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Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Investment Banking’ Category

EBITDA Adjustments in M&A Transactions

By Robert Decker | Nov 08, 2018

At least once a week, we find ourselves looking through adjustments made to earnings before interest, taxes, depreciation and amortization (EBITDA) on a business for sale, and saying, “What in the world…?”
Adjustments can be perfectly acceptable. Owners run excess personal expenses through their business that would not be assumed by a future owner (i.e., fun trips, memberships). Sometimes, family members are paid far-above-average salaries and will not be continuing with the company. On justifiable adjustments, you’ll hear no contest from us. However, just because adjustments are justified, doesn’t mean they’ll leave a good impression on investors. We recently saw a business barely breaking even with a sizable adjustment for private air travel; such adjustments speak volumes about priorities.
Lately, we’ve started tracking some of the bogus adjustments people try to deduct out of companies. Here are some anecdotes illustrating how wishful thinking intersects with the bottom line.

Owner Compensation
The most common add-back is completely subtracting owner compensation, boosting the supposed bottom line by between $200,000 and more than $1 million. Yet, they are usually the leader(s) of the company.
Some owners work full-time, while others are serving in more of an advisory capacity, but unless they permanently reside in another state without any oversight of or contact with the business (including financial), they are doing something worth a dollar amount. That figure may not be the same amount they’ve been paying themselves, but it’s definitely not $0.

Leadership Compensation
A 150-person company had a leadership team of five people. All the leaders were paid quite well, based on below-market salaries and generous performance-based incentive compensation. The Confidential Information Memorandum (“CIM”) argued that they were paid too well for the industry. So, each person’s salary was adjusted down to an industry average, reducing the overall leadership compensation pool by more than $600,000. When we inquired as to whether the current team would be staying post-transaction and under what conditions, the intermediary explained that the adjusted salaries were meant as a starting point and that each leader expected to renegotiate his/her total compensation with the new owner, including base salary, incentives, and equity.

Imagine walking into a company and saying to one of the key leaders, “Hi, we’re your new owners. We’ve heard you’re an essential leader within this company we need to work hard to keep, but we’re going to reduce your salary down to the industry average.” Would you stay? Why should a buyer account for less than anticipated compensation?

Sub-Contracted Labor Costs
A manufacturing company kept a lean full-time team, and used sub-contracted labor during seasonal periods, which is perfectly reasonable. What was not reasonable was the more than $200,000 adjustment for “excess costs of sub-contracting.”
A company can’t have it both ways. A bigger team means bigger year-round operational costs. A lean team means you take a hit when extra labor is required. Pick the operating style and own it.

Marketing Expenses
A particularly courageous CIM presented a list of adjustments that included more than $200,000 in marketing expenses. We immediately requested further explanation and were told that it was an ineffective online marketing campaign the company had run the previous year for a new product line introduction.
Ineffective spending is still real spending. Enough said.

“One-Time” Expenses
Adjustments related to one-time expenses are quite common. Two examples of creative implementation include the cost to develop a company’s website and inventory write-offs conducted every year.
There are occasional one-time expenses that should be adjusted out, but they are rare. We often find lots of recurring non-recurring expenses. More often, these expenses represent necessary costs of doing business above and beyond the line items that normally appear on a company’s annual income statement. The bottom line is that, regardless of whether it’s normal, if it’s a necessary cost of doing business, it shouldn’t be adjusted out.

Research & Development Expenses
Companies seeking to grow must engage in ongoing investment, including R&D. In one recent case, the revenue from a new product line was included, but the associated costs of developing that line were adjusted out.

New revenue streams aren’t delivered by stork. Sustainable businesses require ongoing investment, which a buyer will have to invest in as well.

Retroactive Change Benefit
Two recent CIMs added back projected savings from recent, or even yet-to-be-fully-implemented, changes in process or software retroactively to previous years.
You can’t change the past. The best way to present effective change improvement is to provide evidence of its actual impact and how it might look in the future.

Legal Fees
A company had an unfortunate two-year legal battle. The CIM adjusted out over $700,000 in legal fees related to the “one-time litigation event.”
If a company must enforce its position by legal action, or if its customers, suppliers, or competitors initiate suits against it, the company must spend real money. That won’t change with ownership, and evidence of a substantial legal history will tell a prospective buyer that such events must be accounted for in projections and valuation.
A productive question to ask in making EBITDA adjustments is whether a public company could deduct such expenses to boost earnings presented to shareholders. Can a CEO be adjusted out? Can a leadership team’s salaries be calculated as industry averages rather than what a company actually pays them? Can a website exist, be regularly updated, but not actually cost anything? No, unless you’re Enron.
Including unreasonable EBITDA adjustments may help you feel like you’re presenting a better illustration of the company’s earnings potential for a prospective buyer, but it’s counterproductive. These types of adjustments create distrust with prospective buyers. If you leave a gap, such as assuming there will be no acquisition costs in hiring competent leadership, the buyers will inevitably insert a big round figure into their formula to cover all unknowns.
The best advice on creating a list of adjustments? Be honest and conservative. The relationship with buyers will start out on a much warmer and productive path.

Note: This article was originally published by Adventur.es, a Columbia, Missouri based investment firm, on its web site and it is republished by CFA with Adventur.es approval.


Environmental Liability in M&A

By Dan Vermeire | Oct 23, 2018

Environmental concerns can be hugely important in an M&A deal, and are typically investigated as part of the due diligence process. But, for a business owner, that may be too late.

What’s at stake for your business?
It’s important to know that PLL (Pollution Legal Liability) can affect both the property owner and the tenant. Yes, a business that leases the property can still be responsible for environmental problems. Further, PLL can be from the historic uses, well before you owned or leased the property. And PLL can affect you because of an adjacent property, even if you don’t operate there.

PLL costs can be significant to identify and remediate problems. This may involve drilling and digging at the property, through the floors, parking lots, and open ground, to remove and dispose of contaminated soil. Far worse, if the environmental issue isn’t properly managed, it can be disruptive to your business if customers, employees and regulatory agencies draw the wrong conclusions.

How does the process work?
It is a three-step process, starting with a simple assessment and, if problems are found, progressing to more rigorous efforts. The initial step, Phase 1, reviews the property and creates the Environmental Site Assessment (ESA), which identifies potential or existing environmental contamination liabilities. Various engineering firms specialize in the practice of these reports, according to guidelines from the EPA. The assessment will look for any visible signs of contamination and review the historic uses of the property. If the ESA identifies areas of significant concern, then a Phase 2 is recommended which involves further analysis such as boring, collecting soil samples, and installing ground water monitoring wells. If the Phase 2 identifies significant issues, then a Phase 3 project will remediate the site. As you can see, each step costs more money, takes more time, and may create further disruption to your business.

How can you protect your business?
It is important that the business or property owner’s attorney order the ESA, not the buyer. Why? Because the report can be protected by attorney-client privilege. Should the ESA identify problems, then the information can be kept confidential. Most good law firms will have a working relationship with an engineering firm and keep the owner’s interests in mind, thereby avoiding overly aggressive, or “make work” recommendations.

There are several areas of the ESA that are somewhat subjective, such as the classifications of risks. Professional opinions can vary – one group may think action is needed, while others may not. For this reason, ESA’s are initially produced in a draft form and issues can be discussed. If it is warranted, you can get a second opinion, perhaps more favorable. If the process continues, eventually a report becomes final, and then can be made available to the buyer, banks, and regulatory agencies. A clean ESA has value to both the buyer and seller.

To stay ahead of any issues, you should consider ordering an ESA well before you start the M&A process. In that way, you can be aware of any potential risks and solve them before they become bigger problems.

Other ways to manage environmental risk include indemnification from the seller to the buyer. This approach may often require some meaningful security, such as continued equity, a note, escrow or insurance. Leasing may be considered as an alternative to buying property in an M&A deal. There may be other business reasons to control the property and leasing does not completely eliminate risk for the new owner, but this approach can help in many cases.

Last, but certainly not least, environmental insurance is a very good way to eliminate risk and should be considered in any PLL situation. Policies have been used for many years, are available from many respected providers and can have customized coverage. Many policies are transferrable to the new owner and will cover pre-existing conditions, both onsite and offsite contamination, claims for bodily injury and legal costs. In certain cases, policies will exclude voluntary digging, that is, don’t go looking for trouble. This restriction can be included in the lease or purchase agreement, too. Environmental insurance is affected by the findings in an ESA, so it is important to consider insurance before starting the process. Always work with your advisor to control the process and manage the information flow to the insurance market.

Environmental concerns continue to gain attention, as we move closer to a green planet. Any business that involves owning or leasing property should have an effective strategy to manage environmental risk. Our CFA professionals regularly lead programs that successfully avoid environmental pitfalls.


M&A Trends in 2018

By Terry Fick | Jul 12, 2018

I was recently interviewed by Andy Jones of Private Equity Info about recent trends in mergers and acquisitions. Below are the highlights of our conversation.

Valuation Trends
The most prominent trend is in valuations over the past 3 years. We always see cycles, but this cycle has pushed company valuations higher than they have been in the 30+ years I have been in the industry. From businesses generating $2-3 million in EBITDA all the way up to $50 million in EBITDA, every company’s valuation is higher than in the past.

Baby Boomer Bulge in the M&A Pipeline
Being a baby boomer myself, I expected the past several years to have been almost a glut of sell-side opportunities. But it hasn’t happened. I think we all thought it would come to pass. The baby boomers are aging better than their parents did. Many are still having fun working 50-60 hours per week.
This is a friendly industry. We frequently talk to our competitors and we generally get the same feedback that we see ourselves. That is, when it was about time for the baby boomers to exit, the economy started doing well. So, these baby boomers’ businesses are making good money. Right or wrong, (mostly wrong), they tend to say, “If things are going great right now, why would I sell?”.
Sooner or later they are going to transfer their businesses. At some point, not only will their age start to make it more imperative, but the economy may start to turn down as well. If we are right, and it happens when the economy isn’t great, their valuations are going to plunge. If the seller-to-buyer ratio starts to shift (in favor of the buyer), that will drive valuations down further. For those that hang on until the last minute, all I can say is “looking back won’t be fun”.

I tell people, if I had a brother or sister or child with a business that was doing well right now and it wasn’t for sale, I would hit them with a two-by-four… unless they want to keep it for another 10 or 20 years.

Increased Valuations Impact on Deal Structure
I don’t think higher valuations are impacting deal structure. We don’t see any more or less earn-outs or notes than we used to as a percentage of transactions. But increased valuations have impacted two things:

One, due diligence is much tougher than before. With buyers paying high multiples, they are making sure to look under every rock, that it’s a squeaky-clean deal.

And two, there is more renegotiation of price than there used to be during the due diligence phase. The rubber band is so tight, the deal has no flexibility. If one little thing is out of place, the buyer wants to re-trade. We see this from both corporate buyers and private equity firms.

Main Challenges in Closing Deals
Most deal challenges now are related to due diligence. It’s almost to the point of being silly. There are a lot of questions being asked and analyses being done that really aren’t relevant.

Quality of Earnings (QE) is the driver of due diligence… and it has become onerous. It can be a difficult process because so much of it is a matter of opinion, not fact. That is the biggest challenge of any deal, the buyer’s QE.

We encourage our clients to do their own due diligence prior to entering the sale process, to have more robust data rooms and to hire someone to do a Quality of Earnings analysis. The buyers are still going to do their own due diligence work. But if the seller has a reputable firm do QE in advance, then the seller has some ammunition to fight gray-area claims that come from the buyer’s QE later. Furthermore, if there’s a real issue, like a revenue recognition issue that needs to be addressed, the seller can address it early in the process rather than having a surprise in the third month of due diligence.

Difference in Contract Terms
The biggest difference in contract terms now is the use of rep & warrants insurance. This insurance is becoming a significant piece of offers and is now used on a larger percentage of deals (including smaller deals). We are seeing a lot of contracts include reps & warrants insurance to give both sides a better feeling about who is going to pay for any future problems with the deal.

Reps & warrants insurance takes the risk off the seller for future discoveries where a rep & warrant is breached. With this insurance in place, instead of having a $5 million cap on reps & warrants going forward, the seller might only have a $500,000 cap. Anything above this is taken care of by the insurance company.

The buy-side usually purchases this insurance because it is easier to collect from an insurance company if a claim is valid than from someone who may now be your partner. So, there’s also a social reason for it. You hate to sue your partner. Buyers now use this as an extra bit of ammunition when they are bidding on a deal.

There are probably a dozen companies aggressively offering reps & warrants insurance for M&A transactions. There were perhaps as many as 3,000 policies written last year (2017). Now, with sufficient history with these policies, the underwriters are realizing there are very few claims.

We are also seeing heftier letters of intent (LOI), meaning that more of the detail that used to be reserved for the final purchase documents is at least addressed in the LOI due to sellers’ concerns about re-trading.


Capability and Capacity: Inseparable Components of Growth Strategy

By Peter Moore | Apr 12, 2018

As investment bankers to a wide variety of closely held companies we sometimes witness business owners investing heavily in new production output “capacities” (new equipment, new hires, plant expansions, or even acquisitions) well before they’ve properly established the full “capability” to put that new or expanded capacity to work on an optimized basis.

Generally the goal of creating new production or service capacity is to take advantage of a market opportunity, stay competitive, and create increased enterprise value in the business.

In this context “capability” is the condition of being sure your key team members have the know-how to produce the expanded product or service output. It also means having codified the processes employed to produce your product or service, so that new members to the team can also generate the product or service without any diminution in the quality or effectiveness to the customer. And it means you have the disciplines in place to continue producing the product or service with the same or better level of customer satisfaction, product integrity, and product reliability. It may also mean that you are continuously keeping an eye out for product relevance in your industry and marketplace, as well as being aware of what your competitors are doing and alternatives to your product or services.

Without being sure the capabilities are in place to get the greatest benefit from your new investment, you risk losing the financial advantage you expected. That new capacity (higher production rates, faster throughput, better engineering or design, or systems to reduce materials procurement costs, labor inputs, or transportation and logistics expenses) should be able to deliver measurable improvement in key financial metrics soon after the new investment in the capacity has been made.

While both capability and capacity can sometimes be developed concurrently it is often not advisable to make large capacity investments before you are sure you can provide the associated capability to optimize use of that new equipment, factory addition, acquisition, or expensive new talent.

Taking the time to plan on incorporating these two key elements of growth will help you more confidently achieve the goals you envision by adding new capacity.

For more information on this topic or assistance in expanding your company’s capabilities and capacities, and confidence, please contact your nearest CFA investment banker.


When Will The Buyer Stop Asking All These Annoying Questions?

By Robert St. Germain | Mar 19, 2018

Business sellers often reach the point in the sale process where, in complete exasperation, they start asking the above question of their investment bankers.

The short answer is that questions will be put to the business seller by the impending buyer right up to closing.

Yes, the due diligence phase of the business buy/sell process can be very demanding and very frustrating, especially for the seller. For the first time, they are being asked to share what previously had been closely guarded information with whom are, likely, complete strangers. And that goes against every natural instinct of sellers for whom, theretofore, absolute secrecy was the order of the day to keep any and all info that could possibly be used to their disadvantage from employees, suppliers, customers, and competitors.

On the other hand, the seller must understand that it is the buyer who will be taking on the responsibility for a lot of capital in some combination of debt and equity to make the acquisition. So, the primary reason for all those “annoying” questions is to help the buyer assess the likelihood of replicating or improving historic cash flows to support the debt component of the capital package while generating the necessary return on the equity component.

Those capital components typically will be provided, in part, by the buyer and, in part, by third parties in the form of at least one lender and, perhaps, at least another equity investor. Each supplier of capital to the transaction will have their own set of questions coming from their own unique perspectives. Additionally, each supplier of capital will be assisted by their own set of advisors who will each have their own set of questions to protect the interests of their respective clients.

In aggregate, there will be many questions, some of which the seller very likely will never have asked themselves during their ownership tenure, and some of which will require an extra work effort to answer.

Sellers that engage the services of investment bankers (IB) to lead them through the sale process will be advised in advance of what to expect during DD and how to prepare.  Further and very importantly, the IB will advise the seller both on how to legally protect themselves from compromise in the information exchange and how to stage the release of various types of information only to when it is absolutely necessary to the process.


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


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”.


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.