Mezzanine Debt

Today’s economy has put many private companies in a tight spot.  Companies end up with too much bank debt as business volume and profits contract.  But lower earnings mean that company owners who would have been ready to sell their companies now can’t do it because they end up with too little after paying off their banks.

So, how can you reduce your bank debt, improve your cash flow, and stay tough while you wait for the outside economy and your earnings to recover?  One answer is mezzanine debt.

Mezza-what?  Mezzanine debt gets the name because it’s half way between senior bank debt and equity.  Because it’s kind of both, it serves really well in the right situation.  Mezzanine is semi-permanent capital, like equity, so the company does not have to make monthly or quarterly payments of principal.  It usually has a 5 to 7 year term. Read the rest of this entry »

Not Just For Big Companies

Recently, I was asked to speak to a group of CEOs of mid-sized companies regarding EBITDA and its importance to them as business owners. Several questions from the group centered on what I will loosely call “tax avoidance” and “tax deferral” practices commonly employed by owners of privately held companies. The questions focused upon the impact of these practices on the value of a business. The common theme from the audience was, “buyers understand owners do not want to pay taxes and they are willing to adjust for these practices.”

I reminded the group that buyers, or anyone who is reviewing the performance of their companies, will only be able to evaluate what they can see. If you are writing off inventory, expensing personal items, or employing any of the myriad other “tax avoidance” practices, you do a nice job of lowering your tax burden, but you may not be able to get a return on this “investment” when you look to “withdraw” these funds. All of these practices impact your cash flow positively for you, but not necessarily for those evaluating your company. Read the rest of this entry »

Another look at “Valuation: Getting the Right Price When Selling Your Business”, an article by Gary Parker.

I think Gary has done an excellent job of summarizing the valuation process. However, I feel that he and many others that have written about “valuing” your company have made the explanation too complicated or mysterious.

This writing is an attempt to simplify the explanation of this process and to provide a conclusion that hopefully gives potential clients more comfort that professional “intermediaries” like CFA can provide very reasonable estimates of what their company will be worth.

I am “certified” by NACVA (National Association of Certified Valuation Analysts), which required a great deal of study, testing and experience and as such, I feel I have learned to navigate the valuation “maze” more effectively.

The first and in many respects the most important question of a valuation is “what is its ‘purpose?’” While there can be many reasons for a valuation, the purpose for our clients is the sale of their company (all or part) and as such we will be using the Fair Market Value Approach. This is defined to mean “willing buyer, willing seller both acting with the same information and no compulsion to act”. While academic it is very practical when combined with the market experience of professionals like CFA that have seen hundreds of transactions during their careers. I will only say that other “purposes” such as estate planning will use different approaches, which lead to different methods mentioned in Gary’s article.

The second important point is Read the rest of this entry »

Middle Market investment banking activities felt the effects of the financial crisis.  M&A deal volume for the middle market fell 39 percent in 2008 compared to 2007 and has fallen even further into 2009.  The harsh credit markets have left their mark on the middle market.  The average deal value in Q1 2009 was $64.1 million, down from $93.4 million in the fourth quarter of 2007.  The decrease in average deal size can be accredited to conservative valuations due to the added risk and limited debt funds available.  The incentive for an owner or principals to sell their business has sharply decreased and left many waiting for a more optimal, but indefinite exit timeline.

Traditional business models and financial investments have lost effectiveness, allowing a higher demand for alternative strategies and investments.  Private Equity groups are tentative to invest because of the risk coupled with difficultly accessing debt to leverage the scale of their investments.  An alternative investment like a Management Buyout (MBO) presents an appealing opportunity to private equity. Why? Read the rest of this entry »

For companies with valuations less than $100 million, deal volume for the first half of 2009 was down 58% compared to 2008 as reported by the Alliance of Merger & Acquisition Advisors (AM&AA).

Those numbers don’t sound like good news for company owners who are ready to sell their companies, but that’s past.  The question is, what is coming?

While the history is dark, the silver lining is in the external market factors, like these:

• Strengthening public stock market values are waking up strategic buyers who need to make acquisitions to grow
• Low buyouts over the last 18 months mean that private equity investors are more hungry than ever to put their $400+ billion of uninvested funds to work by doing deals
• It is beginning to look like the worst of the recession may be behind us
• Valuation multiples, reported by AM&AA at 4.7X EBITDA can only go up

The market for under $100 million companies has always been cyclical.  This may indeed be the bottom and we are in the beginning of the upswing.

posted by John Hammett

CEOs and CFOs of middle market companies regularly make important decisions to engage a variety of Professional Service Organizations (PSO) to perform necessary corporate, transactional and financial planning tasks.  Yet, the engagement decision to hire a particular investment bank, wealth management advisor or consulting firm, is often made without examining whether the new PSO has an existing working relationship with the referring PSO already providing services to the company.   

Asking for a referral from an existing professional service provider is the common way that most CEOs and CFOs begin their search for another service provider with a distinct specialization.   However, if the referral discussion focuses on a particular PSO firm’s isolated attributes, this does not necessarily correlate with the prospective PSO firm being a “good fit” within the context of all the PSOs serving the company. 

The effectiveness of the PSO vetting process (the so-called “beauty contest”) can be improved by inquiring whether the referring firm (e.g., an accounting firm) regularly conducts business with the referred firm (e.g., an investment bank).  If a formal Strategic Alliance is found to exist between the PSO firms, then established methods and processes help ensure that the PSOs provide complimentary resources, expertise and advice, in order to deliver collaborative solutions to the client company.   Read the rest of this entry »

Every good investment banker knows the value of having a client represented by an experienced transaction attorney. The absence of one can cost your client a deal or worse yet, cement a bad one. What about an investment banker though? First time sellers will often ask what value a good investment banker adds to a transaction. “Why can’t I go it alone”, they may ask.

I have a long list of answers, but I thought I would reach out to several respected transaction attorneys for their comments. In their practices they work for clients who are represented by investment bankers and clients who are not. From their third party perspective they are well positioned to offer valuable insight.

Cliff Pearl, a transaction attorney with the Denver firm of Hensley Kim & Holzer, LLC, believes that, “The biggest value a good investment bank adds is properly orchestrating the process…. Many sellers believe that the only thing they need is someone to find the buyer willing to pay the highest price, and if they find that buyer themselves they think they don’t need the help of an investment banker. They are wrong. Transactions fail in many instances because there is nobody properly orchestrating the transaction process and acting as the shepherd of the transaction…something the participants and lawyers typically can’t do….” Read the rest of this entry »

Business owners interested in selling their business can readily see the benefits of hiring an investment banker to identify qualified buyers. However, the issue which routinely arises in negotiations between the business owner and the investment banker is whether or not the owner will pay an initial retainer and/or monthly work fee.

Owners often maintain that they only want to pay for the result of an actual sale, and, therefore, are willing to pay success fees upon closing, but they are not willing to pay any up-front fees. However, this view assumes that the risks of not closing a transaction depend solely on the investment banker’s performance, whereas, in fact, closings also depend upon the owner’s determination that he is receiving the highest price, the best terms or the business is being sold to the “right buyer.” Read the rest of this entry »