The previous blog addressed exiting your business from your, the seller’s, perspective. That is, it addressed the whys, whats, and hows to consider when selling your business. As is true of all relationships, however, it takes two to tango. This follow-up blog focuses on the buyer’s perspective. That is, what they are looking for, how they value a business, what they are typically paying, and more. Remember that what follows is based on my personal experiences and observations only within the talent development industry, and thus cannot necessarily be generalized to other industries.
Who are the buyers?In the talent development industry, as in most industries, typical buyers come in two basic shapes: either strategic or financial. Strategic buyers see opportunities for growth through adding new capabilities to existing aligned businesses. An example would be John Wiley’s acquisition of Inscape and CrossKnowledge to expand its original training business, Pfeiffer. Other examples include Korn-Ferry’s multiple talent development business acquisitions over the years to support its original recruiting business, and Right Management’s acquisition of about 10 training firms to support its existing outplacement business.
On the other hand, a financial buyer—most likely from private equity or investment banking—is solely in the deal-making business. That is, this buyer wants to accumulate assets for a portfolio at the lowest price and then grow and sell them at a higher price within a relatively short timeframe. For example, The Riverside Company, a private equity firm, has bought and sold more than 25 training and education businesses.
Venture capital firms represent a third type of buyer, a combination of a strategic and financial buyer, that wants to build a new business comprised of existing ones. For example, Provant “rolled up” numerous training businesses with the intent of consolidating back-office operations and costs to obtain higher margins across the board. While this venture was relatively short-lived, its failure wasn’t due to the idea as much as its execution. IIR and Informa have taken similar but more successful approaches.
Each buyer type poses advantages and disadvantages for both sides of the deal.
Whom should you seek as a buyer?It is important to consider which buyer type will best fit your needs and match your (the seller’s) plans. For instance, if you want to continue working in the business, the buyer must be open to finding an executive position for you, even if you don’t continue leading the company. Typically, strategic buyers are in for the long haul, while financial buyers want to flip their businesses within approximately three to six years. Also, consider what kind of noncompete agreement will be in force to keep you from working in the industry, and for how long. Ultimately, even though the buyer often has more leverage in these transactions, you need a clear personal vision to help determine which type of buyer best fits your personal and professional needs.
What are they paying?Of course, this calculation can vary considerably, and has over the years. However, the following formula seems to have remained relatively steady in the industry: Purchase price is often one to two times top-line revenue, or six to nine times EBITDA. Of course, there have been plenty of outliers. For example, a couple of years ago, a Swiss family venture capital business bought a U.S.-based duty-to-care training business (for nurses and teachers) for 10 times top-line revenue. This premium price was primarily the result of the global expansion potential of a currently high-margin business in a growing industry.
What are the pros and cons of each buyer? As noted previously, each type of buyer presents different personal, professional, and financial offerings. You will want to align yourself with a buyer that meets your needs across all three. We’ve noted the likely length-of-ownership differences between financial and strategic buyers. But there are buy-out differences as well.
A strategic buyer is likely to pay a larger upfront amount than a financial buyer, who will attach earn-out stipulations to protect their investment. However, the potential upside of a financial-buyer deal is that the business is likely to be repurchased in the near term, which could deliver another windfall. How much investment you must retain to receive another payout varies, but typically, for financial sellers, this ends up a very good deal. One colleague of mine has managed to remain his company’s CEO through four sales, each time reaping the benefits of his existing stock ownership. On the other hand, since a strategic-buyer deal is less likely to lead to resale, a strategic buyer will likely provide a larger initial payment with relatively small earn-outs over a three-to-five-year period. And often, you can negotiate an escape once the business is comfortably performing without your day-to-day involvement.
Who is attractive to buyers?Buyers in this industry, like buyers in many industries, are looking for companies with high-margin business models. This often includes SaaS-based firms, those with subscription models, and platform libraries, all generating consistent revenue streams. Other firms attractive to buyers are those whose target customers and users are guided by industry standards and compliance requirements. This is often true in industries and trades requiring certification via training, such as HVAC technicians or computer specialists. These requirements turn “nice-to-have” courseware into “must-have” offers that clients demand just to stay in business.
Another attractive seller is one who has demonstrated leadership in either one deep vertical industry, like health care, or a content area, like sales or customer service. Building around these businesses without reaching beyond their boundaries makes it easier to identify and target a focused market, allowing for more rapid growth.
The net-net of a firm’s overall attractiveness to a buyer is how readily the selling company can be scaled and thus achieve higher returns for relatively lower costs. The industry’s transformation from largely analog to digital delivery has opened up this opportunity as never before. This allows for greater and faster growth, readying businesses for eventual resale.
How do buyers value your company?Lastly, how do buyers begin to value training and education companies? There are multiple variables to assess, but most buyers consider three high-level categories:
Financial Value: This is the easiest to calculate, because it amounts to net worth—that is, assets minus liabilities, which equals the company’s equity. On the asset side, there are savings, accounts receivable, inventory, property, plant, equipment trademarks, and more. On the liability side are accounts payable, loan payments, debt service, and more. Equity comprises the owners’ stock, retained earnings, and net income, all of which are represented on a balance sheet.
Market Value: This is a little more difficult to calculate. While there are numbers on which to base it, the actual value must be inferred based on items such as the total addressable market, share of market, and growth plans. But, the best way to calculate market value may be to use comparable industry sales as a benchmark. The numbers noted in the “What are they paying?” section, while representing a relatively large range, begin to offer some guidelines.
Accretive Value: This is the hardest value to calculate. It involves projecting the return on investment of future mergers and acquisitions, with the assumption that 1+1 = 3 because of the potential for higher efficiencies and scale from integrating different businesses.
Having said all this, a given company’s track record of top- and bottom-line growth and future risk parameters, as well as market volatility, demand for talent development firms, and the importance of a firm to a particular buyer’s acquisition strategy, will play a huge role in any evaluation. Selling your business is not for the faint of heart on any level—financial, personal, professional, or emotional. It takes time and serious due diligence, because for most sellers, it represents releasing a particular lifestyle to which they have likely become accustomed. Proceed knowingly and cautiously.