InSight

Exit and Growth Strategies for Middle Market Businesses

First Half 2020 M&A Surprisingly Active

By Roy Graham | Aug 04, 2020

While there were significant regional differences, first half 2020 M&A transaction numbers are in and they are better than many would expect. Refinitiv™ reports there were 20,728 deals under US$500 million closed globally and 5,152 deals in that size range closed in the US. As the chart shows, the second quarter was lower than the first but also not by as much as many might have expected.

Refinitiv™ reported that worldwide M&A total value declined by 15% compared to the first half of 2019. In the US, the decline was only 6% in both total value and number of transactions. Other regions were hit harder with Europe off 26% in number of transactions and 31% in total value.

With so much COVID related disruption in the economy, how do we explain why activity has not declined more? Firstly, except for the energy sector, the COVID impact did not hit most sectors until the tail of Q1. Additionally, Q2 was not down to the extent many would have expected with 2,514 US closed deals reported in Q2 vs 2,638 reported in Q1.

Technology has proven to be highly resistant to COVID’s impact and was barely down at -3% compared to a year ago. The technology sector represented 17% of all deals to lead all sectors while real estate related M&A totaled 15% of first half deals. There are also some deals that are being driven by necessity though US government assistance programs have clearly helped to limit the number in the US, at least for now.

While some companies are electing to defer their plans to go to market, others are moving forward. Companies that are going to market are generally finding many interested but cautious buyers as buyer demand remains keen while the number of sellers has diminished. In fact, PwC reported a surge in enterprise multiples during Q2 as investors rushed to invest in technology, media and telecom companies.

As government assistance programs taper off, we expect to see more interest in non-control equity and debt investments from private equity sources. Many private equity sources are actively promoting their existing non-control interests and others are rolling out new programs in anticipation of companies that need to strengthen their balance sheets to address bank concerns.

For more information contact your local Corporate Finance Associates investment banker. We will be pleased to discuss your questions without obligation.


Scenario Planning

By Andrew Baird | Jun 03, 2020

In January 2019, how many of us could have envisaged the type of difficulties which have hit our businesses in the last few months? Scenario planning helps you to review what you can control and what you cannot – Dick Cheney’s famous “Unknown unknowns”. It helps you to test and challenge the assumptions you make about the future shape of your business – even more important when there is a global pandemic!

A starting point is to try to define what you don’t know about the future and consider which issues would have the biggest impact on your business.

Go Back To The Basics

REVENUE – Customer numbers, what might affect supply, can you satisfy likely demand?
COSTS – How to price changes, impact of changes to credit terms.

Don’t make it too complicated – too many uncertainties will drive you mad!

Have Current Information

CASH FLOW – Accurate forecasts -both weekly and monthly are an essential tool.
SENSITIVITY ANALYSIS – Changing the key drivers in your cash flow forecast will show how the shape of your business could change.

Develop Your Scenarios

Don’t just plan for the worst – it’s good to know exactly how things could be if your assumptions are sound.
Is that “Ideal World” a serious possibility in the current environment?
If not – how might Covid-19 affect your assumptions? In that case, what do you need to do to achieve an acceptable outcome?

Best Case

What does that “Ideal World” look like? What needs to change and are those changes within your control (e.g. how to control customer numbers!)
Use your cash flow as a basis to change policies and procedures to support the “Ideal World”.
Never forget – it’s still going to be an unpredictable world, so conserve cash to be able to deal with a sudden reversal.

Medium Case

Planning what’s between the “Ideal World” and your worst case (so arguably what’s most likely to happen!)
If your business looks unlikely to survive a medium case, now is probably the time to seek some restructuring advice (and perhaps reconsider the components of your medium case scenario!)

Reconsider the basics – for example:

If you only have 75% capacity, can you break even?
Can you introduce other cost savings?
If not, then…

Worst Case

Less likely if you can recognise early, but you know what it looks like!
Where would be the point of no return? This probably depends on cash reserves, creditor and banking relationships, asset position, etc.
A wind-down reserves calculation is invaluable – what is the minimum cash required to pay all the businesses liabilities and avoid needing an expensive insolvency process.
If you have any concerns, insolvency advice is best taken early, before insolvency seems inevitable.

Scenario Planning is a valuable means of assessing your business and could be considered as important a part of regular review as examining the P&L and Balance Sheet.


M&A AS THE ECONOMY RE-AWAKENS

By Kregg Kiel | May 04, 2020

Everyone wants an ending, a date on the calendar when all of this is “officially behind us”. However, that seems unlikely to occur in the foreseeable future. This crisis will resolve itself in fits and starts. What we will see is an M&A landscape that may be permanently changed. We’ll focus here on what will happen as the economy begins to re-awaken and what happens if we hit headwinds.

BUYERS WILL APPEAR
PE firms interested in acquisitions are already moving beyond the triage stage internally. At the outset of this crisis, firms were focused on the fiscal health of their portfolio companies, not acquisitions. That will change.

The internal laser focus on existing portfolio companies will lessen as PE firms stabilize the salvageable investments and cull those that are not. This will allow them to again turn their attention to deploying capital into acquisition targets – many of which have become more attractive due to the repricing of the market. Opportunities are likely to abound.

SELLERS WILL NEED TO DECIDE
Some business owners who were considering selling their companies before COVID may hold off on exiting in order to avoid selling at a severe discount. Instead, they will focus on rethinking how they do business in a post-COVID world and implement those plans in hopes of increasing enterprise value. Alternatively, some sellers may choose to accelerate their plans to exit – especially those at risk in the Baby Boomer generation.

LENDERS WILL CONTINUE TO BE DISTRACTED
Debt is a key ingredient in most private equity transactions. Without lenders’ debt commitments, most deals have no chance of reaching the finish line. Banks are currently digging out from their government assistance workload which has demanded most of their attention over the past month. While this focus may change as we move into May, it is very unlikely that it will be business as usual anytime soon. Lenders are now very tentative given their inability to access economic risk and/or assign a value to potential transactions. They will also need to devote additional resources to distressed clients who begin to struggle with cash flow issues.

Public acquirers who can rely less on debt and more upon their own stock as currency for acquisitions may benefit the most during a debt tightening. Watch for public companies to become more aggressive in the post-COVID environment.

VIRTUAL SALES AND PROJECT MANAGEMENT WILL EXPAND
For all M&A participants, business development will still be essential in this new environment, however, it will be quite different. The basic ability to have face-to-face meetings has changed for the foreseeable future. Even if permitted, would you go out to lunch with a prospect next week? Even, if you are comfortable with face-to-face meetings, it makes good business sense to extend the courtesy of asking invitees if they are. There will be a varying level of discomfort with having face-to-face interactions for quite some time — until we have a vaccine.

The key to dealing with this new reality is to learn to excel in the virtual world. As much as we’ve learned to rely on virtual online meetings in the post-COVID world, most of those interactions have been with co-workers, business associations and other groups we are not actually selling to or negotiating with. Being able to successfully log into a meeting with sound and video actually working is no longer enough. The investment banking industry will need to grow comfortable with a slew of new practices. Getting transactions to closing (which very few have done during this crisis) will prove to be much more difficult. The need to read body language, make eye contact, and observe the myriad other non-verbal cues associated with interpersonal communications did not go away with the onset of the pandemic. They’ve merely been swept aside while we attempt to cope with the rapid developments that have occurred over the past two months. Be innovative in your use of remote technology. Having the ability to successfully leverage virtual tools for initial business development through the close of a deal is going to be what separates those who are successful from those who aren’t.

YOU WILL NEED TO PLAN FOR THE WORST
Many countries are beginning to cautiously roll back their stay at home rules. What happens if COVID spikes again just as the economy begins to regain its footing? This scenario has to be anticipated and planned for as a real possibility. Imagine that you had known in advance that the current crisis was going to happen. Now, assume a scenario where this “re-opening” of the economy fails at least once and think about what you would have done to prepare for it — because this time you can. Give serious thought to what will happen to the economy and how it will affect the climate for M&A transactions as well as your clients’ businesses. And, again, learn to excel in the virtual world. Developing a plan to address a potential economic relapse before it happens could be the difference between managing your way through another downturn and throwing in the towel. Be safe.

CFA is capable of providing assistance along the entire spectrum of M&A advisory services. We have over 60 managing directors in 30 offices (in the US and abroad) with broad expertise in a number of industry verticals. For more information, contact your closest CFA office.


Capital Markets and M&A | Under COVID-19

By Joe Sands | Apr 17, 2020

INITIAL IMPACT

The unprecedented shut down of the US economy has jolted all industries and left only a few benefiting from the crisis such as select healthcare, food manufacturing, technology, ecommerce, grocery and mass drug stores.  The capital markets have been highly difficult from a logistical point of view with the ‘stay at home orders’ and firms having to restructure operations to serve clients and market participants unable to meet in person or visit the businesses.

The lack of transparency, liquidity, precedent or even the ability to predict when and in what form the economy will reopen makes the ability to value businesses and securities difficult to say the least, never mind assessing risk in a business or a transaction.  We are mindful that as fast as this crisis arose, it’s becoming more conceivable that a substantial, but not full reversal may occur in the near term over a couple of quarters. We are hopeful.

UNCLE SAM’S INITIAL RESPONSE

As rapid as the crisis hit, the US fiscal and monetary policy response has been equally rapid and unbelievably robust.  In addition to the government response, the responses from the medical & scientific communities and the private sector has been like nothing ever seen before.  The US government and the Federal Reserve provided in excess of $4 trillion of liquidity within weeks and before much of the damage, not months after the damage as in previous crises.  The public equity markets fell by an astounding 34% from their peak in only five weeks and bounced back in three weeks as a result of the fiscal and monetary policies and some encouraging signs of the virus subsiding or not even coming close to the disastrous scenarios previously forecast.

OUR RESPONSE

On a case by case basis, each client engagement is being evaluated based on the stage of the engagement, specific business issues, and industry dynamics.  As always, we are focusing on our clients’ best interests and focusing on presenting options and the benefits and risks of each option.  Our goal remains to maximize value, deal terms and the probability of closing in each of our engagements.  For most sell-side M&A and growth capital raise engagements, the general options being reviewed are (1) pause deal marketing until the capital markets settle down, (2) expand the depth of due diligence, (3) extend process timeline to allow for additional due diligence or expanding the marketing outreach, and (4) modify deal terms to reallocate risk sharing.  For buy-side M&A, additional efforts are implemented to the extent that more favorable valuations and targets may be available.  Experience and expertise are what is most important for clients to make informed decisions in these challenging times and that is our mission. Read more »


Banking Relationships and the Small Business Owner

By David Sinyard | Apr 16, 2020

I have previously written about the importance of maintaining good banking relationships.  The recent Covid-19 emergency financing reinforces this need.  As of today, April 16, 2020 the program is out of money unless the government agrees to additional funding.  Millions of applications were filed under this program.  Many will not receive funding.  Those that will are companies that have very good banking relationships.  Their bankers made it a priority to get these loans approved.  A friend of mine is a senior executive with a regional bank.  Their staff worked through the Easter weekend to process loans – ultimately 6000 loans worth $1.2 billion will be funded.  Anecdotally, I know of many who applied and were not processed.  Why?  The importance of the relationship.  These PPP loans are 100% guaranteed by the government, meaning the banks will not suffer any losses. Much is being made currently about the “Main Street Loan” program.  These loans require the banks share 5% of the risk.  The effect of this requirement will be that these loans will be made to borrowers with whom the bank has good relationships.  Good luck to those who don’t.


CFA | COVID-19 Financial Impact, Assessment and Strategy Tool

By Peter Moore | Apr 16, 2020

The Crisis in Business Context

While the health crisis is the threat the Coronavirus holds over each of us, the business consequences are financial and often felt before anyone’s health has been compromised by the virus. Our economy relies upon cash flowing from one person and organization to another, and another, and another and so on. This “cash flow” circulation throughout our entire economy, when  measured is the “velocity” of money. The faster it flows the more robust our economy becomes. Most of our business economic arrangements depend on the basic trust of each party to a transaction, no matter how small the sale or how large the contract. This trust is shaken right now because of the uncertainty of our businesses and our livelihoods. The Federal Government’s job with stimulus funding is an attempt to restore the trust that helps to keep our economy going. Let’s all try and do our part and keep the cash flow moving.   See: What Is Money Velocity and Why Does It Matter?

The worksheets on the following two pages provide a way of looking at your company’s situation through the lens of your financial statements – both balance sheet (your financial condition at a point in time) and your income statement (your financial performance over a period of time). Looking closely at each line item of your own unique financial statements provides an orderly way of considering what and where you may be able to positively impact your own financial circumstances. Can you reduce liability, collect on assets owed to you, reduce an expense, and eliminate some overhead? All of these you’ve probably already looked at somewhat, but as circumstances continue to change it might be helpful to look even more carefully by visiting this worksheet for your business and your home situation too. Read more »


Who Moved My Deal? | Why Selling Your Company isn’t a DIY Project [Part 1]

By Daniel Sirvent | Apr 09, 2020

While intelligence, creativity and grit are all requisite characteristics of a future surgeon, nothing quite works like experience.

Nearly any medical school resident can handle a surgical procedure under normal circumstances; they’ve studied and memorized the procedures and the most likely risks associated with them. So why do they need an attending surgeon to supervise? Because when things don’t go according to plan, they need someone who’s “been there and done that” who can remain calm and work through the situation to re-stabilize the patient and get them to recovery.

How Business Owners Kill Their Own Deals

Why would an intelligent, creative and gritty business owner who hires a mechanic to repair their car and a plumber to fix their toilet, ever even think about trying to sell what may be their most prized and valuable financial asset all by themselves?

Simply put, they believe they understand the procedure (just find a buyer and stand your ground) and they believe they have the “right stuff” to negotiate a great deal.

Unfortunately, what they’re often lacking is the experience to handle the unexpected turns that come with the territory and often don’t realize their mistakes until it’s too late. Which could mean that at best they’ve missed an opportunity or at the worst, agreed to a deal that’s left them holding the short end of the stick.

So what are some of the most common mistakes that can derail a transaction and/or lower the transaction value in a business sale?

Time vs. Ego – What Kills More Deals?

Years ago, I had a public company CEO as a client who told me “time is the enemy of all deals.” While his intentions were well placed (he didn’t want to be the party that was dragging its feet), I gently and directly let him know that…he was completely wrong. Time is actually an asset that both parties need to protect and manage effectively, but that’s not the same as assuming that every part of the process must be fast. While poor time management carries its own risks, ego is the true enemy of all deals. When either party in a transaction fails to acknowledge the role ego plays, the entire deal is put at risk.  Read more »


Another New Normal?

By Jim Gerberman | Mar 30, 2020

I have the privilege of being part of a group of business owners and leaders who meet routinely to help each other with issues and challenges related to pursuing their business and personal purpose. At a recent monthly meeting, one of our team presented each of our members with shirts that he had discovered during a trip to Hawaii. He shared the “Red Dirt Shirt” story as an example of a resilient business owner that had found success from a catastrophic event.

On September 11, 1992, the Hawaiian island of Kauai was devastated by Hurricane Iniki. According to their company website:  “Among the businesses affected was our small screen print shop. All of our white shirts waiting to be printed were drenched with water and stained with Red Dirt blown in from the storm. Instead of throwing out the shirts, we decided to dry them as they were. The T shirts, stained with the ultra iron rich Red Dirt soil and printed with Hawaiian based themes became a hit with locals and visitors alike.”  Today, the Red Dirt Shirts company has seven locations in Hawaii, Arizona and Utah and produces and sells more than 100,000 shirts per month.

Rather ironically, on the same day that our team received these shirts, an article in The New York Times reported that “China Identifies New Virus Causing Pneumonialike Illness”. Three days later, on 11 January, Chinese state media reported the first known death from an illness caused by this coronavirus.

A relevant question for each of us:  “Is there a Red Dirt Shirt story for you and your business in this time of unprecedented uncertainty?”  And:  “How might one identify and pursue such opportunities?”

I really like the suggestions recently shared by Mark Cuban:

  • Experiment with new ideas. Since you have holes in your schedule, it’s a great time to experiment with new lines of business and see what sticks. He also recommended brainstorming not only with your peers, but also with your competitors. They are all in the same boat. Try to figure out the best way to reignite the industry.
  • Really get to know your employees. Take the time to understand the individual circumstances of your employees and their families.
  • Clean up parts of the business you’ve been neglecting or haven’t had time for. Control what you can control. Rather than focusing on how bad it is, focus on how you can use this time to connect with your future customers.

A final thought from an article shared by a friend: “Crises teach us that CEOs aren’t expected to be as right as they are expected to be engaged”.

Stay safe. Stay healthy. Stay engaged.


This Week’s NEW NORMAL in M&A

By Dan Vermeire | Mar 24, 2020

What a difference a week or two can make! The world has gone to war against the Coronavirus, the DOW is down by a third, and most of the population is sheltering at home.

What does this mean to the M&A market? The answer is… it depends.

This crisis is unique. The financial crisis of 2008/09 nearly killed the banking industry. Banks were essentially closed – couldn’t or wouldn’t lend into deals. Most buyers were very shy and without the support of the banks, they had to work with limited capital. Naturally, times were very lean in M&A.

In this crisis, the banks are still open and interest rates are lower than ever. Most buyers are still flush with cash and want to put it to work. For the most part, the buy-side is still strong.

But for sellers and businesses in general, you need to look on a case-by-case basis. Some sectors are terrible. With the Saudi/Russia/US oil war, the O&G sector is not very attractive for buyers. Airlines, cruise lines, hotels and restaurants, and anything directly servicing them are very difficult targets now and for the foreseeable future. Many won’t survive.

However, some sectors are stronger because of the Coronavirus. IT Services is very strong, if their customer base isn’t tied to one of the sectors mentioned above. Healthcare continues to be strong. And most food companies are strong, especially ones in the “good for you” products. Many other sectors are strong too.

With some sectors being unattractive, the buyers’ universe of good targets has just gotten smaller. That means that companies in the strong sectors have become more interesting.

Keep in mind that many companies are scrambling to adjust to the new conditions and revamp their strategic plans. Many have travel restrictions and other logistical challenges. All to say that it is more difficult to engage and make progress on M&A deals. But, not impossible. With the right combination of buyer and seller, deals are continuing to move forward.


M&A Quarterly News In The Plastics and Rubber Industry Sector

By Jim Zipursky | Mar 17, 2020

The report below gives a good overview of the first quarter M&A activity in the Plastics and Rubber Industry Sector. M&A activity for North American based target companies in the Plastics and Rubber sector for Q4 2019 included 24 closed deals, according to data published by industry data tracker FactSet.

One of the notable lower middle market transactions closed in November when Tank Holdings Corp, a portfolio company of Olympus Advisors LLC, acquired Chem-Tainer Industries, Inc., doing business as Todd Enterprises, for an undisclosed amount. Olympus Partners is a private equity and venture capital firm. Chem-Tainer Industries engages in manufacturing plastic tanks. The company’s products include open top, water, bulk storage, split containment and septic tanks. Chem-Tainer Industries is headquartered in West Babylon, NY.

Read more »