Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Business Valuation’ Category

Does Your Company Deserve a Higher Valuation?

By George Walden | Mar 05, 2017

In a video I posted on Vimeo, I explain about why  some companies are worth more and have a higher valuation than others when the numbers appear the same? Why do some companies receive a 7X multiple and others receive a 4? Click on the play button below to see the entire video.

Recently I was at a presentation by a Texas Private Equity Group (PEG), a financial buying group of businesses to get insights into how they evaluate companies. They showed us their template of analysis. Read more »

4 Potential Value Killers of Your Business

By George Walden | Feb 08, 2017

In a video I posted on Vimeo, I explain about four of the many potential value killers of your business when it is time to sell. Click on the play button below to see the entire video.

Four of the many potential destroyers of value of your business when it is time to sell: Read more »

Risk Reduction is Value Creation

By George Walden | Nov 30, 2016

Business owners have asked me to advise them on what they can do to improve the value of their company. In a video I posted on Vimeo, I explain about how risk reduction is value creation.  Click on the play button below to see the entire video.

My favorite answer is to reduce risk for the buyer and the value should improve. The only way for a buyer to account for risk is to lower the price.

What are some of the areas a business can evaluate and make value improvements? Some things are relatively easy to change, some are not so easy. Here are some of the easier ways:

1.  Build an organized systemic approach to running your company: Companies should be systems based, not personality based. Clearly defined roles and a systemic approach to your operations make a company less dependent on any single individual. Systems range from IT to marketing, from employee development to operational implementation. The common thread throughout all systems is that they measure and provide information that allows the business to make decisions. This documentation provides a buyer insight into the company and removes risk from the loss of a single employee. Read more »

M&A in the Business Services Industry – Inflated Valuations

By Kim Levin | Apr 13, 2016

inflated valuations2015 Mergers and Acquisition activity in the Business Services industry was characterized by inflated valuations and a highly competitive landscape.  According to Pitchbook, a data collection platform that covers Private Equity Group (PEG) investment, there were 3,521 transactions worth just shy of $184 billion in the business services sector alone.

To date, private equity firms still remain eager to deploy money sitting on the sidelines into both platform (large base) and add-on (smaller niche) investments in the business services sector.  However, competition from strategic corporate buyers over the past few years has resulted in an uptick on purchase prices for platform size deals and its very much a seller’s market.  Private equity investors are being forced to pick their battles wisely.  When they determine they have an advantage over a corporate investor, you will occasionally see a PEG even overpay for an acquisition in a bidding war if they can envision a positive outcome over the entire hold period.  But with inflated prices comes a more cautious approach to due diligence.  We see the breadth and length of due diligence both increase and deals take longer to close.

Add-on deals offer private equity investors an opportunity to put money to work and many times these transactions can often be negotiated and completed outside the competitive auction process offering shorter closing time frames.  Such deals accounted for 62 percent of all buyouts in the fourth quarter of last year, a historically high percentage.

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Middle Market M&A Valuations Surged in 2015

By Catherine Patience | Mar 29, 2016

M&A valuationsThe use of “averages” doesn’t always tell the whole story when studying middle market mergers and acquisitions.  Case in point, middle-market M&A “average” valuation multiples would have you believe that 2015 ended the year in step with 2014.  The average valuation multiple for both years on all transactions, regardless of size, was 6.7x.  However, when you drill down into the specific data, a clearer picture is painted.

2015 saw M&A valuations surge in both the lower and upper tiers of the middle market.   In the $10-25 million enterprise value range, valuation multiples rose from 5.4x in 2014 to 5.9x in 2015, or an increase of 9.25% year over year.  In the upper tier of the middle-market, companies with enterprise values between $100 and $250 million, the rise was even more dramatic; from 7.8x to 9.0x, or an increase of 15.38%.  Interestingly, valuation multiples actually dropped nearly 13% for companies in the $50 – $100 million enterprise value range.  Acquirers were concentrating on two things last year:  building “platforms” in their investment portfolios via larger acquisitions and adding substance to existing portfolios via smaller addon purchases.

Company size and quality still matter in middle-market M&A.  Larger, better run companies have continually been rewarded with higher prices at sale.  When existing management remains post-close in a large, well-run concern the multiples jump even higher.

In 2015, the use of leverage continued its rise, but its use was not consistent across all middle-market size tiers. The equity percentage contributed by buyers of smaller companies was under 40% and climbed steadily with an increase in the size tier…the larger the deal size, the greater the equity contribution.

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Using Systems in Your Business

By George Walden | Dec 17, 2015

I was recently interviewed by Texas Business Radio, a program focused on business best practices.  I wanted to share my thoughts about raising the value of a company.  Click on the video below to watch my interview.

Posted by George Walden.

Purchase Price Adjustments Can Mean Big Money

By Brad Purifoy | Apr 01, 2015

Upward Chart Money SignNo two M&A transactions are exactly alike, but one issue that will arise in almost every deal is that of a purchase price adjustment (PPA). Exactly when and why PPAs are structured, and how they measured are critical issues directly impacting how much money a seller will ultimately receive from the buyer in a transaction.

So what exactly is a purchase price adjustment, and how is it typically used in a transaction? There are many reasons they can exist, and in different forms, but in general a purchase price adjustment is used to ensure that a buyer will receive the amount of net assets that existed when the purchase price was determined and agreed to by the parties.

As background, a transaction usually comes together in stages, the first of which is when the parties agree on a basic price and deal structure (e.g. is the buyer buying assets or stock for a certain price). At this stage there is typically a term sheet or Letter of Intent (LOI) signed by the parties laying out this basic deal and some related terms and conditions. Once the LOI is signed, the buyer has an agreed upon time period to kick the tires of the business (have accountants review the books, etc.). This stage is often referred to as the Due Diligence period, and usually takes 60 to 90 days, or longer. Usually concurrently, negotiations regarding final documentations occur, third party lending arrangements and agreements are put into place, etc. And as final steps, the agreed upon documents are signed and the transaction funds. 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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M&A News for the Aviation Industry

By Joe Contaldo | Dec 12, 2014

Private JetAccording to First Research, global shipments of general aviation aircraft, a demand indicator for aircraft parts, increased 4.8% in the first half of 2014 compared to the same period in 2013, according to the General Aviation Manufacturers Association (GAMA). Business jets saw the largest jump in demand as shipments increased by 12.4%. Makers of aircraft parts serving the general aviation market may want to focus marketing and production resources on business jets and piston aircraft, which are experience strong demand.

In addition, Aerospace companies are increasingly following the lead of many automakers and choosing to situate new US facilities in the southern part of the country, according to Stateline, the news service of the Pew Charitable Trusts. Companies that have recently established facilities in the South or announced plans to do so include Airbus (Alabama), Boeing (South Carolina), GE Aviation (North Carolina), and Gulfstream (Georgia).

Read the Entire Aviation, Aerospace & Defense M&A 4th Quarter Newsletter Here

Q4 Engineering & Construction Industry M&A Report

By Catherine Patience | Nov 21, 2014

M&A activity in the Engineering and Construction sector for North American based target companies in Q3 2014 included 67 closed deals according to data provided by S&P Capital IQ.  This is a slight decrease in deal count since Q2 2014, where 72 transactions occurred. Total transaction value increased dramatically between Q2 and Q3 from $565 million to $6.57 billion due to the AECOM purchase of URS Corporation.

Read the Entire Engineering and Construction M&A 4th Quarter Newsletter Here