Small Business M&A Success Stories

Critical Factors for Business Valuations Succession, Exit Planning, Mergers and Acquisitions in the Current Post-Pandemic Business Cycle

The past few years have been a rollercoaster for business owners to navigate customer demand disruptions, supply chain and staffing obstacles, as well as pricing challenges associated with inflation. All of this accumulated to highs and lows in financial performance for businesses of all sizes…and created headwinds when business went to prepare for a company sale.

This blog post dives into the success stories of several small businesses that achieved successful exits through mergers and acquisitions (M&A) in the pandemic and post-pandemic landscape.

Buyers typically look to normalize three prior years of financial performance in order to inform valuation pricing, deal structure, and financing options. By analyzing the key factors behind business exits, succession planning, and ownership transitions, we can provide valuable insights for business owners and their advisors looking to navigate a similar path.

Home Services: Garage Door Sales, Installation, and Service

Industry: B2B Services

Key Factors for a High Valuation:

  1. Recurring Revenue Stream: This company offered annual maintenance contracts alongside one-off installations, creating a predictable revenue stream with high customer retention. A sticker with company name, phone number, and website on the installed hardware drastically increases future service calls.
  2. Strong Customer Loyalty: Positive customer reviews, and ample Google/Yelp Reviews, and a focus on building long-term relationships with homeowners led to a loyal client base, a valuable asset for any buyer.
  3. Technical Expertise and Trained Workforce: A team of highly skilled technicians ensure quality service, minimizing customer service issues and enhancing brand reputation. Doing the right thing for the customer verse upselling leads to higher frequency and scoring on Google reviews.

Valuation Reduction Factor:

  • Reliance on Key Employees: Baby boomer led businesses, with an aging workforce, and key employees near retirement age, is a risk for new business owners.

Residential Property Management Company

Industry: B2C Services

Key Factors for High Valuation:

  1. Diversified Portfolio: Managing a mix of residential property types, including single-family homes, apartments, and condos, reduced reliance on any one market segment and mitigated risk.
  2. Scalable Technology Platform: A user-friendly property management software streamlined operations, allowing the company to efficiently manage a growing number of properties.
  3. Experienced Management Team: A team with a proven track record of managing rental properties effectively ensured smooth operations and minimized tenant turnover.

Valuation Reduction Factor:

  • High Vacancy Rates: High vacancy rates in the company’s target market could raise concerns about future profitability and reduce the perceived value for potential buyers.

Remote Run Business: Fantasy Sports Advice & Statistics Subscription Service

Industry:Technology

Key Factors for High Valuation:

  1. Subscription-Based Revenue Model: The recurring revenue model of monthly or annual subscriptions provided predictable cash flow, making the business highly attractive to investors. Our Technology Business Valuations can help any business in tech find their top multipliers.
  2. Strong User Engagement: High user retention and engagement metrics demonstrated a loyal customer base willing to pay for the service, increasing its value.
  3. Proprietary Data and Analytics Platform: A unique and well-developed data collection and analytics platform provided a significant competitive advantage.

Valuation Reduction Factor:

  • Overdependence on a Single Platform: If the platform relied heavily on a single sports data provider, a disruption in that partnership could severely impact the business model.

Screen Printing, Embroidery, and Promotional Products Company

Industry: B2B Services

Key Factors for High Valuation:

  1. Diversified Product Offering: Offering a wide range of customization options and product categories catered to a broader customer base, reducing reliance on any single market trend.
  2. Strong E-commerce Presence: A well-developed e-commerce platform facilitated online sales and expanded the business’s reach beyond its immediate local market. Buyers love a diversified customer base with massive distribution of revenue over many customers.
  3. Established Vendor Relationships: Long-standing relationships with reliable suppliers ensured consistent product quality and efficient production.

Valuation Reduction Factor:

  • Staffing Challenges: This is a challenging industry when the production occurs in large major metros with high minimum wage verse mass production in lower cost markets. Recurring customers, and long standing customer retention is key.

Large, Industrial Scale Metal Fabrication and Welding

Industry: Manufacturing

Key Factors for High Valuation:

  1. Experienced Workforce with Specialized Skills: A team of skilled welders certified in specific fabrication techniques proved the company’s ability to handle complex projects, making them valuable assets.
  2. Modern Equipment and Technology: Investing in state-of-the-art equipment ensured efficient production and minimized rework, increasing overall profitability.
  3. A Growing Economy: Covid was tough for construction related industries, but some major metros in the US still expanded, and some recovered faster than others (e.g. markets with massive housing needs and growth).

Valuation Reduction Factor:

  • Heavy Reliance on Key Customers: Revenue concentration greater than 20% for any one single customer drives an EBITDA multiple down. Learn more about how we deliver our Manufacturing Business Valuations.

Specialty Engineering Design and Consulting

Industry: B2B Services

Key Factors for High Valuation:

  1. Proven Track Record of Project Completion: A history of successfully delivering complex engineering design projects on time and within budget demonstrates reliability and expertise.
  2. Strong Client Relationships: Building long-term partnerships with repeat clients fostered trust and loyalty, guaranteeing a steady stream of project opportunities.
  3. Deep Industry Expertise: Specializing in a specific engineering niche allowed the company to command premium fees and establish itself as a leader in that market. Being the the absolute best and a strong track record marketing this world renowned projects is a great asset.

Valuation Reduction Factor:

  • Flatline Earnings: Stable earnings is great, but absolute flatline on earnings over many years gives buyers pause on growth opportunities.

IT Managed Services

Industry:Technology

Key Factors for High Valuation:

  1. Recurring Revenue Contracts: Long-term managed service agreements with clients provided predictable revenue and a strong customer base for the buyer to inherit.
  2. Cybersecurity Expertise: A team with demonstrably strong cybersecurity capabilities was highly sought-after in the post-pandemic landscape, increasing the company’s value.
  3. Scalable Cloud Infrastructure: Leveraging cloud-based solutions facilitated efficient service delivery to a growing client base and simplified onboarding for new clients.

Valuation Reduction Factor:

  • Earnings Volatility: Large, Fortune 1000 customers cut back on contract spending during the pandemic, demonstrated track record for 2-3 years of earnings growth improves likelihood of higher EBITDA multiple and better SBA financing options.

Management Consulting

Industry: B2B Services

Key Factors for High Valuation:

  1. Specialized Industry Expertise: Focusing on a particular industry niche allowed the company to develop deep knowledge and expertise, making them invaluable advisors to clients in that sector. An extremely fast switch to 100% remotely operated staff ensured
  2. Strong Network of Clients and Industry Relationships: A well-established network of clients and relationships with industry leaders provided access to a steady stream of new projects.
  3. Proven Client Success Stories: A documented track record of helping clients achieve significant business improvements enhanced the company’s reputation and commanded premium fees.

Valuation Reduction Factor:

  • High Consultant Turnover: High turnover among consultants could raise concerns about the consistency and quality of service delivery, potentially deterring potential buyers.

Software Development Agency

Industry:Technology

Key Factors for High Valuation:

  1. Agile Development Methodology: Adopting an agile development process fostered efficient project management, rapid delivery of features, and high client satisfaction.
  2. Strong Management Team: Owners who have a strong middle management structure, and can go on vacation for a month completely off grid, is attractive to private equity groups looking to bolt-on additional capabilities to their platform investments.
  3. Recurring Revenue from Software Subscriptions: Offering a maintenance and service component, with monthly fees and balloon payments for extra work, created a predictable revenue stream, and shifts the EBITDA multiple to the higher end of this specific industries range.

Valuation Reduction Factor:

  • Limited Proprietary Software Portfolio: Focusing solely on custom development projects could limit the overall value compared to a company with a portfolio of proprietary software products.

Residential Energy Systems – Design and Installation

Industry:Technology

Key Factors for High Valuation:

  1. Expertise in Emerging Technologies: A focus on cutting-edge energy-efficient technologies like solar panels and battery storage positioned the company for growth in a rapidly evolving market.
  2. Strong Partnerships with Installers: Established relationships with reliable and experienced installers ensured efficient project completion and customer satisfaction.
  3. Financing Partnerships: Partnering with financial institutions to offer financing options for homeowners broadened the customer base and increased project conversions.

Valuation Reduction Factor:

  • Heavy Reliance on Government Incentives: Over dependence on government subsidies and tax credits for solar installations could make the business vulnerable to policy changes and impact future profitability.

Aerospace and Defense Systems Integrator

Industry:Technology

Key Factors for High Valuation:

  1. Long track record working with the Federal Government: Possessing the necessary government contracts and vendor approvals allowed the company to work on mission critical projects, a significant advantage in the aerospace and defense sector.
  2. Established Supply Chain Network: A well-established network of reliable suppliers ensured access to critical components and facilitated on-time project completion.
  3. Strong Quality Control Procedures: A rigorous quality control system minimized defects and maintained a high level of product reliability, a crucial factor in the aerospace and defense industry.

Valuation Reduction Factor:

  • Limited Customer Base: Reliance on a small number of government contracts could limit diversification and expose the company to budget cuts or changes in government priorities.

By understanding these key factors and potential valuation discounts, business owners and their advisors can develop strategies to maximize the value of their companies in the post-pandemic landscape. Read our guides on how to sell a Business or How to buy a Business if you are currently in the market, we help business owners every day. This knowledge empowers them to make informed decisions about growth opportunities, operational improvements, and ultimately, a successful exit through M&A. Preparing three to five years out gives the business ample time to enter a new normal rhythm of business.

Should you need any advice on how to improve the value of your business, or help on making changes to prepare for business sale, please contact us at any time at info@exitequity.com

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