Ask HN: Advice on choosing an M&A firm for a company with ~1M earnings

[throwawaymna]

Hi HN,

I own a privately held, web-based business with revenue in the low millions and around 1M EBITDA. We've seen strong growth over the past few years, but are currently on somewhat of a plateau. Future prospects look decent though, so I expect we will remain comfortably profitable, and I could see outcomes over the next 1-2 years anywhere from flat or slight decline up to perhaps 50% growth.

Having run this company for a number of years now, I am starting to consider an exit. I'm not in any particular hurry, but am at least starting to think about what our valuation might be. Since the company was entirely bootstrapped, I don't have any real experience working with VCs or M&A firms. I know if I was looking to sell I would want representation that understands the market, but beyond that, I'm interested in advice on how to choose a good mid market M&A firm.

I've seen it recommended not to go with firms that charge an up-front fee, because incentives are more aligned if the firm only earns when a sale is done. That makes sense to me, but I don't know how common the various cost structures are, so how feasible that is. Any info on that, as well as industry standard rates/ranges in general would be helpful.

Plus any other advice. Most of what you find online is put out there by the firms themselves, who of course have an interest in focusing on their various strengths. Input from people who have sold companies around this size would be invaluable.

Thanks!

[hkarthik]

Why not find a new CEO to run the day to day, while you switch to more of a chairman/advisory role? You could then create enough incentives in place to grow everything towards a meaningful exit.

I worked at a company that used this exact strategy. Took a few years to play out, but it allowed the founder to take some money off the table through a private equity round, and finally get a meaningful acquisition spearheaded by the new CEO.

[bluelu]

Normally, you won't sell to a strategic if you have not have had a business relationship with him before and he sees significantly value in your business.

As for private Equity, it probably depends on the fund, but I would assume most of them look for growth companies.

So then the question is who is left? Maybe another entrepreneur looking to diversify, then maybe you could try at one of those market places where you can advertise your website. However I wonder if you are not to big.

Evaluation depends on where you are located (US, Europe, etc..), target market size, competition, metrics (growth, churn, potential), Software as a service vs services/consulting, etc... If you are not selling a product (Saas), or you are not growing (which seems to be your case), be prepared to be valued at a multiple of your earnings, and not total revenue. As for growth, everyone will look at past growth to extrapolate future growth. If you have no past growth, no one will believe you that you will grow your business next year 50% more.

As for the fees, I would expect you to pay a fee when you bail out because the price is too low, or decide not to sell, as they have also done work on their side. Otherwise no one wants to work with you anymore as well in the future. Still you should increase their revenue share the higher they sell. Don't expect though that they know all the companies to target, or have all the connections to those companies.

Most buyers will also require you to stay onboard for 2-3 years.

You should provide more details about region, type of business, market, growth rate, then you can get better replies.

[throwawaymna]

For sure, past growth will of course be looked at to gauge future prospects. Our growth has historically been driven largely by branding initiatives on our end, but our user retention is also really high. So all along we've tended to have spurts of growth around successful campaigns, followed by consolidation periods where it levels out. But I've never targeted maximum growth at any cost, but rather sustainable growth while maintaining a healthy profit margin, so it tends to come in bursts as profitable marketing opportunities present themselves. I think we have enough of a track record of those that a strong possibility of future growth is a reasonable assumption, but of course that would be a tougher case to argue than a company that has consistently grown X% per month for years.

Regardless, at this point I'm not looking to sell right away, just beginning to consider the possibility of selling at all. And one of the early steps in that process would be finding representation for the shopping and deal process, hence looking into M&A firms.

There are actually a number of potential strategic acquirers that we have or have had relationships with, so we would certainly consider those, but regardless I'd want someone representing our interests and shopping us around too. I've been approached by a number of such firms over the years, but don't really have strong criteria for narrowing down who we might want to work with if I did decide to pursue a sale, so that's what I'm trying to work out now.

[bluelu]

You should take a holiday and really think about what you would like to achieve next and why you want to sell.

If your decision is to sell (not now, but it will take some time...), then talk to 2 or 3 of such companies, explain your situation, and ask them how they think you can maximize your earn out at the end (should you invest aggressively, expand into new markets, what are the KPIS which are relevant, etc...), and when you should go to market. Sure you will have to pay for this advice, but you can certainly afford.

And then you decide if you want to do this and invest/grow the company, or let the profits roll based on their input, and then start a process one year later (or whatever they say) when you have shown track record.

[segmondy]

In this interview Vincent Woo of coderpad talks about how he sold his company. https://www.indiehackers.com/podcast/170-vincent-woo-of-code...

There's transcript so you can search it, he mentioned the company he used and why... "The way I ended up, I sold my company eventually through the brokers, FE International. "

[throwawaymna]

Just finished the episode and really enjoyed it. Heard a lot of my own thinking echoed back to me in his feelings about how he wanted to run the business and thoughts around selling (and around taking VC money!) Laughed out loud a couple of times. Thanks again.

[throwawaymna]

Awesome, will listen to that podcast now. Thanks.

[CoffeePython]

I've seen lots of good things recently about https://microacquire.com/ from other founders. I'm not affiliated with them and have not used their product but from the outside it seems like a better way to transact than paying a fee.

[throwawaymna]

Thanks. It does look though like that site is targeted more at smaller companies than ours. My understanding is that at our scale we would probably want a firm representing our interests.

[AznHisoka]

The best time to sell is when you don’t need to, and when you are in peak growth mode. Not when your growth is plateauing and you feel the need to exit.

So if you feel growth will increase, I would put the pedal to the metal, and ramp up growth for a year or 2, then sell for the highest possible valuation.

[throwawaymna]

Yep, I'm not planning to sell immediately. Just starting to do some research on what would be involved. Honestly I don't know that I'd even sell at all at this point, but it's useful to know one's options. Certainly will continue to pursue further growth!

[freebee56]

The fees charged by brokers on small companies are astonishingly high ( double digits). Anything you can do to find a buyer will save big bucks. Have you considered an esop or maybe mezzanine debt refinancing? Once there is another natural shareholder it becomes much easier to sell.

[throwawaymna]

Can you elaborate on that? Why do additional owners make it easier to sell? If anything I'd expect the opposite.

Re double digits, if that means eg 10%, I would expect a good firm could likely provide at least that much value. Maybe I'm overestimating their capabilities.

[freebee56]

If you find the buyers yourself you don't have to pay commission for them to buy additional equity in further rounds. Also, as they get more familiar with the business they won't need a big haircut to make the deal. What are you expecting the new owners to provide?