Business Selling Myths – Part 1

Would you feel comfortable going into open heart surgery with a doctor who had never performed the procedure before?  So, why would you try to sell your business alone, or let your CPA try?  Your business is your precious child.  Hire someone who is seasoned and understands the nuances involved in successfully marketing and selling businesses.  Hire an Investment Banker!  You’re more likely to get fair value for your business, in a reasonable time frame with fewer complications IF a good Agent represents you.

An Investment Banker will:

•    Set Pricing Expectations:  We will work with you so you have a reasonable expectation for the price your company will bring in the market.  We will not set an asking price, as we let the market bring their best offer and create a competitive process.

•    Market the Business:  Marketing your business successfully is a time consuming and expensive process.  We have a team of professionals that work for you to prepare, and keep current, a Confidential Descriptive Report and Blind Profile.  We will handle all of the time consuming details while you keep an eye on the performance of your company.

•    Find and Screen Prospective Buyers:  We have a vast network of Private Equity Groups (PEGs) and Strategic Buyers that we work with on a regular basis.  Additionally, we will form a customized communication plan, based on your needs, to reach out to new prospects.  After prospects are found we quickly determine their financial and competitive qualifications as it relates to the potential transition.  An attractive offer is worth very little if the odds of a successful closing are low.  A good Investment Banker will not waste time or money with “tire kickers” or unqualified prospects.

•     Negotiate the sale:  There are so many other important factors to consider beyond price.  Of course, pricing is important and we will work so that no money is left on the table.  But, we have structured many sales and know how to ask for those “extras” that make the
deal really special.

•    Work through Due Diligence and Reach Closing:  This process can get rather involved.  We will help keep the deal on track and focused on reaching a successful closing.  We have experience that is much needed during this often frustrating phase.

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Posted by Gerald Lindsay.

July 6, 2011 – Chicago, IL – Corporate Finance Associates  is pleased to announce that Saturday Capital, LLC has acquired Code Red LLC. Code Red’s founder, Brian Leonard invested alongside Saturday Capital and will remain CEO of the company.

Code Red, a leader in CPR, provides first aid and automated external defibrillator (AED) training to companies nationwide. Code Red was founded in 2005 by Brian Leonard with the mission of protecting the workplace from sudden cardiac arrest and workplace related injuries.  As a national training center for the American Heart Association, Code Red is able to provide clients with CPR, First Aid and AED training classes anywhere in the United States. Code Red also distributes AEDs for some of the largest AED manufacturers – serving clients nationwide.

“Rob Umlauf, Vice President in our Chicago office, had a long relationship with Code Red… almost since the company’s inception.  When Mr. Leonard was ready to take the company to the next level, we immediately knew that this was a perfect fit for our client, Saturday Capital,” stated Joe Contaldo, Managing Director of Corporate Finance Associates.

“Corporate Finance Associates introduced us to the ideal situation for Saturday Capital – a great company with management excited for growth,” Patrick Doherty, Managing Member of Saturday Capital stated.

Saturday Capital is a St. Louis-based lower middle market private equity fund organized to acquire manufacturers, value-added distributors, and service companies headquartered in the greater Midwestern regions of the United States with $1 million to $3 million in EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization). Saturday Capital also invests in early stage and growth investments. For more information: www.saturdaycapital.com

Transaction Information:

On June 13, 2011, Saturday Capital, LLC acquired Code Red, LLC in a private transaction.  The details were not disclosed.  Joe Contaldo, Managing Director and Rob Umlauf, Vice President of Corporate Finance Associates  advised Saturday Capital in the transaction.

About Corporate Finance Associates:

Corporate Finance Associates is an investment banking firm, providing lower middle-market companies with a wide range of financial advisory services in support of mergers, acquisitions, divestitures, capital sourcing, and corporate restructuring.  From project inception to completion a senior principal guides clients through every challenge, advocates on their behalf, and leverages CFA’s experience and extensive resources.  Corporate Finance Associates has  20 offices in United States, three in Canada, three in India and 14 partner offices throughout Europe and Latin America.  More information about buying or selling a business is available via the Internet at www.corporatefinanceassociates.com.

For more information contact:

Joe Contaldo, Managing Director
Corporate Finance Associates
+1 (847) 836-7035
jac@cfachicago.com

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Posted by Joe Contaldo.

There are companies whose size makes them too large for individual, life-style investors and too small for financial or strategic investors. In those cases, growing through acquisition as a means to achieve critical mass may be a good first step toward positioning the company for a future sale.

A number of issues will need to be addressed as one considers this option. From the buying company’s standpoint things to look for will include:

• the stability of cash flows
• the existence of a loyal, experienced, and flexible second layer of management
• a robust and scalable IT system in place
• a realistic business plan, among other important aspects.

Things to look for in the target company will include a motivated seller:

• committed to a smooth transition
• a business model and a corporate culture that will complement the buyer’s
• a healthy balance sheet
• strong customer and vendor relations

Preparation will be key. There are a number of steps that need to be taken even before approaching potential targets. There are many more that will follow once the execution process begins. And yet, more as negotiations lead to due diligence and a successful closing.

So, for some of those business owners thinking about selling in the next few years, buying may be a good first step in that direction.  If you have any questions or comments about using acquisitions as an exit strategy, post a comment below and I’ll be happy to respond.

Read about Business Exit Strategy Planning.

Posted by Eduardo Berdegué.

For an explanation about the historic trends in middle-market business activity, read this month’s Middle Market Pulse.

Posted by John Hammett. 

In order to purchase good, quality companies, buyers were contributing more and more of their own cash to the deal.  In the second quarter of 2009 we saw average equity contributions reach near 60%.  The balance of the deal structure was usually a combination of senior and mezzanine debt.  These high levels of equity contributions were a direct result of the limited capital available in the market.  As lending has slowly improved, we are now seeing the blend of debt to equity more equally balanced.
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The April Middle Market Pulse provides a great snapshot about how lending levels effect M&A deal flow, so read the entire article now.

Posted by Peter Heydenrych.

Let’s start with the notion that a dealmaker must be able to deeply understand your business, exceptionally market and represent your business, and advocate on your behalf in the relentless pursuit of their fiduciary responsibility to you!  Of course, a seller or buyer of a company should look for certain key skills before they hire an investment banking representative who has (or doesn’t have) some ability to alter the course of their future!  Skills come in two varieties… hard skills and soft skills.  Some of these skills are easily identified through simple questions and some may only be apparent after you get to know your prospective representative.

So, let’s address the definitions of hard and soft skills.

Hard Skills

Hard skills are teachable and technical abilities that are required in the investment banking business.  Many of these capabilities are also tested by FINRA (Financial Industry Regulatory Authority) before investment bankers become fully licensed.  They include a deep and thorough knowledge of finance and accounting.    Your intermediary must also be well versed in research and marketing.  To the extent your business sector has unique attributes it doesn’t hurt if your investment banker also has specific sector knowledge or experience.  Many skilled bankers are able to deftly work in many industries.  Moreover, to be an effective investment banker one must have at least base knowledge of the law as it applies to mergers and acquisitions.  These are just a few of the hard skills required to be an effective investment banker.  If you meet an intermediary that lacks these basic skills, well, it is time to move on.

However, it is in the application of these hard skills that having so-called soft skills is the most critical value you can receive from your investment banker.  Stated differently, soft skills are the most important drivers of success!

Soft Skills

Wikipedia defines soft skills as a sociological term relating to a person’s “EQ” (Emotional Intelligence Quotient), the cluster of personality traits, social graces, communication, language, personal habits, friendliness and optimism that characterize relationships with other people.  Hard skills are the IQ and soft skills are the EQ. 

Another view is that soft skills are behavioral competencies and might include conflict resolution, negotiation, creative problem solving, strategic thinking, and influencing and selling skills.  Effective bankers and business owners who have sold their companies can attest these latter skills and “owning the deal” are critical to getting deals done.

The Dilemma

Managing a “deal” can be a very complex process.   Every deal is different and every situation requires the ability to adapt – to creatively solve problems, to think strategically, to influence behaviors, to negotiate, and to work through conflict.

How can you identify the key element, the behavioral competencies, when you meet an investment banker?  Well, it so happens that great leaders also have great soft skills.  John Wareham has been exploring this issue for decades in books “The Anatomy of a Great Executive” and “Secrets of a Corporate Headhunter”. 

The simple answer is you have to have keen awareness of these key traits, and ask probing questions that exploit these skills.  However, the more accurate answer is that, well, it takes time to recognize these traits in people.

Get to know your prospective dealmaker well!  Ask them about other deals they’ve worked on and how they’ve solved the challenges they faced.  Explain some of the challenges you face in your business and listen to their feedback.  Listen to how quickly they “get it” when it comes to understanding your company.  These are all clues as to the abilities of the dealmaker. 

I often hear prospective clients ask about how we at CFA differ from others in our industry.   As smart business people they ask us about our value proposition!  I view our value proposition on three different levels.  First, we have organizational might.  Second, our dealmakers have key hard skills that get applied in the machinery of getting a deal done.  And, third, we have the “right stuff” when it comes to behavioral competencies, those soft skills that are the most critical factor leading to deals closing.

Posted by John Klearman.

If all the prognosticators are correct, 2011 should be a boom year for the M&A markets and many companies will appear on the selling blocks for the first time.  From a buyer’s standpoint, it will be critical to make sure that what you see is really what you get.  Doug’s article is a good read and you can find it in its entirety here.

Posted by Robert St. Germain

Posted by Peter Heydenrych.

Posted by John Hammett.

The Tax Relief Act extended through 2012 the individual income tax rate schedule, which provides for a maximum tax rate on ordinary income of 35%.  Without passage of the Tax Relief Act, the individual income tax rate schedule that was introduced during the Clinton Administration, with a maximum tax rate of 39.6%, would have taken effect in 2011.  The income tax rate schedule for estates and nongrantor trusts, with a maximum tax rate of 35% on ordinary income, was also extended through 2012 by the Tax Relief Act.

Under the Tax Relief Act, the lower tax rate on long-term capital gains and qualifying dividends has been extended until December 31, 2012.  Except for certain items such as unrecaptured Section 1250 gain on real property (25%) and collectibles (28%), the maximum tax rate on long-term capital gains and qualifying dividends is 15%.  Without the Tax Relief Act, for 2011, the maximum tax rate on long-term capital gains would have increased to 20% and dividends would be taxed as ordinary income.

Besides the extension of Bush-era tax cuts referenced above, the Tax Relief Act contains other beneficial provisions.  For example, an Alternative Minimum Tax (AMT) patch was added for 2010 and 2011.  The term, “AMT patch,” refers to the AMT exemption level that prevents many taxpayers from being subject to the AMT.  Examples of temporary individual income tax incentives that were extended under the Tax Relief Act include the following:

• Charitable contribution on IRA proceeds
• Charitable contributions of appreciated property for conservation purposes
• The higher education tuition deduction
• The teacher’s classroom expense deduction
• The alternative state and local sales tax deduction (used when greater than the state income tax deduction)

Without the Tax Relief Act, the foregoing list of temporary individual income tax incentives would have expired on December 31, 2009.

For 2011, the Tax Relief Act reduced the employee portion of Social Security taxes on wages up to $106,800 from 6.2% down to 4.2%.  For self-employed individuals, the 2011 self-employment tax rate is 10.4% up to the $106,800 threshold.   Instead of a deduction for one-half of the self-employment tax in computing adjusted gross income in 2011, the income tax deduction will be slightly greater than one-half of the self-employment tax thereby bringing this income tax deduction into parity with the FICA taxes paid and deducted by employers who are subject to this payroll tax.

Prior to the Tax Relief Act, certain small business stock could be purchased by non-corporate taxpayers on or before December 31, 2010 and, after a five year holding period, be sold with a 100% exclusion from tax on the gain, subject to certain dollar limitations.  The Tax Relief Act added a one year extension for acquiring small business stock that qualifies for the 100% exclusion (i.e., a stock purchase made on or before December 31, 2011).

The research tax credit was scheduled to expire on December 31, 2009; however, the Tax Relief Act renewed and extended this credit until December 31, 2011.  Without going into the specific details, there were several other targeted business income tax incentives that expired on December 31, 2009.  The Tax Relief Act generally extended such business tax incentives until December 31, 2011.

The Tax Relief Act revived the estate tax for decedents dying after December 31, 2009.  With respect to individuals who died in 2010, an interesting choice is presented.  The executor or administrator can choose to apply the estate tax and obtain a raised basis to fair market value for qualifying assets that are included in the estate.  The other choice is to not apply the estate tax and be required to use the modified carryover basis rules on certain assets included in the estate.  An estate tax payment will not be due if the taxable estate does not exceed $5 million.  The maximum estate tax rate is 35%.  The new estate tax rules are temporary and are scheduled to expire on December 31, 2012.

As with any significant transaction or tax planning strategy, it is wise to seek counsel from a competent tax professional before entering into a transaction.

Posted by David DuWaldt