InSight

Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Private Equity’ Category

Why do potential acquisitions fail to close?

By David Sinyard | Aug 14, 2017

The termination of a purchase agreement entails significant costs for both the buyer and the seller. Research suggests that relational aspects are as vital as financial considerations.  The role of personal rapport between executives, as well as the importance of the bidder’s reputation, have major impact. First, private equity groups appear to consider the relational aspects of buying entrepreneurial and/or private businesses.  The importance of their reputation and of building rapport illustrate that non-financial aspects are important. Second, sellers should.. Read more »


What is a financial buyer?

By George Walden | Aug 11, 2017

Financial buyers include Private Equity Firms (PEGS), Venture Capital Firms, Family Investment Funds and Hedge Funds. These financials buyers are typically looking for a return on investment. They are not necessarily industry oriented. In fact, they are often industry agnostic.

They are usually looking for a stand-alone entity that they can add systems and build on. These financial engineers often use leverage to structure their transactions and place an emphasis on the company’s cash generating capabilities to service debt. This process is called a “Recapitalization”.
In a recapitalization the owner exchanges cash for equity conveyed based on a current market value of the company. The average hold is between 3 and 7 years and in a second offering the “second bite of the apple occurs”. It is not uncommon for the second bite to be as large as the first, but certainly this is not guaranteed.

Using a typical 80%/20% split let’s value the company at a 100 million dollars. A common Recapitalization structure would look something like this. The owner and buying group agree that the company could carry 50% of the structure as debt. This means capital in the transaction is 50M. The owner is asked to put in 10M to get 20% of the company. The financial buyer puts in 40M. The owner receives 90M for the market value of the company and retains 20% percent of the equity in the go forward of the company.

Transactions with financial buyers are more of a partnership rather than an 100% purchase. They often will buy a controlling interest in a company but minority acquisitions are not uncommon. Especially for high performing companies. Why would the owner of a performing company want a financial buyer? To remove risk, gain liquidity, receive financial underwriting and an advisory team.
Financial buyers can be very flexible in their acquisition strategy and structure.

Financial Buyers are not necessarily operators and often want to get behind a management team or the current owner to protect the operational viability of the company. Financial buyers provide more than money. There is usually an advisory role such as you would see with a board helping you to direct and build a vision for corporate growth. Financial buyers usually have a system in place to facilitate add-on acquisitions. After a platform acquisition they often buy additional companies to gain market share, mimicking a strategic buyer, with the goal of maximizing their return when they exit the investment.

I have heard many times over the year’s financial buyers ruin good operational companies. The evidence just doesn’t support this, in fact financial buyers often build phenomenal companies with their thoughtful approach to the numbers and systems. Most sellers should look harder at this type of buyer to understand how to raise the value of their company and implement what is important to attract the Financial buyer’s attention.


4 Reasons the Timing is Right to Sell Your Business Now

By Brian Ballo | Jun 30, 2017

Time to sell your businessBusiness owners inquiring whether the timing is right to sell their business, often start by asking: “What are business valuations in the market today?” EBITDA multiples can provide a quick thumbnail answer to this question. However, just focusing on today’s industry numbers, does not wisely evaluate the risk of whether the business will be worth more or less in the future, as compared to selling the business now.

 

Savvy business owners, who are attuned to macro factors impacting business valuations, such as the aging population, financing terms and tax reasons, understand that several conditions exist today, that point to selling your business in 2017. In addition to these macro factors, the question of when to sell your business also depends on the life-stage of the company, as well as compelling personal reasons and family situations.

1. Due to Aging Boomers, the Supply of Businesses for Sale will be Increasing

In 2017, the massive generational shift in wealth is underway, as hordes of boomer business owners are motivated to retire. In the next 5 years, 40% of family-owned businesses in the United States will be sold, due to baby boomer retirements. By 2019, the boomer’s sale of their closely held businesses will create nearly $6 trillion in liquidity.
Most M&A professions view the tidal wave of baby boomer retirements as resulting in a potential glut of businesses coming on the market. This mounting supply of businesses for sale, means downward pressure on valuations for years to come. When that tipping point may occur is not known. What is known, is that every day for the next 12 years, another 10,000 baby boomers will turn 65.

2. Slowly Rising Debt Costs Would Decrease Purchase Prices

How fast interest rates rise will affect the M&A sector. Typically, the London Interbank Offered Rate (LIBOR), which is connected to the Federal Reserve’s short-term rate, determines the debt financing rate. Although the Federal Reserve did not raise rates recently, the consensus is that the Federal Reserve will increase rates sometime in 2017.

A rise in LIBOR would make using debt more expensive when funding an acquisition, resulting in buyers offering to paying less for companies. If rates rise too quickly, business owners may have trouble getting the prices they want.

3. Your Company’s Life-Cycle Timing indicates a Strategic Reason to Sell

Each company has life-cycles, and the challenges of passing to the next developmental stage, can often be strategically improved through a sale or merger. Companies in the initial development and emerging growth stages, require debt and minority equity capital, but, generally, are not good acquisition candidates. On the other hand, companies in later stage growth, that have reach a stable, mature level, or that are declining, are attractive to both strategic corporate acquirers and Private Equity Groups (PEG).

Companies that are earning profits, and that have promising projections for increasing revenues, need financial resources to sustain growth. The right Buyer can provide needed working capital, management expertise, competitive strength, and expansion into new markets. For mature companies, the right Buyer can provide more effective distribution channels, improved operating margins, as well as fresh management, to return the company to growth.

Companies in the declining stage of their life-cycle, typically resulting from owner burn-out, can also be attractive acquisition targets. Corporate and PEG Buyers have the money and other resources needed in order to achieve a turnaround. In addition, the right Buyer provides a renewed sense of direction, while working to solve the reasons for decline, defend the company’s market share, and improve competitive performance.

Unlike the macro factors discussed above, where your company is in its’ life-cycle is specific to your company. Usually the best time to obtain the highest price occurs when sales and earnings are good and trending upward, with a history of good performance. This gives buyer’s confidence in projected future earnings.

4. As an Owner, You have Compelling Personal Reasons to Sell

The emotional bonds of an owner to his business can be strong. In American culture, being an owner is an important part of how we define ourselves, part of our self-image. Ownership provides a general sense of self-esteem, pride, and a feeling of control. As result, for many owners, their business and social lives are interwoven, making letting go of the business, all the more difficult.

However, smart business owners appreciate that businesses are in business to make money, and they view at their companies primarily as assets. With the right investment and tax planning, the proceeds from the sale of the business, can be utilized to achieve retirement goals, and be distributed to heirs pursuant to properly structured trusts. Talk about these issues with your investment banker, wealth manager, attorney, and accountant.

Yet, selling impacts the owner’s lifestyle, as well as the lifestyles of other family members. With work-outs common, the owner will often have to adjust to the more restrictive responsibilities of being an employee of the new owner.
With certain macro conditions pointing towards selling now, do compelling personal reasons also exist for a transition to “life after sale”? Talk about these issues with your spouse, and your family, and then you will be better prepared to decide if the timing is now right to sell your business.


Consider A Family Office as a Potential Buyer or Partner for Privately Held Businesses

By Joe Sands | May 18, 2017

Selling My BusinessAn Emerging Trend: Family Offices Seeking Private Company Investment Opportunities

There is a growing trend of family offices acquiring or investing in private businesses and the trend is picking up steam for good reasons including but not limited to:

• Direct investing provides Family Offices with the potential for superior returns, transparency and control of their investments in private companies

• In some cases, private companies’ interests can be better aligned with a Family Office as an investor or owner than with a traditional funding source

What is a Family Office?

A Family Office is an entity that provides services to either a single wealthy family or multiple wealthy families. The Family Office (FO) is generally set up by the wealthy family (a family with assets typically in excess of $100 million and often in the billions) and ranges in the number of professionals employed and services covered. The services provided by a family office are tailored to the family’s needs, and can cover: (i) wealth management, (ii) investment management, (iii) private banking, (iv) accounting and tax management and (v) other services such as travel, legal, bill paying and security. The rationale for setting up a family office is centered around privacy, confidentiality, control, transparency and a consolidated team working together without any bias or conflicts of interest. FOs invest across a wide array of domestic and international public and private securities as well as real estate. Collectively, family offices are estimated to hold assets in excess of $2 trillion.

Advantages for the Private Company:

• A FO’s primary objective is to preserve and grow wealth over the long term rather than selling their best investments quickly or using high amounts of debt in order to generate a high IRR of new investment funds.

• FOs are more likely to hold a good investment for many years or even potentially in perpetuity and to be an ongoing source of growth capital for the company.

• FOs are already running businesses and are sensitive to the softer issues such as company culture, succession issues, impact on the local community as well as maximizing business strategies. Most have been through up and down economic cycles and won’t take short-cuts to preserve their jobs.

• The different investment objective of a FO can also manifest itself in less balance sheet leverage being employed which may be attractive to business owners who want to be sure of the future stability of the company. Many institutional investors focus on maximizing IRRs which can bring with it an interest in maximizing debt levels since the higher the leverage, the higher the return on the equity, everything else being equal. Most FOs, on the other hand, are more conservative on the use of debt in their acquisition financing.

• Finally, FOs are using their own capital and can therefore close on investments quickly without relying on bank or investment committee approvals.

Conclusion:

When considering a sale or capital raise for a privately owned business, there are many types of traditional and non-traditional capital providers and acquirers. A well thought-out strategy for each situation must be developed to engender a successful outcome. Doing so requires evaluating which types of investors to reach out to and including multiple types of investors. This will no doubt maximize business value as well as the ongoing operating relationship. Family Offices are a good complement to a robust investment banking process.


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.


Private Equity – Sellers in the Driver’s Seat

By Catherine Patience | May 17, 2016

Sellers in the Driver's SeatIn a sluggish unpredictable economy with volatile stock and bond markets, investors continue to rely on Private Equity investments as a safe haven for their dollars.  Recent PE returns have surpassed expectations, so continuing to raise new capital has not been an issue for Private Equity Groups (PEGs).  In fact, in the first quarter of 2016, fundraising in the private equity markets was up 14% over the same period last year.  With new capital sitting on the sidelines, Private Equity must now seek out solid companies to buy, decide what they’re worth and hope they can seal the deal before another investor beats them to it.

Deal sourcing has been a challenge for the past several years.  PEGs have wrestled with two investment approaches: “overspending” for larger or best in class companies vs. purchasing smaller, lower quality companies at lower multiples and then devoting significant time and resources to rebuild and grow.  Statistics tell us that given a choice, PEGs would prefer do the former, but in many cases are forced to do the latter. Smaller transactions, or Add-Ons (to existing base portfolio companies), represented nearly 70% of all private equity transactions in the first quarter of this year, a continuing upward trend.

In addition, PEGs continue to face stiff competition for quality deals from strategic buyers looking to grow by acquisition.  Many PEGs are willing to offer incentives to selling companies, like a quicker close, to gain an advantage in the auction process. The current competitive environment has put sellers in the driver’s seat.  As long as value expectations are realistic, this may be a very good time to be selling a middle market business.

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What Business Owners Must Know About Private Equity

By Roy Graham | Dec 08, 2015

Private EquityThe PE community has established an impressive record of success in both partnering with business owners to grow the value of their businesses and in returning high rates of returns to their own investors.  Private equity recapitalizations have proven in the aggregate to be a valuable vehicle by which a business owner can capture a portion of his business’s value today while bringing in a savvy business partner who can help create greater business value going forward.  However for a business owner to reap the greatest benefit from private equity it is essential to understand how private equity operates and to use this knowledge to determine how best to find a PE partner.

A paper published earlier this year by Harvard Business School and authored by Gompers, Kaplan and Mukharlyamov provides interesting insight into the operations of private equity via an extensive survey of 79 private equity investors.  When we study these findings, we can glean some valuable takeaways that can help business owners learn how to smartly capitalize on PE investment. Read more »


Private Equity Cashes In

By Steve Hauser | Jul 27, 2015

MoneyThe fine folks at Pitchbook recently published their Q3 2015 Private Equity Breakdown and there are 3 key story lines to note:

•  U.S. – based PE exits in throughout 2014 and H1 2015 were and remain at extraordinary levels in $. In 2014 PE exits totaled $167 Billion, a record, but with the rate of exits in 2015 that value will be exceeded by the time you read this. And we’ll have 5 months left in the year!

•  The Investments-to-Exits ratio (based on # transactions) was only 1.7X for H1 2015, the lowest ratio in 10 years.   To some degree, the PE industry is “emptying the closet”.

•  Corporations are the big customers for such exits, outspending larger PEs 8:1 in H1 2015, and they likely will double their spending over 2014 by year-end….exceeding $300 Billion. Read more »


Succession Planning for Business Owners

By David Sinyard | Dec 11, 2013

Passing the BatonBusiness owners face three alternatives as they approach retirement: pass on both the management and ownership of the business to the next generation, pass on the shares but bring in professional managers, or sell the business. The results of a PricewaterhouseCoopers Family Business Survey conducted in 2012 indicate that 41% of the respondents intended to convey their stock and management of the business to their children.  More than half of these respondents were unsure whether the next generation had the requisite skills for this to successfully occur.  Twenty-five percent planned to bring in professional managers due to the perceived lack of skill of the next generation.  Twelve percent were undecided and the remaining 17% planned to sell the business.  With results such as these, it is no surprise that succession planning in family firms has received significant attention.

So what options are available to the retiring business owner?  It would appear from the PwC data that alternatives to passing the controls to the next generation need to be examined.  One viable option is to sell to a private equity group.  Not only can private equity investors enable the resolution of succession problems, their involvement can lead to improved operating efficiencies in the firm.  Private equity provides capital in exchange for an equity stake in a potentially high growth company.  While the family may cede control, private equity can provide significant support to help grow the business as well as providing liquidity for those retiring.  The process of identifying and selecting the correct private equity group requires time and the expertise of trusted advisors.

Posted by David Sinyard.

7 Step Guide to Business Exit Planning


PEGs and Company Management

By David Sinyard | Jun 24, 2013

Business Meeting with PaperHow do Private Equity Groups (PEGs) view the role of management as they consider investing? Many view the quality of the management team as a fundamental issue in a proposed transaction. In reality, PEGs show flexibility regarding the quality of the management team. There is a continuum from those who see the existing management team as being very important to others who are far less concerned. Some indicate that the businesses must have good management in place. Other PEGs express less concern with the existing management: they just want a competent management team. What appeared to matter more was that someone be identified who would remain with the firm post transaction. The relationship between the management team and the PEG is also important as they are very much focused on the chemistry between their group and the management team. The issue is whether the ownership culture is willing to embrace change. Management generally will be supplemented and upgraded. The PEGS expect it. The usual function that is most focused on is finance as the incumbent typically will not have the qualifications and skills to handle the role. The PEGs will put in new CFOs to upgrade the position, in particular, in terms of reporting. Additionally, the PEGs anticipate the need to invest in information systems and putting professional processes in place.

Posted by David Sinyard.

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