Exit and Growth Strategies for Middle Market Businesses

Archive for 2008

Why Business Plans Get Rejected

By David DuWaldt | Dec 20, 2008

With all the news about the difficulties the Big Three auto executives had in securing financing from the U.S. government, it is good to know that middle-market business owners do not need an Act of Congress to get funded. However, you can be assured if you are looking for financing in today’s market — every aspect of your business will be examined in detail, including your business plan.

Even with a great product or service and a long list of customers your business may not receive the desired funding. Prospective investors receive so many business plans each year that weeding through them with only a cursory review has become a standard practice.  In order to ensure your business plan gets read by investors, it will need to stand out. From the investor’s point of view, some of the more common problems with a business plan include the following:

Unrealistic Claims About Competition or Risk

Everyone has competitors, so to claim that you have no competition will almost certainly cause investors to conclude that you do not have a firm grasp of the market. The “Competition” section of your business plan is your opportunity Read more »

Not the Time to be Under-Capitalized

By George Walden | Nov 25, 2008

During the last period of economic boom many companies expanded through debt financing. The logic was if one machine is making money then adding three machines will make three times the money. As long as the economy was strong and margins remained high this was viewed as good thinking. After all, even if the economy dropped, the value of the equipment, even leveraged, would be equity that could be used to raise capital in a downturn.

Then just like the housing market, the phrase “mark to market” enters the valuation. Suddenly you find you’re upside down in the market. Whether you borrowed money to expand your organization, equipment, or inventory; all have suddenly become less valuable in a down economy. The true value of the equipment is the value of the goods produced by the equipment, not the intrinsic value of the equipment itself. The inventory values have declined. There is too much equipment on the market at the same time and suddenly the value of your asset has been cut in half. Your people are being paid a premium especially when compared to foreign markets but they are refusing to go along with your cost cutting measures.

The dictionary defines under-capitalization as follows:”A business has insufficient capital to carry out Read more »

2009 Ripe for Corporate Buyers

By Brian Ballo | Nov 24, 2008

For Corporate Buyers that Pursue a Disciplined Approach: 2009 is the Time to Buy a Company

Corporate executives at middle market companies understand that meeting investor demands for growth is difficult to achieve organically. Therefore, making strategic acquisitions are critical to building scale and growing revenues.

The impetus for pursing an acquisition have become even more compelling in light of the current challenging economic times, which has put downward pressure on valuation multiples. Indeed, a recent Boston Consulting Group report entitled “The Return of the Strategist: Creating Value with M&A in Downturns” underscores why a weak economy is often an ideal time to acquire a company.  Key findings of this report include:

  • Corporate buyers are uniquely positioned to take advantage of the tough economic times, since they possess the cash to complete transactions, whereas the financial private equity buyers have been restrained from borrowing in the wake of the credit crisis.
  • Acquisitions completed during recessions are twice as likely as upturn deals to produce long-term returns in excess of 50%, and, on average, create 14.5% more value for acquirer shareholders.
  • The best type of company to buy during a recession is one with strong finances and relatively weak profitability.
  • Corporate buyers can also increase their returns and likelihood for success by acquiring relatively small targets.
  • Surprisingly, acquirers can also create value by paying above-average premiums, provided the underlying rationale for the deal makes sense.
  • Acquirers in difficult economic conditions are better at identifying targets with unrealized potential, probably because of the disciplining power of downturns, when every dollar counts.

Yet, despite the promise of adding value from a discounted acquisition, the reality is still that the majority of acquisitions will fail to result in any cost savings or merger synergies. So, how do the top value creators in downturns pick the best targets? Read more »

The Carried Interest Controversy

By David DuWaldt | Nov 12, 2008

It was just last year that the Senate Finance Committee conducted a few hearings about the controversial tax treatment of “carried interest.”  The website,, provides us with the following definition for the term, carried interest:

“A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds.  This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund’s performance.”

Given the recent election results and ongoing debate about executive compensation in the midst of the current financial crisis, it should not be a surprise that the tax treatment of income associated with carried interests could be changed as early as 2009.

Under current federal tax law, the character of the income to the carried interest is the same as the income earned by the fund.  Therefore, if most of the profits of the fund consist of Read more »

Mezzanine Financing Can Close the Deal

By Roy Graham | Nov 04, 2008

Down economic cycles can offer excellent buying opportunities for well positioned companies but they may create funding challenges to getting a deal closed.  When credit is easy and senior debt lenders are liberal with leverage and terms, most buyers don’t need additional help in funding their deals.  In a down economy, it’s quite a different matter and mezzanine financing may be the solution.

Mezzanine financing is also known as subordinated debt and is junior to the security interest of senior debt while ahead of equity stakeholder rights.  Many of the features of a mezzanine loan are similar to a bank loan.  There will be provisions for interest payments, an origination fee, amortization terms, covenants, potential liens, default definition and remedies, and other items.  Additionally, mezzanine investors craft warrants into their structures to compensate for their risk as junior lenders.  Warrants provide the right to purchase equity at a later date.  Don’t worry, mezzanine investors don’t want to own your company so they will include “put” options, which when exercised, require the borrower’s company to buy-back the stock at a pre-determined price often tied to a valuation formula based on a multiple of the company’s earnings.  In short, it’s an in and out transaction designed to augment their return. Read more »

Good News for the Medical Device Industry

By David DuWaldt | Oct 22, 2008

On February 20, 2008, the United States Supreme Court issued a momentous decision in Riegel v. Medtronic.  This decision represents a major victory for the medical device industry since it provided that medical devices, which are approved under the Food and Drug Administration’s pre-market approval (PMA) process, cannot be subject to a products liability or other personal injury claim under state law.

The Riegel case was decided based on certain language contained within the Medical Device Amendments of 1976 (MDA), which preempt state law claims for damages when a medical device has undergone the PMA process.  While this case does provide relief to manufacturers with respect to those medical devices that did receive pre-market approval from the Food and Drug Administration, it is important to note that medical devices which only meet the “section 510(k) process” (a section of the MDA describing the review process) do not get relief from state law injury claims.  This particular issue has already been decided by the U. S. Supreme Court in the 1996 case of Medtronic v. Lohr, and therefore, distinguishes Lohr from the Riegel case.

So what economic effect might the Riegel case have on medical device manufacturers?  Like so many other questions, this will depend on several factors, including the type of medical devices being manufactured and sold. Read more »

The Ultimate Deal Killer

By Jim Zipursky | Oct 14, 2008

As Investment Bankers, we are often asked, “What kills most deals?” This is an especially critical concern in uncertain economic times like those we are in now. Unequivocally, our answer, regardless of the economic situation, is always the same, “Time is not your friend in deals; it is the ultimate deal killer.”

When we reflect upon our deals that did not get done, or those that died between Letter of Intent and Closing, regardless of the specific reason, time killed all of these deals in some why or another.

Once a seller of a business makes his/her decision to sell the business, time does not move fast enough. Sellers imagine the worst: customers or employees learning of the sale; declining revenues; problems with the business; all these events happening the longer a deal takes to get done. Some of these fears are justified, others are not. Read more »

What Strategic Alliances Do Your PSOs Have?

By Brian Ballo | Sep 29, 2008

CEOs and CFOs of middle market companies regularly make important decisions to engage a variety of Professional Service Organizations (PSO) to perform necessary corporate, transactional and financial planning tasks.  Yet, the engagement decision to hire a particular investment bank, wealth management advisor or consulting firm, is often made without examining whether the new PSO has an existing working relationship with the referring PSO already providing services to the company.   

Asking for a referral from an existing professional service provider is the common way that most CEOs and CFOs begin their search for another service provider with a distinct specialization.   However, if the referral discussion focuses on a particular PSO firm’s isolated attributes, this does not necessarily correlate with the prospective PSO firm being a “good fit” within the context of all the PSOs serving the company. 

The effectiveness of the PSO vetting process (the so-called “beauty contest”) can be improved by inquiring whether the referring firm (e.g., an accounting firm) regularly conducts business with the referred firm (e.g., an investment bank).  If a formal Strategic Alliance is found to exist between the PSO firms, then established methods and processes help ensure that the PSOs provide complimentary resources, expertise and advice, in order to deliver collaborative solutions to the client company.   Read more »

Waiting for the Next M&A Wave

By Kim Levin | Sep 06, 2008

A lot successful business owners are reeling from the combined effects of the expanding credit crunch and economic slowdown we are currently experiencing.  Many owners who had been thinking about selling their companies and creating long-term financial security and more free time for themselves now feel trapped and  unable to pursue their dream.

As a middle market investment banker and exit strategy advisor, I have recently observed an overriding temptation in business owners to simply ride out the current storm and wait for the next wave of M&A activity “the next valuation peak” and then return to their thoughts to selling their business.   The problem is, if they wait until the next wave comes, it will be too late to maximize their opportunity, and they risk missing it altogether (again!).

My advice to middle market business owners is this: don’t just wait for the next wave to arrive. Expect it and Read more »

Procastination: The Bane of Succession Planning

By Jim Zipursky | Aug 26, 2008

Recently, Fortune Small Business magazine conducted a survey of owners of privately-held, small & mid-sized businesses in the USA. Two questions were asked:

  • How critical to your business’ survival is succession planning?
  • Have you done anything about formalizing a succession plan?

The results were extremely interesting. More than 95% of the respondents said a succession plan was critical to the long-term survival of their business, but a staggering 85% had not done anything to formalize their succession plans.

This survey reinforces information we learned first-hand several years ago when Read more »