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Exit and Growth Strategies for Middle Market Businesses

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Why do potential acquisitions fail to close?

By David Sinyard | Aug 14, 2017

The termination of a purchase agreement entails significant costs for both the buyer and the seller. Research suggests that relational aspects are as vital as financial considerations.  The role of personal rapport between executives, as well as the importance of the bidder’s reputation, have major impact. First, private equity groups appear to consider the relational aspects of buying entrepreneurial and/or private businesses.  The importance of their reputation and of building rapport illustrate that non-financial aspects are important. Second, sellers should.. Read more »


A Recent Example of the Strategic Benefits of Merging with a Competitor

By David Sinyard | May 03, 2017

Recently RLJ Lodging Trust (“RLJ”) (NYSE: RLJ) and FelCor Lodging Trust Incorporated (“FelCor”) (NYSE: FCH) announced that they have entered into a definitive merger agreement under which FelCor will merge with and into a wholly-owned subsidiary of RLJ in an all-stock transaction. According to the press release the merger will establish the third biggest pure-play lodging REIT by enterprise value, creating meaningful scale to capitalize on cost efficiencies, negotiate leverage and access to capital, and the opportunity to strategically recycle assets and optimize the portfolio. The combined company will have ownership interests in 160 hotels, including premium branded hotels located primarily in urban and coastal markets with multiple demand generators. The combination also provides significant penetration within key high-growth markets and broad geographic and brand diversity.

Summary of Strategic Benefits (per management):

  • Combination creates the third largest pure-play lodging REIT with a combined enterprise value of $7 billion

    – Increased shareholder liquidity and cost of capital efficiencies
    – Stock transaction allows both sets of shareholders to participate in the upside
    – Enhanced positioning with brands and operators

  • Leading upscale portfolio of compact full-service and premium focused-service hotels generating strong operating margins

    – Combined portfolio will include 160 hotels in 26 states and the District of Columbia, diversified across Marriott, Hilton, Hyatt and Wyndham flags
    – Broad geographic diversity and strengthened presence in key markets such as California, Florida and Boston

  •  Positive financial impact and positioning for future value creation

    – Accretive in first full year
    – Expected cash G&A expense savings of approximately $12 million and approximately $10 million of potential savings from stock-based compensation expense and capitalized cash G&A
    – Opportunity for additional ongoing operating and cash flow improvements through greater purchasing power, market leverage and capital expenditure efficiencies

• Future opportunities to unlock value from portfolio repositioning
• Potential conversion and redevelopment opportunities
• Opportunity to actively refine portfolio
• Strong and flexible balance sheet
• Significant liquidity, minimal near-term maturities and opportunity to lower cost of capital

Mergers such as these are predicated on these Strategic Benefits. The market will measure the success of this transaction in light of whether management ultimately realizes on these listed opportunities.


The Buyout – For Business Owners to Exit Their Business

By David Sinyard | Aug 15, 2016

business owners to exit their businessThe buyout is an important route for small and medium size business owners to exit their business and could be particularly relevant for family firms who find no successor inside the family.  According to a recent survey, it is estimated that around 35 percent of businesses globally consider ownership succession through a buyout (PWC 2011). One of the primary sources of capital for such buy-outs comes from Private Equity (PE) firms.

An interesting academic article has recently been published in the Journal of Small Business Management 2016 by Ahlers, Hack, Kellermanns, and Wright that focuses on perceived bargaining power in buyout negotiations between PE firms and current owners who sell their business.  They looked at competition, expertise, and time pressure as key elements of PE firms’ perceived bargaining power.  Their research indicates that PE firms experience high perceived bargaining power in buyout negotiations, depending on factors such as competition, expertise advantage, and seller’s time pressure.  Higher competition between potential buyers lowers the PE firm’s perceived negotiating power.  Expertise as it relates in particular to valuation, synergies, and process-related aspects of buyout deals would seem to provide the PE firm with more perceived bargaining power, particularly as it relates to valuation.  If the seller in buyout deals suffers from time pressure, PE firms may gain higher levels of perceived bargaining power.

Clearly sellers need to be aware of these perceptions of stronger bargaining power.  The process must be run so as to balance the bargaining positions of both seller and buyer.

Posted by David Sinyard.

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What Will Cause a Buyer to Walk Away From Your Deal?

By David Sinyard | Jan 06, 2016

walking away 2What can keep the transaction from closing?

After you have made the decision to sell your business and you have an agreement with a buyer, what can keep the transaction from closing? An understanding of the review and approval process of the buyer will help understand what might happen and can potentially save you from making costly mistakes that can de-rail your deal.

A buyer (in our example a private equity group) will conduct a significant amount of due diligence on your company before it provides a Letter of Intent outlining the major terms of the agreed acquisition. This means that they have analyzed your industry, looked at your business in detail, met the management team and reviewed the financial statements that you have provided. Read more »


SBA – Great Source of Business Capital

By David Sinyard | Aug 10, 2015

Business CapitalEntrepreneurship in America remains vital to the U.S. economic growth.    The number of new business establishments tends to rise and fall with the business cycle of the overall economy.  The U.S. Bureau of Labor Statistics collects data on new businesses and job creation. The number of business starts is roughly 550,000 per year, yet survival rates are tough.   A major reason is often lack of business capital.

A major source of entrepreneurial funding is through the Small Business Administration (SBA) loan programs.  The primary SBA lending program is the SBA 7(a) guaranty loan program which is extended to business owners to use for start-ups, expansion, business acquisition working capital, equipment and inventory.  The maximum loan amount is $5,000,000 and the terms vary and range between 7 years for working capital and 25 years for real estate.   As an example, the bank of which I am a director recently approved a $3 million loan to a restaurant owner to take out the construction loan on his building in which he has two different food service establishments.

Another popular SBA loan program is the SBA 504.  This program is focused on commercial real estate, either new construction or acquisition and some major equipment financing.  Maximum loan size is $13,500,000.  Loan terms can be up to 30 years.  A recent example that I have seen is a $12,000,000 loan to construct a new assisted living complex.

Community banks are very interested in pursuing these loans.  The SBA guarantees a major portion of the indebtedness.  The loans are often sold in the secondary market, freeing capital for the bank.  In addition to origination fees, the banks also earn a servicing fee.

The key for a business owner is to find an experienced SBA lending group that has an extensive record of underwriting and closing these loans for business capital.

Posted by David Sinyard.

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Banking Relationships Do Matter

By David Sinyard | Sep 16, 2014

BankI have recently been elected to the board of directors of a community bank in Atlanta.  My prior experiences with banks have been obtaining loans and having business and personal accounts to pay bills and cash checks.  I sit on a number of committees, including a loan committee.  Over the past few months my experience has confirmed that the relationship that a business owner has with his/her banker is critical.

I had a client several years ago whose business was very negatively affected by the downturn.  His bank, a national bank, took the opportunity to force him to pay penalty interest for what they viewed were covenant breaches.  We obtained an SBA loan, refinanced the bank’s loans, and negotiated to get much of the penalty interest refunded to the client. Another client was recently informed by representatives of his national bank that his banking relationship was not big enough for them, so he needed to find another bank!  Apparently $10 million in loans and active bank balances was not enough for them.

Last night I was talking with the president of my bank and an owner of a local $60 million business.    This owner had no relationship with anyone from his national bank except that he had played golf once with someone senior.  He was very interested in talking to us as he was looking for a real banking relationship and some true service.

As a business owner, how good is your relationship with your bank?  While the big banks do all the advertising and seem to want your business, the community and regional banks may be a better choice.  When we review a loan application, much of the conversation is about the longer term client relationship.  Do you feel that your banker feels that way?

Posted by David Sinyard.

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How Does a PEG Look at Your Company?

By David Sinyard | Feb 04, 2014

Business PlanningOn behalf of our clients, what we want to be able to do is understand how to present their business in the best light possible to the Private Equity Group (PEG) .   What are the strengths and weaknesses of the business so that we can position it in order to have a successful outcome?  Our task in representing our clients is to obtain the best valuation and best structure possible.  PEGs see thousands of deals per year.  What is it they are looking for because they are going to make a decision based on a one to five page summary of whether they are going to proceed or not?  There is a very narrow window to get their attention.  More often than not the person getting that teaser is not one of the founding or general managers of the firm who is ultimately making the decision.  So the gatekeeper is basing it off of their experience up to that time, their interpretation of what the investment rules or criteria are of the business.  You have to get through the gatekeeper.

Then he or she brings it to a partner or someone else who would lead the transaction and at that point they would decide wrong sector right business model or whatever.  Then it’s going be presented to the rest of the team on Monday morning.  Then somebody in that room may say “oh I did one of those ten years ago, I hate that industry or I hate that business model or we would never do one of those, I lost money in those, or hey a friend of mine runs one of those you should talk to him.”  Maybe everybody says “I love it” and you get into the peeling back the onion on the diligence process.  At each one of those steps there is decision making and as you get closer and closer to closing the risk level increases because you are getting closer to lots of money changing hands and you are getting further away from the people you were speaking to at the beginning of the process.  It’s harder to go back to them.  Some things you never discussed at the beginning start getting discussed at the end. So you have got all this very tense rapidly moving and often shifting landscape that you are trying to manage.

Managing the process is critical.  For a discussion of some of the issues inherent to PEG review of potential investments between a Managing Partner of a PEG, Devin Matthews of Chicago Growth Partners, and a Principal of CFAW, David Sinyard, please go to: http://www.pefuncast.com/podcasts/.

Posted by David Sinyard.

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How do Private Equity Groups Assess Potential Investments?

By David Sinyard | Dec 23, 2013

Business Meeting with PaperThe Role of Management and a Focus on Family Owned Businesses

Before Private Equity Groups (PEGs) invest, they review a significant number of proposals hoping to find that diamond in the rough, that perfect addition to their investment portfolio.  Three a day is not unheard of, so the annual volume can easily be 700-1000 proposals.  Of these, the majority of PEGs typically close on 2-4 deals per year.  There is a great deal of time and work involved in reviewing and ultimately deciding which deals to pursue. How do PEGs decide which deals to pursue?  Their due diligence costs often exceed $100,000 per transaction.  Before they commit the time and money, they have to be convinced that this is a company that they want to own.

The review procedures utilized by PEGs differ significantly and range on a continuum from a very formal process to an informal review practice.   When PEGs follow a formal process they may have evaluation criteria and will use a checklist for each submission they review.  It is scored and in order to move to the next step in the process, a company would need a minimum score to advance.  The majority of PEGs use an informal review process and based on  time and experience, the business development officers will “know” whether it’s something of interest.  Evaluations of specific criteria appear to exist for every deal and most PEGs tend to look for strong, stable cash-flow, low debt levels, leading market positions,  and niche products or services.  But one variable stands out to separate the proposals into “yes” and “no” piles – the management team. Read more »


Succession Planning for Business Owners

By David Sinyard | Dec 11, 2013

Passing the BatonBusiness owners face three alternatives as they approach retirement: pass on both the management and ownership of the business to the next generation, pass on the shares but bring in professional managers, or sell the business. The results of a PricewaterhouseCoopers Family Business Survey conducted in 2012 indicate that 41% of the respondents intended to convey their stock and management of the business to their children.  More than half of these respondents were unsure whether the next generation had the requisite skills for this to successfully occur.  Twenty-five percent planned to bring in professional managers due to the perceived lack of skill of the next generation.  Twelve percent were undecided and the remaining 17% planned to sell the business.  With results such as these, it is no surprise that succession planning in family firms has received significant attention.

So what options are available to the retiring business owner?  It would appear from the PwC data that alternatives to passing the controls to the next generation need to be examined.  One viable option is to sell to a private equity group.  Not only can private equity investors enable the resolution of succession problems, their involvement can lead to improved operating efficiencies in the firm.  Private equity provides capital in exchange for an equity stake in a potentially high growth company.  While the family may cede control, private equity can provide significant support to help grow the business as well as providing liquidity for those retiring.  The process of identifying and selecting the correct private equity group requires time and the expertise of trusted advisors.

Posted by David Sinyard.

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PEGs and Company Management

By David Sinyard | Jun 24, 2013

Business Meeting with PaperHow do Private Equity Groups (PEGs) view the role of management as they consider investing? Many view the quality of the management team as a fundamental issue in a proposed transaction. In reality, PEGs show flexibility regarding the quality of the management team. There is a continuum from those who see the existing management team as being very important to others who are far less concerned. Some indicate that the businesses must have good management in place. Other PEGs express less concern with the existing management: they just want a competent management team. What appeared to matter more was that someone be identified who would remain with the firm post transaction. The relationship between the management team and the PEG is also important as they are very much focused on the chemistry between their group and the management team. The issue is whether the ownership culture is willing to embrace change. Management generally will be supplemented and upgraded. The PEGS expect it. The usual function that is most focused on is finance as the incumbent typically will not have the qualifications and skills to handle the role. The PEGs will put in new CFOs to upgrade the position, in particular, in terms of reporting. Additionally, the PEGs anticipate the need to invest in information systems and putting professional processes in place.

Posted by David Sinyard.

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