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Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Investment Banking’ 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


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.


What Keeps M&A Transactions From Closing?

By Jim Zipursky | Oct 25, 2016

What keeps M&A transactions from closing? A recent survey of investment bankers at CFA regarding their experience with M&A deal failures leads to interesting results, as can be seen in the accompanying graphic.

figure-1-2016-10

Failure reasons can be broken into five general categories: Seller Issues, Buyer Issues, Company Issues, External Factors, and The Process. Not surprising, Seller Issues and Company Issues account for nearly 66% of deal failures. Buyer Issues and The Process account for 28% of deal failures.

What is the number one reason for deal failures? Earnings fluctuations, which means the earnings are not as projected. This causes significant problems for buyers, making valuations and lending much more difficult. Not surprising, the number two reason is Seller valuation issues, which means Sellers want more than their company is worth. Taken in the aggregate, across all five categories, valuation-related issues account for more than 52% of deal failures. Clearly, valuation/earnings issues are the number one cause of deal failures.

Surprisingly, external factors and the process itself do not cause as many deal failures. The silver lining in these results? Seller Issues and Company Issues can be avoided with proper preparation of the seller and the company. A seller who has reasonable valuation expectations, clean financial statements with verifiable earnings and realistic financial projections help keep most deals out of the ditch.

Posted by Jim Zipursky.

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Buyers & the Sell-Side Process

By Steve Hauser | Jun 27, 2016

sell-side processThe M&A environment in the U.S. is as heated as ever; and, while those of us in Middle Market Investment Banking more often than not represent sellers, we relish working with buy-side clients with well-defined missions and criteria.

We understand that the Holy Grail for any buyer is the one-on-one “negotiated” deal with a seller, where there is no sell-side advisor, no competition from other buyers, no hard-and-fast timetables, and the due diligence routine is very accommodating to the buyer.  However, though these “proprietary” deals do exist, they are uncommon, especially for those sellers at or exceeding $5 million in EBITDA. Instead, the buyer should expect that any well-run, solidly profitable Middle Market company will be represented by an Investment Banker and sold through what we call in the industry, “the Process”.

The M&A market in the U.S. has been and continues to be fueled by very low “real” interest rates, exceptional amounts of cash in PE firms, hedge funds, and large corporations, and moderate-at-best macroeconomic (i.e. organic) growth prospects.  Demand for good deals exceeds the available supply of good targets, and the sell-side auction-like process is an entrenched feature of our M&A market.  Prospective buyers, particularly bargain hunters from offshore, can find the experience to be a challenge, wishing they had more control, less pressure to modify their offers, and general freedom from the constraints of “the Process”. Read more »


M&A in 2016

By Catherine Patience | Jan 19, 2016

M&A in 2016Crystal balls, psychics, astrologers and forecasters all attempt, with varying degrees of accuracy and success, to predict the future.  When it comes to private investment, and M&A in 2016, the picture is even more murky due to the scarcity of reliable information and layers of confidentiality surrounding completed transactions.  Pitchbook, a collector and provider of private company data, did a nice job of translating recent data into hints at what the M&A future may look like next year in their recent Crystal Ball Report for 2016.

We will likely see deal multiples continue to slide a bit lower and deal volume, which lagged in 2015, continue to decline.  One bright spot in this scenario is lower middle-market add-ons which should see volume levels at or near those of 2015.

Read more »


Middle Market Businesses and the Shark Tank Phenomenon

By Cliff Kendel | Jun 17, 2015

SharkTankShark Tank has exposed Main Street businesses to finding equity capital for business concepts.

Main Street is warming up to partnering with savvy professional investors through creating a salient story/elevator pitch by having committed experienced management paired with a financial venture partner.  The venture partner helps refine the concept, focus the team, and elevate the business to a higher level of success.

Middle market investment bankers assist Main Street businesses enhance their “story” presented in a ninety second(or less) elevator pitch that:

• Quickly and succinctly articulates the Investment opportunity
• Explains why the management team is uniquely qualified to execute the plan
• Understand the financial history and plan for the future

Then, the investment banker conveys the story to  targeted groups that have the knowledge and desire to be in the industry “space” that the Company is operating; vets the prospective investor; and facilitates a mutually beneficial economic transaction.

Corporate Finance Associates investment bankers are a diversified team of experienced financial and operating executives, who have run businesses, been CFOs and senior operating executives of various types of businesses, sold businesses for Clients and their own account, and developed real estate and senior living concepts for clients and their own account.  How can we help you with your business?

Posted by Cliff Kendel.

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Expansion of Tech M&A

By Catherine Patience | May 27, 2015

Upward Chart Money SignThe recently published KPMG 2015 M&A Outlook Survey Report suggests that one of the top industry sectors that will benefit from robust M&A activity this year will be technology, continuing a trend that began in 2013.  Cloud computing, big data, mobile devices and social media are segments that will command the attention of both financial and strategic investors alike.

So why should we expect this tech M&A growth expansion to continue?  Fueled by historically low interest rates and historically high EBITDA multiples, corporate growth through acquisition has been the fast track to higher profits.  This approach appears to cost more up front, but the immediate boost to the bottom line more than compensates by the resulting increase in EBITDA.  Combined with Private Equity investors’ buckets of “dry powder”, you have a recipe for expansion in 2015.  Private Equity investors will also add their own twist to the increase in M&A activity in the sector by entering the profit taking arena.  Many of their tech investments made in prior years have reached the expiration point and Private Equity will be liquidating tech assets this year.  We will likely continue to see consolidation in the industry with larger companies snatching up smaller ones when the time is right.

Preparing your company to take advantage of a surge in M&A activity is all about revenue and timing.  The highest possible revenues generate the highest possible EBITDA margins.  In addition, a strong and wide customer base is important.  In tech, the opportunity for M&A opens and closes quickly and you need to be ready to move when the opportunity presents itself.  Make sure your financials and your financial reporting is ready and you are prepared to put your due diligence team to work.   Your M&A advisor can then roll up his sleeves and get to work.

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