Business owners know everything there is to know about running their business, whether it be heavy equipment sales or healthcare services. As an M&A advisor, I have spent my life walking alongside business owners as we tour their facilities talking about products, sales, employees, competitors and every other aspect of their business. However, most become uncomfortable when we begin discussing how to finance growth.

If you are a growing company you will have cash flow problems. Do not be lulled into the belief that because sales continue to increase that your business is growing at the best pace. Optimum business growth is reached through a combination of sales and capital infusion.

Banking Problems
In today’s economy, banks have tightened their lending standards. Many owners have developed banking relationships throughout their years in business, but in today’s lending climate they are not able to get the funds they need. Because of this, it is a great time to consider a capital partnership.

A Solution
If you are like many business owners, you may reach a crossroads where taking on a partnership makes sense. Capital Partnerships mainly come through two channels: Private Equity Groups (PEGs) or Strategic Buyers.

When many owners think of the typical transaction they think of a majority buy-out, time to retire, but retirement is not the only option. Capital Partners are willing to make either majority OR minority investments. They often prefer the management team to stay in place and operations to continue as before. They are simply making an investment in a company they feel has solid foundations and most importantly – room for growth. These investors do not require control because they are backing companies they believe in, companies with a solid history of growth, a capable management team and the potential for future expansion.

How to Choose a Capital Partner:
When choosing a partner there are several factors on which to focus:

• TRUST – You need to be working with individuals that you trust and like. If you don’t care for the group, save yourself some time and walk away. Remember this is a partnership and you will need to work together to be successful.
• FUNDING – Your partner needs to have the ability (either through fund raising or through already allotted means) not only to finance the transaction, but to have capital for growth. Going forward you will want to look to your partner to essentially be “the bank” for the company.

There are many options to owners of middle market businesses looking to grow their business or prepare for retirement, but often a Capital Partnership is the most attractive. An M&A advisor can help you begin the process of exploring capital partnership.

posted by Gerald W. Lindsay

Do you really understand the impact of the coming tax hikes on capital gains and income?

Our office has been working on a five-year business plan for a client that has really exposed the impact of the tax increases coming in 2011 and 2013.

Not only are increases in capital gains taxes going to take a bigger bite out of the proceeds of the sale of a company, but coming increases in income taxes and health-care taxes will take a bigger bite out of the income to owners who continue to own their companies.

We are all aware that the expiration of the Bush Tax Cuts will increase capital gains rates in 2011. For a company owner who is a resident of Minnesota, this will cause a 6.5% reduction in the after-tax proceeds the owner will take away from a sale.  Not everyone has noticed that the new Health Care bill also increases capital gains beginning in 2013.  When this kicks in, owners will take home 11.4% less compared to today’s tax rates.  This means that the company must be worth 6.5% more next year and 11.4% more 2 years later, just to stay even. Read the rest of this entry »

Today’s Wall Street Journal included an editorial (see below) that reports that the Financial Reform bill now in Congress will likely disqualify 77% of private party investors who have historically capitalized small, private companies.  This will have a major impact on capital formation for private companies with less than $20 million in revenues.

Angels Out of America – How the Dodd Bill Harms Start-Ups

Senator Chris Dodd’s 1,400-page financial reform bill contains many economic land mines, and here’s one of the worst: Provisions that would make it harder for business start-ups to raise seed capital. Read the rest of this entry »

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 »