InSight

Exit and Growth Strategies for Middle Market Businesses

Consider A Family Office as a Potential Buyer or Partner for Privately Held Businesses

By Joe Sands | May 18, 2017

Selling My BusinessAn Emerging Trend: Family Offices Seeking Private Company Investment Opportunities

There is a growing trend of family offices acquiring or investing in private businesses and the trend is picking up steam for good reasons including but not limited to:

• Direct investing provides Family Offices with the potential for superior returns, transparency and control of their investments in private companies

• In some cases, private companies’ interests can be better aligned with a Family Office as an investor or owner than with a traditional funding source

What is a Family Office?

A Family Office is an entity that provides services to either a single wealthy family or multiple wealthy families. The Family Office (FO) is generally set up by the wealthy family (a family with assets typically in excess of $100 million and often in the billions) and ranges in the number of professionals employed and services covered. The services provided by a family office are tailored to the family’s needs, and can cover: (i) wealth management, (ii) investment management, (iii) private banking, (iv) accounting and tax management and (v) other services such as travel, legal, bill paying and security. The rationale for setting up a family office is centered around privacy, confidentiality, control, transparency and a consolidated team working together without any bias or conflicts of interest. FOs invest across a wide array of domestic and international public and private securities as well as real estate. Collectively, family offices are estimated to hold assets in excess of $2 trillion.

Advantages for the Private Company:

• A FO’s primary objective is to preserve and grow wealth over the long term rather than selling their best investments quickly or using high amounts of debt in order to generate a high IRR of new investment funds.

• FOs are more likely to hold a good investment for many years or even potentially in perpetuity and to be an ongoing source of growth capital for the company.

• FOs are already running businesses and are sensitive to the softer issues such as company culture, succession issues, impact on the local community as well as maximizing business strategies. Most have been through up and down economic cycles and won’t take short-cuts to preserve their jobs.

• The different investment objective of a FO can also manifest itself in less balance sheet leverage being employed which may be attractive to business owners who want to be sure of the future stability of the company. Many institutional investors focus on maximizing IRRs which can bring with it an interest in maximizing debt levels since the higher the leverage, the higher the return on the equity, everything else being equal. Most FOs, on the other hand, are more conservative on the use of debt in their acquisition financing.

• Finally, FOs are using their own capital and can therefore close on investments quickly without relying on bank or investment committee approvals.

Conclusion:

When considering a sale or capital raise for a privately owned business, there are many types of traditional and non-traditional capital providers and acquirers. A well thought-out strategy for each situation must be developed to engender a successful outcome. Doing so requires evaluating which types of investors to reach out to and including multiple types of investors. This will no doubt maximize business value as well as the ongoing operating relationship. Family Offices are a good complement to a robust investment banking process.


How Do I Know It Is Time To Sell My Company?

By Robert Contaldo | May 09, 2017

After 35 years of selling companies, I have found that it is nearly impossible to convince a business owner to sell until the business and personal reasons align. But once they do, no good ever comes from delaying a sale.

Selling your business, which is perhaps your largest asset, can be a difficult decision. It has been part of you and part of your family. It has been good to you like an old friend. You have loved it – you have cursed it – you have nurtured it, you have seen it from birth through the teen years and into maturity. Unlike us, it can live for generations – though the time will come when it must change hands.
When the cycle of business and our personal circumstances begin to herald the transition, it should be addressed in order to realize the financial security for which it was created.
After 35 years of selling companies, I have found that it is nearly impossible to convince a business owner to sell until the business and personal reasons align. But once they do, no good ever comes from delaying a sale.
So – here are ten points to consider when deciding whether or not it is time to sell your business:

1) The Thrill Is Gone

We all go through seasons in life. Young business owners focus on raising a family, planning for the future and striving for a financially secure retirement. To that end, fighting the battles and making the sacrifices are necessary and expected as part of a growing business. However, there comes a time when a business owner does not care to take the business any further. The battles and victories that at one time were energizing have now lost their importance, and have become somewhat boring and wearisome. The focus shifts to more time off, warmer weather, grandkids, or more leisure time activities. Many business owners want to pursue a new direction in life that satisfies a greater personal or community need.

2) Your Marketplace Is Changing

Businesses that do not change will ultimately fade away. Change requires new market direction, more equipment, more people, new technology, expanded facilities, and other capital investment. Market changes can include more complexities involving government regulations, taxes, banking, certification requirements, customer reporting requirements, global competition that threatens margins and customers seeking fewer suppliers and lower costs. Many times the direction is clear, but the mind, body, and emotions are not willing to embrace change.

3) Risk Becomes a Four Letter Word

With all that needs to be done in a changing marketplace, business owners cannot afford to be squeamish when it comes to ongoing investment in the company. When one reaches the point of not making logical investments in the company or tends to count the debt rather than the probable benefit, it might be time to sell. Most business owners reach a point where they are tired of “betting the farm”, tired of personal guarantees, tired of meeting financing requirements and covenants, and worn out over protecting assets from legal liability. There comes a time when it makes sense to “take some chips off the table” and build financial firewalls.

4) A Change Would Be Good For the Family

Many have experienced the challenges of a family run business. As the succeeding generation grows into personal and business maturity, it may be time for a generational transfer of ownership. A recapitalization with a Private Equity Group as a financial partner can allow the founding shareholders to take the lion’s share of the business value in cash at closing, while the succeeding generation reinvests (through a small amount of the proceeds) for a meaningful share of the company going forward. The company would also have access to growth capital. How great would it be to again have a family relationship that is not encroached upon by business? Is the business stealing time from your kids or grandkids? Are you trading memories for dollars you’ll never need? Many business owners have delayed a sale in spite of the concerns of a loving spouse who desires a different and better life for themselves…until it’s too late.

5) Seller’s Market

The three principal buyer groups are: Private Equity Groups, Strategic Acquirers, and Family Funds.
Private Equity Groups have become the new conglomerates with overflowing levels of investment capital. With 2,500 or so Private Equity Groups in the United States and a like number overseas, with an estimated $1.5 trillion to invest, competition to buy companies remains robust among financial buyers. Multiple offers can be a reality for even some marginal industries or smaller companies. Premiums are being paid for companies as demand exceeds supply.
Strategic Acquirers see growth through acquisitions as the preferred way to gain market share quickly, add product lines, augment human resources, enhance management, and stay competitive.
From a valuation standpoint, strategic acquirers have historically been either the best or worst buyers (more often the worst) until the past few years. In many cases, their top competition has been acquired by a Private Equity Group which by mandate begins to effectuate meaningful growth. As the industry and market begins to take notice, it puts pressure on the privately owned company to do likewise.
Family funds can be worthy suitors. These sophisticated and respected families bring significant personal finances, outside private investment capital, experience, contacts, expertise, and many times a long-term investment strategy.

6) Unusual Financial Gain

Perhaps you have been approached by a bona fide buyer who is larger, cash heavy, willing to overpay, and inebriated with the desire to own your company. (We can dream can’t we?)

7) The Business Is Growing

It seems incongruent that a business owner should consider selling when growth is accelerating, but growth can end the life of a business – fast. Cash flow becomes the monster that consumes. Even in circumstances where growth is more controlled, businesses reach a point where professional management at a higher level is demanded. The founder of the company is wise to recognize that the large business dynamic has thrust him into unfamiliar territory, requiring personnel changes, organizational upgrades, a bigger, more complicated, much different way of thinking, and a doubling-down of time, effort and commitment.

8) The Business Is Flat

If flat, declining or inconsistent financial performance characterizes your business over the past several years and you just cannot seem to “crack the code”, let someone else figure it out! A strategic buyer, or an individual buyer with a dynamic skill set, or a Private Equity Group with more money and contacts might hold the key. Many business owners fail to realize that by staying in business under these circumstances, they forfeit personal income opportunities elsewhere and personal finances can be insidiously eroded.

9) Managing People Has Worn You Out

Do you long for the time when you need to only manage yourself? Are employee issues, government regulations, unions, health insurance, profit sharing, and retirement plans driving you to the brink?

10) My Partner Is A Problem

Most partnerships have a problem partner; if yours doesn’t, it might be you. Think: Jerry Lewis/Dean Martin; The Beatles, The Eagles; some marriages; and unfortunately, many businesses. Interestingly, we’ve found that most partnership problems are exacerbated by making more money – after the partners had been unified growing the business and defeating their common enemies. Many times, financial success spawns a disparate commitment toward reaching the next level as one continues to push and the other is dragged along.

11) Personal Compelling Reasons

The reason for considering selling a business will generally transcend the enterprise value of the business (though not to minimize the value component). The fundamental checkpoint in considering the sale of a business is this: “Does this business stand in the way of doing something else with my life?”
Hopefully the decision to sell is voluntary and not due to circumstances that necessitate a sale; but in any event, an exit strategy should be considered as part of estate planning since life is uncertain. An expert team comprised of an Investment Banking Professional and financial and legal counsel is a must.
All business owners experience all or some of these points from time to time with varying intensity. When that trusted “gut” feeling indicates more than a passing notion of selling, it may be time to explore options. The reality is that more business owners have said, “I wish I had sold sooner” than “I sold too soon”.


A Recent Example of the Strategic Benefits of Merging with a Competitor

By David Sinyard | May 03, 2017

Recently RLJ Lodging Trust (“RLJ”) (NYSE: RLJ) and FelCor Lodging Trust Incorporated (“FelCor”) (NYSE: FCH) announced that they have entered into a definitive merger agreement under which FelCor will merge with and into a wholly-owned subsidiary of RLJ in an all-stock transaction. According to the press release the merger will establish the third biggest pure-play lodging REIT by enterprise value, creating meaningful scale to capitalize on cost efficiencies, negotiate leverage and access to capital, and the opportunity to strategically recycle assets and optimize the portfolio. The combined company will have ownership interests in 160 hotels, including premium branded hotels located primarily in urban and coastal markets with multiple demand generators. The combination also provides significant penetration within key high-growth markets and broad geographic and brand diversity.

Summary of Strategic Benefits (per management):

  • Combination creates the third largest pure-play lodging REIT with a combined enterprise value of $7 billion

    – Increased shareholder liquidity and cost of capital efficiencies
    – Stock transaction allows both sets of shareholders to participate in the upside
    – Enhanced positioning with brands and operators

  • Leading upscale portfolio of compact full-service and premium focused-service hotels generating strong operating margins

    – Combined portfolio will include 160 hotels in 26 states and the District of Columbia, diversified across Marriott, Hilton, Hyatt and Wyndham flags
    – Broad geographic diversity and strengthened presence in key markets such as California, Florida and Boston

  •  Positive financial impact and positioning for future value creation

    – Accretive in first full year
    – Expected cash G&A expense savings of approximately $12 million and approximately $10 million of potential savings from stock-based compensation expense and capitalized cash G&A
    – Opportunity for additional ongoing operating and cash flow improvements through greater purchasing power, market leverage and capital expenditure efficiencies

• Future opportunities to unlock value from portfolio repositioning
• Potential conversion and redevelopment opportunities
• Opportunity to actively refine portfolio
• Strong and flexible balance sheet
• Significant liquidity, minimal near-term maturities and opportunity to lower cost of capital

Mergers such as these are predicated on these Strategic Benefits. The market will measure the success of this transaction in light of whether management ultimately realizes on these listed opportunities.


Buying and Selling – Beating The Odds

By Craig Allsopp | Apr 24, 2017

I was reading a study about private business sales the other day and came across a very startling statistic – only 20% of the companies put up for sale ever change hands.

This is a sobering thought – particularly if you are a business owner contemplating retirement and counting on the sales proceeds to fund it.

For some businesses it’s a matter of performance that makes a sale difficult, if not impossible. These companies may be losing money, or facing lawsuits or might be overly dependent on one or two customers.

For others, it’s a lack of preparation that creates the roadblock that prevents a transaction. Businesses with sloppy records, aging equipment and poorly maintained facilities fall into this category. Most investors aren’t looking for a fixer-upper and will quickly pass when they see one.

Still other companies never trade because their owners have unrealistic expectations when it comes to the notion of “transferable value.” They fixate on a number – without considering how their companies rank against their peers’ or the operational challenges and investment new owners will face.

So what is the solution to beating the odds in an environment where it is so hard to sell a company?

We believe it starts with preparation and a commitment to making fact-based decisions throughout the process.

Here are three basic concepts to get the sale process off and running toward a positive result.

  • Invest in a bench marking study. This will provide you with an objective look at your company’s position versus its peer group and provide you with a realistic expectation of its transferable market value.
  • Commit to spending time and effort to spruce up your business. Your company will stand out if you have a good management team, orderly books and records and well-documented customer relationships.
  • Hire a licensed investment banking firm to handle your transaction. Dealmakers at these firms are subject to FINRA testing and SEC regulation. You can see their dealmakers qualifications online and easily find out if they have been subject to any disciplinary action.

To sum up, there are no guarantees when it comes to selling a business. But proper preparation and committing to a professional process are more likely to beat the odds then leaving the details to chance.


Logistics & Transport Industry M&A News | 1st Quarter 2017

By Doug Nix | Apr 15, 2017

Logistics & Transport IndustryAccording to Douglas Nix, Chairman of CFA’s Transportation and Logistics Industry Group, there is a very strong demand for good quality logistics & transport companies of all sizes. Significant bid premiums are being submitted by all categories of strategic buyers in every auction run by CFA.

On a global scale, the shipping of dry bulk containers – across all modes – continues to climb and is projected to continue on an upward trajectory. The growth is expected to be driven by freight rates, ship availability, ship utilization, oil market fundamentals, exchange rates and commodity prices and production.

A recent industry survey reported that the top priorities of North American logistics leaders for their 2017 transportation operations were:

  • Reduce overall transportation costs
  • Improve route planning accuracy
  • Improve the quality and timeliness of management information/reporting

While there are several reasons driving these priorities, we believe the key ones are:

  • The continued shortage of qualified drivers. Many trucking companies are still reporting 100% annual turnover rates in their driver pool. The impact of the Federal Motor Carrier Safety Administration’s electronic logging devices requirement is expected to worsen this shortage as it comes on stream in December 2017.
  • Continued weakness in freight rates resulting from overcapacity in intermodal, water and road markets.
  • The tightening of supply chains combined with the growing demand from shippers for transparency and real time, accurate freight status information. 

Industry Indicators:

  • Total US manufacturers’ shipments, an indicator of the volume of goods shipped by truck, fell 1.5% year-to-date in December 2016 compared to the same period in 2015.
  • Total US revenue for general freight trucking fell 1.4% in the second quarter of 2016 compared to the previous year.

Posted by Doug Nix.

Read the Entire Transport, Logistics and Supply Chain 1st Quarter Newsletter Here


M&A News | Technology, Media & Telecom Industry

By Dan Vermeire | Apr 06, 2017

M&A News Technology – m&a news technologyOne of the largest transactions of the quarter in was completed in December when Roper Technologies, Inc. acquired Deltek, Inc., a portfolio company of Thoma Bravo LLC, for US$2.8 billion in cash. The transaction was funded through cash on hand, borrowings under Roper Technologies’ existing credit facility and new debt. The acquisition enables Roper Technologies to solidify its market position. Roper Technologies engages in the provision of engineered products and solutions for global niche markets. Deltek provides enterprise software and information solutions. Its products include project ERP solutions, enterprise information management, business development solutions, project and portfolio management solutions, HR and talent management solutions and professional services automation solutions. Read more »


When Is A Partial Sale Right For You?

By George Walden | Apr 04, 2017

When an owner comes in to my office to discuss selling their company they are often only thinking binary. Sell it all or keep 100 %. As you might guess, transactions take many forms and occur for various reasons.  There are times when is it appropriate to consider a partial sale of your company.

1.     When you need expertise: The private equity community has created tremendous wealth for many owners by adding operational systems, expertise in personnel and a strategic vision. If you listen to many M&A minutes you know that I preach systems based operational decision making to facilitate growing your company and its people. If you are having trouble building a sales team or developing organizational depth because you are too busy running the company, having a group that supports you in those efforts may be the best way to get your company to the next level. Private Equity Groups (PEGS) to support and protect their investment are usually very open to acquiring expertise and provide systemization. They will often assist you in a strategy for business development including future acquisitions and product development. Why should you try to invent the wheel when somebody else has not only done it before, they have done it serially, often multiple times?

2.     When you need access to capital: Having the right partner can not only make growing a company easier through system contribution and strategic planning, they will often facilitate your ability to get access to capital for growth.  Think of it this way. Not only have you become more bankable because as a shareholder or partial owner their balance sheet strengthens yours they often have access to sources of capital that can improve your rates.

3.     Many business owners have most of their wealth tied up in the company. The last five years for the oilfield industry has been brutal. Many very good companies have failed or barely survived. Don’t you bet those owners wished they had taken chips off the table when the company was doing well and diversified their risk. Everyone knows you shouldn’t have all your eggs in one basket. The old axiom, what goes up does come down! Most companies and all industries cycle.  Ask Sears if you don’t believe it. The best time to sell some or all of a business is when it is doing well. Because the company is doing well it often commands a premium in the market.

If you are concerned about losing control of your business, most business owners don’t realize good companies and I am defining them as positive cash flows greater then 2M ebitda are attractive to minority investors.  The system approach the right buyers bring to the table can help accelerate your company and propel it to the next level. Remember most buyers want to add value to the company and that should always be a consideration in shopping buyers.

In closing, a partial sell should be a part of your consideration when you need expertise, financial depth or liquidity diversification.

Posted by George Walden.


M&A News | Print & Packaging Industry

By Anthony Contaldo | Mar 30, 2017

Print & Packaging IndustryOne of the largest deals of the Print & Packaging Industry in the 4th quarter of 2016 took place in November when Ocelot Acquisition, Inc., a newly formed joint venture of CVC Capital Partners Ltd and BA Glass BV, agreed to acquire Anchor Glass Container Corp, a portfolio company of KPS Capital Partners LP and AlpInvest Partners BV for more than US$1 billion in cash. Anchor Glass Container, based in Tampa, Florida, manufactures glass containers. It offers beer, beverage, liquor, food and custom mold making products and services. Read more »


Plastics & Rubber Industry | M&A News

By Jim Zipursky | Mar 23, 2017

plastics & rubberPrivate equity has been in the plastics & rubber products space. In November 2016 AEA Investors LP acquired TricorBraun Holdings Inc, a portfolio company of Goldman Sachs Mezzanine Partners and CHS Capital LLC, for an undisclosed amount in cash. The transaction was funded through US$735 million senior secured credit facility provided by the Antares Capital LP. TricorBraun Holdings operates as a holding company with interests in plastic packaging solutions. It supplies rigid packaging and related components for the personal care, cosmetics, healthcare, food and beverage, industrial and household chemical markets.

Production overcapacity, weak demand, and pressure from imports have contributed to slow growth in the US PET (polyethylene terephthalate) plastic blow molded packaging market, according to industry experts cited by Plastics News in November 2016. Even as the US industry has consolidated over the last few years, overcapacity persists, which has caused PET producers to reduce prices as they compete for market share and to cut costs in an effort to preserve margins. Industry watchers suggest that PET converters’ cost-cutting efforts have come at the expense of product innovation investment, as some producers have reduced engineering staffs. Manufacturers also face competitive pressure from imports, as well as alternative packaging products, including paper and stand-up pouches, that have innovated in marketing and product design. Soft drink and water packaging remain steady markets for PET converters, but dairy and juice markets are flat. Food offers an opportunity for growth, but further hot-fill and barrier (oxygen, moisture, UV light) innovation is needed. Other growth markets include dairy substitutes (almond and soy milk), and sports drinks. One upside for PET converters is that low oil prices are likely to keep resin feedstock prices in check.

Industry Indicators
  • US nondurable goods manufacturers’ shipments of chemical products, an indicator of demand for plastic resin and synthetic fibers, rose 2.0% year-to-date in November 2016 compared to the same period in 2015.
  • The spot price of crude oil, a key raw material in plastic resin and synthetic fiber manufacturing, rose 50.3% in the week ending January 13, 2017, compared to the same week in 2016.

Posted by Jim Zipursky.

Read the Entire Plastics & Rubber 1st Quarter Newsletter Here


M&A Industry News From the Metal Fabrication Sector

By Robert Contaldo | Mar 16, 2017

metal fabrication sectorM&A activity for North American based target companies in the metal fabrication sector for Q4 2016 included 46 closed deals, according to data published by industry data tracker FactSet.  The average transaction value was $62.8 million.

On a global scale, M&A activity in the metal fab sector was stronger in Q4 than Q3, but still lower than in 2015. Total deal value surged by 12% to $12.9 billion in Q4, bringing the total deal value in 2016 to $40.2 billion, still 40% lower than in the year prior.

Global demand for steel is expected to rise 0.5% in 2017 compared to 2016, according to a recent report by The World Steel Association. Key challenges include uncertainties related to the UK’s vote to exit the EU, along with China’s efforts to shift its economy toward services and consumption, with less investment in manufacturing, exports, and construction. Demand in China is forecast to drop 2% in 2017. However, some emerging markets should experience robust growth in steel demand. Amid government investments in infrastructure, India’s steel demand is forecast to increase 5.7% in 2017. Other key pockets of steel demand growth include Turkey (with 4.2% growth expected), Brazil (3.8%), and Mexico (3.2%). In developed markets, steel demand is forecast to rise 1.1% in 2017, led by the US, which should see demand grow by 3%. The EU and Japan are each expected to experience a 1.4% increase in steel demand.

Industry Indicators

  •  US durable goods manufacturers’ shipments of primary metals, an indicator of primary metal production, fell 7.8% year-to-date in November 2016 compared to the same period in 2015.
  • US steel mill product prices, which impacts profitability for primary metal manufacturers, rose 8.7% in December 2016 compared to the same month in 2015.

Posted by Bob Contaldo.

Read the Entire Metal Fabrication 1st Quarter Newsletter Here