How a management buyout works: in today’s market where there is a lack of credit,  which drives valuation multiples,  whereby there is a lack of cash available, a lack of liquidity for a greater  breadth of potential buyers for one’s company,  you need to focus on the needs of the principals of a company in terms of exiting.  What meets the needs of an owner of a company that wants to leave his or her company, or sell it, might not match the issues we have in today’s economy.  An exit strategy really starts with the owner.  The owner has to be ready to sell.   Sometimes when the owner is ready to sell it might not be the best time to sell in the market.    That doesn’t mean that the owner’s not going to get a very good deal.  Remember, it’s not all about price, it’s also about structure.  You might get less of a price, but you might get much more cash up front.   Versus a much bigger price, but much less cash up front,  then you are, as an owner, tied to all these different conditions precedent to obtaining the rest of your value down the road, which might not be sensitive to your needs today.  So, the MBO (Management Buyout), is a very firm and robust way to exit today, for any owner, especially if he or she has a capable management team that is entrusted with taking a company forward, which is a natural risk mitigant to any prospective buyer.

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Posted by JP Balestrieri.

Middle Market investment banking activities felt the effects of the financial crisis.  M&A deal volume for the middle market fell 39 percent in 2008 compared to 2007 and has fallen even further into 2009.  The harsh credit markets have left their mark on the middle market.  The average deal value in Q1 2009 was $64.1 million, down from $93.4 million in the fourth quarter of 2007.  The decrease in average deal size can be accredited to conservative valuations due to the added risk and limited debt funds available.  The incentive for an owner or principals to sell their business has sharply decreased and left many waiting for a more optimal, but indefinite exit timeline.

Traditional business models and financial investments have lost effectiveness, allowing a higher demand for alternative strategies and investments.  Private Equity groups are tentative to invest because of the risk coupled with difficultly accessing debt to leverage the scale of their investments.  An alternative investment like a Management Buyout (MBO) presents an appealing opportunity to private equity. Why? Read more »

In the current market, we are faced with companies and governments requiring the expansion or renovation of their capital intensive assets in various related infrastructure market segments.  Whether expanding manufacturing facilities, implementing new infrastructure capacity or leveraging existing assets for expansion into different regions or market niches, innovative financing is often at the core of long-term projects to transform a company’s strategy.  The ability to transform and execute upon one’s corporate strategy in capital intensive industries (like energy, oil & gas, transportation, government concessions and/or heavy equipment and manufacturing) is dependent upon the access to capital required to deploy existing and new capital assets that are critical to the long term recurring cash flows of a company’s or project sponsor’s(s) operations.

Akin to the underlying transformation in corporate objectives, the challenge with the project finance strategy is that the investment is made upfront while the anticipated benefits of the initiative are realized in the much longer term.  It is imperative to identify and prequalify sources of funds that can thoroughly understand the underlying changes being implemented by the prospective borrower(s) and project sponsor(s), and to achieve a comfort with the future cash flows arising from the collateral package of project investment or captive acquisition. Read more »