Middle-market business sellers have important choices in their divestiture process.  One key choice is whether or not you desire to have an auction OR a negotiated sale.

Sale by Auction is a multi-stage and sometimes complicated process.  The investment banker markets your firm to multiple prospective buyers through potentially more than one round of activity, with successively smaller groups of buyers competing for the purchase.  This process is resource intensive and in difficult M&A markets entails a hint of idealism as well – the belief that your business will be attractive to a relevant number of buyers.  When executed properly, though, an auction will have a positive impact on business value – price and terms.  A side benefit is that it also encourages speed of execution via quick action by buyers.   In the leveraged buyout boom of the 90s, auctions were very common and today are still a preferred method of marketing a business.  Auctions provide a greater degree of comfort that the market has been exploited and is giving the seller a broader set of responses as to value.  Auctions do, however, have their downside.  Even the most astute investment banker who admonishes prospective buyers and ensures they sign strong Non-Disclosure Agreements cannot control how information may be used once it gets into the hands of prospective suitors.  Therefore, auctions can have a negative impact on employee morale if information of a pending sale should leak.  Sometimes bidders may collude as well.  And these variables can ultimately lead to reduced leverage when negotiating once the “winning” buyer is chosen.

A Negotiated Sale is much narrower in scope. Read the rest of this entry »

Business owners know everything there is to know about running their business, whether it be heavy equipment sales or healthcare services. As an M&A advisor, I have spent my life walking alongside business owners as we tour their facilities talking about products, sales, employees, competitors and every other aspect of their business. However, most become uncomfortable when we begin discussing how to finance growth.

If you are a growing company you will have cash flow problems. Do not be lulled into the belief that because sales continue to increase that your business is growing at the best pace. Optimum business growth is reached through a combination of sales and capital infusion.

Banking Problems
In today’s economy, banks have tightened their lending standards. Many owners have developed banking relationships throughout their years in business, but in today’s lending climate they are not able to get the funds they need. Because of this, it is a great time to consider a capital partnership.

A Solution
If you are like many business owners, you may reach a crossroads where taking on a partnership makes sense. Capital Partnerships mainly come through two channels: Private Equity Groups (PEGs) or Strategic Buyers.

When many owners think of the typical transaction they think of a majority buy-out, time to retire, but retirement is not the only option. Capital Partners are willing to make either majority OR minority investments. They often prefer the management team to stay in place and operations to continue as before. They are simply making an investment in a company they feel has solid foundations and most importantly – room for growth. These investors do not require control because they are backing companies they believe in, companies with a solid history of growth, a capable management team and the potential for future expansion.

How to Choose a Capital Partner:
When choosing a partner there are several factors on which to focus:

• TRUST – You need to be working with individuals that you trust and like. If you don’t care for the group, save yourself some time and walk away. Remember this is a partnership and you will need to work together to be successful.
• FUNDING – Your partner needs to have the ability (either through fund raising or through already allotted means) not only to finance the transaction, but to have capital for growth. Going forward you will want to look to your partner to essentially be “the bank” for the company.

There are many options to owners of middle market businesses looking to grow their business or prepare for retirement, but often a Capital Partnership is the most attractive. An M&A advisor can help you begin the process of exploring capital partnership.

posted by Gerald W. Lindsay

Entrepreneurs prepare extensively over the years as they build their businesses, but many fail to plan for an exit.  In my recent article, “Exit Planning for Business Owners”, I examined an area that many business owners neglect and that may be the most important part of the business transaction: life-after-business. In fact, during the current troublesome economic and tax environment, never before has it been so important for entrepreneurs to engage world-class wealth planning professionals prior to a business sale as part of their final exit plan.  There can be no small mistakes in the wealth management plan because once a deal is finalized, it cannot be undone.

In reality, when entrepreneurs sell their company they are really just transitioning from their current business (say, Smith Widget Co.) to another business, which we will call Your-Money-Inc.  This new company will have a completely new mission and will need to be guided through an entirely new set of challenges.  Creating a mission statement for Your-Money-Inc. should always begin well before your business is sold.  This planning process starts with a seemingly simple question: “What goals do I want to accomplish starting immediately after I exit?”

How can you be sure that your company’s market value will support these goals post-close?  Read the rest of this entry »

It’s always valuable to know what the other side is thinking. BDO Seidman, the nation’s #6 accounting firm, does a large number of due diligence reviews of companies for financial buyers. Their most recent newsletter to private equity clients gives BDO’s view of what they are going to look at before they give their clients the green light to close a deal – Six Keys to a Successful Deal

Whether you are getting ready to sell your company in the near term, or are planning for it a couple years down the road, today is the time to understand these issues and start working on making these areas look really good to prospective buyers.

This is what BDO is telling their clients (the fancy language and big words are theirs, not mine):

Look Forward While Looking Back.
Whereas previously a buyer could credibly base future earnings on past performance, economic conditions require buyers to take a more holistic approach to assessing the viability of the seller. If drastic operational cuts have been made, these need to be substantiated to ensure they’re sustainable for the long-term. Externally, greater emphasis must be placed on the diligence of the health of business constituents, such as vendors and business partners.

Cash Reigns.
Now more than ever, buyers must understand the cash generating abilities of a business. Watch out for sellers who may have underinvested in, or even deferred, key expenditures because this could mean that it will take more than just the initial investment to move the business forward.

Determine What’s “Real” In The Business.
Some key questions to ask include: Read the rest of this entry »

Suppose you own a valuable asset that does not earn any income or it earns very little income.  Let us assume that this property has substantially appreciated in value such that, if you sold it today, you would realize a substantial gain and resulting tax on the gain.  So how can you turn this valuable property into an income producing source without erosion to principal due to taxation?

Answer:  By conveying the property to a Charitable Remainder Trust (CRT).

Here’s how it works:  After the trustor/donor transfers property to the CRT, the property is sold by the trustee.  There is no tax on the sale since the CRT is exempt from income tax under Section 664(c)(1) of the Internal Revenue Code.  The proceeds from the sale are invested into income producing property.  The trustee distributes income to the trustor during his or her lifetime.  Upon death of the trustor, the remaining property (corpus) is transferred to a designated charity.

Besides the benefit of avoiding tax from a taxable sale, in the year of transfer to the CRT, the trustor receives a charitable contribution deduction for the computed value of the charitable remainder interest.  The charitable remainder interest computation is based upon the value of the property transferred to the trust, the type of trust, the payout rate, frequency of payments each year, the mortality table, the applicable federal interest rate, and the age of the trustor.

There are two types of charitable remainder trusts Read the rest of this entry »

Part 3 of 7

We have been looking at the two-fold challenge faced by Business Owners wishing to “extract themselves and their wealth” from their businesses in the next decade.  Firstly, that the economic recovery may be slow, and, secondly, that the retirement of the Baby Boomers will put “10 million” businesses on the market in this period.

From this perspective, we recognize that many companies will not sell without careful planning and preparation.  The point of considering possible “Positioning Strategies” is that most business are not being run with a mind to “selling”, and are typically not optimally prepared for an exit because:

1. the ownership and management roles are not properly separated, and
2. the key determinants of value, namely growth and risk, are not calibrated to the expectations and desires of market buyers (investors)

Exiting through a sale, recapitalization or merger generally involves investors and may involve lenders. Management is pivotal.  Exiting through a transfer of the business to family, management or employees, or through a gifting strategy, may or may not involve lenders but, once again, management is a pivotal issue.  Exiting through liquidation, on the other hand, does not depend on management to the same extent.

Generally, the different Exit Strategies depend on key considerations as follows: Read the rest of this entry »

Although sales price and terms are important components of any stock sale transaction, the structure of such a transaction can have a major effect upon what the seller is left with after taxes are paid on the resulting capital gain.  In the case of a management buyout transaction, a structure worthy of consideration involves the use of a leveraged ESOP.

ESOP is an acronym for Employee Stock Ownership Plan, which is a special type of qualified employee benefit plan.  An ESOP is a defined contribution plan that can emulate either a money purchase pension plan or a profit sharing plan.  An ESOP is similar to a stock bonus plan except that, unlike a stock bonus plan, it can utilize the credit of the company, borrow funds from outside sources, and use the funds to purchase company stock from existing stockholders.  The fact that an ESOP can enter into this type of leveraged transaction is what makes it different from all other qualified employee benefit plans.  The act of borrowing funds through the credit of the company and buying company shares is considered a prohibited transaction for all other employee benefit plans under the Employee Retirement Income Security Act of 1974 (“ERISA”).

As with other employee benefit plans, the ESOP operates as a trust.  Therefore, an Employee Stock Ownership Trust (“ESOT”) is created and a designated trustee or trustees serve in a fiduciary capacity on behalf of the employee beneficiaries of the trust.  The trustee or trustees for the ESOT are appointed by the company’s board of directors. Read the rest of this entry »

While working on a recent transaction where we represented a seller who was looking to complete a Management Buyout sponsored by private equity groups, one of the potential equity sponsors told us,  “We will only invest in this transaction if there is another investor group who invests along side us.”  “Is that to minimize your risk,” I asked.  “No, it is our requirement to have a co-investor because it validates our investment philosophy.”

In other words, like sheep who flock together, this investor group was satisfied with an investment so long as someone else came to the same conclusion.  “But what if you like the opportunity but do not find a co-investor,” I inquired of the group.  “Then we walk away from the opportunity,” I was told.

This group, and many others with same investment criteria, are not willing to trust their own instincts but need validation from others.  Ultimately, this is a sheep mentality… following others at all costs.

Eagles, on the other hand, hunt and soar alone.  They find their prey and seize the moment.  Eagles have the courage and temerity to make their own decisions based on their own standards and criteria and seize the moment regardless of what others around them are doing. Read the rest of this entry »

Part 2 of 7: The Solution – Know the Endgame

The Issue is how to Extract yourself and your Wealth

We’re looking at how business owners can most successfully extract themselves and their wealth from the company they own and, typically, run, recognizing that the success of this critical process will have a direct and significant impact on their family, associates, employees and, of course, themselves. Business owners want to know that their legacy is assured and that a wealth transfer can be effected to assure their life-after-business goals, including the protection of their loved ones.

In Part 1 I noted that my Business Owner clients are encountering a challenging and demanding market, partly because credit has been tight, and partly because buyers are already anticipating the boomer exit era which will give them multiple acquisition options and the ability to be selective, pursuing only quality opportunities. I also noted that this “oversupply” does not appear to have an end in sight, which means that business owners expecting to exit in the next decade need to be systematic, employ a professional team, plan, prepare and execute a selected “optimal” exit strategy.

It will take a Military Campaign to engage and overcome this Market Condition

Not a single day goes by without someone in the media asking how it is that we’re engaged in Iraq or Afghanistan without an Exit Strategy. i.e. without knowing when, why and how we will ensure an endgame.

Don’t be reactive or opportunistic about selling your business! Be proactive, methodical and in control! Read the rest of this entry »

Singing In the Rain

No doubt, for the past 18 months, the current economic crisis has hung over our heads like a summer storm over the Great Plains.  We are certain it will pass, but its rains and winds can produce lasting damage for all in its path.  In times such as these, we can either seek the comfort and security of shelter, or, more aggressively, we can learn to sing and dance in the rain.

Recently, I was invited to attend a recent summit of CEOs of mid-market companies.  I heard many CEOs who literally shouted: “Now is not the time to seek acquisitions because we do not know if we have hit bottom yet,” “Banks are not lending like they once did,” “How can we consider an acquisition now when we have our own business challenges?”  These were common themes and common statements during presentations, around the lunch table, and at the bar during cocktail hour.

However, a few of CEOs, those who I will call the “enlightened elite” embraced an alternative approach, exclaiming for all who would listen: “There has never been a better time than now to make acquisitions. Read the rest of this entry »