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Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Corporate Finance’ Category

4 Ways to Maximize the Proceeds from the Sale of Your Business

By Brian Ballo | Jun 27, 2017

Naturally, business owners believe that their business can be sold at the higher end of the pricing range. However, an attractive Letter of Intent to purchase a business typically does not come unsolicited. Therefore, to increase the odds of maximizing the price and proceeds from the sale of your business, the following tactical steps can be taken:

1. Focus on Increasing EBITDA

If corporate and private equity group buyers are focused on EBITDA, then you should be also. Cash flow is king. That means, improving your income statement is the best way of maximizing the price at which the business sells.

Owners who have structured business operations to benefit themselves and their families, through above-market salaries or tax treatments, should prepare recasted financial statements to exclude certain perks in order to present the company as a profit-generating engine to potential new owners. Items such as personal expenses, charitable contributions, and significant non-recurring expenses can also be added-back to earnings.

Real EBITDA can be bolstered by focusing on the business’ core competency, or the most profitable income streams, which is also more appealing to a buyer than a company going in many different directions at once. Obtain profit and loss statements by division, or by customer-type, then address weaknesses, before such risks are identified by potential buyers.

Buyers seek a return on investment, and pay a premium for a company with a healthy growth trend. A strong brand, loyal customers, and competitive market positioning, are all attractive. Mitigating risks such as customer concentration and product diversity will also enhance value.

2. Assemble Accurate Financial and Operational information

Buyers pay more when they are comfortable that historical and pro-forma financial statements are accurate. Three years audited financial statements is a best practice, although some buyers may accept reviewed financials instead.
Having updated and accurate financial and operational information will also enable you, as a business owner, to understand and make pre-sale improvements. In addition, good documentation will also permit your advisory team to identify relationships or transactions which could have purchase price implications, such as assets on the balance sheet that have been valued on a historical basis that need to be adjusted to reflect market prices.
The buyer’s due diligence requests are coming. To give the buyer confidence, and to assist your advisors in responding to the buyer’s requests, having accurate financial data assembled, will make the buyer feel he knows what he is getting, and likely result in an increased purchase price. Your investment banker will summarize the company’s numbers and story in an initial Confidential Descriptive Memorandum, then, organize the data in a Virtual Deal Room password protected access.

3. Strengthen the Management Team and Operational Systems

Buyers pay more when they are comfortable that the company’s earnings trend will continue post-transaction. The challenge is that if the seller CEO – who has been making all the key decisions, and has the primary relationships with key customers – will be transitioning out of the business, with part of the purchase price paid an earn-out.

The CEO owner can mitigate the risks to the company, and himself, by strengthening the management team, including, identifying a replacement CEO, who will remain with the company post sale. This way, the existing CEO can move to a less demanding new position, while the probability remains good that projected earnings estimates will be to hit.

Part of improving housekeeping should also focus on systems and procedures, particularly, the information technology network. Outdated technology and processes, will negatively impact value. A good IT system will create the favorable impression that the company is poised to move into the future. The procedures manuals should also be updated, so the buyer is able to operate the business without you.

4. Achieve Teamwork Throughout the Sale Process

Corporate Finance Associates, a major investment banking services firm, works to implement NextStep, a systematic, team-driven, sale of business program, which guides business owners through the process of extracting both themselves and their wealth from the business. CFA approaches exit planning in a systematic way, working as part of a team of advisors to ensure that the process addresses all options, and is focused on pursuing the goals and objectives established by the business owner.

As the investment banker, CFA focuses on creating a competitive bidding environment amongst multiple buyer candidates. The other team member, including a Wealth Advisor, Tax Attorney, and an Accountant, provide expert counsel in their respective disciplines to help ensure the business owner is fully informed as to the merits and demerits of proposed strategies.

An effective team will support the ongoing performance of your company during the sales process. If the owner selects a capable team of advisors, then he can focus on maintaining the financial performance of the company, while the advisory team handles all the details of closing the sale transaction.


A Recent Example of the Strategic Benefits of Merging with a Competitor

By David Sinyard | May 03, 2017

Recently RLJ Lodging Trust (“RLJ”) (NYSE: RLJ) and FelCor Lodging Trust Incorporated (“FelCor”) (NYSE: FCH) announced that they have entered into a definitive merger agreement under which FelCor will merge with and into a wholly-owned subsidiary of RLJ in an all-stock transaction. According to the press release the merger will establish the third biggest pure-play lodging REIT by enterprise value, creating meaningful scale to capitalize on cost efficiencies, negotiate leverage and access to capital, and the opportunity to strategically recycle assets and optimize the portfolio. The combined company will have ownership interests in 160 hotels, including premium branded hotels located primarily in urban and coastal markets with multiple demand generators. The combination also provides significant penetration within key high-growth markets and broad geographic and brand diversity.

Summary of Strategic Benefits (per management):

  • Combination creates the third largest pure-play lodging REIT with a combined enterprise value of $7 billion

    – Increased shareholder liquidity and cost of capital efficiencies
    – Stock transaction allows both sets of shareholders to participate in the upside
    – Enhanced positioning with brands and operators

  • Leading upscale portfolio of compact full-service and premium focused-service hotels generating strong operating margins

    – Combined portfolio will include 160 hotels in 26 states and the District of Columbia, diversified across Marriott, Hilton, Hyatt and Wyndham flags
    – Broad geographic diversity and strengthened presence in key markets such as California, Florida and Boston

  •  Positive financial impact and positioning for future value creation

    – Accretive in first full year
    – Expected cash G&A expense savings of approximately $12 million and approximately $10 million of potential savings from stock-based compensation expense and capitalized cash G&A
    – Opportunity for additional ongoing operating and cash flow improvements through greater purchasing power, market leverage and capital expenditure efficiencies

• Future opportunities to unlock value from portfolio repositioning
• Potential conversion and redevelopment opportunities
• Opportunity to actively refine portfolio
• Strong and flexible balance sheet
• Significant liquidity, minimal near-term maturities and opportunity to lower cost of capital

Mergers such as these are predicated on these Strategic Benefits. The market will measure the success of this transaction in light of whether management ultimately realizes on these listed opportunities.


Buying and Selling – Beating The Odds

By Craig Allsopp | Apr 24, 2017

I was reading a study about private business sales the other day and came across a very startling statistic – only 20% of the companies put up for sale ever change hands.

This is a sobering thought – particularly if you are a business owner contemplating retirement and counting on the sales proceeds to fund it.

For some businesses it’s a matter of performance that makes a sale difficult, if not impossible. These companies may be losing money, or facing lawsuits or might be overly dependent on one or two customers.

For others, it’s a lack of preparation that creates the roadblock that prevents a transaction. Businesses with sloppy records, aging equipment and poorly maintained facilities fall into this category. Most investors aren’t looking for a fixer-upper and will quickly pass when they see one.

Still other companies never trade because their owners have unrealistic expectations when it comes to the notion of “transferable value.” They fixate on a number – without considering how their companies rank against their peers’ or the operational challenges and investment new owners will face.

So what is the solution to beating the odds in an environment where it is so hard to sell a company?

We believe it starts with preparation and a commitment to making fact-based decisions throughout the process.

Here are three basic concepts to get the sale process off and running toward a positive result.

  • Invest in a bench marking study. This will provide you with an objective look at your company’s position versus its peer group and provide you with a realistic expectation of its transferable market value.
  • Commit to spending time and effort to spruce up your business. Your company will stand out if you have a good management team, orderly books and records and well-documented customer relationships.
  • Hire a licensed investment banking firm to handle your transaction. Dealmakers at these firms are subject to FINRA testing and SEC regulation. You can see their dealmakers qualifications online and easily find out if they have been subject to any disciplinary action.

To sum up, there are no guarantees when it comes to selling a business. But proper preparation and committing to a professional process are more likely to beat the odds then leaving the details to chance.


When Is A Partial Sale Right For You?

By George Walden | Apr 04, 2017

When an owner comes in to my office to discuss selling their company they are often only thinking binary. Sell it all or keep 100 %. As you might guess, transactions take many forms and occur for various reasons.  There are times when is it appropriate to consider a partial sale of your company.

1.     When you need expertise: The private equity community has created tremendous wealth for many owners by adding operational systems, expertise in personnel and a strategic vision. If you listen to many M&A minutes you know that I preach systems based operational decision making to facilitate growing your company and its people. If you are having trouble building a sales team or developing organizational depth because you are too busy running the company, having a group that supports you in those efforts may be the best way to get your company to the next level. Private Equity Groups (PEGS) to support and protect their investment are usually very open to acquiring expertise and provide systemization. They will often assist you in a strategy for business development including future acquisitions and product development. Why should you try to invent the wheel when somebody else has not only done it before, they have done it serially, often multiple times?

2.     When you need access to capital: Having the right partner can not only make growing a company easier through system contribution and strategic planning, they will often facilitate your ability to get access to capital for growth.  Think of it this way. Not only have you become more bankable because as a shareholder or partial owner their balance sheet strengthens yours they often have access to sources of capital that can improve your rates.

3.     Many business owners have most of their wealth tied up in the company. The last five years for the oilfield industry has been brutal. Many very good companies have failed or barely survived. Don’t you bet those owners wished they had taken chips off the table when the company was doing well and diversified their risk. Everyone knows you shouldn’t have all your eggs in one basket. The old axiom, what goes up does come down! Most companies and all industries cycle.  Ask Sears if you don’t believe it. The best time to sell some or all of a business is when it is doing well. Because the company is doing well it often commands a premium in the market.

If you are concerned about losing control of your business, most business owners don’t realize good companies and I am defining them as positive cash flows greater then 2M ebitda are attractive to minority investors.  The system approach the right buyers bring to the table can help accelerate your company and propel it to the next level. Remember most buyers want to add value to the company and that should always be a consideration in shopping buyers.

In closing, a partial sell should be a part of your consideration when you need expertise, financial depth or liquidity diversification.

Posted by George Walden.


Second Half of 2016 – Marked Increase in M&A Activity

By Kim Levin | Oct 13, 2016

Marked Increase in M&A ActivityAccording to data published by international financial data tracker Bureau Van Dijk, North American deal volume and value declined significantly during the first half of 2016 following the global trend. According to Bureau Van Dijk, there were 12,298 transactions completed in H1 2016 (a decline of 17.3% over H2 2015) with a combined value of $692.5 billion (a decline of 41.3% over H2 2015). During H1 2016 the U.S. saw 10,147 US deals worth a combined $633.4 billion. Canada saw 2,152 deals worth$59.9 billion.

Private Equity

Falling in line with general M&A trends, North American private equity and venture activity also slowed on the value and volume fronts. Private equity and venture investors took part in 6,487 deals in the region worth $120.8 billion. In contrast, H2 2015 saw 7,792 deals worth $262. 6 billion invested in the second half of 2015.

Sector Activity

Sectors that saw the most activity were metals/metal products (981 deals) followed by general capital machinery (799 deals) and publishing/printing (791) deals. Read more »


M&A Deal Structure

By Kim Levin | Aug 23, 2016

deal structureDeal structure in an acquisition usually involves much more than deciding on selling stock vs. selling assets.  The devil is in the details and can involve significant dollars to the seller of a middle market business. GF Data, a company which collects data on middle market M&A transactions, recently reported on issues in deal structure.  One of the areas they considered is how seller financing or earnouts (SFE) effect a transaction in terms of purchase price.

When buyer and seller agree on the terms of the deal, one of the most important issues negotiated is the purchase price.  Generally, the buyer seeks assurance that he isn’t buying a business that will nosedive after the closing and the seller wants to be certain that the buyer will continue his business legacy.  As part of the deal structure, the buyer may ask the seller to assume some of the ongoing business risk by structuring part of the purchase price of the transaction in the form of an earnout.  And in some cases, in order for the transaction to move forward, the buyer may need the seller to finance part of the transaction in the form of a seller note that is paid in monthly instalments over a fixed period of time.  In either case, earnout or seller financing, both parties must be confident that the other will honor the terms of the purchase agreement.  This is why finding the right buyer-seller pairing is paramount.

GF Data recently reported the impact SFE clauses have had on deal values. Nearly half of all transactions in the $10-$25 million enterprise value range use seller financing or earnouts when structuring the deal.   The valuations on SFE deals in that size range was slightly lower, a half a turn.  However, with transactions over $50 million, use of SFEs was not as prevalent and the resulting valuations on those deals was at or above those that did not.  GF Data suggest that seller financing/earnouts is a way to bridge the gap against the seller’s sense of “market” on smaller deals and provide an added premium on larger ones.

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Canada M&A | Record Breaking 2015

By Kim Levin | Jun 14, 2016

Canada M&AIn 2015, Canada dominated the field of US cross border transactions, so we’re keeping a watchful eye on our neighbor to the north. One measure of Canada M&A health is private equity (PE) deal volume and value, which were at record breaking levels in 2015.  Buyers spent nearly $49 billion last year across 283 completed deals, according to Pitchbook, a private equity and venture capital database.

2016 is off to a slow start, as we have seen volume drop by 33% and value down nearly 16%.  This decline is not a signal of any fundamental shift in Canadian PE dynamic, but is, rather, a typical progression as fund managers swing from racing to complete deals by year’s end to deal sourcing anew, with the cycle coming full circle.

Like the United States, Canada is experiencing a trend toward smaller deals.  As we’ve mentioned before, financial buyers first look to large, well-managed companies with unique product offerings or niche markets to add to their portfolios as long as the price is right.  Over the past few years, competition for those prized companies has pushed prices to the stratosphere. As a result, many private equity investors have begun to focus on companies that have many prized company attributes but are smaller in size and fit their price objectives. In 2015, 61% of all transactions were smaller, add-on deals and as of the first quarter of 2016 that number is up to 68%.  Looking back, before the M&A bubble burst in 2008, 68% of investments were in larger, platform-size transactions so we’ve seen a huge shift in investment focus.

From a lending standpoint, Canadian banks are well capitalized and are aggressively lending to sponsors.  In addition, when compared with transactions in the US, the size of most Canadian deals are smaller, and thus less risky for lenders.

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Middle Market M&A Business Insights – Declines in 2015

By Kim Levin | Mar 22, 2016

According to data published by international financial data tracker Bureau Van Dijk, middle market (deal value of $50 million to $500 million) deal volume and value in North America declined in 2015. There were 10,517 middle market deals worth an aggregate $254.93 billion announced in 2015 compared to 11,296 deals worth $313.73 billion in 2014. The year-over-year volume decrease was 10%, while value declined 19%.

Private Equity

Private equity and venture capital volume and value mirrored the rest of the market in 2015. There were 3,224 deals valued at 81.5 billion in 2015, down from 3,420 deals worth 84. 7 Billion in 2014.

Sector Activity

Healthcare and technology were the most active sectors driven by multiple mega deals in each segment. The biggest deal announced in 2015 was drug giants Pfizer and Allergan’s pending $160 billion merger. On the technology side, the largest transaction was the $78 billion Charter Communications Time Warner Cable merger. Another mammoth deal took place in the food and beverage sector when Anheuser-Busch InBev reached an agreement to buy U.K. rival SABMiller in mid-November for $120 billion.

Read more »


Status Quo in M&A?

By Kim Levin | Jan 27, 2016

status quo in M&AGF Data recently published its Q3 M&A report and the take away from their collected data is a slight variation on the status quo in M&A…or more accurately “Less of the Same.”

Trends in transaction activity remained fairly constant, but the number of completed deals dropped over 27% from the second quarter to the third, 51 deals to 37.  This drop off may be slightly exaggerated due to late reporting, but the volume in the September quarter was light.

Size premiums remained at near record levels and valuation rewards for better than average performing companies continued.  Companies in the $50-250 million total enterprise value range traded at an average of 8.0x for the first nine months of the year, while smaller size companies ($10-50 million) traded at an average of 6.3x. Buyers continued paying premiums for companies with not only better than average financial performance, but also prior institutional ownership and management retention post sale.  Buyouts featuring these elements have been valued at an average 8.9x year to date.

Prior to 2012, buyers paid anywhere from .2x to 3x more for platform vs. add-on acquisitions.  During the past three years, the valuation differences between platform acquisitions and add-on acquisitions have narrowed significantly and in the most recent quarter – 3Q 2015 – add-ons had the upper hand. Valuations for the year are now about even for the two groups – 6.9x for platforms vs. 6.8x for add-ons.

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U.S. Corporation Income Tax – Studies and Proposals

By David DuWaldt | Nov 10, 2015

Tax CalculatorIn my blog post of October 27, 2014, The Art of Corporate Inversions, I alluded to the fact that, relative to other countries, the United States has the highest income tax rate imposed on C corporations. And since the late 1990s, several multinational corporations have changed their domicile to another foreign territory or country. Federal lawmakers have passed stricter rules in an attempt to prevent corporate inversion transactions and income shifting strategies.

With the concerns about the shifting of income from the United States to lower tax rate countries and the effect upon the U.S. economy, several studies were conducted. An interesting recent article at the Tax Foundation website touches on some of the studies and suggests that a lower tax rate structure for corporations, which are subject to U.S. income tax, could reduce income shifting by multinational corporations and increase the tax base. In some ways, this concept is similar to the famous “Laffer Curve” that was introduced by Dr. Arthur Laffer in the late 1970s and supported the macroeconomic theory of supply-side economics.

Last February, as part of the 2016 budget proposal, President Obama recommended a reduction in the corporation income tax rate from 35% down to 28%, with a special rate of 25% for manufacturers. The proposal provided for unspecified cuts in tax preferences and a one-time tax on unrepatriated foreign earnings of U.S. based multinational corporations. At this moment, we are patiently waiting for Congress to pass a budget for the 2016 fiscal year.

Last July, Representatives Charles Boustany (Republican – Louisiana) and Richard Neal (Democrat – Massachusetts) released a discussion draft of their Innovation Promotion Act of 2015, which is an “innovation box” bill to provide for a 10.15% effective tax rate on income derived from certain intellectual property. This tax based incentive is not new to some of the countries that belong to the Organisation for Economic Co-operation and Development (OECD) and have their own “innovation box” low tax rate incentives. Unfortunately, with any specific tax incentive, legislation of this type adds to the complexity of the tax code and the cost of tax administration.

We do have some corporation tax reform proposals by some of the presidential candidates that rank high in the recent polls. Democratic candidate, Hillary Clinton, has not proposed a specific corporation tax rate but has commented that she likes the pre-Bush tax rates of the 1990s. Democratic candidate, Bernie Sanders, did not specify a proposed corporation income tax rate but did comment that it should be higher than the current rate. Republican candidate, Donald Trump, proposes a reduction in the corporation income tax rate from 35% to 15%. Dr. Ben Carson proposes a corporation income tax rate of between 15% and 20%. Marco Rubio proposes a reduction in the corporation tax rate to 25%. Jeb Bush proposes a reduction in the corporation income tax rate to 20%.

It is challenging to guess what the corporation income tax rate will be in a few years from now but it will be interesting to observe what happens when Congress addresses the issue.

Posted by David DuWaldt.

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