InSight

Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Business Valuation’ Category

SHOULD I SELL THE COMPANY’S REAL ESTATE WITH THE BUSINESS OR KEEP IT AS A SEPARATE ASSET?

By Terry Fick | May 30, 2017

The easiest (and cleanest”) thing to do with your real estate is to include it with the sale of your business. However, that is not usually the way to maximize your financial outcome.

Let’s first look at the purely financial aspects of keeping the real estate vs. selling it with the business.

  • It is important to recognize that most buyers of businesses prefer not to own the real estate.
  • Let’s assume you are selling your company at a value equal to 7 times your EBITDA.
  • Since the business owns the real estate, the company has no lease payments, thereby increasing the EBITDA and the selling value.
  • While Real Estate values swing broadly based on type of real estate and location, that value is almost always higher than 7 times the decrease in the value of the company that results from adding a market lease to your expenses.

EXAMPLE:

  • Assume you can lease it to the buyer for $600,000/year.
  • This reduces the value of your company by 7 times $600,000, or $4,200,000
  • However, using a recent transaction we were in, the “Cap rate” of the warehouse owned by the company was 6%, which is a multiple of 16.6x the annual rate.
  • So, he kept the real estate (Then sold it to a third party real estate investor) for almost $10 Million, but reduced the value of his business by only $4,200,000.

You might want to simply keep the real estate and generate the income from a lease (in this case, $600,000) as a long term investment. Whether you keep it or sell it separately, be sure to get a lease of at least ten years to secure the value of the real estate.

If you own the real estate separately from the company, but you want to sell the real estate, as well, the decision is reversed. Keep the real estate separate and get a good market rate lease, then sell the real estate to a third party, a real estate investor.

One caveat is that some real estate, such as a very special manufacturing facility is very difficult to sell separately, so that may be an important consideration. An appraisal on that property would definitely be in order before you make that decision.

Note that there are real estate investors that will buy even specialty use businesses with good leases. One such company we often call is AIC VENTURES in Austin, Texas.


Consider A Family Office as a Potential Buyer or Partner for Privately Held Businesses

By Joe Sands | May 18, 2017

Selling My BusinessAn Emerging Trend: Family Offices Seeking Private Company Investment Opportunities

There is a growing trend of family offices acquiring or investing in private businesses and the trend is picking up steam for good reasons including but not limited to:

• Direct investing provides Family Offices with the potential for superior returns, transparency and control of their investments in private companies

• In some cases, private companies’ interests can be better aligned with a Family Office as an investor or owner than with a traditional funding source

What is a Family Office?

A Family Office is an entity that provides services to either a single wealthy family or multiple wealthy families. The Family Office (FO) is generally set up by the wealthy family (a family with assets typically in excess of $100 million and often in the billions) and ranges in the number of professionals employed and services covered. The services provided by a family office are tailored to the family’s needs, and can cover: (i) wealth management, (ii) investment management, (iii) private banking, (iv) accounting and tax management and (v) other services such as travel, legal, bill paying and security. The rationale for setting up a family office is centered around privacy, confidentiality, control, transparency and a consolidated team working together without any bias or conflicts of interest. FOs invest across a wide array of domestic and international public and private securities as well as real estate. Collectively, family offices are estimated to hold assets in excess of $2 trillion.

Advantages for the Private Company:

• A FO’s primary objective is to preserve and grow wealth over the long term rather than selling their best investments quickly or using high amounts of debt in order to generate a high IRR of new investment funds.

• FOs are more likely to hold a good investment for many years or even potentially in perpetuity and to be an ongoing source of growth capital for the company.

• FOs are already running businesses and are sensitive to the softer issues such as company culture, succession issues, impact on the local community as well as maximizing business strategies. Most have been through up and down economic cycles and won’t take short-cuts to preserve their jobs.

• The different investment objective of a FO can also manifest itself in less balance sheet leverage being employed which may be attractive to business owners who want to be sure of the future stability of the company. Many institutional investors focus on maximizing IRRs which can bring with it an interest in maximizing debt levels since the higher the leverage, the higher the return on the equity, everything else being equal. Most FOs, on the other hand, are more conservative on the use of debt in their acquisition financing.

• Finally, FOs are using their own capital and can therefore close on investments quickly without relying on bank or investment committee approvals.

Conclusion:

When considering a sale or capital raise for a privately owned business, there are many types of traditional and non-traditional capital providers and acquirers. A well thought-out strategy for each situation must be developed to engender a successful outcome. Doing so requires evaluating which types of investors to reach out to and including multiple types of investors. This will no doubt maximize business value as well as the ongoing operating relationship. Family Offices are a good complement to a robust investment banking process.


How Do I Know It Is Time To Sell My Company?

By Robert Contaldo | May 09, 2017

After 35 years of selling companies, I have found that it is nearly impossible to convince a business owner to sell until the business and personal reasons align. But once they do, no good ever comes from delaying a sale.

Selling your business, which is perhaps your largest asset, can be a difficult decision. It has been part of you and part of your family. It has been good to you like an old friend. You have loved it – you have cursed it – you have nurtured it, you have seen it from birth through the teen years and into maturity. Unlike us, it can live for generations – though the time will come when it must change hands.
When the cycle of business and our personal circumstances begin to herald the transition, it should be addressed in order to realize the financial security for which it was created.
After 35 years of selling companies, I have found that it is nearly impossible to convince a business owner to sell until the business and personal reasons align. But once they do, no good ever comes from delaying a sale.
So – here are ten points to consider when deciding whether or not it is time to sell your business:

1) The Thrill Is Gone

We all go through seasons in life. Young business owners focus on raising a family, planning for the future and striving for a financially secure retirement. To that end, fighting the battles and making the sacrifices are necessary and expected as part of a growing business. However, there comes a time when a business owner does not care to take the business any further. The battles and victories that at one time were energizing have now lost their importance, and have become somewhat boring and wearisome. The focus shifts to more time off, warmer weather, grandkids, or more leisure time activities. Many business owners want to pursue a new direction in life that satisfies a greater personal or community need.

2) Your Marketplace Is Changing

Businesses that do not change will ultimately fade away. Change requires new market direction, more equipment, more people, new technology, expanded facilities, and other capital investment. Market changes can include more complexities involving government regulations, taxes, banking, certification requirements, customer reporting requirements, global competition that threatens margins and customers seeking fewer suppliers and lower costs. Many times the direction is clear, but the mind, body, and emotions are not willing to embrace change.

3) Risk Becomes a Four Letter Word

With all that needs to be done in a changing marketplace, business owners cannot afford to be squeamish when it comes to ongoing investment in the company. When one reaches the point of not making logical investments in the company or tends to count the debt rather than the probable benefit, it might be time to sell. Most business owners reach a point where they are tired of “betting the farm”, tired of personal guarantees, tired of meeting financing requirements and covenants, and worn out over protecting assets from legal liability. There comes a time when it makes sense to “take some chips off the table” and build financial firewalls.

4) A Change Would Be Good For the Family

Many have experienced the challenges of a family run business. As the succeeding generation grows into personal and business maturity, it may be time for a generational transfer of ownership. A recapitalization with a Private Equity Group as a financial partner can allow the founding shareholders to take the lion’s share of the business value in cash at closing, while the succeeding generation reinvests (through a small amount of the proceeds) for a meaningful share of the company going forward. The company would also have access to growth capital. How great would it be to again have a family relationship that is not encroached upon by business? Is the business stealing time from your kids or grandkids? Are you trading memories for dollars you’ll never need? Many business owners have delayed a sale in spite of the concerns of a loving spouse who desires a different and better life for themselves…until it’s too late.

5) Seller’s Market

The three principal buyer groups are: Private Equity Groups, Strategic Acquirers, and Family Funds.
Private Equity Groups have become the new conglomerates with overflowing levels of investment capital. With 2,500 or so Private Equity Groups in the United States and a like number overseas, with an estimated $1.5 trillion to invest, competition to buy companies remains robust among financial buyers. Multiple offers can be a reality for even some marginal industries or smaller companies. Premiums are being paid for companies as demand exceeds supply.
Strategic Acquirers see growth through acquisitions as the preferred way to gain market share quickly, add product lines, augment human resources, enhance management, and stay competitive.
From a valuation standpoint, strategic acquirers have historically been either the best or worst buyers (more often the worst) until the past few years. In many cases, their top competition has been acquired by a Private Equity Group which by mandate begins to effectuate meaningful growth. As the industry and market begins to take notice, it puts pressure on the privately owned company to do likewise.
Family funds can be worthy suitors. These sophisticated and respected families bring significant personal finances, outside private investment capital, experience, contacts, expertise, and many times a long-term investment strategy.

6) Unusual Financial Gain

Perhaps you have been approached by a bona fide buyer who is larger, cash heavy, willing to overpay, and inebriated with the desire to own your company. (We can dream can’t we?)

7) The Business Is Growing

It seems incongruent that a business owner should consider selling when growth is accelerating, but growth can end the life of a business – fast. Cash flow becomes the monster that consumes. Even in circumstances where growth is more controlled, businesses reach a point where professional management at a higher level is demanded. The founder of the company is wise to recognize that the large business dynamic has thrust him into unfamiliar territory, requiring personnel changes, organizational upgrades, a bigger, more complicated, much different way of thinking, and a doubling-down of time, effort and commitment.

8) The Business Is Flat

If flat, declining or inconsistent financial performance characterizes your business over the past several years and you just cannot seem to “crack the code”, let someone else figure it out! A strategic buyer, or an individual buyer with a dynamic skill set, or a Private Equity Group with more money and contacts might hold the key. Many business owners fail to realize that by staying in business under these circumstances, they forfeit personal income opportunities elsewhere and personal finances can be insidiously eroded.

9) Managing People Has Worn You Out

Do you long for the time when you need to only manage yourself? Are employee issues, government regulations, unions, health insurance, profit sharing, and retirement plans driving you to the brink?

10) My Partner Is A Problem

Most partnerships have a problem partner; if yours doesn’t, it might be you. Think: Jerry Lewis/Dean Martin; The Beatles, The Eagles; some marriages; and unfortunately, many businesses. Interestingly, we’ve found that most partnership problems are exacerbated by making more money – after the partners had been unified growing the business and defeating their common enemies. Many times, financial success spawns a disparate commitment toward reaching the next level as one continues to push and the other is dragged along.

11) Personal Compelling Reasons

The reason for considering selling a business will generally transcend the enterprise value of the business (though not to minimize the value component). The fundamental checkpoint in considering the sale of a business is this: “Does this business stand in the way of doing something else with my life?”
Hopefully the decision to sell is voluntary and not due to circumstances that necessitate a sale; but in any event, an exit strategy should be considered as part of estate planning since life is uncertain. An expert team comprised of an Investment Banking Professional and financial and legal counsel is a must.
All business owners experience all or some of these points from time to time with varying intensity. When that trusted “gut” feeling indicates more than a passing notion of selling, it may be time to explore options. The reality is that more business owners have said, “I wish I had sold sooner” than “I sold too soon”.


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 Kim Levin | 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 »