Exit and Growth Strategies for Middle Market Businesses

My Car Has Working Capital

By Dan Vermeire | Jan 20, 2015

CarMost transactions deal with the subject of Working Capital. But what is Working Capital?  And how does it affect the purchase price?  A very familiar and simple example is when buying a used car.  Yes, a car does have Working Capital.  

Let’s say your neighbor is selling a used car.  You look it over, want to buy it, and agree on a price. You notice that the car has a half-tank of gas.  It also has about $20 of change in the cup holders.  And it still has $2K on the bank note.  So, the deal is, you’ll buy the car for X price, and agree that it will have a half-tank of gas.  Less gas and he owes you some cash.  Also, the seller can keep the $20 change, but he must pay off the bank note.  

For a business, Working Capital is usually AR + Inventory, minus AP.  Notice that Cash is not in the equation, because cash is really a by-product of Working Capital.  If Working Capital goes down, by collecting more AR, then cash goes up.  If Working Capital goes up, by paying off AP, then cash goes down.  In a transaction, Working Capital is analyzed and an “appropriate” level is agreed.  After the deal closes, if Working Capital was too low, then some cash is used to make up the difference.  So, the Working Capital is like the half-tank of gas when you buy a car.   

An additional concept is “cash-free, debt-free” and most business transactions are done on this basis.  The seller is responsible for any debt, other than trade AP, which is like paying off the bank note on the used car.  Also, usually the seller keeps the excess cash, after Working Capital is satisfied, similar to the change in the cupholders.  

There are many more details about Working Capital, so please call CFA to learn how the used car can apply to your transaction!

Posted by Dan Vermeire.

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M&A Trends in the Transportation Industry

By Doug Nix | Jan 16, 2015

Transport and LogisticsMultiple sectors of the transportation industry remain on an upward trajectory. According to a report from industry research group First Research, the US transportation services market is forecast to grow at an annual compounded rate of 5 percent between 2014 and 2018. US railroads, trucking, and water transportation services, all major indicators for freight forwarding, is forecast to grow at an annual compounded rate of 5 percent between 2014 and 2018. US warehousing and storage services is forecast to grow at an annual compounded rate of 4 percent between 2014 and 2018.

Read the Entire Transport, Logistics and Supply Chain 4th Quarter Newsletter Here

Posted by Doug Nix.

How Much Leverage Should You Use When Buying a Business?

By Catherine Patience | Jan 06, 2015

Middle Market PulseThe use of leverage is always a challenge. Use too little, and you leave profits on the table. Use too much, and you could be putting yourself in jeopardy. Most middle market M&A transactions are financed using a combination of debt and equity. A deal may have a single lender, or a mix of senior, junior or mezzanine debt. Debt has a lower cost of capital than equity, so the return on equity increases as the percentage of debt goes up. The goal is to use as much debt as possible without hitting the point where cash flow from the equity component cannot service the debt interest.

In acquisitions made in 2011 to 2013, total debt averages were remarkably stable, averaging 3.4x in each of those years. However, for deals closed during the first nine months of 2014, we have seen debt averages begin to rise, with the average jumping to 3.7x. Deals financed on the characteristics of another entity (ie: an existing portfolio platform or the corporate-level facility of a family office) employed even more debt, with an average of 4.4X.

As one goes from the smallest deal tier to the largest, the pickup in leverage becomes more pronounced. At $10-25 million TEV, leverage increased just .1X from 2013 to 2014 year to date. At $25-50 million and $50- 100 million, the gain was .3X and in the $100-250 million bracket, average total debt jumped .6X.

From one sector to the next, the use of leverage is not equal. Currently, manufacturing deals are participating fully in the flush leverage market, with debt levels rising from 3.4x in 2013 to 3.9x year to date. Business services, on the other hand have not experienced the same leverage run up, with a slight decline in 2014.

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Technology, Media & Telecom Industry News

By Arun Batavia | Jan 02, 2015

Hand with Cell PhoneThe market for wireless communication between objects such as cars and wearable items such as smartwatches and smartglasses represents a significant opportunity for telecommunications providers. The machine-to-machine (M2M) market is forecast to bring in $252 billion between 2015 and 2019, according to technology research and advisory firm Ovum. Global telecom operator revenue share of the total cellular M2M market is set to reach $25 billion by 2019.

Read the Entire Technology, Media and Telecom 4th Quarter Newsletter Here


Plastics & Rubber Industry M&A Trends

By Jim Zipursky | Dec 29, 2014

Tires with Earth

The life of a new product from concept to market has decreased from years to months, affecting the entire supply chain of plastic products. Equipment manufacturers look increasingly to closer collaboration with plastics suppliers to cut production timetables, asking them to be responsible for specialized molded component design, development, and assembly.

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Read the Entire Plastics & Rubber 4th Quarter Newsletter Here

News From the Metal Fabrication Industry

By Robert Contaldo | Dec 19, 2014

TurbineDespite increased demands for steel from end-use industries such as automotive, construction, and energy sectors, steel production has declined globally. Simultaneously, steel prices have remained weak; further declines in prices are expected as demand growth flattens. A positive note from this is the decrease in iron ore prices, which could lower production costs for steel makers. Also, demand for aluminum has increased, showing that the surplus in capacity may end soon. This is partly driven by the increased use of lightweight alloys in automobiles and aircrafts.

Strong growth in the United States GDP (4.6 percent in the second quarter) combined with improvements in key end-use sectors such as automotive and construction, should drive increased demand, leading to a need for increased capacity.


Read the Entire Metal Fabrication 4th Quarter Newsletter Here

M&A News for the Aviation Industry

By Joe Contaldo | Dec 12, 2014

Private JetAccording to First Research, global shipments of general aviation aircraft, a demand indicator for aircraft parts, increased 4.8% in the first half of 2014 compared to the same period in 2013, according to the General Aviation Manufacturers Association (GAMA). Business jets saw the largest jump in demand as shipments increased by 12.4%. Makers of aircraft parts serving the general aviation market may want to focus marketing and production resources on business jets and piston aircraft, which are experience strong demand.

In addition, Aerospace companies are increasingly following the lead of many automakers and choosing to situate new US facilities in the southern part of the country, according to Stateline, the news service of the Pew Charitable Trusts. Companies that have recently established facilities in the South or announced plans to do so include Airbus (Alabama), Boeing (South Carolina), GE Aviation (North Carolina), and Gulfstream (Georgia).

Read the Entire Aviation, Aerospace & Defense M&A 4th Quarter Newsletter Here

M&A Trends in the Food & Beverage Industry

By Terry Fick | Dec 05, 2014

Cut VeggiesThe food and beverage industry is directly connected to the consumer and has been adapting to consumers who are more actively using social media and mobile technology in their buying decisions. Based on survey of executives in this sector by KPMG, an audit, tax and advisory firm, growth is of high priority. The main channels of growth, based on executive respondents, are product innovations, attracting new customers, capturing alternative sales channels, focusing on healthier and specialty products, and M&A activity. 

Read the Entire Food & Beverage 4th Quarter Newsletter Here




Q4 Industrials M&A Update

By Kim Levin | Dec 01, 2014

737632-industry-on-a-misty-night for blogM&A activity for North American based industrial target companies in Q3 2014 included 563 closed deals and total deal value of $20.3 billion, according to data provided by S&P Capital IQ. This is a slight increase from the previous quarter where 541 deals were closed. Total transaction value increased from $11.4 billion to $20.2 billion from Q2 2014 to Q3 2014 largely due to the AECOM acquisition of URS Corporation.

Oil, gas, and petrochemical related companies dominated industrial manufacturing activity. Almost 40 percent of US related transactions were energy related deals. In addition, there were several mega-deals announced, indicating the market has grown and is actively looking to consolidate. According to the report, industrial manufacturers will continue searching for growth in non-core businesses with good leadership and an existing competitive edge.

Read the Entire Industrials M&A 4th Quarter Newsletter Here

Q4 Engineering & Construction Industry M&A Report

By Catherine Patience | Nov 21, 2014

M&A activity in the Engineering and Construction sector for North American based target companies in Q3 2014 included 67 closed deals according to data provided by S&P Capital IQ.  This is a slight decrease in deal count since Q2 2014, where 72 transactions occurred. Total transaction value increased dramatically between Q2 and Q3 from $565 million to $6.57 billion due to the AECOM purchase of URS Corporation.

Read the Entire Engineering and Construction M&A 4th Quarter Newsletter Here