Negotiating the Price Gap Between Buyers and Sellers
Sellers generally desire all-cash transactions; however, oftentimes partial seller financing is necessary in typical middle market company transactions. Furthermore, sellers who demand all-cash deals typically receive a lower purchase price than they would have if the deal were structured differently.
Although buyers may be able to pay all-cash at closing, they often want to structure a deal where the seller has left some portion of the price on the table, either in the form of a note or an earnout. Deferring some of the owner’s remuneration from the transaction will provide leverage in the event that the owner has misrepresented the business. An earnout is a mechanism to provide payment based on future performance. Acquirers like to suggest that, if the business is as it is represented, there should be no problem with this type of payout. The owner’s retort is that he or she knows the business is sound under his or her management but does not know whether the buyer will be as successful in operating the business.
Moreover, the owner has taken the business risk while owning the business; why would he or she continue to be at risk with someone else at the helm? Nevertheless, there are circumstances in which an earnout can be quite useful in recognizing full value and consummating a transaction. For example, suppose that a company had spent three years and vast sums developing a new product and had just launched the product at the time of a sale. A certain value could be arrived at for the current business, and an earnout could be structured to compensate the owner for the effort and expense of developing the new product if and when the sales of the new product materialize. Under this scenario, everyone wins.
The terms of the deal are extremely important to both parties involved in the transaction. Many times the buyers and sellers, and their advisors, are in agreement with all the terms of the transaction, except for the price. Although the variance on price may seem to be a “deal killer,” the price gap can often be resolved so that both parties can move forward to complete the transaction.
Listed below are some suggestions on how to bridge the price gap:
- If the real estate was originally included in the deal, the seller may choose to rent the premise to the acquirer rather than sell it outright. This will decrease the price of the transaction by the value of the real estate. The buyer might also choose to pay higher rent in order to decrease the “goodwill” portion of the sale. The seller may choose to retain the title to certain machinery and equipment and lease it back to the buyer.
- The purchaser can acquire less than 100% of the company initially and have the option to buy the remaining interest in the future. For example, a buyer could purchase 70% of the seller’s stock with an option to acquire an additional 10% a year for three years based on a predetermined formula. The seller will enjoy 30% of the profits plus a multiple of the earnings at the end of the period. The buyer will be able to complete the transaction in a two-step process, making the purchase easier to accomplish. The seller may also have a “put” which will force the buyer to purchase the remaining 30% at some future date.
- A subsidiary can be created for the fastest growing portion of the business being acquired. The buyer and seller can then share 50/50 in the part of the business that was “spun-off” until the original transaction is paid off.
- A royalty can be structured based on revenue, gross margins, EBIT, or EBITDA. This is usually easier to structure than an earnout.
- Certain assets, such as automobiles or non-business-related real estate, can be carved out of the sale to reduce the actual purchase price.
Although the above suggestions will not solve all of the pricing gap problems, they may lead the participants in the necessary direction to resolve them. The ability to structure successful transactions that satisfy both buyer and seller requires an immense amount of time, skill, experience, and most of all – imagination.
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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.
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Tackling Growth Delusions When Buying a Business
There is no doubt about it, it can be exciting to buy a new business. However, in the process, it is very important that you don’t become unrealistic about future growth. Keep in mind that in the vast majority of cases, if a business is poised to quickly grow substantially, the seller would be far less interested in selling.
Richard Parker’s recent article for Forbes entitled “Don’t Be Delusional About Growth When Buying a Business” seeks to instill a smart degree of caution into prospective buyers. Parker notes that when evaluating a business and talking to the owner, many buyers come away with a sense that enormous growth is just “sitting there” waiting to be seized. In particular, Parker cautions those buyers who are buying into an industry that they know nothing about; those individuals should be very careful.
When buying into an industry where one has no familiarity, there can be a range of problems. The opportunities that you see may not have been tapped into by the existing owner for a range of reasons. You couldn’t possibly guess what these reasons might be without more of a knowledge base. Since you are an outsider, you likely lack the proper perspective and understanding. In turn, this means you may see growth opportunities that may not exist, as the seller may have already tried and failed. Summed up another way, until you actually own the business and are running it on a day to day basis, you simply can’t make a proper assessment of how best to grow that business.
The seductive lure of growth shouldn’t be the determining factor when you are looking for a business. A far more important and ultimately reliable factor is stability. The real question, the foundation of whether or not a business is a good purchase option, is whether or not the business will maintain its revenue and profit levels once you’ve signed on the dotted line and taken over. You want to be sure that the business doesn’t have to grow to remain viable.
As Parker points out, the majority of small business buyers will buy in a sector where they don’t have much experience, and that is fine. What is not fine is assuming that you can greatly grow the business. Of course, if new buyers can achieve that goal, that is great and certainly icing on the cake. But don’t depend on that growth.
In the end, everyone has some ideas that work and some that don’t. You may take over a business and, thanks to having a different perspective than the previous owner, are able to find ways to make that business grow. But realize that many of your ideas for growing the business may fail completely.
A professional business broker will be able to help you determine what business is best for you. A business broker will help keep you focused on what matters most and steer you clear of the mistakes that buyers frequently make when buying a business.
Effectively Utilizing Confidentiality Agreements
Every year countless great deals, deals that would have otherwise gone through, are undone due to a failure to properly utilize and follow confidentiality agreements. A failure to adhere to this essential contract can lead to a myriad of problems. These issues range from employees discovering that a business is going to be sold and quitting to key customers learning of the potential sale and taking their business elsewhere. Needless to say, issues such as these can stand in the way of a sale successfully going through. Maintaining confidentiality throughout the sales process is of paramount importance.
Utilizing a confidentiality agreement, often referred to as a non-disclosure agreement, is a common practice and one that you should fully embrace. There are many and diverse benefits to working with a business broker; one of those benefits is that business brokers know how to properly use confidentiality agreements and what should be contained within them.
By using a confidentiality agreement, the seller gains protection from a prospective buyer disclosing confidential information during the sales process. Originally, confidentiality agreements were utilized to prevent prospective buyers from letting the world at large know that a business was for sale.
Today, these contracts have evolved and now cover an array of potential seller concerns. A good confidentiality agreement will help to ensure that a prospective buyer doesn’t disclose proprietary information, trade secrets or key information learned about the business during the sales process.
Creating a solid confidentiality agreement is serious business and should not be rushed into. They should include, first and foremost, what areas are to be covered by the agreement, or in other words what is, and is not confidential. Additional areas of concern, such as how confidential information will be shared and marked, the remedy for breaches of confidentiality and the terms of the agreement, for example, how long the agreement is to remain enforced, should also be addressed.
A key area that should not be overlooked when creating a confidentiality agreement is that the prospective buyer will not hire any key people away from the selling company. Every business and every situation is different. As a result, confidentiality agreements must be tailored to each business and each situation.
When it comes to selling a business, few factors are as critical as establishing and maintaining confidentiality. The last thing any business wants is for its confidential information to land in the hands of a key competitor. Business brokers understand the value of maintaining confidentiality and know what steps to take to ensure that it is maintained throughout the sales process.
The Variety of Variables Involved in Selling Your Business
Selling a business is more than a big decision, as it is also quite complex. Finding the right buyer for a business is at the heart of the matter. In the recent Forbes article, “Ready to Sell Your Business? Follow These 3 Tips to Find the Best Buyer,” author Serenity Gibbons outlines that selling a business is a multifaceted process with a lot of moving parts.
A central variable for those looking to sell a business is to have a coherent and well thought out exit strategy in place. She points out that at the top of your to-do list should be selling your business the right way, and that means having a great exit strategy in place. In fact, many experts feel that you should have an exit strategy in place even when you first open your business.
Another key variable to keep in mind is that, according to Gibbons, only an estimated 20% to 30% of businesses on the market actually find buyers. This important fact means that business owners, who usually have a large percentage of their wealth tied up in their businesses, are vulnerable if they can’t sell. It is vital for business owners to make their businesses as attractive as possible to buyers for when the time comes to sell.
This article points to author Michael Lefkowitz’s book “Where’s the Exit.” This book outlines what business owners need to do to get their business ready for their exit. Updating your books, ensuring that a good team is in place and ready to go and taking steps to “polish the appeal of your brand” are some of the important topics covered.
Gibbons notes that “not every buyer with cash in hand is the right buyer for your company.” Mentioned are three key variables that must be addressed when looking to find the right buyer: consider your successor, explore your broker options and find a pre-qualified buyer.
In the end, working with a business broker is the fastest and easiest way to check off all three boxes. An experienced professional knows the importance of working exclusively with serious, pre-qualified buyers. Since a good business broker only works with serious buyers, that means business brokers can greatly expedite the process of selling your business.
In her article, Gibbons supports the fact that working with a business broker is a smart move. Those looking to get their business sold and reduce an array of potential headaches along the way, will find that there is no replacement for a good business broker.
2017 Business Owner Exit Planning Survey
The 2017 Business Owner Survey conducted by Jackim Woods & Co. provides some interesting insights how owners of privately held companies are thinking about ownership transition. 80% of the respondents to this year’s survey were between 45 and 70 years. The businesses they owned had reported revenues of between $500,000 to $75 million. The survey included responses from companies in the manufacturing, business and consumer services, and distribution sectors.
The survey showed that:
78% of business owners plan to exit their businesses in the next 10 years.
75% would exit today if the net proceeds were enough to ensure a comfortable retirement.
81% of business owners have no “heir apparent” or “internal successor” to take over the business.
How Prepared are Owners for an Exit?
It is interesting to note that despite the vast majority of business owners wanting to exit as soon as possible or within 10 years, very few have taken proactive steps to get prepared. This year’s study found that:
If you are beginning to think about your options, please feel free to contact us to learn more about the M&A process and how you can begin to prepare yourself and your business for a successful exit. In our 20+ years of experience working with business owners, we have learned that the most successful exits take sound planning and solid execution of that plan, so it’s never to early to begin a discussion with us.
Read MoreCamping World Acquires TheHouse.com
Camping World Holdings, a network of RV-focused retail locations, has announced to purchase TheHouse.com, an online retailer specializing in bikes, sailboards, skateboards, wakeboards, snowboards and outdoor gear.
The acquisition will build on and complement the foundation already in place to serve customers across the Camping World RV SuperCenter network and positions the company for faster e-commerce growth by expanding customer reach and adding new product offerings. Camping World recently acquired certain assets of Gander Mountain, a leader in the hunting, fishing, camping and outdoor gear market and Overton’s, which features boating and marine accessories.
According to Camping World management, Camping World and TheHouse.com will maintain distinct brands, with Camping World focusing on the outdoor camping and RV industry, while TheHouse.com continues to provide a unique experience for the active outdoor lifestyles.
This new acquisition, coupled with their recent acquisition of Overtons.com and GanderOutdoors.com, continues Camping World’s focus on serving the needs of outdoor enthusiasts and furthers the company’s strategy of diversifying their customer base.
Read More5 Ways to Maximize the Value of Your Private Security Company
Responding to the strong interest in security related companies from strategic and financial buyers, the Illinois Security Professionals Association (ISPA) asked Rich Jackim to write an article for its monthly newsletter on the 5 Ways to Maximize the Value of Your Private Security Company.
Thor Industries Acquires Jayco, a Leading RV Manufacturer
Thor Industries acquired Jayco Corp. for approximately $576 million in cash. This transaction represents a unique and significant opportunity for Thor to enhance its growth through the acquisition of a major manufacturer of complementary products like travel trailers, folding camping trailers, higher-end diesel Class A motorhomes and larger Class C motorhomes.
