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Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Exit Strategies’ Category

How Investment Bankers Provide Value When Business Owners Sell

By Peter Moore | Jun 06, 2017

Sometimes in the process of discussing the sale of a company with a business owner, they turn to you and ask “What is it that you do to justify the fees you charge. Couldn’t we do this ourselves?” It’s a fair question, and especially for those who’ve never sold a company before, it’s a question whose answer is worth understanding.

Selling a company for most owners is a big and sometimes daunting undertaking. There is often a lot of emotion about the decision, and hundreds of details to manage.

Consider these fundamental but time consuming activities your investment banker will be handling:

  1. They (a team of professionals whose full time job is selling companies) provide a proven process for representing the seller’s interest to a marketplace of sophisticated buyers. (It includes market research on your industry, developing marketing materials to present your company to qualified buyers, gathering years of historic company information and reducing it to an easy to understand story of your business, developing target lists of potential buyers, connecting with those prospects, making hundreds of phone calls, answering hundreds of questions, negotiating deal terms and preparing the owners for a closing.)
  2. Your investment banker will manage all the schedules of calls, meetings, and presentations so you can remain focused on running and growing your business.
  3. Your investment banker uses a marketing process, databases, and networks of market contacts to bring you the most qualified buyers possible, which creates a more competitive environment for your company.
  4. Your investment banker’s job is creating the greatest amount of competition to derive the greatest value for the seller.
  5. Engaging a qualified investment banker adds instant credibility to prospective buyers that the seller is serious and will be prepared.
  6. We are intermediaries that buyers may speak freely with, without getting emotional responses from owners. Buyers can float ideas which may ultimately help in crafting a successful transaction.
  7. We are sometimes needed to be the designated “Bad-Guy” to handle delicate parts of a negotiation.
  8. We have watched both buyers and sellers make hundreds of unfortunate mistakes. One of our goals is trying to minimize the unwitting errors of judgment and lack of awareness.
  9. We also support the selling process by preparing information about your company including, a valuation assessment, financial summaries and analysis, review of operations practices, talent and staffing requirements and the overall management team, sales and marketing activities, your competitors, industry trends, and much more. All of this is designed to present you in the best possible manner. This is often done with peer group and industry comparative analysis.
  10. Investment bankers also help you protect from having too much information divulged too soon, and we screen out “shoppers” who may be nosey or just “kicking the tires”, or those without the ability to close a transaction.
  11. We do all of these things and more in a highly confidential manner, and work closely with the business owners, and their other advisors (attorney, accountant, financial planner) to minimize the intrusions on their work day, and bring about an efficient close to a rewarding transaction.

 

If you are contemplating the sale of your business please consider contacting your nearest investment banker at Corporate Finance Associates. Find us at www.cfaw.com


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”.


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 Should You Sell Your Company?

By George Walden | Jan 09, 2017

When should you sell your company?  If you were to ask most business owners this question they would say, “When I am ready.” Not a very scientific approach for the wealth generating machine you have created. But let’s assume for the sake of argument you decide you are within 5 years of that decision.

In a video I posted on Vimeo, I explain about the indicators that let you know it is time to sell.  Click on the play button below to see the entire video.

Here are three indicators that let you know it is time to sell and when used correctly they may even raise the value of you company: Read more »


How Your Business is Sold | The M&A Process

By George Walden | Nov 07, 2016

A well-run, solidly profitable Middle Market company will almost always be, and should be, represented by an Investment Banker and sold through what we call in the industry, “The Process”.  So what is the M&A Process? In a video I posted on Vimeo, I explain about the M&A Process.  Click on the play button below to see the entire video.

 

It begins with Documentation:

1. Documentation is more than a blind teaser, confidentiality agreement and a memorandum (CIM) on the business. It is about understanding the strengths and weaknesses of the company, industry and the likely types of buyers that should be approached.
Read more »


Adapt or Die – Build a Plan

By George Walden | Oct 04, 2016

Two weeks ago I was at the 45th annual Turbomachinery and 32nd Pump Symposium underwritten by the Turbomachinery Lab from Texas A&M supporting my investment banking business partner Matt Register and Texas Business Radio. I found myself fascinated by the tone of the room. It was like two different types of exhibitors were exhibiting at the same event. There were companies doing well, excited about the prospects of the future. Then there were those companies that were experiencing a significant slowdown in their orders and they were very concerned about their viability in the marketplace. In a video I posted on Vimeo, I explain about “Adapt or Die.”  Click on the play button below to see the entire video.

As everyone in the energy sector knows, explorations and many of the ancillary services tied to exploration have slowed down in Texas. What has started as just a regular cycle of slowdown has become more extended and while I heard a lot last year that 2016 will be a better year, now I hear 2018 will begin the recovery of the drilling cycle. You could probably flip a coin on 2018 and be just as right in a prediction. So why are some companies excited about their growth prospects and others worried that the orders aren’t going to arrive soon enough? Read more »


It’s a Seller’s Market For Now – Private Equity is Very Active

By Kim Levin | Sep 27, 2016

seller's marketThe flow of private equity funds into industry sectors is an ever changing investment stream channeling to the most attractive perceived returns on investment.

In 2015, a mega deal in the Business & Consumer Products and Services sector accounted for roughly half of the $103.8 billion invested by US private equity.  With the backing of 3G Capital and Berkshire Hathaway, H.J. Heinz Company and Kraft Foods Group (NASDAQ: KRFT) merged to create The Kraft Heinz Company, forming the third-largest food & beverage company in North America.

While not nearly as large as the Kraft Heinz deal, several deals in the Technology/Media/Telecom sector boosted 2015 investment significantly over 2014.  The $5B Informatica PIPE (private investment – public equity), $3.7B Riverbed Technology investment by Thoma Bravo and others, and the $3.5B Ellucian investment by TPG Capital collectively contributed to a substantial increase in this sector over 2014. So what does 2016 look like so far this year? Technology/Media/Telecom looks to be hot again this year.  A handful of large deals in this sector have already closed including; a $15B investment into ADT Security Services by Apollo, Koch and Protection 1, a $7.4B investment by The Caryle Group into Veritas Technologies, and billion dollar private equity investments into Solera Holdings, Solarwinds, Qlik Technologies and Marketo to name just a few.

The private equity community continues to be extremely active.  As of the end of 2015 PE dry powder across North America and Europe was $749B.  This is about the level at the end of 2014.  Debt capital remains cheap and plentiful with many non-bank funding sources ready to step in when traditional lenders are reluctant.

Companies looking to sell, secure growth capital or desiring a partial liquidity event are now operating in an extremely good environment. In fact, sourcing worthwhile deals has become a major challenge for private equity as valuations are high and the deal flow has been limited.  It is definitely a seller’s market, at least for now.

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Is This the End of Valuation Discounts for Intra-Family Transfers of Ownership Interests?

By David DuWaldt | Sep 20, 2016

valuation discountsOn August 2, 2016, the U.S. Treasury Department released proposed regulations that pertain to IRC Section 2704. The intent of the proposed regulations is to eliminate the use of valuation discounts with respect to the transfer of ownership interests between family members. Consistent with the rulemaking process of proposed regulations, the submission of written comments must be received by November 2, 2016 and a public hearing is scheduled for December 1, 2016.

To gain a better understanding of how these proposed regulations came into existence, it is beneficial to look back at some legislative history. Chapter 14 of the Internal Revenue Code (i.e., Sections 2701 through 2704) became law in 1990. Chapter 14 is entitled “Special Valuation Rules” which specifically pertains to the federal estate, gift and generation-skipping transfer tax. The adoption of Sections 2701 through 2704 of the Internal Revenue Code was an attempt by Congress to eliminate the use of valuation discounts for tax planning and compliance purposes. Although there was a lot of attention placed on the use of family limited partnerships, the scope of Chapter 14, and the recently released proposed regulations, includes all family businesses such as corporations, general partnerships, limited liability companies, and other arrangements that are considered business entities. Read more »