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In the current market of business sales and acquisitions, private equity groups (PEGs) are some of the most active buyers of mid-market companies. They are placing a growing emphasis on what is commonly known as “industry roll-ups” – a strategic merging of multiple companies within the same market or vertical.

This has been a growing trend throughout the state since the beginning of this year and could present some big opportunities for Florida business owners looking to sell. At the same time, sellers need to be well informed about how roll-ups work, so they can properly protect themselves during the sale process.

Understanding Industry Roll-Ups

Industry roll-ups involve a buyer, often a private equity group or another financial entity, acquiring several companies within a specific industry, usually one approaching maturity. These acquired entities are then integrated or “rolled up” into a single overarching company.

According to Investopedia, private equity firms use roll-up mergers to streamline competition in crowded or fragmented markets and to combine companies with complementary capabilities into a comprehensive business entity.

Buyers like industry roll-ups because they help them achieve substantial, rapid growth and increase market presence in a relatively short period of time. Investors who acquire businesses with the roll-up method can consolidate back-office functions, allowing them to increase overall revenue without increasing overhead. This helps increase the per-company return on investment much more than if a business was purchased on its own.

Benefits of Industry Roll-Ups for Business Sellers

Selling a business as part of an industry roll-up can offer sellers advantages not typically found in conventional sales processes. The competitive dynamics of multiple PEGs pursuing roll-up strategies in the same industry can drive up the selling price due to heightened buyer interest. More buyers lead to increased leverage for the seller.

Even more importantly, roll-ups give sellers the opportunity to realize additional profits by opting to “roll equity” in the transaction. In a typical roll-up scenario, sellers receive a combination of cash and shares in the holding company in exchange for their ownership stakes in the acquired companies. This arrangement can potentially yield substantial returns in the long term.

To clarify the concept of rolling equity, here is an example. Instead of selling your company for 100% cash, you decide to receive 75% of the value in cash, then roll 25% of the value in the roll-up. Five years later, after more companies have been added to the roll-up, the combined company sells for a lot more money, and you, as one of the individual sellers, can cash out.

Considerations When Selling a Business

While industry roll-ups present enticing opportunities, sellers must exercise caution. Unlike conventional sales, where buyers typically drive the due diligence process, sellers must also scrutinize the buyer’s capability to execute successful acquisitions and ensure post-purchase earnings growth.

As a seller, it is important that you are comfortable with the buyer’s strategy and track record in executing roll-ups. Some key items to ask about include the buyer’s experience in the industry, their past roll-up endeavors, integration plans for acquired companies, and your continuing role within the new entity. Make sure you gain an understanding of how many deals the buyer has executed and the value those deals have created. With respect to the current roll-up, ask about the number of companies that are included and specifically which ones.

Navigating the complexities of industry roll-ups requires the involvement of a seasoned M&A professional, such as a business broker. A broker can navigate you through the intricacies and potential risks associated with roll-up transactions. Do not underscore the necessity of expert guidance in this type of transaction. If you are not an expert on roll-ups a small mistake can prove to be very costly. Choosing the right professional to guide you through the process can significantly improve the chances of a successful and lucrative transaction.

If you are considering the sale of your business in the near future, or even within the next few years, it’s important to understand what your options are, and what type of buyers your business may appeal to. Unless you’ve sold multiple companies, getting a holistic picture of the entire process can be overwhelming.

As I write this letter, I am sitting waiting for Hurricane Milton to descend upon Florida. Wherever it lands, we are going to have many BBF members that will be seriously affected. We have already had several BBF members that have had to deal with Hurricane Debby and Hurricane Helene already in 2024. I am keeping all our members in my prayers and hope everyone suffered minimal damage. Please reach out if there is anything we can do for you.

District election results are completed and congratulations to our District Leaders for 2025. They are as follows:

I am happy to announce your Board of Directors has negotiated and come to an agreement for BBF to continue to purchase for the next 3 years (through 2027) membership to IBBA for all active and current members of BBF. This is a great opportunity for all our members to take advantage of the fantastic educational opportunities IBBA has to offer along with all the free tools that are available. Please take advantage of all the good things that IBBA has to offer.

Embarking on a business deal is a complex journey that demands strategic planning, negotiation skills, and a shared commitment to success. After years of experience in business sales, I’ve been able to highlight the key attributes shared by successful deals that navigate the twists and turns of negotiations and ultimately reach the closing table.

Clear Communication

Successful deals are underpinned by clear and open communication, not only between brokers and their customers, but between brokers, and after due diligence is concluded, between buyers and sellers themselves. Both parties must articulate their expectations, concerns, and priorities transparently. Effective communication fosters understanding and trust, laying a strong foundation for the deal’s success.

Mutual Understanding of Value

Before reaching the closing table, both buyers and sellers must have a mutual understanding of the value of the business. This involves a realistic analysis of financials, assets, and market conditions. Aligning on value minimizes surprises and promotes a smoother negotiation process. It also keeps all parties invested in seeing the deal through when an inevitable bump in the road comes along during the process.

Thorough Due Diligence

Successful deals share the attribute of thorough due diligence. Buyers delve into the details of financials, contracts, and operations to gain a comprehensive understanding of the business. Sellers, in turn, provide transparent and detailed information to instill confidence in the buyer, in a timely manner. As a broker, I’ve found that monitoring the due diligence process and helping buyers and sellers keep track of all documents requested and received, aids the parties in a smoother due diligence process as well, which in turn, leads to clearing the due diligence contingency.

Flexibility and Adaptability

Flexibility is a hallmark of successful deals. Both buyers and sellers should be willing to adapt to changing circumstances, adjust expectations, and explore creative solutions when issues do arise. A flexible approach allows the parties to overcome challenges and find common ground. This attitude keeps deals moving forward toward the closing table.

Negotiation Expertise

Successful deals are marked by effective negotiation skills on both sides. Buyers and sellers who approach negotiations with a collaborative mindset, a willingness to compromise on non-essential points, and an understanding of each other’s needs contribute to a positive negotiating environment. Brokers or buyers/sellers who take a hard nose approach to negotiations most often never win in the long run. Their inflexibility cultivates mistrust and distance from the other side of the deal, which ultimately will not work in their favor.

Professional Guidance

Engaging professional advisors, such as business brokers, attorneys, and accountants, is a shared attribute of successful deals. These experts provide guidance, navigate legal complexities, and ensure that the deal gets done right. Their involvement adds a layer of professionalism and expertise.

Focus on Long-Term Vision

Both buyers and sellers with a focus on the long-term vision contribute to successful deals. Rather than fixating on immediate gains, parties prioritize the sustainable success of the business post-acquisition. This shared vision fosters collaboration and commitment throughout the deal process. In most cases, the seller wants their business to continue to thrive after the sale, and the buyer wants to be successful with their new business, so keeping everyone’s eyes on the prize is the key.

Resolution of Contingencies

Successful deals involve the resolution of contingencies in a timely and efficient manner. Buyers and sellers with their brokers need to work together to address any potential obstacles, whether related to financing, contracts, or other critical aspects. Proactively resolving contingencies prevents delays and builds confidence.

Trust and Relationship Building

Trust is a vital component of successful deals. Building a positive relationship between buyers and sellers enhances trust and fosters a collaborative atmosphere. Parties who prioritize relationship building are more likely to overcome challenges and work together towards a successful closing. Brokers are there to guide the deal and to provide a much-needed buffer during negotiations, but encouraging trust-building between the parties is important too.

Commitment to Win-Win Outcome

By far, the most successful deals are characterized by a commitment to a win-win outcome. Both buyers and sellers recognize that a mutually beneficial agreement, where both parties achieve their goals, is the ultimate marker of success. This collaborative mindset paves the way for a positive closing experience. As brokers, we should always strive to foster a win-win scenario, rather than purely focus on a one-sided deal, as those often go sideways.

In the realm of business deals, success is not solely defined by reaching the closing table but by the attributes that underpin the journey. Clear communication, mutual understanding, thorough due diligence, and a commitment to a win-win outcome are shared attributes that distinguish deals that stand the test of negotiations and ultimately reach a successful conclusion. As buyers and sellers navigate the complexities of deal-making, embracing these attributes enhances the likelihood of a positive and enduring business transaction.

Business acquisition deals can come with a lot of emotion. From start to finish, the process can be a journey through highs and lows. More than half of business acquisition deals that go out to market don’t close for one reason or another. While each case is unique, there are recurring themes that contribute to these outcomes. In this article, we’ll delve into the top reasons why business acquisition deals die in underwriting, shedding light on common pitfalls and offering insights to help proactively navigate the underwriting process effectively.

Here are the most common reasons business acquisition deals die in underwriting:

1. Cash Flow: At the heart of every successful business lies a healthy cash flow. Unfortunately, inadequate cash flow projections or inconsistencies in financial documentation can plague acquisition deals. Lenders scrutinize any inconsistencies, adjustments, or normalization of cash flow as they assess the borrower’s ability to repay the loan. When documentation fails to align with historical performance or lacks credibility, lenders hesitate to proceed, fearing repayment risks. As such, precise attention to cash flow forecasting and clear financial reporting are imperative to instill confidence in lenders during underwriting.
2. Seller’s Notes: Seller financing, in the form of seller’s notes, can be a double-edged sword in acquisition deals. While it demonstrates the seller’s confidence in the business’s future success, conflicting terms or unrealistic expectations can derail underwriting efforts. Lenders assess the terms of seller’s notes, including interest rates, repayment schedules, and collateral arrangements, to evaluate the overall risk exposure. Misalignment between buyer and seller expectations, coupled with unfavorable terms, often leads to an underwriting impasse. Additionally, when dealing with the Small Business Administration (SBA), it’s important to ensure that everything we are doing meets their requirements. Effective negotiation and clear communication between all parties are crucial to navigate this potential stumbling block.
3. Inaccurate Information: Transparency is the cornerstone of underwriting success. Yet, inaccurate or incomplete information provided during the due diligence process can cast a shadow of doubt over the entire transaction. Whether it’s undisclosed liabilities, inflated asset valuations, or undisclosed related-party transactions, any discrepancies undermine the lender’s confidence in the deal’s viability. Thorough due diligence, conducted by both buyers and sellers, is essential to uncover any discrepancies early on and address them transparently to mitigate underwriting hurdles.
4. Buyer Background: Lenders place considerable emphasis on the buyer’s background and experience in the industry when evaluating acquisition deals. Lack of relevant industry experience or a questionable track record can raise red flags during underwriting. Additionally, concerns related to creditworthiness, character, and capacity to manage the acquired business can complicate the underwriting process. Buyers must demonstrate their competence, commitment, and financial stability to reassure lenders of their ability to successfully execute the acquisition and repay the loan.
5. Collateral Objections: Collateral serves as a safety net for lenders, providing assurance of loan repayment in the event of default. However, disagreements over collateral valuation or insufficient collateral coverage can impede the underwriting progress. Lenders meticulously assess the value and liquidity of proposed collateral to mitigate risk exposure. Disputes over collateral adequacy or encumbrances on key assets often necessitate negotiations between buyers and lenders to bridge the valuation gap and alleviate underwriting concerns.

Navigating the underwriting process in business acquisition deals requires diligence, transparency, and collaboration among all participants. By addressing common pitfalls borrowers can enhance the likelihood of underwriting success and propel their acquisition endeavors forward. The Bank of Tampa’s team of SBA experts aim to help entrepreneurs with the knowledge and resources they need to overcome underwriting hurdles and realize their business acquisition dreams.

If you are interested in learning more about SBA lending and what we can do for you, please feel free to reach out to me directly at bwilliams@bankoftampa.com.

These enhancements can make your CIM not only a source of vital information but also a persuasive tool in engaging potential buyers effectively.

Wow, here we are in August, just a couple weeks away from our conference. This conference holds a special place in my heart, as it brings back memories of my own journey in this dynamic Business Brokerage industry. When I first attended a conference years ago, I was relatively new to the world of Business Brokerage. I remember feeling a mix of excitement and apprehension, eager to learn but unsure of what to expect. Little did I know that event would become a pivotal moment in my career. I invite you to join us in 2 weeks in Orlando. Click HERE for all the details and to complete registration.

Our districts honored many of our top performers in the 2nd quarter of the year with their 2023 performance awards. We had 217 exceptional Brokers receive a plaque for their production of $1 million $$$ + for 2023. Also honored were the top performers in various categories for the district along with the State. Congratulations to all, those award winners can be found on our website under district awards once you sign in.

One of our 2024 initiatives is to start a scholarship program presenting 5 scholarships to children and grandchildren of past and present BBF members. I am pleased to announce we were successful in completing this initiative and the award winners can be found by clicking HERE. I look forward to continuing this initiative in years to come.

Hope to see everyone at the conference on August 23-25.