IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Oliver Kotelnikov. Mr. Kotelnikov, is a senior business brokerage intermediary at IBA (www.ibainc.com):
Hospitality Industry M&A – 2021 State of the Marketplace
The year is off to a momentous start for the Washington state hospitality business community. While major developments on the legislative front have kept the operators busy, and often guessing, a sustained pattern of strong market activity on the M & A side has carried through the end of 2020 and into Q1 of the new year. The hospitality sector remains viable, but not without challenges, principle among them one of image and marketplace perception associated with the uncertain future of the industry landscape and the attractiveness of related business opportunities to investors. Accurately valuing businesses and commercial real estate, a selectively strategic approach to marketing and presentation, setting realistic expectations, and intelligent buyer engagement have been the critical factors to achieving maximum value at the time of sale for clients and successfully completing transactions over the last 12 months. Having sold a variety of different businesses with and without real estate in the hospitality space during the pandemic, with two transactions already completed in 2021 and multiple active new listings presently on the market, I would like to share my professional knowledge and experience for the benefit of business owners considering an exit in the next 6-18 months.
Performance
Businesses that have remained operational, actively seeking a path to recovery through opportunities for new sources of revenue and growth have continued to experience strong buyer demand. The pandemic has motivated many business owners to explore ways of revenue diversification in the adjacent possible by experimenting with new products and services. Acquiring new customers by expanding the list of products and/or services offered has been viewed by buyers as a component of sustained future growth for the business. Going concerns demonstrating resilience and continuing to reinvent themselves will also have the advantage of operating in an environment of increased market share and demand as less adaptive competitors exit the industry. By outsourcing the transaction of sale to a professional intermediary, sellers elect to remain focused on their core competency of running the business and optimizing performance. The ROI and the results of this particular decision speak for themselves. Once the buyer has been sourced, parties traditionally begin collaborative efforts to reach the finish line. It is also an area where deals routinely fail. The transactional last mile delivery has been especially perilous of late, complicated by new, pandemic related elements introduced into the equation. In service of completing recent projects, my representation services have included sourcing reliable financing, ensuring timely termination of existing government loan program obligations, working with landlords and negotiating lease reassignments, advising on and assisting with alternative deal structure options, alleviating delays associated with securing liquor licenses, and removal of liens and other potential impediments to closing of transactions.
Value
The business must be fairly and competitively priced in order to resonate with the marketplace. A unique economic event collectively known as 2020 has to be factored into the evaluation and viewed in the context of past, present, and anticipated future performance of the business. What are the value implication of one “tricky” year on a successful, multi-decade, or multi-generational business? It largely depends on the entity’s adaptive capabilities and the predicted impact on future earnings. Truly a case of past performance not being indicative of future results, generating an accurate, objective opinion of value for privately held company in 2021 is nuanced and complex. In completed transactions, the majority of my evaluations and subsequent listing price recommendations came within 10% of value achieved at the time of sale. Market activity ranged from full price, all cash at closing resulting from a competitive, multiple offer environment, to reached agreements that included earnouts and other deferred compensation components aimed at diversifying the pandemic related risk and the uncertainty associated with future earnings of the business. My post evaluation recommendations have also included delaying going to market, potential pivoting strategies, optimizing performance in specific areas to improve key value driving metrics, and reducing costs in areas not likely to significantly impact value at the time of sale. Receiving a professional, comprehensive, updated opinion of value for the business is the first step in the successful process of sale and is highly recommended to all business owners considering the sale of a privately held company. Business evaluations are provided on a complimentary basis to potential clients.
Location
The geographical piece of the puzzle has undergone a dramatic transformation with surprising manifestation in the buy sell space. Challenges experienced by the downtown Seattle retail and commercial core similar to other areas of King County were amplified by civil unrest, and city and state adopted policies detrimental to the business climate. Completing a transition of ownership in King County required a different approach than achieving a sale in a smaller market. Honeyhole Sandwiches, a legendary Capitol Hill establishment, successfully pivoted to an all take out model, while experiencing intermittent, but significant disruption to operations due to ongoing protests in the area. One such event occurred during a meeting my client and I were conducting with a perspective buyer. Adherence to best practices and transparency in negotiations led to an honest discussion between the parties about the present realities of an otherwise stellar location, and temporary challenges of operating under a new business model. Agreement on the terms of the deal was reached shortly. The sale of Mike’s Seafood, an equally well-known landmark restaurant in Ocean Shores, was in part achieved through highlighting the location benefits of a socially distant, open air paradise. The well-known outdoor recreation destination and vacation community experienced a record number of visitors in 2020. My clients seized the opportunity, focused on performance, and delivered one of the strongest financial quarters and summer seasons on record. An offer for the restaurant and the associated commercial real estate was received in the fall. Separate transactions in Winthrop saw ownership of two businesses transition between local families. A booming real estate market in the Methow Valley precipitated by urban flight to lower-density areas had to be considered in the valuation of the commercial real estate in both transactions. The business and the real estate assets were successfully transitioned for high market value as a package on behalf of my sell side clients to facilitate retirement.
Funding
The lending climate is highly consequential to successful deal completion in the M & A space and has generally been favorable, if a bit of a moving target. Incentivized by federal stimulus dollars, the SBA has worked with local banks to fund not only federal assistance programs like PPP, EIDL, and the Shuttered Venue Operators Grant, but also issued updated guidelines for incentivized programs aimed at new acquisition loans. Transactions that closed in beginning of 2020 adhered to significantly different lending criteria of buyer capital injection, interest rates, relevant operator experience, and transition training requirements than similar transactions crossing the finish line in 2021. Agency back log and the administrative overhead associated with processing funding for multiple active federal aid programs simultaneously has extended closing timelines for new loans. Increased levels of activity are also due to a new, recently released Section 325 of the federal Economic Aid Act. Subject to availability of funds, SBA will cover the first 3-6 months of P & I payments on all qualifying 7(a) and 504 loans approved prior to September 30, 2021 for the acquisition of businesses and commercial real estate. At the expense of neither party, a significant discount is introduced into the transaction by the lender. The subsidy is likely to further catalyze an already active marketplace with buyers seeking to take advantage of this limited time opportunity.
If you have questions relating to the content of this article, the process associated with preparing a business for sale, or establishing the market value for a privately held company or family business, Oliver Kotelnikov would welcome the opportunity to talk with you. Mr. Kotelnikov can be reached at (425) 454-3052 or oliver@ibainc.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.