Exit and Growth Strategies for Middle Market Businesses

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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:

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.

7 Step Guide to Business Exit Planning

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.

Capital Ideas Newsletter

M&A Lessons from the Shark Tank

By David Sinyard | Jul 06, 2012

Shark TankOne of my guilty pleasures is watching “Shark Tank” on Friday evenings.  If you’ve never seen it, the premise is as follows:  business owner appears before a “panel” of investors (a.k.a. The Sharks), business owner pitches his company to the sharks and none, or one or more of the investors make him an offer.  The show gets really interesting when more than one shark makes an offer for the business and when this happens usually the owner ends up with a much better deal than when only one offer is on the table.

Sound familiar?  If you’re a business owner with a company to sell and this doesn’t sound familiar, you’re probably working with the wrong advisor.  One important function of an experienced professional M&A advisor is to establish a competitive selling environment.  Whether your company is being positioned to appeal to a private equity investor, strategic buyer or both, competition usually improves the seller’s results.

 Download the 10 Biggest Mistakes Sellers Make 

Posted by David Sinyard.

The Importance of Succession Planning in Family Held Businesses

By David Sinyard | Jun 22, 2012

Passing the BatonDeveloping a succession plan may be the most important business plan a company owner will ever make – it secures their family’s future long after they are gone. Yet, the vast majority of family owned businesses do not have a succession plan in place and statistics show that nearly three quarters of family owned businesses do not survive the transition from founder to second generation. Given the importance of such a plan, understanding the obstacles that stand in the way of a successful business succession is the first step to putting a plan in place.   Given the importance of such a plan, understanding the obstacles that stand in the way of a successful business succession is the first step to putting a plan in place.

Most family business owners fully intend to keep the business within the family’s control, but choices made by the founder can derail such a plan from coming together. One common reason for inactivity is that the founder fears losing control of the business. They view succession as a demotion from the central role in the business and associate it with retirement and even their own mortality. Research demonstrates that founders tend to remain at the helm on average between 25 and 30 years. This length of tenure has an effect on how second generation family members view their opportunities. Read more »

Facebook – Is it really that hard to play fair?

By David Sinyard | May 24, 2012

Facebook ChartAre there any lessons business owners can learn from the recent Facebook IPO?  If nothing else… it should teach us the importance of due diligence and fair play.

For months, Facebook’s IPO has been the dominant story in news media all around the globe and the more you read or view, the more interesting it gets.  The taking public of a private company is just one way for the initial investors in a growing concern to create a liquidity event.  But when your liquidity strategy involves government regulated entities, such as the public markets, you’d better do it by the book.  No shortcuts, no surprises.  And should anything surface that indicates a change in the economic picture of the company, you better let everybody know about it, and yes, all at the same time.  Unhappy investors are not usually investors for long.

As M&A professionals, we work on behalf of one party in a given transaction, and the goal is when all the dust settles, both parties in the transaction are pleased with the outcome.  Happy seller… happy investor.  That wouldn’t happen if one of the parties was acting on information that was inaccurate or untrue.  We stress a thorough due diligence process and the need to keep all parties informed of material changes in information, financial and otherwise.  No one wants to see surprises at the end of a deal.

The story of the Facebook IPO is certainly not over yet.  We’ll soon see how the inevitable investigation into who knew what when pans out.  Bottom line…would it really have been that hard to just play fair?

Posted by David Sinyard.

Government Lends a Helping Hand

By David Sinyard | May 08, 2012

Our client was faced with a serious challenge.  He has been in the food processing business for 23 years and has a great reputation.  His products are sold to broad line distributors, branded restaurants and major grocery stores around the country with some international distribution as well.  The recession of 2008 was challenging for the food service industry and his lender at the time used the downturn to really put pressure on him.  Sales declined, negatively affecting his company’s debt covenants.  In addition, a low appraisal significantly reduced the valuation of his business.  The bank used these unfavorable conditions as leverage to cut his credit line, increase interest rates and impose harsh fees and penalties on his company.  With the banking industry and financial markets in turmoil, it was difficult for our client to seek alternative solutions.

We advised him to refinance his mortgages using the new SBA 504 program.  Based on a more favorable appraisal, he successfully closed on loans funded by the SBA and his new lender.  As part of the refinancing, his debt service payments were reduced by $6,000 per month.  We were able to negotiate a refund of nearly $50,000 worth of related expenses imposed on his company by the previous lender.  In addition, a recalcitrant partner was bought out.  Our client now has a great relationship with his new bank and is enjoying record sales and profitability.

Posted by David Sinyard.

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