Exit and Growth Strategies for Middle Market Businesses

If You Are Going to Sell Your Business, Sell Now

By Marc Borrelli | Mar 02, 2015

Sell Your BusinessIf you are going to sell your business, sell now.  At the ACG Capital Connection in Atlanta two weeks ago the common theme from the Private Equity Groups I spoke to was that multiples are back at 2007 levels. They were lamenting the fact that they didn’t have more portfolio companies ready to sell.

Jeff Mortimer, Director of Investment Strategy at BNY Mellon, further reinforced this notion during a presentation I attended today. Jeff said that any private company owner who is looking to exit should sell now. In Jeff’s opinion, the bull market has maybe up to 24 months to run; however, multiples will fall before the end of the market as buyers see the impending downturn and won’t pay for the growth that has passed. Thus in his view the selling usiness window could close anytime in the next 6 – 18 months and if an owner were to miss it, it would be another 8 to 10 years before multiples were to return to this level.

To paraphrase Oscar Wilde, “To ignore one sign, Mr Worthing, may be regarded as a misfortune; to ignore both looks like carelessness.”

Posted by Marc Borrelli.

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Energy Sector News

By Roy Graham | Feb 27, 2015

Energy Sector NewsAccording to First Research’s energy sector news,  the recent drop in crude oil prices is putting pressure on larger US producers to scale back on fracking operations. Fracking has been a huge boon to US oil production in recent years, but as prices fall, costs remain high, and the return on investment has diminished. ConocoPhillips recently announced it will cut back drilling operations and exploration spending. Shell also plans to reduce spending and cut employment. Smaller oil companies with lower cost structures are continuing to profit from fracking, but margins may be squeezed if oil prices continue downward, a scenario some experts say is likely given Saudi Arabia’s plan to keep production high. Unlike US producers, Saudi Arabia is able to profit from oil even if prices reach $30 per barrel, according to Forbes.

New Canadian rules for rail transport of oil and ethanol could boost operating costs for oil producers. Tighter regulation came nearly a year after a train derailment in Quebec killed 47 people, prompting regulators in Canada and the US to pursue tighter regulation of oil tank cars. The new Canadian rules, issued in April 2014, call for railroads to develop emergency plans for responding to explosions; the rules also fast-track the retirement of older tank cars and require the adoption of stronger tank cars within the next three years. Prompted by Canada’s moves, regulators in the US are working to update their tanker rules, which have been in dispute for years. US regulations are likely to call for stronger tank cars, reduced speeds for trains carrying oil or ethanol, and safer routes for trains carrying more than 20 tank cars.

Posted by Roy Graham.

Read the Entire Energy M&A 1st Quarter Newsletter Here

It’s Always Something in Exit Planning

By Jim Gerberman | Feb 23, 2015

Exit PlanningThe recent production of “Saturday Night Live 40th Anniversary Special” brings back some great memories of the original “Not Ready for Prime Time Players” and the creativity that they and the SNL writers brought into our homes in those early years of the show. And, the stories that we would later share about “Killer Bees”, “Coneheads”, “Samurai” and the like became a routine part of our culture. I have a particular favorite character – introduced by Gilda Radner (rest in peace) in the form of Roseanne Roseannadanna…and her catch-phrase “It’s Always Something”.

Many of us can relate to the challenge of overcoming inertia…of going against the grain. This is particularly true when dealing with a subject that is rather easy to put off or that is rather difficult to address. The subject of “exit planning” is one such subject for many business owners. Accordingly, some questions.

Firstly: Why is exit planning hard to do? For the most part, the daily life of a business owner is dealing with things that are urgent and demand our immediate attention. It’s natural for these to get precedence. The discipline required to effectively address exit planning (or any planning, for that matter) necessitates putting a number of these “urgent items” into proper perspective and giving priority to those that are truly important. In his classic book The 7 Habits of Highly Effective People, Steven Covey called this “Putting First Things First”. Otherwise, as Roseanne Roseannadanna would say: “It’s Always Something”. Read more »

News From the Healthcare Industry

By Peter Heydenrych | Feb 20, 2015

HealthcareHealthcare M&A activity for North American based target companies in the  sector for Q4 2014 included 94 closed deals (more than 300 announced), with an average enterprise value of $228 million. Full-year totals for 2014 broke previous records for the number of deals and the dollars spent. More than 1,200 healthcare industry transactions were announced last year, an increase of 26% over 2013’s total of 1,035 transactions. The previous record for most transactions in a year was set in 1997, at 1,287. Total deal value reached $387.4 billion in 2014, and an increase of 137% over 2013’s total of $163.7 billion. The pharmaceutical sector accounted for 55% of the year’s total spending ($213 billion) and 14% of the deal volume (188 transactions).

As for the 2015 M&A outlook in the sector, activity is likely to keep booming in the first half of 2015 as Americans continue to enroll in healthcare plans through the exchanges.

Total revenue for the US healthcare sector is forecast to grow at an annual compounded rate of 5 percent between 2014 and 2018. US consumer prices for medical care commodities, an indicator of healthcare costs, increased 4.8 percent in December 2014 compared to the same period in 2013. US consumer prices for medical care services, an indicator of profitability for healthcare services, rose 2.4 percent in December 2014 compared to the same month in 2013. Total US revenue for healthcare and social assistance rose 5.3 percent in the third quarter of 2014 compared to the previous year.

Posted by Peter Heydenrych.

Read the Entire Healthcare 1st Quarter Newsletter Here

Is the Hot Seller’s Market Cooling Off?

By John Hammett | Feb 19, 2015

Seller's MarketFor the last 18 months, I have been telling private company owners that we are in a hot “seller’s market” that is pushing up values for companies in the $5 million to $25 million range.  The lack of active company sellers juxtaposed with the high demand from private equity investors working hard to invest $400 billion in new acquisitions drove up valuations last year by about 1.0 times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization.

Now it looks like that price premium is starting to go away.

GF Data, is a data analysis firm that reports on deal prices paid by private equity investors.  GF data reported today that Price/EBITDA multiples for transactions valued between $10-$250mm dropped ½ of a “turn” from 6.6X EBITDA to a 6.1x average multiple.  The GF Data report explained further that:

“Our data suggest that for the first time since 2007 more business owners are beginning to feel that the current mix of economic, industry and capital market conditions will not last forever, and that these conditions themselves are becoming an impetus to sell.”

This may be the beginning of a return to historically lower values for private company sellers.  My sense is that owners who planned to sell their companies in 2015-2016 need to move now if they are going to pick up part of the 20% premium from the seller’s market conditions during 2014.

Posted by John Hammett.

Buying and Selling Businesses Strategies

By Craig Allsopp | Feb 05, 2015

Business MeetingThe great blizzard of 2015 left us snowbound in New England last week. So time for a little reflection.

I was talking the other day with a business owner I know. His company is successful and he makes about $1 million a year. Personal issues have him thinking about retirement. But he isn’t quite ready to put the company up for sale.

This scenario is pretty common in the dealmaking business. Owners think about selling all the time. But when it comes time to act, they often have a hard time pulling the trigger.

Why is that? For one thing, I think business owners are like athletes. They don’t want to leave the game early. They are natural born competitors. And deep down they worry about missing the action. After all what beats running a successful company? Read more »

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