E28: Navigating Mergers and Acquisitions with Joe Van Voorhis

Learn the insider secrets to selling your business for top dollar! In this episode, Eric interviews Joe Van Voorhis of Generational Equity to discuss mergers and acquisitions. Joe shares his expertise from over 35 years in the industry, including 18 years at Generational Equity. He explains the M&A process, how to properly value a business including intangible assets, recasting financials, and who the typical buyers are. Joe also discusses the current seller's market and dry powder that private equity firms have to deploy. If you’re a business owner thinking of selling your company, then this episode is for you!

Here are some topics from today’s discussion:

• Mergers and acquisitions defined
• Generational Equity’s focus on small and mid-market deals
• More about Generational Equity
• How to determine the value of your business
• How to assess your intangible assets
• The traditional buyers
• The concept of recasting
• What does dry powder mean?

Episode Highlights:

[03:12] What Does the Term ‘Mergers and Acquisitions’ Mean?

Mergers have become a rarity in today's business landscape. Instead, it's largely acquisitions where larger companies absorb smaller ones. At Generational Equity, they specialize in assisting clients who are looking to transition from their current business to pursue new career paths or retirement. Their role revolves around helping them strategically structure their companies to attract potential buyers, ensuring they are market-ready. Furthermore, they facilitate the seamless transaction of selling their business to a qualified third party.

[09:25] How to Determine the Value of Your Business

Buyers typically assume control of the transaction process. They enter the scene, employing tactics to shape and evaluate the worth of a business based on industry standards. Often, individuals rely on the averages provided by trade organizations, as buyers possess in-depth knowledge of valuations from their professional experiences. However, to truly determine fair market value, active participation in the marketplace is crucial. A large pool of potential buyers fosters competitive dynamics and defines the value. Nevertheless, preparing a business for market readiness can be a time-consuming endeavor, usually taking around 6 to 8 months. Once in the market, the number of potential buyers can exceed expectations, greatly increasing the chances of finding the right buyer at the right price. Savvy buyers, just like sellers, begin negotiations with conservative offers and only raise them when outperformed by market forces. This competitive market approach is strongly encouraged to maximize outcomes for our clients.

[16:59] The Traditional Buyers

• Strategic buyers (companies looking to acquire competitors or expand into new markets)
• Private equity firms and family offices
• EB-5 visa investors (foreign nationals looking to acquire a US business to get a green card)
• Foreign buyers (both public and private companies)

Joe emphasizes that they want to cast a wide net and access buyers from multiple categories, not just local competitors. Their database has over 34,000 qualified professional buyers.

[20:54] What is Recasting?

Recasting refers to adjusting a business's financial statements to more accurately reflect its true profitability and value. Joe explains that many business owners will underreport profits on their tax returns by taking excess salary, rent payments, or distributions to family members to reduce taxable income. In the M&A process, recasting adds back expenses that were really ways to take profits out of the business, like excess salary or one-time capital expenditures. This "steps up" the reported net profits to a more accurate level that better represents the earning potential a buyer can realize. Recasting typically increases reported profits by around 30% according to Joe.

Resources:

Generational Equity

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