Upsize on Tap: The scoop on M&A

Jay Sachetti got into the residential cleaning industry about three years ago. His company, Bundl Home Cleaning & Maintenance, has done several acquisitions and is exploring more. 

While 2024 has been a good year, it’s not as hot as it had been during an extended era of historically low interest rates coming out of the pandemic. The correction on that has, he says, created some challenges in getting deals done.

“I think as we transitioned out of that environment there was some misalignment between seller expectations and buyer expectations and what those returns were going to look like with a different financial picture,” he says.

Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.

Challenges and horror stories

While O’Brien described the current market as “busy” and Ross-Hanson used “robust,” Sachetti called it “uneven.” Bundl has chosen to expand through acquisition because his business is focused on recurring work and he figured it would be easier to grow by acquiring companies in new Twin Cities markets that had established portfolios rather than chasing new contracts one at a time. He’s seen the market as a buyer in recent years.

Through-the-roof multiples paid for businesses during the low interest period reset expectations and it has taken some time to re-regulate prices after the pandemic messed with financials for three years, he says.

“I’m looking at your 2020, your 2021, even your 2022 books and in a lot of cases it can be hard to figure out up from down because there were so many weird things going on,” he says.

Other common challenges stepping in the way of getting business transitions completed, he says, are when owners get bad advice from the wrong adviser before lawyers and other team members are brought together, especially in cases where they decide spontaneously to sell without doing proper planning in advance, O’Brien says.

“There was a lot of puffing going on about the value of the business prior to the contract getting signed and then, after the contract was signed, ‘oh, actually, no, it’s a lot less,’” he says. “That’s probably one of the more common things I see is you get somebody in there that really doesn’t know the business and is not the appropriate person to be on the team.”

O’Brien emphasized that those problems can be solved with long-term planning and bringing in a team of advisers well in advance of a sale. 

Ross-Hanson agreed and added that a lot of business owners assume when they are ready to move on, there will be a bidding war, an all-cash offer and an opportunity to “sail off into the sunset.”

“The reality is that’s a dream, it’s not real, it’s not a plan,” she says. “Not starting early enough is the biggest war story or problem, not having an experienced advisory team helping evaluate what those options may be.”

Options include acquisitions. But there are others, including ESOPs — employee stock ownership plans — or other forms of internal transitions to family members, individual employees or a management team, she says. Ultimately, pre-planning for what is realistic will maximize your opportunity to actually make a good deal in the end. “Having the right expertise on the advising team, building that early, starting the planning early, would be my recommendation,” she says.

Sachetti adds that while business brokers add value in many ways, some also can complicate deals by creating valuation expectations that vary significantly from what the market will pay.

He adds that business owners also hurt their efforts to maximize proceeds from a sale with purchases aimed at reducing a tax bill for any given year.

“You’ve had a good year, there’s some cash in the bank and boy, that tax bill is going to look huge,” he says. “So, hey, let’s go buy an RV or a boat or a camper, something you can run through the business as an expense. The downside is that when it comes to sell, you’ve taken your earnings down on a one-for-one ratio with whatever it is that you buy and that is now directly subtracted by the multiple you want for your business. You traded out four times, three times, eight times, whatever the multiple is you want.”

Change expectations

Ross-Hanson emphasized market statistics indicating that only 30 percent of businesses that go up for sale end in a successful transaction. So, how do owners make sure they give themselves the best chance to sell? She advised them to consider all alternatives — and to be aware that all deals look different. 

The likelihood is that a transfer within a family or to a management team will take some time and won’t result in the largest possible deal because those parties might lack cash or bankability. 

“A lot of times that financing is also going to have to come from what they call seller financing, where the cash flow of the business is going to be utilized to gradually allow those internal buyers to buy ownership,” she says. 

The size of the business and the asset-denseness of a company will also impact salability, adds Sachetti.

“The smaller you get, the harder it is to sell, the more assets there are, it’s harder to sell,” he says. “The value of those assets you can liquidate are worth more than the cash flow and whatever the multiple might be.”

Finally, O’Brien adds that internal family sales are becoming less common, especially as successful transfer rates decrease significantly as the business moves from second to third and fourth generations. Many of those latter generation members, he says, have lived a certain lifestyle because of the business, but don’t necessarily want to put in the work to continue its success.’

“They aren’t coming from a certain bootstrapping of the building of the business,” he says. “I think also, there is a desire to maybe step out from under the shadow of the parents and be known for something other than just taking over that particular business.”

State of readiness 

One positive right now is that business owners seem to be heeding the advice of people like O’Brien, Ross-Hanson and Sachetti, who say they need to begin readying their business for sale well in advance of putting it on the market.

Ross-Hanson sits on the board of the Twin Cities chapter of the Exit Planning Institute, which recently conducted a State of Owner Readiness study. Twice as many businesses are planning for their exit compared with the last time such a study was conducted in 2017.

 “The subject of exit planning for privately held businesses has probably never been more pronounced than now,” Ross-Hanson says. “The increase in awareness, planning, team building has over doubled in that time, just even from the last six years.”

O’Brien agrees. An exit strategy should ideally be part of the company’s initial business plan. Among things to look at, he adds, are buy-sell provisions, growth strategies and provisions for buying out minority partners if an opportunity arises.

“You should be talking about what the exit strategy is as part of your planning from day one and then be looking at it through the life of the business, measuring against some benchmarks to see if you’re on target,” he says. “I have a lot of clients who are doing that now, where they are years away from actually selling.”

Robust 2025 market and closing advice

As the discussion closed, each panelist offered their strongest advice to owners looking to find their way to the best deal possible. Ross-Hanson reemphasized that every business owner will eventually leave their company, voluntarily or involuntarily, and it will likely be the most important transaction of their lives. “The quality of that exit,” she says, “is in direct proportion to the quality of preparation made. The better prepared, the better the outcome.”

O’Brien reiterated the need to have good advice. “Make sure you have a good team of advisers and make sure they know each other and work with each other and talk with each other, so when the day the sale comes, everybody is on the same page,” he says. “You may go through this one time. … We go through it many times in a week, so rely on our advice if you hit a bump in the transaction.”

Sachetti emphasized the need for an experienced, stable management team that will stay on board after a deal.

“You can show a track record and a story and a history,” he says. “When I’m looking for businesses to buy, I’m looking for tenure. I’m looking for depth in the team.”

Despite some of the challenges in getting deals done, speakers universally say they expect 2025 to be another solid year for business transition activity.

A robust market in 2024 where deals have cut across markets from manufacturing to HVAC companies to breweries that have tired of trying to compete in a deeply competitive market, O’Brien says, will continue featuring a number of aging business owners who want to wind down and retire.

And business owners like Sachetti, who have decided acquisition will help them grow faster than they could organically, will continue pushing the market. “We’re out on the hunt ourselves,” he says. “I hear and see a lot of that going on, as well, so I am optimistic for 2025.”

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