployment was much easier to recover from, the question came up much less frequently.
Do I have a shot at getting some of the holdback money?
When a seller sells to a buyer in today’s marketplace, the holdback is generally 10%-20% of the purchase price. There are certainly buyers that only put 60%-70% down and others that pay 100% at closing, but the 10%-20% holdback is clearly the most commonly occurring scenario. The term of the holdback is generally for one year, with normal attrition decreasing the amount of the holdback that will be paid at the end of one year. In past years there were many buyers who took a jaded view of account bases and did everything they could to kill off any potentially problematic account within the one year holdback period. When dealing with this such a buyer, the answer as to whether one is likely to get any of his holdback money was most certainly “no”. We toldl the sellers that the best mindset was to act as if they would get none of it back, and if anything came back they should consider it an early Christmas present. Thankfully, most of those buyers are no longer around. Buyers that we work with today view the account bases in exactly the opposite manner. They understand that if they can keep the troubled accounts and make them long term payers, they will benefit many times over what they would have saved by killing the account. Many of today’s buyers would rather pay ALL of the holdback (and it some cases allow replacements to make that happen) and therefore end up with a much larger group of accounts for many years.
The above discussion dealt with a normal holdback percentage with a one year period. There are ways to lessen the amount that is charged back during the holdback period. One way is to shorten the holdback period. We have done deals with holdback periods of 90 days and 6 months. The shorter holdback period minimizes the amount of dollars charged back to the seller as he has a shorter time frame in which to lose the accounts.
Another way to limit the holdback chargeback is for the deal to have an attrition basket. An attrition basket states that a certain percentage of the attrition won’t count against the holdback and all that will count is what exceeds the attrition percentage. An example would be a deal with a 10% holdback for one year. If the seller’s annual attrition is 7% and the attrition basket is also 7%, essentially all of his normal attrition would not count against the holdback. This would result in the seller getting most if not all of his holdback money returned. Attrition baskets are negotiated items and often range from a full year of the seller’s attrition to a lower percentage (e.g., an attrition basket of the first 3% of attrition).
Does the buyer have the money?
This is a new question that we never saw until this past year and yet it is being asked more often. We get calls from sellers that want to sell that tell us they went through some period of time (usually 6 months to a year) where they had signed a letter of intent, gone through an exhaustive and intrusive period of due diligence (including their employees finding out), and then the buyer couldn’t come up with the money. Whether the buyer blamed his bank, his equity or lunar tides, the result was an exhausted seller that would only deal with future buyers if they could prove that they had the money in the bank early on. In a number of cases with questionable buyers, we told the interested parties that they were welcome to make an offer or meet only after they first provided a recent bank statement with monies greater than the purchase price. In each case the buyers failed to provide the documentation and the seller was saved further fruitless aggravation.