As of January 2009, many banks and non-bank lenders are caught in a ‘liquidity trap’ where they must fix their own balance sheets before they can resume lending to customers. Getting buyout financing is harder than ever and new loans are secured by both cash flow and hard assets. On Wall Street, there’s a big slowdown in mergers & acquisitions.

Wall Street’s train wreck is Main Street’s opportunity.  Smart business owners and their advisors will certainly use these changes to their advantage.  Here are some ideas for owners considering a capital transaction in 2009:

1. Cash is king. Instead of an illiquid investment in a private company, this is probably a good year to have cash.  Consider a buyout or recap if you have another use for money. There are many opportunities in financial investments and real estate, for example.
2. Debt is cheap. For borrowers that qualify, interest rates are as low as they have been in a lifetime.  If you have good credit and debt-free assets, consider recapitalizing with low-cost debt.  Ask for an estimate of your secured debt capacity. Read the rest of this entry »

Case Study

Situation: In 2001 CFA was engaged by Bronco Manufacturing, an oil rigs parts specialist, to prepare a business valuation and assist in evaluating unsolicited offers over the next couple of years. Bruce and Max, the firms partners, asked CFA to take Bronco to market.  in 2004. Bruce was 60 and ready to retire while Max was 50 and wanted to grow the company more aggressively.

Solution: We considered a leverage buyout for Max, but determined a re-cap with a private equity group was a better strategy for both owners. This journey took three years and we kissed a lot of frogs along the way. We contacted over 100 potential acquirers. Ninety percent were Private Equity firms. From start to finish, Bronco received 11 letters of intent and ultimately found the right partner. The long time line may lead one to think something was wrong with Bronco, but that is not the case. The client was very selective. The good news was that the value of the company quadrupled during that period. This transaction illustrates the importance of patience, persistence and tenacity, as well as a belief that there was a “right” buyer for Bronco.