It’s Time to Exit. Are you Ready?
Thinking about whether or not you are ready to exit is an important question. It’s something that every business owner will have to address at some point. Importantly, you don’t want to wait until the 11th hour to prepare to sell your business. There are far too many pieces in this particular puzzle to wait until the last minute. You’ll want to begin the process sooner by asking yourself some key questions.
Determining Value
First, you’ll need to determine the actual value of your business. It is a harsh truth, but what you think your business is worth and what the market feels that it is worth may be two very different things.
This point serves to underscore the importance of working with a business broker or M&A advisor early in the process. An experienced broker knows how to go about determining a price that will generate interest and seem fair. Remember that at the end of the day, it will be the marketplace that determines the value of your business, but working with a seasoned professional is an excellent way to match your offering price with what the market will ultimately bear.
Going Within
Secondly, you’ll want to consider whether or not you truly want to sell. It is not uncommon for business owners to begin the process of selling their business only to realize a few hard facts. Wanting to sell and the time being right to sell are often two different things.
Upon placing your business on the market for sale, you may learn that you’re not emotionally or financially ready. If this happens to you, consider it a learning experience that will serve you well down the line.
Get Your Ducks in a Row
If you have done a financial assessment, a little soul searching and have begun working with a business broker or M&A advisor to determine that now is a good time to sell your business, then there are several steps you’ll need to take. You can be sure that any serious prospective buyer will want a good deal of information regarding your company.
At the top of the list of items potential buyers will want to see are three years of profit and loss statements as well as federal income tax returns for the business. Other important documents ranging from lease and lease related documents, lists of loans against the business and a copy of a franchise agreement, when applicable, are all additional documents that you will need to provide. You should also have a list of fixtures and equipment, copies of equipment leases, lists of fixtures and equipment, and an approximate amount of inventory on hand. A failure to not have this information organized and ready to present at a moment’s notice could be a costly mistake.
Working with professionals, such as accountants, lawyers, and brokers, is a savvy move. Owning and operating a business can be a complex process, and the same holds true for selling a business. Investing the time to seek out experienced and professional advice is the first step in selling your business.
Determining the Right Time to Sell
Determining when it’s finally the right time to sell can be a tricky proposition. If you are thinking about selling your business, one of the best steps you can take is to contact a business broker. A good business broker will have years, or even decades, of proven experience under his or her belt. He or she will be able to guide you through the process of determining what you need to do in order to get your business ready to sell.
One major reason you should contact a business broker long before you think you might want to sell is that you never know when the right time to sell may arise. Market forces may change, unexpected events like a large competitor entering your area, or a range of other factors could all lead you to the conclusion that now, and not later, is the time to sell.
In a recent The Tokenist article, “When is the Best Time to Sell a Business?”, author Tim Fries covers a variety of factors in determining when is the best time to sell. At the top of Fries’ list is growth. If your company can demonstrate a consistent history of growth, that is a good thing. Or as Fries phrases it, “What never varies, however, is the fact that growth is a key component, buyers will look for.” Growth will be the shield by which you justify your price when you place your business on the market.
If your business is experiencing significant growth then you have a very strong indicator that now could be the time to sell. Fries points to a quote from Cerius Executives’, CEO, Pamela Wasley who states, “When your business has grown substantially, it might be time to consider selling it. Running a business is risky, and the bigger you get, the bigger the risks you have to face.” Again, growth is at the heart of determining whether or not you should sell.
Knowing the “lay of the land” is certainly a smart move. For example, have there been a variety of businesses similar to your own that have sold or were acquired recently? If the answer is “yes,” then that is another good indicator that there is substantial interest in your type of business.
Reviewing similar businesses to your own that have sold recently can help you determine how much buyers are paying for comparable businesses. This can help you spot potential trends. In short, you should be aware of market factors. As Fries points out, everything from relatively low taxes and low interest rates to strength in the overall economy and an upward trend of sales prices can impact the optimal times for a sale.
Now, as in this exact moment, might not be the right time for you to sell. Getting your business ready to sell takes time and preparation. Fries points out that smart sellers “look for a good time, not the perfect time” to sell a business. Working with a business broker is a great way to determine if now is the right time to sell your business and what steps you have to take in order to be prepared for when the time is right.
Should You Sell Your Family Business?
When the complicating variable of family is added to the equation of selling a business, the situation can get rather messy. Family usually complicates everything and businesses are, of course, no exception. Ken McCracken’s recent article “Family business: to sell or not to sell?” 6 questions to help you make the right decision,” seeks to decode the complexities so often associated with family businesses.
Consider the Market
The foundation of determining whether or not now is the right time to sell must begin with market forces. Determining how much your business is worth is a key variable in any decision to sell.
The best way to determine the worth of your business is to have an outside party, such as a business broker, evaluate your business. What you believe your business to be worth and what the market dictates could be very different. You may discover that your business does not have the value that you hoped for. If this is the situation, then selling simply may not be an option.
What is Next for You?
Tied to knowing your market value is understanding what you will do next after you sell your business. For example, do you have a family member who can run the business without you? What will you and any family members who work for the business do after the sale goes through? You may discover that the sale could be very disruptive for you personally. All too often, people fail to recognize the emotional and mental stress that comes along with selling a business. Many owners begin the selling process only to discover that they are not emotionally ready to do so. While everyone wants to be unemotional in making their business decisions, this is not always the case.
Due Diligence
You will also need to deal with the issue of due diligence. Working with a business broker is an excellent way to handle the due diligence process. Business brokers usually vet prospective buyers ahead of time, which can save you a great deal of aggravation and wasted time.
McCracken believes business owners should investigate how the prospective buyer handled previous acquisitions. Specifically, McCracken believes that business owners should look to how well the prospective buyer honored previous commitments, as doing so is an indicator of how trustworthy a buyer may be.
Planning for Negotiations
Finally, McCraken believes it is essential to know who will oversee negotiations. It is key to note that many deals that could have otherwise been successful, fall apart due to poor negotiations. A business broker can be invaluable in negotiations. After all, who wouldn’t want someone with dozens, or even hundreds, of successful transactions advising them?
Selling a family business can be emotionally charged and can cause significant life changes for not just you, but for members of your family as well. Often, family businesses were built up over a lifetime or even over generations, which can make the decision to sell quite emotionally charged.
Overview of Mergers and Acquisitions in the Education Sector 2019
2019-2020 saw a steady increase in M&A activity in the education sector. Strategic buyers and investors are scrambling to adapt to changes in learning modalities while private equity groups and financial buyers have shown renewed interest in the sector because of changes in the regulatory environment and the increased reliance on scaleable technology. In many instances, there is an ongoing shift from live, in-person instruction to an emphasis on online or blended instruction.
The K-12 education market remains active, as new technologies and services continue to improve student performance and teacher efficiency, improving overall educational outcomes. Companies that offer adaptive learning solutions and assessment products continue to have a meaningful impact. Advancements in online education, digital classrooms, specialized curriculum, and peer-to-peer sharing platforms are transforming the ways that students and teachers collaborate both inside and outside the classroom.
With the emergence of the COVID-19 pandemic and subsequent closure of schools worldwide, remote learning became more important than ever. Laptops and tablets have accelerated the pace at which students are utilizing digital tools and content, allowing the introduction of new entrants into the sector and compelling existing education providers to evaluate new technologies and teaching models. However, there is an uneven level of accessibility and preparedness for remote education in K-12 throughout the U.S.
The Higher-Ed sector has seen rapid advances in EdTech with online tutoring, instruction, proctoring, testing, grading, and assessment gaining traction and expanding rapidly. This includes rapid advances in automated online grading in subjects such as chemistry, math, and other quantitative disciplines. Recent developments in AI-based, automatic grading of essays and papers also garnered a lot of attention from investors.
Current M&A Market Landscape
Jackim Woods & Co tracked over 900 education industry merger and acquisition (M&A) transactions beginning in 2018 through the end of 2019. Note that this covers all segments, including traditional brick-and-mortar higher ed and childcare services companies, as well as EdTech deals, which accounted for nearly half of the total transaction volume. K-12 EdTech/Media and Professional Training Services were tied as the industry’s most active market segments in 2019 with 90 transactions each. The total transaction volume increased nine percent between 2018 and 2019, while the average deal size declined somewhat. The total value of M&A transactions in the education sector declined 21%t, from $15.64 billion to $12.30 billion.
Strategic Buyers
• Strategic acquisitions saw a nine percent gain on an annual basis, from 292 to 318 deals. Strategic buyers accounted for 66% of transaction volume and 52% of transaction value in 2019.
Financial Buyers
• Private equity sponsored transactions in the education sector increased eight percent over the past year, from 149 to 161 deals. Financial buyers represented 34% of the transaction volume and 48% of transaction value in 2019.
• The education industry’s largest acquisition in 2019 was Thoma Bravo’s purchase of Instructure for $1.86 billion. Instructure developed the very popular and widely used Canvas learning management system (LMS).
• The most active overall buyer in the Professional Training segment was Leeds Equity Partners with four acquisitions, including Kaplan Altior, which delivers classroom-based, online and in-house skills training and assessments to the legal and professional services sectors; VitalSmarts, a communication and leadership development training business; The Center for Legal Studies, which offers online programs and training courses for paralegals and other legal support professionals; and Watermark Learning, a business analytics and project management training company.
Valuation Multiples
Enterprise value multiples in the education sector have been strong over the past 24 months.
The industry’s median revenue multiple rose from 1.8x to 2.5x, while the median EBITDA multiple declined from 10.5x to 9.6x. However, these statistics can be misleading, since revenue and EBITDA multiples vary widely by sector and the size of the company being acquired. For example, EdTech companies that accounted for the largest volume of M&A transactions over the last 24 months sell for much higher multiples than higher ed institutions, childcare services, and professional training companies, as illustrated below.
Higher-Ed Institutions
Title IV post-secondary institutions with EBITDA of less than $3 million sold for an average EBITDA multiple of 4.0, while larger institutions with EBITDA over $3 million sold for an average EBITDA multiple of 5.0.
K-12 Institutions
K-12, early childhood, and tutoring and test-prep service companies with EBITDA less than $3 million sold for an average EBITDA multiple of 4.5, while similar companies with EBITDA over $3 million sold for an average EBITDA multiple of 5.5.
Professional Training Services
Professional training and continuing education companies with EBITDA less than $3 million sold for an average EBITDA multiple of 4.5, while similar companies with EBITDA over $3 million sold for an average EBITDA multiple of 5.5.
EdTech
Companies with revenue of less than $3 million sold for an average revenue multiple of 1.9 or an average EBITDA multiple of 6.8. While EdTech companies with revenue over $3 million sold for an average revenue multiple of 2.8 or an average EBITDA multiple of 9.5.
Transactions Per Segment
Higher-Ed Institutions
Transactions in the Post-secondary, Higher-Ed Institutions sector increased 46%, making it the sector with the largest year-over-year increase. The segment’s highest value transaction in 2019 was YDUQS’ announced acquisition of Adtalem Educacional do Brasil for $472 million. YDUQS is Brazil’s second-largest private higher education organization. Adtalem Educacional do Brasil offers programs in healthcare, law, business management, engineering, and technology and serves more than 81,000 degree-seeking students. However, the vast majority of higher-ed transactions involved small and mid-sized Title IV career or vocational schools that were acquired by larger Title IV schools, as the industry consolidation continues to playout.
Childcare Services
Deal flow in the Childcare Services sector remained relatively constant. Spire Capital portfolio company O2B Kids, which has eight locations in the Southeast US, was a very active buyer with the acquisitions of Brookside Academy, The Village Academy, and Home Away Frome Home.
EdTech/Media
Transaction volume in the K-12 Media and Tech segment stayed nearly the same on a yearly basis. High profile segment acquirers during the past year included ACT with the acquisition of Mawi Learning, which provides a suite of social-emotional learning (SEL) tools and services for school districts; Houghton Mifflin Harcourt with the acquisition of Waggle, a web-based adaptive learning platform that provides differentiated Math and ELA instruction for students in grades 2 through 8; Scholastic with the acquisition of Make Believe Ideas, a UK-based publisher of children’s books; and Weld North with the acquisitions of Glynlyon, a digital curriculum company; and Assessment Technology, Inc. (ATI), a provider of instructional improvement and effectiveness technology.
Deal activity in the Higher-Ed Media and Tech segment underwent a 15% increase from 2018 to 2019. Notable acquisitions include John Wiley & Sons’ acquisition of Zyante, a provider of computer science and STEM education courseware; and Elsevier’s acquisition of Parity Computing, which uses artificial intelligence to transform raw STM content for publishers and researchers.
Professional Training and Services
In the Professional Training segment, the number of Technology deals increased 21%, while Services transactions underwent a 4% increase. A few notable acquisitions in the combined Professional Training segments included Wendel Group’s acquisition of Crisis Prevention Institute, which provides behavior management and crisis prevention training programs, and 2U’s acquisition of Trilogy Education Services, which offers skills-based training programs in high-demand tech fields at universities and companies.
Conclusion
The transformation occurring in the education sector bodes well for continued strong M&A activity in 2020 and 2021. Many educational institutions have built or acquired important platforms for students, faculty, and administrators to improve educational outcomes. At the same time, increasing utilization of data, the need for efficient interoperability of existing systems, and acceptance of technology that drives student outcomes or employee performance are all enabling factors that have helped to keep M&A volume healthy.
Additionally, system infrastructure spending in both K-12 and post-secondary sectors has become more of a priority among states, school districts, and institutions. The product offerings available for these markets have become more compelling in terms of cost savings, learning impact measurability, and system compatibility. The potential revenue has also created a high stakes environment that has encouraged larger software developers to enter the market by acquiring smaller competitors.
About Jackim Woods & Co.
Jackim Woods & Co. is an independent M&A advisory firm that provides M&A advisory to education-related businesses, including K-12 schools, Title IV career colleges, test-prep and tutoring firms, and continuing education/professional training companies.
The firm offers skilled mergers and acquisitions services to privately held businesses and buyers, including private equity groups, in both sell-side and buy-side transactions. The principals at Jackim Woods & Co have been involved in over 100 business sales, with a combined value of over $450 million.
If you own an education-related company and are interested in exploring your options, please contact Rich Jackim, Managing Partner at 224-513-5142 or rjackim@jackimwoods.com.
Read MoreWhy You Should Focus on Proper Exit Planning
If you are like many business owners, you are primarily focusing on building your business. Yet, as we’ve covered here many times before, you should start thinking about what you’ll need to do to sell your business before you even officially launch. Many businesses can take years to sell or even fail to sell all together. For this and many other reasons, it is important to invest some time and energy into thinking about proper exit planning and strategies.
Walker Deibel’s recent Forbes article, “How Proper Exit Planning Benefits the Buyer and Seller,” Deibel discusses his interview with Exit Planning: The Definitive Guide, author John H. Brown. Brown and Deibel both agreed that, when properly handled, exit planning can help both the seller and the buyer.
Exit planning can make a business more transferable. As Deibel points out, when buyers are evaluating businesses, transferability is a key factor. A buyer must feel that he or she can walk into a business, take it over, keep it running effectively and even grow the business in the future.
A key aspect of being able to buy a business and having that business be successful is that all relationships from vendors to customers are transferable. A good management team, one that can step in and help a new owner thrive, is a must. Building that team in advance is a savvy move for any business owner looking to sell his or her business. Concerns on any of these fronts can spell doom for a seller. If a buyer doesn’t feel that they can operate a business, then they probably shouldn’t be buying it.
Great exit planning most definitely benefits the seller as well. As Deibel notes, when sellers engage in exit planning, they realize how much money they need in order to exit. In turn, this forces sellers to become very focused and goal-oriented. Sellers will take proactive steps to ensure that their business is as appealing to a potential buyer as possible.
Ultimately, proper exit planning is a win-win, one that benefits both buyer and seller. Exit planning can provide sellers with much-needed clarity while simultaneously lowering the overall risk that sellers face.
Buying or selling a business is a multifaceted, and often quite complex, process. The sooner you begin working with a professional, like a business broker, the better off you’ll be in finding the right business for you and your particular needs. For most people, buying or selling a business is the financial decision of a lifetime. Having a proven trusted partner, one that knows the lay of the land, is simply invaluable.
Copyright: Business Brokerage Press, Inc.