Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Business Valuation’ Category

Q2 Transport, Logistics & Supply Chain M&A Update

By Kim Levin | Jul 03, 2014

TLIPG-Warehouse of ProductsM&A activity in the Supply Chain and Logistics sector for North American based target companies in Q1 2014 included 72 closed deals according to data provided by S&P Capital IQ. The average deal value was $64 million with an average enterprise value to revenue multiple of .67. The deal activity has primarily been driven by large acquirers gobbling up smaller local outfits with the hopes of enhancing market share at relatively modest multiples. According to a report from global consulting firm PriceWaterhouseCoopers, this sentiment has set up smaller trucking and logistics companies for a lively M&A market over the next 12 months.

Read the Entire Transport, Logistics & Supply Chain 2nd Quarter Newsletter Here

Middle Market M&A Sweet Spot

By Kim Levin | Jun 25, 2014

Middle Market PulseFour major industry categories accounted for over 80% of the middle-market M&A transactions recorded by GF Data in 2013.   Manufacturing, business services, health care services and distribution lead all sectors in total deal volume last year. Of those, business services showed the greatest improvement year to year. This trend may be indicative of a general improvement in the economy and if 2014 lives up to expectations, the business services sector may continue to represent one of the “hottest” middle-market M&A sectors.

Companies in the business services sector provide support services to businesses, such as office administration, hiring and placement of personnel, security services, cleaning, and waste disposal.   According to First Research, the US business services sector consists of about 340,000 companies with combined annual sales of about $720 billion. As long as businesses continue to use temporary workers or outsource either landscaping, janitorial or security monitoring services, the sector will be ripe for growth.

The US business services sector is highly fragmented with the 50 largest companies accounting for less than 25 percent of sector revenue. Large companies often enjoy economies of scale and can compete for large, national accounts while small companies compete by offering highly specialized services, or through superior customer service. These smaller size companies often sit right in the sweet spot of the middle market.

Since the year 2000, business services has consistently represented between 15 -20% of Corporate Finance Associates‘ completed transactions.   Demand for business services ultimately depends on the level of business spending, which is determined by the health of the overall economy and so far all signs point to a health 2014.

Subscribe to the Middle Market Pulse

Q2 Plastics & Rubber Mergers & Acquisitions Update

By Kim Levin | Jun 20, 2014

Green TubingM&A activity in the Plastics and Rubber sector for North American companies in Q1 2014 included 25 closed deals according to data provided by S&P Capital IQ. The average deal value was $56 million led by a number of strategic acquirers looking to expand market share and capabilities. PE buyers were also active in the space looking to deploy capital.

Read the Entire Plastics & Rubber 2nd Quarter Newsletter Here

Consider ESOP Tax Benefits to Maximize a Business Sale

By Mark Klopfenstein | Jun 17, 2014

Calculator with PenMany business owners stand to benefit greatly from special tax benefits available exclusively in ESOP transactions. The CFA professionals can help business owners understand and evaluate how these opportunities might apply to a specific client situation. We can objectively quantify the anticipated results of various sale alternatives, including a traditional asset sale, a traditional stock sale, and a partial or complete sale to an ESOP. We can also assist owners in considering all relevant intangible factors. Our role is to assist clients in choosing and executing the best transaction for their unique goals and circumstances.

Capital Gain Tax Planning Opportunities Exclusive to ESOP Transactions

Unlike a traditional asset sale or stock sale, the ESOP alternative enables statutory capital gain tax savings opportunities. Under the provisions of section 1042 of the Internal Revenue Code, sellers of C corporation stock can defer (in many cases permanently) their capital gain taxes. With the increase in federal tax rates applicable to capital gains from 15% to 23.8% effective January 1, 2013, this provision has taken on increased importance in sale planning. Generally, the gain is deferred to the extent the sale proceeds continue to be re-invested in stocks and bonds of U.S. issuers and when at least 30% of the company’s stock is owned by the ESOP immediately after the transaction. Other requirements apply as well, but many owners will qualify for this benefit. The investment strategy can include long-dated notes from blue chip issuers that meet the requirements and can usually be combined with estate tax planning to allow for a permanent benefit. Nearly all states follow the federal provision as well. Read more »

Q2 Metal Fabrication Mergers & Acquisitions Update

By Kim Levin | Jun 13, 2014

MFIPG-Metal Welding,VerticalM&A activity in the Metal Fabrication sector for North American based target companies in Q1 2014 included 14 closed deals according to data provided by S&P Capital IQ. A lot of the activity was driven by consolidation plays as companies look to enhance their service offerings to gain market share. As the economy continues to rebound and manufacturing and homebuilding regain momentum, M&A activity should continue to vault forward.

Read the Entire Metal Fabrication 2nd Quarter Newsletter Here

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 »

Q2 Healthcare Mergers & Acquisitions Update

By Kim Levin | Jun 06, 2014

HEIPG-Doctor and xraysM&A activity in the Healthcare sector for North American based target companies in Q1 2014 included 313 closed deals according to data provided by S&P Capital IQ. According to a report from PriceWaterhouseCoopers, an international consulting firm, deal activity in the first quarter of 2014 was relatively consistent with the same period in 2013. However, the value of announced deals showed a sharp uptick indicating growth in multiples and demand for health-related companies as technology evolves and the Boomer Generation ages.

Read the Entire Healthcare 2nd Quarter Newsletter Here

Stay Hungry, Stay Foolish

By Jim Gerberman | Jun 02, 2014

Diploma handsIt’s that time of year for commencement speeches as new graduates across the country face “the next step”. Advice is given freely. I’m reminded of the old adage: “You get what you pay for.” For that matter, the following words are surely no exception.

I’m reminded of a certain commencement ceremony that my wife and I attended along with family members for our son, Steven. On that day, little did we know that the 2005 class of Stanford University would be addressed by none other than Steve Jobs. His speech that day has been heralded as one of the best ever…no argument from me. In fact, the speech was published in its entirety a few months later in Fortune magazine. I have shamelessly used (and respectfully acknowledge Mr. Jobs) the title of that speech for the title of this article. For a complete text of the speech, click here.
Read more »

Q2 Food & Beverage M&A Update

By Kim Levin | May 30, 2014

SundaeM&A activity in the Food and Beverage sector for North American based target companies in Q1 2014 included 54 closed deals according to data provided by S&P Capital IQ. Approximately 80% of targets were acquired by strategic acquirers with the remained purchased by increasingly active private equity buyers. There continues to be a strong appetite among financials buyers to acquire organic branded food products along with vitamins and nutraceuticals.

Read the Entire Food & Beverage 2nd Quarter Newsletter Here

How to Manage and Maximize the Real Value of Earnouts

By Terry Fick | May 27, 2014

While earnouts can be an excellent tool to bridge the value gap and maximize an owner’s take home value, the concept does not ring well with most owners…unless they and their advisor know how to use the tool.

In order to know when and how to use the tool we should first look at how and when NOT to employ this strategy.

Don’t use an earnout:

  1. As part of the core value of a company that is based on current and past earnings.
  2. To help a weak buyer “finance” your company.
  3. In general, if you will not keep running the company during the earnout period.

There is also one situation where an earnout is a great piece of the pie. That is when the buyer is paying a high value for the company before you tack on the earnout. It is then Gravy on an already good deal.

Answering the question of when to use an earnout is not so black and white. Earnouts come in all shapes and sizes and can be tightly managed or simply something thrown against the wall. Remember when negotiating an earnout, or whether to use one at all, the major question is “Is there a deal out there that pays me as much without the use of an earnout?” Earnouts should be a valid way to maximize what you are being paid for the future by allowing the buyer to share some of that risk with you. This goes back to the tenet of valuation, “Lower the buyer’s risk, and you raise your reward”. Read more »