Exit and Growth Strategies for Middle Market Businesses

Archive for 2010

A Good Time to Sell to Private Equity?

By David Sinyard | Dec 16, 2010

My recent Capital Ideas article focused on private equity funds and why they just might be a perfect partner for a private business owner.  After reading a recent quarterly report from Pitchbook, a research company that collects information on Private Equity Firms and deals, the time to either sell or partner up with private equity may just be now. 
According to the report, there is roughly $485 billion in unspent capital sitting on the sidelines and this money must be spent before any new significant fundraising will occur.  Positive trends continue in rising valuations, availability of debt financing and economic recovery in general, which likely will translate into increased deal flow into 2011.

posted by David Sinyard

Tax Legislation Update

By David DuWaldt | Nov 12, 2010

As you may have heard, the Small Business Jobs Act of 2010 (SBJA) was signed into law on September 27, 2010. Included in this recent tax legislation are some provisions that may prove beneficial to certain buyers and sellers of businesses.

The SBJA moved up the gain exclusion from the sale of small business stock to 100%. By comparison, prior to 2009, the exclusion was 50% of the gain. In the early part of 2009, tax legislation was passed which increased the exclusion from gain to 75% for qualifying small business stock acquired during the period from February 17, 2009 to December 31, 2010. Eligibility for the 100% exclusion includes the following requirements:

  1. The stock must be held at least five years
  2. The aggregate gross assets of the issuing corporation must not exceed $50 million
  3. The stock is acquired in an original issuance from the corporation
  4. At least 80% of the value of the assets must be used in a qualifying trade or business
  5. The stock must be acquired by December 31, 2010

With respect to stockholders that are individuals, the exclusion from gain is capped at 10 times the stockholder’s basis in the stock or $10 million, whichever is greater. Under the SBJA, the excluded amount will not be treated as an alternative minimum tax (AMT) preference item.

For S corporations, one of the provisions included under the SBJA is the reduction of the built-in gains period to five years. Read more »

Is it Safe? Buying or Selling a Business in Today’s Market

By Jim Zipursky | Nov 04, 2010

Anyone who saw the movie “Marathon Man” vividly remembers Laurence Olivier torturing Dustin Hoffman while continuing to ask the question, “Is it safe?” Much as Sir Laurence’s character “Szell” kept repeating the question to Hoffman’s “Babe” character, we in the M&A industry today are constantly asked, “Is it safe?” in regards to making acquisitions or divestitures in the current market.

“Is it safe?” As it pertains to acquisitions today, the answer may lie within your own perspective. From a market standpoint, today’s market would seem to favor buyers and acquirers for several reasons:


Factors Making It Safe

  • Valuations for privately-held businesses are lower today than 18 months ago, although they are higher than they were just six or 12 months ago
  • We see purchase price multiples in 2010 down approximately 7% from 2008 and approximately 13% from their peak in 2006/2007
  • It took six years from the last trough to peak (2001 to 2007) in valuations; we expect the same cycle for the current M&A market, which means valuations will increase over time, but will not peak for several years

Factors Making It Unsafe

  • Valuations for publicly-traded businesses are also lower today than at the peak of the market in 2007/2008. For buyers using their stock as currency, acquisitions today could be costly if their stock is undervalued.
  • As mentioned above, valuations for privately-held businesses are also down (relative to recent market peaks). For buyers using their own company as collateral for debt to make acquisitions, lower valuations means less capital available for leverage.


Factors Making It Safe

  • Confidence in the economy seems to be increasing, even if only modestly. Companies, in general, are experiencing year-over-year growth from the trough in 2009. Read more »

Q3 Energy Industry Newsletter – Aftermath of the Spill

By Herbert "Bud" Boles | Nov 03, 2010

The worst oil spill in history has been capped and now we will witness serious subsequent actions such as endless litigation, enormous claims, some of which will be exaggerated and others exonerated. Certainly, to the Gulf of Mexico, the devastating losses of life, jobs and permanent damages cannot be minimized, belittled or overlooked.

As a member of CFA’s Energy Industry Practice Group, I keep abreast of developments in the U.S. energy markets. Each quarter we analyze the current energy climate taking into consideration a variety of factors and summarize it for you in our Energy Newsletter. For a complete look at the Q3 Energy Industry Newsletter, click here.

To view previous issues or to regularly receive our Energy Industry Newsletter, please visit our website to subscribe.

posted by Herbert “Bud” Boles

Building Business Value—A Systematic Process

By Kim Levin | Aug 23, 2010

To build value you first need to know where your company performs best and where it is deficient. In short, your strengths and weaknesses from a buyer’s point of view. A detailed diagnostic of your company unveils those strengths and weaknesses, its value enhancers and risk considerations, the traits that are unique and highly valued and the threats to which your business may be vulnerable.

A thorough assessment begins with market research that includes a comprehensive analysis of industry trends and an in-depth review of your competition. From this assessment benchmark your company against other businesses of similar size that have sold in your industry or related markets. In identifying those elements where buyers paid premiums, be sure to consider the full spectrum of attributes. Much of the value of your business may be intangible and difficult to recognize.

It is important to have an objective versus subjective perspective or you may fail to recognize opportunities for enhanced value. While you know your business better than anyone else does, the only way to enhance value is to take an outside perspective. Careful analysis from professionals familiar with the M&A market is recommended in order to structure a value improvement plan based on the way buyers perceive value.

Recognize that buyers buy businesses only in part based on recent financial performance. The major portion, on average three-quarters of the value, is based upon the future potential and other characteristics of the business.

There are several “owner” related reasons why businesses sell for less than their potential. Read more »

Funding Your Transition From Executive to Owner

By Roy Graham | Aug 11, 2010

You are an accomplished senior level executive with a strong record of success in corporate America but you want more. You understand your industry as well as anyone and you want to capitalize on that knowledge by acquiring a company that you can grow to build wealth. How do you get started? What is the process? Is it doable?

You may want to start by asking yourself if you would want to acquire the company that you are currently working. If the answer is yes and you believe ownership might be receptive, a management buyout may be a great place to start. After all, you already know your own company so you probably know of any skeletons that may be hidden away as well as the kinds of opportunity that exist. Your due diligence should be easier and you’ll have little, if any, learning curve.

Perhaps your company isn’t available, it’s not attractive or you have an alternative strategy and wish to focus on acquiring another company or a buildup of companies. These are all viable options for which there will likely be multiple sources of funding if you are well prepared and understand the process.

There are many investment groups that will fall over each other in their rush for the opportunity to back a strong management team and a good target company. You can reach out directly to private equity groups and try to handle the process yourself but you may find it frustrating as you navigate a myriad of hurdles. Read more »

Value of Companies

By John Hammett | Aug 04, 2010

After a career spent buying and selling companies, I’ve learned that the essence of a deal comes down to this simple fact:

A company is sold when its value is greater to the buyer than it is to the seller.

This obvious statement raises the more complex question: Why is the value of the same company different for the buyer and the seller? This can also be answered in a simple, though perhaps less obvious, statement:

Value is the future cash flows to the owner over time, discounted by the owner’s risk discount rate.

Now, this starts to get more complex. The values are different because the cash flows over time will be different for different owners, and because each owner has a different discount rate. In addition, the discount for the same owner will change over time.

Here are two examples from the owner’s perspective:

  1. Think of a company owned by a relatively young person in his mid thirties. You don’t often hear of these owners selling their companies. Here’s why: for this owner, he expects to get a 30-year return of future cash flows. Plus, he will expect to grow those cash flows at a rate greater than inflation over the 30 years.Equally important, his discount rate for risk is low. His rate is low because he has a 30-year window to adjust and recover from the bad things that will happen along the way. He can weather a three-year recession and still be building value when the economy recovers. His health is good, so there is little risk that he will be forced to sell his company during a period of lower M&A valuations.
  2. Now think of a company owned by a person in his sixties. His future income stream is really only three or five, or maybe seven years long. He cannot expect significant growth in that income stream in those few years. He is not prepared to make extra investment of time or money to accelerate growth. Even if he had an idea to stimulate growth, there is little time to implement it, it would have risk and the rewards may come after he is retired.The other piece of this owner’s equation is that his risk discount rate is much higher. His company faces risks daily from the economy, increasing taxes, regulations, new competitors, lost key employees and his own personal health. With a short time horizon to recover, this owner runs the risk of significantly diminished cash flow when it is time to sell. The inability to recover from all these risks put a high discount on future earnings. The combination of these two factors – cash flow and risk – is exactly why owners decide to sell their companies when they approach the end of their careers.

So, what does it look like from the buyer’s perspective? Read more »

Auctions vs. Negotiated Sales

By Kim Levin | Jul 26, 2010

Middle-market business sellers have important choices in their divestiture process.  One key choice is whether or not you desire to have an auction OR a negotiated sale.

Sale by Auction is a multi-stage and sometimes complicated process.  The investment banker markets your firm to multiple prospective buyers through potentially more than one round of activity, with successively smaller groups of buyers competing for the purchase.  This process is resource intensive and in difficult M&A markets entails a hint of idealism as well – the belief that your business will be attractive to a relevant number of buyers.  When executed properly, though, an auction will have a positive impact on business value – price and terms.  A side benefit is that it also encourages speed of execution via quick action by buyers.   In the leveraged buyout boom of the 90s, auctions were very common and today are still a preferred method of marketing a business.  Auctions provide a greater degree of comfort that the market has been exploited and is giving the seller a broader set of responses as to value.  Auctions do, however, have their downside.  Even the most astute investment banker who admonishes prospective buyers and ensures they sign strong Non-Disclosure Agreements cannot control how information may be used once it gets into the hands of prospective suitors.  Therefore, auctions can have a negative impact on employee morale if information of a pending sale should leak.  Sometimes bidders may collude as well.  And these variables can ultimately lead to reduced leverage when negotiating once the “winning” buyer is chosen.

A Negotiated Sale is much narrower in scope. Read more »

Current Market Multiples and What Your Banker Won’t Tell You

By Jim Zipursky | Jul 19, 2010
Multiple Mania: Part 2 of 2

Previously, (Multiple Mania: Shortcutting Success) we had discussed earnings multiples and their value to the Mergers & Acquisitions process. As previously discussed, we tend to view earnings multiples as shortcuts which, when properly applied, can be useful as sanity checks, but we certainly would never recommend acquiring or selling a privately-held business strictly based upon an earnings or purchase price multiple.

Of course, there are many factors which influence multiples, as we discussed previously. One factor is the prevailing or current economic condition. We all know how bad the economy got in 2008 and 2009. We hope we are on the road to recovery, but there are still some rocks in our path.

Purchase price multiples are post-mortem account; you do not know the number until the transaction is closed. That is one of the problems with reviewing multiples. However, we do know during the period of 2006 to the middle of 2008, purchase price multiples were higher than they had been in the 2003 to 2005 timeframe. Those of us in the M&A business watched as purchase price multiples declined during the latter half of 2008 and the first nine months of 2009. Thankfully, we have seen a recovery in the market and a slight increase in multiples.

So what drives multiples? Read more »

Growing Your Business Through Capital Partnerships

By Gerald W. Lindsay | Jul 09, 2010

Business owners know everything there is to know about running their business, whether it be heavy equipment sales or healthcare services. As an M&A advisor, I have spent my life walking alongside business owners as we tour their facilities talking about products, sales, employees, competitors and every other aspect of their business. However, most become uncomfortable when we begin discussing how to finance growth.

If you are a growing company you will have cash flow problems. Do not be lulled into the belief that because sales continue to increase that your business is growing at the best pace. Optimum business growth is reached through a combination of sales and capital infusion.

Banking Problems
In today’s economy, banks have tightened their lending standards. Many owners have developed banking relationships throughout their years in business, but in today’s lending climate they are not able to get the funds they need. Because of this, it is a great time to consider a capital partnership.

A Solution
If you are like many business owners, you may reach a crossroads where taking on a partnership makes sense. Capital Partnerships mainly come through two channels: Private Equity Groups (PEGs) or Strategic Buyers.

When many owners think of the typical transaction they think of a majority buy-out, time to retire, but retirement is not the only option. Capital Partners are willing to make either majority OR minority investments. They often prefer the management team to stay in place and operations to continue as before. They are simply making an investment in a company they feel has solid foundations and most importantly – room for growth. These investors do not require control because they are backing companies they believe in, companies with a solid history of growth, a capable management team and the potential for future expansion.

How to Choose a Capital Partner:
When choosing a partner there are several factors on which to focus:

  • TRUST – You need to be working with individuals that you trust and like. If you don’t care for the group, save yourself some time and walk away. Remember this is a partnership and you will need to work together to be successful.
  • FUNDING – Your partner needs to have the ability (either through fund raising or through already allotted means) not only to finance the transaction, but to have capital for growth. Going forward you will want to look to your partner to essentially be “the bank” for the company.

There are many options to owners of middle market businesses looking to grow their business or prepare for retirement, but often a Capital Partnership is the most attractive. An M&A advisor can help you begin the process of exploring capital partnership.

posted by Gerald W. Lindsay