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Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Exit Strategies’ Category

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 Catherine Patience | 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 »


Selling a Business | The Auction Process

By George Walden | Sep 06, 2016

George Walden, CFA Houston, has an interesting take on why you should create an auction process to raise the value of your company when selling a business.  In a video he posted on Vimeo, he explains the process.  Click on the play button below to see the entire video.

Conduct an auction:

I have heard all kind of reasons over the years for not conducting an auction process for the sale of a company.

  1. I am afraid my employees will find out.
  2. I am afraid my competition will find out.
  3. I don’t want a lot of people walking through and disrupting my business.

Create an auction process:

One of the many roles of the investment banker is to create an auction process. With competition your situation usually gets better. Creating competition keeps everyone a little more honest in the process. A lone buyer feels no competition. When a buyer knows others want the same company they tend to become more aggressive. When you have multiple potential buyers, all of whom want the same company, the buyers feel the competition. Buyers don’t lead with their lowest price because they know the competition wants to win just as much as they do. The seller typically through an auction has other offers to consider. The price often goes up! Auctions provide built-in competition for the value of your company.

Each buying group will see the company a little different from the other. What is important to one buyer is not necessarily important to the other. Those differences in perspective can create tremendous value. A fundamental in our office is try to find the buyer whose acquisition solves a problem.  Look for the situation where 1+1= 3. Make that argument effectively and watch value be created and resistance reduced. Read more »


The Buyout – For Business Owners to Exit Their Business

By David Sinyard | Aug 15, 2016

business owners to exit their businessThe buyout is an important route for small and medium size business owners to exit their business and could be particularly relevant for family firms who find no successor inside the family.  According to a recent survey, it is estimated that around 35 percent of businesses globally consider ownership succession through a buyout (PWC 2011). One of the primary sources of capital for such buy-outs comes from Private Equity (PE) firms.

An interesting academic article has recently been published in the Journal of Small Business Management 2016 by Ahlers, Hack, Kellermanns, and Wright that focuses on perceived bargaining power in buyout negotiations between PE firms and current owners who sell their business.  They looked at competition, expertise, and time pressure as key elements of PE firms’ perceived bargaining power.  Their research indicates that PE firms experience high perceived bargaining power in buyout negotiations, depending on factors such as competition, expertise advantage, and seller’s time pressure.  Higher competition between potential buyers lowers the PE firm’s perceived negotiating power.  Expertise as it relates in particular to valuation, synergies, and process-related aspects of buyout deals would seem to provide the PE firm with more perceived bargaining power, particularly as it relates to valuation.  If the seller in buyout deals suffers from time pressure, PE firms may gain higher levels of perceived bargaining power.

Clearly sellers need to be aware of these perceptions of stronger bargaining power.  The process must be run so as to balance the bargaining positions of both seller and buyer.

Posted by David Sinyard.

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Letter of Intent – The Start of a Beautiful Relationship?

By Craig Allsopp | Jun 22, 2016

Letter of IntentOne of the major milestones in the purchase or sale of a business is securing a Letter of Intent. Though not as sparkly as an engagement ring, a signed LOI represents the intentions of a buyer and a seller to march down the aisle together.

At the same time, the LOI serves as something like a pre-nuptial agreement – spelling out the general terms and conditions that govern the relationship necessary for a buyer to consummate a transaction.

Like most things marital, things can get a little sticky when discussing the particulars. Some deal principals and their advisors leave no stone unturned in crafting an LOI, while others prefer a simpler approach – a basic letter that covers important terms such as the purchase price and closing conditions while leaving most of the other details for the final sales agreement. Read more »