Much can be said about how crazy 2020 was. No need to belabor it again here, you’ve heard it all before. But my conversation with Elaine (not her real name) gave rise to a whole new level of crazy about 2020.
No, I am not saying Elaine is crazy, quite the opposite. She owns a highly regarded professional services firm near my hometown. We were talking over the holidays about her plan to sell her business in 2021. She told me in late 2020 she was approached by two private equity (PE) firms that are doing roll-up acquisitions in her industry. It seems these two calls came within 45 minutes of each other.
Elaine told me selling in 2021 was not on her radar. She had planned to sell the business in three years after her youngest daughter graduated from Southeast Missouri State University (where my two sisters went to college). But after the two calls came on the same day, Elaine said she and her husband had a long talk and decided to pursue these unplanned opportunities.
Both PE firms told Elaine the kind of deal she could expect, “Something in the neighborhood of 10X her 2020 EBITDA.”
In my 25 years of M&A work, I’ve never heard of a situation like this. Some of it is luck, and some of it is Elaine being ready to take full advantage of the luck when it happens. The luck: there is robust PE activity in a customer segment that Elaine serves. Nothing she has ever done could see that coming. But once it happened, Elaine was in a wonderful situation. Her business drives high margins, has scores of clients around the country, no one client is more than 3% of her revenue, and the average time a current customer has been a client is four years.
Get the picture? I can sum up how the PE buyers are looking at Elaine’s business in two words: reliable profitability. PE firms crave reliable profitability, it’s just that simple.
“I guess I was lucky,” Elaine said to me. “I had no idea this was happening in my space, clueless actually.” “You may not have seen it coming,” I replied, “but the offers you’re getting are directly related to the strength of what you’ve built over the years.”
“Yeah, I guess you’re right,” she said, “I planned to build a strong business so when this luck arrived, I was ready.”
To be clear, waiting around for “luck” to happen is a tenuous strategy. Like I said earlier, I have never seen the kind of swift activity that Elaine is now in the middle of. But she was ready. Though prepared to sell in a few more years, she won’t need to wait until that point to have her business in a position to be very valuable to a buyer.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the story, names and fact patterns are changed to preserve the parties’ identities.
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