Planning Your Training Company’s Future
By Peter Yoon, Managing Director, Berkery, Noyes & Co., LLC
It is never too early to start establishing concrete long-term goals for your company. For many C-level executives, this involves contemplating the eventual sale of their business. With the recent robust level of merger and acquisition (M&A) activity involving corporate and professional training companies, this seems to be an appropriate time to put what may be an unfamiliar process into proper perspective.
The M&A marketplace for corporate and professional training companies has been picking up as of late. The first half of 2012 saw a 31 percent increase in transaction volume compared to the previous six months for companies within the space. Moreover, market values for publicly traded companies in the sector have been steadily increasing for at least the last 12 months.
There are several reasons for the more pronounced interest from public investors, as well as from strategic and financial buyers of private companies. Corporate and professional training companies, in general, have shown good top-line growth and profitability recently. The prevailing attitude is that the corporate training and continuing education sector is very cyclical. This notion is especially relevant for private equity firms, which have been on the sidelines for the last few years and now are looking to deploy their capital in a sector they believe will be a growth area. In addition, the learning modality increasingly is changing from live, in-person instructor-led training to more of a software-as-a-service (SaaS) model that emphasizes online or blended learning. Strategic and financial buyers are attracted to the recurring revenue characteristics of the SaaS model.
Other areas in the education and training space, including preK-12 and post-secondary, are facing clouds on the horizon that make the corporate training and continuing education sector seem more attractive. This includes declining enrollment, funding issues, and regulatory uncertainty. For-profit, post-secondary strategic buyers seeking to diversify their revenue streams —primarily for regulatory reasons—are showing particular interest in corporate training companies.
Furthermore, large corporations seem to be spending on training and perks for existing employees rather than recruiting. There is a strong desire to bolster retention rates and avoid the opportunity costs of hiring new personnel amid what is widely acknowledged as a “jobless recovery.”
Start Preparing Now
The first thing I would suggest is to get audited financial statements prepared if you have not already done so. You might be surprised how many companies with sound management teams, strong growth, and efficient operations survive with QuickBooks and a bookkeeper alone when it comes to financial accountability. Having audited financial statements gives potential buyers comfort that revenue and profitability conform to the Generally Accepted Accounting Principles (GAAP), which is what they require. In addition, many companies are valued in a sale based on a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), and EBITDA is derived mainly from the audited financials to give some assurance of accuracy. Although there is almost always some discussion regarding a company’s real EBITDA, an audit gives both the buyer and seller a base to work from.
Second, be mentally ready to have all aspects of your company looked over with a fine-tooth comb, so do not expect potential issues to be hidden for long. The investment banker you hire will conduct due diligence to prepare you for a sale. Then the potential buyer will conduct his or her own process. Sales processes have increased in duration as the due diligence process has become more involved.
Third, determine what your goals are post-transaction. Do you want to completely exit the business? Or do you want an opportunity to diversify your assets but still participate meaningfully in the potential upside of the business with a value-add partner? Figuring this out up front will save a lot of unnecessary time and effort. At the very least, it will determine which potential buyer universe you would like to concentrate on.
Maximizing Your Company’s Value
There are many reasons to hire a financial advisor. Having an investment banker working on your behalf signals more serious intent on completing a transaction, frees up management to focus more on running the business during the intensive sales process, and provides support during the due diligence phase. Most importantly, the financial advisor will help create competition for your company. More often than not, value is left on the table by not going through a sales process. It may be common sense, but having more than several potential buyers interested in your business maximizes its value, and an advisor running the auction process can make all the difference.
Often, potential buyers will contact acquisition prospects to conduct one-to-one negotiations. In a one-to-one negotiation, not only is the seller in a position of weakened negotiating leverage, it is also more difficult to evaluate pricing and terms. If this process reaches a point when an offer is presented, it may seem too enticing to pass up. However, you may not know whether the offer is acceptable without having any means of comparison. In some cases, you may think the price offered is not high enough, and, thus, avoid moving forward, when conducting a sales process may have shown that the price was more than reasonable. An advisor who understands your business will help establish a potential buyer list that will streamline the process and avoid wasting time and effort reaching out to inappropriate parties.
With the increased amount of interest in the corporate training and professional education sector, it has become a necessity for business owners to recognize the market landscape and begin initiating a plan of action in order to take advantage of current opportunities.
Peter Yoon is managing director at Berkery, Noyes & Co. LLC investment bank. He specializes in the education and training sector, including the post-secondary, preK-12, child-care services, and corporate training areas. Yoon advises education companies on matters relating to mergers and acquisitions, financings, and general business development. For more information, visit http://www.berkerynoyes.com/sector/education.aspx.