Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Acquisitions’ Category

Keys to a Successful Acquisition Search

By Brian Ytterberg | Jul 13, 2016

successful acquisition searchesA successful acquisition search can be a long and arduous process.  Many buyers become frustrated as they encounter a number of starts, stops and dead-ends along the way.  Many eventually give up as they do not find a suitable target in a reasonable amount of time, or worse, they miss out as their competitors acquire one of their potential targets.

We have noticed a few keys that to successful middle market acquisition searches which include the following:

  • Review your strategic plan.  Where do you want to be in three or five years?  How can an acquisition help you realize your long-term goals?
  • Know your capabilities, strengths and weaknesses. What size acquisition can you handle?  What amount of leverage can you sustain?  Do you have the management team and depth to pursue an acquisition? Read more »

Do 70% of all Acquisitions Fail?

By Doug Nix | Jun 04, 2015

FailureDo 70% of all acquisitions really fail?

How many times have you heard that “70% of all acquisitions fail”? When most people hear this, they immediately conclude that it is an irrefutable fact that 70% of all acquisitions are catastrophic failures.

With statistics like that it is surprising that there are 10’s of thousands of acquisitions reported every year.

So let’s dig a little deeper into the statement. For privately owned companies, the comment is most often based on academic studies around the answer to the question – “How well did the acquisition meet the acquirer’s initial objectives and targets?”

The studies treated an acquisition as a failure if it did not fully meet all of the initial objectives and targets.  That would mean that if the acquisition met every initial target, except that it generated an ROI of 22% when the target ROI was 23%, then it was a failure. Does that sound like a catastrophic failure to you? It doesn’t to me either.

The real observation should not be that “70% of all acquisitions fail”, but that “70% of acquisitions in some studies didn’t meet all of the initial acquisition objectives and targets.”  A very big difference, and one that hopefully reduces the high anxiety levels management teams must deal with when they start considering an acquisition program.

Posted by Doug Nix.

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Successful Acquisitions Require Successful Integration

By Jordan Nix | Apr 27, 2015

Puzzle PiecesThe success or failure of an acquisition depends on how the target is integrated. The prevailing fallacy is to integrate based on relative size; smaller targets are fully merged in with the acquiring company while larger targets remain standalone operations.

Successful integration requires a clear understanding of what is being purchased. The best way to do that is to look at a business in terms of its basic elements, its resources, processes, and priorities.

Resources are physical things such as people, products, and customers. Processes are the way in which a business uses its resources; how it designs, sells, and manufactures its product or service. Priorities are what guide a business; they are its customer value proposition and profit formula.

Resources are easily integrated. Processes and priorities are not. Read more »

How Much Leverage Should You Use When Buying a Business?

By Catherine Patience | Jan 06, 2015

Middle Market PulseThe use of leverage is always a challenge. Use too little, and you leave profits on the table. Use too much, and you could be putting yourself in jeopardy. Most middle market M&A transactions are financed using a combination of debt and equity. A deal may have a single lender, or a mix of senior, junior or mezzanine debt. Debt has a lower cost of capital than equity, so the return on equity increases as the percentage of debt goes up. The goal is to use as much debt as possible without hitting the point where cash flow from the equity component cannot service the debt interest.

In acquisitions made in 2011 to 2013, total debt averages were remarkably stable, averaging 3.4x in each of those years. However, for deals closed during the first nine months of 2014, we have seen debt averages begin to rise, with the average jumping to 3.7x. Deals financed on the characteristics of another entity (ie: an existing portfolio platform or the corporate-level facility of a family office) employed even more debt, with an average of 4.4X.

As one goes from the smallest deal tier to the largest, the pickup in leverage becomes more pronounced. At $10-25 million TEV, leverage increased just .1X from 2013 to 2014 year to date. At $25-50 million and $50- 100 million, the gain was .3X and in the $100-250 million bracket, average total debt jumped .6X.

From one sector to the next, the use of leverage is not equal. Currently, manufacturing deals are participating fully in the flush leverage market, with debt levels rising from 3.4x in 2013 to 3.9x year to date. Business services, on the other hand have not experienced the same leverage run up, with a slight decline in 2014.

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Q3 Aviation, Aerospace & Defense M&A Industry Report

By Kim Levin | Oct 03, 2014

Nose WheelM&A activity in the North American Aerospace and Defense sector for Q2 2014 included 29 closed deals according to data provided by S&P Capital IQ. Total deal value soared to $443 million, while average deal value reached $44 million. High deal value is largely attributed to several mega deals, the largest being The SI Organization’s $215 million acquisition of QinetiQ North America. Three additional deals, valued at more than $60 million added to the high deal value of the quarter.

Aerospace M&A remains robust with volume expected to match the record high set in 2013. However, deal making on the defense side has not been as strong.

Read the Entire Aviation, Aerospace & Defense M&A 3rd Quarter Newsletter Here

Rep and Warrants insurance. What is it, how does it work and why should we care?

By Terry Fick | Sep 09, 2014

Purchase AgreementWe all know that the most difficult part of the negotiations of a Purchase Agreement are the Reps and Warrants and Indemnification sections.  An R&W insurance policy basically takes a seller off the hook for the typical indemnifications they accept when they sell their company. It can be a great tool when you have that seller that thinks he has (and will accept) no responsibility for damage claims from the buyer for sins that occurred prior to the sale.

Occasionally, when a seller digs his heels in on these issues, the buyer will buy the insurance.  Dan Vermeire just completed a $15 Million sell side transaction and he and the attorney got the buyer to buy such a policy. The seller is not responsible for anything that may come up except for fraud, and obviously, there is no escrow. The attorney that Dan brought in convinced the buyer there would be no deal if there were even market indemnifications, so they bought and paid for the policy.

Keep in mind that it is expensive and is not as simple as calling your P&C broker and asking for a quote. Multiple sources tell us that the cost is usually 1% of the amount of the policy (Usually the cap the seller wants on the indemnifications), with a minimum premium of about $150,000.  Obviously, this means that on most of our deals, the minimum will apply. In addition to that, there is a due diligence fee of $20-$40,000, paid before the insurance company agrees to underwrite the policy. Read more »

How Does FINRA Relate to Selling or Buying a Business?

By Roy Graham | Aug 11, 2014

finraMany business owners are not familiar with FINRA or how it relates to buying or selling a business.  FINRA (Financial Industry Regulatory Authority, Inc.) is an independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.

FINRA’s oversight of interstate securities activities includes not only publicly traded securities but also private securities of any size company including the one you may be buying or selling.  If you are buying or selling a business, FINRA is providing oversight of those FINRA licensed broker-dealers and representatives who may be working on your deal.

FINRA oversight begins with the licensing process.  Every applicant must be sponsored by a FINRA licensed broker-dealer and complete a detailed application.  This application is submitted to FINRA along with the applicant’s finger prints which are sent to the FBI as part of a criminal background check.  After an application is approved there is an examination to establish core level of expertise.  M&A activities require passing the Series 79 examination to secure an “Investment Banking Representative” license.  Certain types of private placements and other types of securities require the Series 7 “General Securities Representative” examination.  Representatives will also take a Series 63 “Uniform Securities Agent State Law” examination.

Once an individual is licensed his or her activities are monitored both by the sponsoring broker-dealer and by FINRA.  FINRA regularly examines broker-dealers and their representatives for compliance with FINRA rules and may bring disciplinary actions and fines against registered brokers and firms for violations.  It may refer particularly egregious cases to the SEC or other agencies for litigation and/or prosecution.

You may wish to check a firm and or broker you are considering.  FINRA provides convenient public access to their “BrokerCheck” feature via their website  BrokerCheck includes current licensing status and history, employment history and, if any, reported regulatory, customer dispute, criminal and other matters. FINRA recommends that it be the first resource investors turn to when choosing whether to do business or continue to do business with a particular firm or individual.

Posted by Roy Graham.

Avoid Deal Killers When Selling Your Company – Part 2

By Kim Levin | Aug 06, 2014

Calculator with PenOver the life of the blog, much has been posted about Deal Killers, those pesky things to avoid when you’re selling your company.  John Hammett wrote a great series of blog posts several years ago that still stands the test of time.  I thought it was a good idea to revisit this series of posts.  The first blog post in this series discussed Deal Killer #1, No Management Depth.  The second deal killer focuses on the lifeline of a business…its customers. This is the 2nd in a series of 5.


by John Hammett

A company with more than 20% of its business with any one customer has a major potential Deal Killer.  Customer concentrations of 30%, 40%, 50% make it increasingly harder for owners to sell a company.  Even if big customer is a well-regarded company, buyers do not want the risks associated with a sudden loss of such a large portion of business.

Many companies grow with the growth of a few key customers because it is often easier to cultivate one or two strong relationships.  Keeping up with the demands of a large or a fast-growing customer can take attention away from the task of broadening the company’s customer base.  Sometimes buyers have the perception that customer concentration is an indication that the management team is lazy. Read more »

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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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 »