Exit and Growth Strategies for Middle Market Businesses

Archive for 2014

Robust Activity in Healthcare M&A

By Kim Levin | Jul 24, 2014

Middle Market PulseThe US health care sector includes more than 830,000 hospitals, doctors’ offices, emergency care units, nursing homes, and social services providers with combined annual revenue of about $2.2 trillion.  M&A activity in the sector has been robust over the past several years as the nation grapples with healthcare reform.  One segment of the sector seems to be of particular interest at present…Healthcare IT.

The Patient Protection and Affordable Care Act, better known as “Obamacare” continues to have far reaching implications across all healthcare subsectors.  Demands for quality healthcare data continue to increase and private equity funds and strategic buyers alike are investing in new segments that improve provider workflows and patient outcomes. Investments span a variety of provider and services assets, including healthcare-related information technology (HCIT) solutions.

The recent passage of the Protecting Access to Medicare Act of 2014, also known as the “doc fix” bill, spared the US health care sector the effects of physician rate cuts and comprehensive medical coding changes for another year. The bill delayed a Medicare physician rate cut based on the sustainable growth rating (SGR) formula and physicians have avoided an approximate 25 percent SGR rate cut for several years by winning reprieves from lawmakers. Another major change for the health care sector, implementation of the ICD-10 medical coding system, was also delayed until October 2015. Adopting the new diagnostic codes, which the AMA opposes, will require significant IT investment.

Some medical entities have already invested in preparing for the ICD-10 change, but Healthcare IT activity should be robust as providers implement these costly programs.  Investors will look to capitalize on this coding change.

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Manufacturing M&A on a Roll

By Kim Levin | Jul 15, 2014

Middle Market PulseRecent data suggests that mergers and acquisitions in the middle-market manufacturing sector are on a roll in 2014 and not seemingly slowing down any time soon. Deloitte’s recently published annual Corporate Development Survey found that 62 per cent of executives from the manufacturing industry intend to increase mergers and acquisitions activity between now and 2014. This is much higher than the overall average of 46 percent across all industry categories who are thinking of increasing M&A. What is the cause of this uptick in activity in manufacturing?

Manufacturing as a sector was hard hit during the recession and many business owners worked tirelessly to keep their businesses afloat. For those manufacturing businesses that came through healthy, now is a great time to plan for growth. However, many business owners weren’t quite as fortunate. Even though the crisis is over, they’re just plain tired.   They see this as a window within which to sell the business and get out. With both ample buyers and a supply of ready sellers, activity should continue to rise.

Manufacturing M&A can achieve many different goals, from expanded capabilities and capacities, expanded and complementary product lines, access to new or improved technologies to new or improved territory or distribution channels. Regardless of the objective, once a business owner has decided to grow by acquisition, the first step in the process is a carefully constructed plan. For most middle market business owners this may be the first experience they will have exploring, identifying and negotiating a purchase or sale. Is this something they can take on themselves? Maybe…but, in all likelihood they may be better served continuing to concentrate on the day to day operation of their business and passing on the M&A duties to an experienced professional who can advocate on their behalf.

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The Importance of Customer Appreciation

By Kim Levin | Jul 08, 2014

Thank youAnalysis shows the cost of acquiring new customers is 5-7 times higher than the cost of retaining established ones. Yet, often times, a customer appreciation expense is one of the smallest line items in the company budget.   If used effectively, however, this investment can have a dramatic impact on a company’s bottom line. Customer appreciation is one of the major factors customers consider when returning to a business. Showing customers how much you appreciate their business can turn them into regular clients. The most obvious way to show this is by verbally telling them, “Thank you for your business, we hope to see you again.” And, remembering names, as well as preferences with your products and services can go a long way toward showing your customers that you appreciate them. Read more »

Q2 Transport, Logistics & Supply Chain M&A Update

By Kim Levin | Jul 03, 2014

TLIPG-Warehouse of ProductsM&A activity in the Supply Chain and Logistics sector for North American based target companies in Q1 2014 included 72 closed deals according to data provided by S&P Capital IQ. The average deal value was $64 million with an average enterprise value to revenue multiple of .67. The deal activity has primarily been driven by large acquirers gobbling up smaller local outfits with the hopes of enhancing market share at relatively modest multiples. According to a report from global consulting firm PriceWaterhouseCoopers, this sentiment has set up smaller trucking and logistics companies for a lively M&A market over the next 12 months.

Read the Entire Transport, Logistics & Supply Chain 2nd Quarter Newsletter Here

Q2 Technology, Media, Telecom M&A Update

By Kim Levin | Jun 27, 2014

Circuit Board and FilamentsM&A activity in the Technology, Media & Telecom sector for North American based target companies in Q1 2014 included 675 closed deals according to data provided by S&P Capital IQ. The average deal value was $119 million with strong average revenue multiples at 2.92. According to MergerMarket, an industry data source, Q1 2014 was the third quarter during the last twelve months to see TMT M&A exceed the value of the Energy, Mining & Utilities sector. Telecom has been the best-performing industry among the S&P 500 over the past year and the Media & Technology industries performed above average during the global downturn in 2008. As the economy improves, M&A activity in the space has continued to heat up.

Read the Entire Technology, Media and Telecom 2nd Quarter Newsletter Here

Middle Market M&A Sweet Spot

By Kim Levin | Jun 25, 2014

Middle Market PulseFour major industry categories accounted for over 80% of the middle-market M&A transactions recorded by GF Data in 2013.   Manufacturing, business services, health care services and distribution lead all sectors in total deal volume last year. Of those, business services showed the greatest improvement year to year. This trend may be indicative of a general improvement in the economy and if 2014 lives up to expectations, the business services sector may continue to represent one of the “hottest” middle-market M&A sectors.

Companies in the business services sector provide support services to businesses, such as office administration, hiring and placement of personnel, security services, cleaning, and waste disposal.   According to First Research, the US business services sector consists of about 340,000 companies with combined annual sales of about $720 billion. As long as businesses continue to use temporary workers or outsource either landscaping, janitorial or security monitoring services, the sector will be ripe for growth.

The US business services sector is highly fragmented with the 50 largest companies accounting for less than 25 percent of sector revenue. Large companies often enjoy economies of scale and can compete for large, national accounts while small companies compete by offering highly specialized services, or through superior customer service. These smaller size companies often sit right in the sweet spot of the middle market.

Since the year 2000, business services has consistently represented between 15 -20% of Corporate Finance Associates‘ completed transactions.   Demand for business services ultimately depends on the level of business spending, which is determined by the health of the overall economy and so far all signs point to a health 2014.

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Q2 Plastics & Rubber Mergers & Acquisitions Update

By Kim Levin | Jun 20, 2014

Green TubingM&A activity in the Plastics and Rubber sector for North American companies in Q1 2014 included 25 closed deals according to data provided by S&P Capital IQ. The average deal value was $56 million led by a number of strategic acquirers looking to expand market share and capabilities. PE buyers were also active in the space looking to deploy capital.

Read the Entire Plastics & Rubber 2nd Quarter Newsletter Here

Consider ESOP Tax Benefits to Maximize a Business Sale

By Mark Klopfenstein | Jun 17, 2014

Calculator with PenMany business owners stand to benefit greatly from special tax benefits available exclusively in ESOP transactions. The CFA professionals can help business owners understand and evaluate how these opportunities might apply to a specific client situation. We can objectively quantify the anticipated results of various sale alternatives, including a traditional asset sale, a traditional stock sale, and a partial or complete sale to an ESOP. We can also assist owners in considering all relevant intangible factors. Our role is to assist clients in choosing and executing the best transaction for their unique goals and circumstances.

Capital Gain Tax Planning Opportunities Exclusive to ESOP Transactions

Unlike a traditional asset sale or stock sale, the ESOP alternative enables statutory capital gain tax savings opportunities. Under the provisions of section 1042 of the Internal Revenue Code, sellers of C corporation stock can defer (in many cases permanently) their capital gain taxes. With the increase in federal tax rates applicable to capital gains from 15% to 23.8% effective January 1, 2013, this provision has taken on increased importance in sale planning. Generally, the gain is deferred to the extent the sale proceeds continue to be re-invested in stocks and bonds of U.S. issuers and when at least 30% of the company’s stock is owned by the ESOP immediately after the transaction. Other requirements apply as well, but many owners will qualify for this benefit. The investment strategy can include long-dated notes from blue chip issuers that meet the requirements and can usually be combined with estate tax planning to allow for a permanent benefit. Nearly all states follow the federal provision as well. Read more »

Q2 Metal Fabrication Mergers & Acquisitions Update

By Kim Levin | Jun 13, 2014

MFIPG-Metal Welding,VerticalM&A activity in the Metal Fabrication sector for North American based target companies in Q1 2014 included 14 closed deals according to data provided by S&P Capital IQ. A lot of the activity was driven by consolidation plays as companies look to enhance their service offerings to gain market share. As the economy continues to rebound and manufacturing and homebuilding regain momentum, M&A activity should continue to vault forward.

Read the Entire Metal Fabrication 2nd Quarter Newsletter Here

Three Ways to Sell a Company

By Craig Allsopp | Jun 12, 2014

For SaleWith the economy gaining steam and valuations rising, the market is turning more favorable every day for business owners who want to sell their companies.

This is especially true in the middle market – companies with sales of $10 million to $100 million – where deal values tracked by GF Data averaged more than six times earnings in its most recent report.

Statistics also show that 51% of private business owners prefer to sell to third parties, while 16% favor a management buyout and 15% opt to sell to family members or employees.

Those who choose to exit have three basic options:

The Auction Process: This is the conventional way to sell 100% of a company and works well for retiring owners who decide to hire an investment banker to run a competitive auction to get the highest price. The banker will spent several weeks gathering business and financial information about the company and developing options for the business owner to consider. If the decision is made to go to market the banker will use company information to create an offering document, or Confidential Information Memorandum. At the same time, he or she will begin surveying the market to create a list of roughly 100 (or more) prospective buyers, both financial and strategic. With the CIM complete and list in hand, the banker will begin talking with likely buyers and responding to their information requests. He will keep the owner informed about indications of interest as the first step in a buyer selection process that will later include management meetings, site visits, negotiations, requests for more information and – after a term sheet is agreed – due diligence. The banker will spend upwards of 300 hours from start to finish in a typical engagement. He or she will be paid a retainer and/or a monthly fee to cover their time and costs with the bulk of their compensation coming from a “success fee” when the deal closes. The owner will spend a significant amount of time working with the banker on this once in a lifetime transaction. Read more »