Frequently Asked Questions
Focus Strategies Investment Banking “Ready to Sell?” Webinar Series Q&A
What is your ideal transaction size and how are the fees determined?
We are always happy to visit with individuals who are considering selling their business, even if a transaction may be years down the road. We want owners to know their options and be in the best possible position when they make the decision to sell. Typically, Focus Strategies engages with privately held, middle-market companies with annual revenues generally between $10MM and $250MM and annual EBITDA between $3MM and $15MM. For some industries, such as subscription-based software and other businesses with high levels of recurring revenue, the lower-end revenue and EBITDA amounts may be significantly lower. The fee structure will depend on the type of transaction. If we are raising capital (debt or equity), we would charge a success fee that would be a percentage of the capital raised. If we are working on a buy-side or sell-side transaction, success fees calculated as a percentage of the transaction size would apply. We would typically charge recurring monthly retainers for capital-raising, buy-side, or sell-side engagements; retainers paid are usually credited against applicable success fees.
Is it better to use a Business Broker, M&A Broker Firm or an Investment Bank?
Focus Strategies is a U.S. Securities and Exchange Commission (“SEC”) registered and Financial Industries Regulatory Authority (“FINRA”) member broker-dealer and engages as an exclusive financial advisor to its clients. FINRA is an independent, non-governmental regulator for all securities firms doing business with the public in the United States. Since we represent companies who are selling, we do act in a broker/intermediary role. Firms such as ours are known as “investment banks”. Business brokers and M&A brokers typically represent relatively smaller businesses (measured by annual revenue and EBITDA) than does Focus Strategies. If you would like to discuss whether you should hire a business broker or an investment bank, please feel free to contact us.
Is it customary to include outside specialists (e.g.: lawyer, accountant) for a transaction? If so, are there specialists you can recommend?
Our strong recommendation is for a business owner to gather a team of advisors for any strategic transaction. Focus Strategies can work with an owner’s existing advisors, or where referrals are appropriate, we can assist an owner in assembling all or a portion of the team roles needed for the transaction at hand. We have a large network of trusted tax, legal, and other specialty professionals to support client needs. These advisors do not receive any compensation from Focus Strategies but instead engage directly with the business owner..
Do you have any advice on the current bill that is in the House that states that the capital gains tax rate will go up as of 9/13?
As of fall 2021, a pending bill in Congress proposed to increase the maximum capital gains income tax rate from 20% to 25% for sales that occurred on or after September 13, 2021 for single filers earning more than $400,000 in taxable income, or married filers earning more than $450,000 in taxable income. The bill also included several other changes to the existing tax structure. As of this writing (early November) the tax bill continues to be debated in the House.
Can you talk more about the Qualified Small Business Stock sale?
“QSBS” stock can yield a significant tax benefit for selling business owners. Under current tax law, Section 1202 of the Internal Revenue Code provides that a holder of stock in a “Qualifying Small Business” (generally a “C” corporation entity operating in the technology, retail, wholesale or manufacturing industries that has not exceeded $50 million in assets at any time from inception) can avoid taxes on as much as $10 million in gains, as long as the stock has been held for at least five years and satisfies other qualifying conditions. The pending tax bill contains a provision that would cut the QSBS tax benefit in half for taxpayers who earn more than $400,000 in annual taxable income.
Is the closing process different with a strategic buyer vs. a financial buyer?
Some strategics are well versed in acquisitions and have an in-house corporate development team that can manage the due diligence and transaction closing processes. Private Equity (“PE”) firms have a great deal of experience with acquisitions and because of that, are able to manage the closing process efficiently. That factor typically results in a faster closing for a transaction with a PE buyer.
Other than the sales price, what other considerations should a business owner prioritize when selling their business?
In our experience, founders have started the company or owned it for a while and have built a team of employees that they are very proud of. Areas to explore include the opportunities for the owner’s team post transaction (i.e., how likely will the buyer be able to hire the entire team? Will there by layoffs? Will the buyer relocate the business?). Some other factors to consider are whether the business owner can or may be required to “roll over” equity in the transaction (i.e., carry over some percentage of ownership into the post-transaction company), and whether the buyer/investor has the capability to execute on the growth plans of the business.
How does Focus Strategies create a potential buyers list for their clients?
Focus Strategies approaches buyers’ lists three different ways:
- We have many first-hand relationships with potential buyers/investors with whom we transact routinely; we are very familiar with the industries, size and characteristics of businesses in which these parties are interested;
- Sometimes our sellers/clients will have potential acquirers/investors in mind, and/or the seller has already been contacted by buyers/investors;
- We have access to databases listing private equity firms, other types of investor groups such as independent sponsors and family offices, and strategic companies both nationally and internationally.
As it relates to a potential buyers list, are there geographical limits?
Focus Strategies has the ability to perform an international, national, and/or local search of potential buyers/investors. When we engage a client, as part of the assessment of the business, we consult with the owners on their goals and objectives. Once those are established, we begin aggregating the best potential suitors for our client.
What is an Executive Summary/Teaser?
An Executive Summary, often called a “Teaser”, is typically a 1- or 2-page document that highlights the qualities of a company and the seller’s objectives on a no name basis to maintain confidentiality.
What is the difference between an Indication of Interest (“IOI”) and a Letter of Intent (“LOI”)?
The IOI is a non-binding outline of a proposed transaction submitted by a potential buyer early in the selling process. The IOI addresses material deal terms in summary fashion. Points addressed include, but are not limited to, the structure of the transaction, approximate price range (expressed as a dollar value range or stated as a multiple of revenue or EBITDA), availability of funds and sources of financing, the amount of seller rollover equity that the buyer proposes, management retention plan, and timeframe to close the transaction. The LOI, which comes later in the process, is a more formal document that typically states the final offered price subject to the buyer’s final due diligence. The LOI also outlines in greater detail the proposed deal structure. An LOI typically includes a binding exclusivity period during which the seller would exclusively deal with the buyer (and no other potential purchasers) to close the planned transaction, and an estimated closing timeline.
Do the terms often change from the Indication of Interest (“IOI”) stage to the Letter of Intent (“LOI”) stage?
As financial advisor to the seller, we will consult with the seller and the management team to review and analyze the submitted IOI’s. The seller will then select potential buyers for the management meetings. If a potential buyer remains interested in purchasing the company once the management meetings are completed, that party will submit a proposed LOI. The Seller will ultimately select a final bidder and execute an LOI with the leading prospect. The more prepared business owners are and the more negotiating that is done during the LOI stage, the less final terms will vary from the LOI following documentation and closing. Factors unique to the seller’s business in particular (typically discovered during buyer’s detailed due diligence) or circumstances with the economy in general (i.e. emergency pandemic, global supply chain disruption, fundamental changes in the economy, etc.) may necessitate a reconsideration of LOI terms. On occasion, buyers will either pause work towards a transaction or attempt to renegotiate the deal based on these developments. We will work with you to make sure those surprises are minimized to the greatest extent possible, and, if at all possible, that you will be able to close on the terms that were negotiated.
Who generally attends the management meetings?
The specific transaction at hand determines who the players are and who will attend the management meeting. From the seller’s side, the owner or principal of the business will almost always be present. The seller’s management team will usually attend and make a presentation to the potential buyer that focuses on the growth plan of the business. The seller’s financial advisors will attend, as well. From the buyer’s side, the executive management of the buyer, whether that is a strategic buyer, partner(s) of a PE firm, or other professional investor, will attend. In some instances, a representative of the buyer’s senior debt lender or a subject matter expert who consults with the buyer on industry-specific points may attend as well.
How important is a Quality of Earnings (“QofE”) and how long does it take?
The QofE process, which involves detailed financial due diligence on the subject company, is typically the primary gating factor that determines whether a potential transaction is terminated shortly following execution of an LOI or moves towards closing. The more institutional the buyer, the higher the odds that there will be a buy-side QofE. Sellers may also elect to have a sell-side QofE performed on their business by a consultant of the Seller’s choosing prior to taking the company to market. Sellers often think they do not need a sell-side QofE where the selling business has audited financials; however, in our experience, a sell-side QofE is often advisable. First, the sell-side QofE provider is available to serve as a subject matter expert for the seller on technical issues that arise during the buy-side QofE and is by then familiar with the seller’s business. Additionally, in the course of performing a sell-side QofE, accounting or other issues are often discovered and can be addressed prior to taking the seller’s company to market. The QofE timeframe is dependent on the complexity of the business being sold. Generally, it will range between 3-6 weeks.
How can I get in contact with you after the webinar?
Feel free to visit our website at www.focus-strategies.com or you can reach Ollie directly at 737-263-0429 or firstname.lastname@example.org.
Is Focus Strategies a broker dealer?
Yes. Focus Strategies is a FINRA registered broker dealer and engages as an exclusive advisor to clients. FINRA is an independent, non-governmental regulator for all securities firms doing business with the public in the United States. FINRA is authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly. Focus Strategies abides by all FINRA regulations –
a re-enforcement of Focus Strategies high ethical standards and commitment to integrity.
a re-enforcement of Focus Strategies high ethical standards and commitment to integrity.
Does Focus Strategies speak on panels?
Yes. As a team, Focus Strategies often speaks on panels for various industries and gives periodic market updates based on their experience in the current economic environment. Contact us at 512-477-3280 if you would like to inquire about speaking engagements.
Does Focus Strategies invest directly in companies?
As an investment banking firm, Focus Strategies does not invest directly in its clients. Rather, we represent the client by marketing their business to multiple parties to get the best possible price and terms available from the marketplace. Focus Strategies has separate business operations whereby private investments are made through a private investment company but these entities are distinctly separate and follow all appropriate regulations and processes to maintain such separation.
Are subordinated debt and mezzanine debt the same?
These terms are often used interchangeably and refer to a loan or security that ranks below other loans and securities with regard to claims on a company’s assets or earnings. Subordinated debt may also be called a junior security or subordinated loan.
Is private placement the same as raising capital?
These terms are often used interchangeably and refer to the raising of equity, debt or a combination of equity and debt. Capital is raised from private sources as opposed to issuing stock on a public market exchange.
Is Focus Strategies a tax advisor?
No. As a company, Focus Strategies does not provide tax advisory services, inheritance structuring or legal counsel. However, for every client and every project, Focus Strategies often assembles all of the team roles needed for the transaction at hand and has a large network of trusted tax, legal and other specialty professionals to support client needs.
Is Focus Strategies a stock broker?
No. Focus Strategies is not a securities and exchange broker and does not sell or purchase stock on behalf of clients. In the event a client transaction occurs with a public company, Focus Strategies may advise on the valuation and issuance of stock within a transaction but does not engage in security sales.
Is Focus Strategies a business broker?
Since we represent companies who are selling, we do act in a broker role. However, business brokers typically represent smaller clients than Focus Strategies. If you would like to know if you should hire a business broker or an investment bank, please contact us at 512-477-3280.