Exit and Growth Strategies for Middle Market Businesses

Selling Your Business Is Not An Event… It Is A Strategic Process – Part II

By Terry Fick | Nov 14, 2018

Part II


Selling your business is not an event… It is a strategic Process.

Like most successful outcomes, selling your company starts with the right preparation!

  • Set your expectations of value.
  • Prepare an NDA so it is ready at the appropriate step below.
  • Set up a virtual data room and populate it with the basic information anyone will need to see. Since you may present your information to multiple parties, this eliminates a duplication of efforts, creates an air of professionalism and gives the impression you are, or plan to, talk to more than one party. Your Attorney or Investment Banker will manage this if you prefer.
  • Look at your company through the eyes of a buyer. Ask yourself what aspects of this company would be attractive to you and what aspects would give you pause. Plan to accentuate the positives and minimize any negatives.
  • Develop a growth plan. Always sell the Future!

Now, prepare some more!

Are you ready to answer the typical questions they will ask?

  • Are your financial reports up to a buyer’s standards? If you aren’t sure what is expected, ask a professional.
  • Can you answer questions about your market position, your customer concentration, your competition (and how you stack up), which of your products are the most profitable, what are your strengths in the Marketplace, What role you want after a transaction, etc.?
  • Who would take your place if you are ready to retire?
  • Prepare a supportable projection for 3-5 years.
  • The list goes on, but a little preparation will give you a significant advantage.

Dealing with buy-side Brokers

They may or may not be credible.

  • Ask them to name their client
    • If they will not, politely tell them you are moving on.
    • Caveat: If they say they will if you give them some info, tell them your revenues and what you sell to who. Period.
  •  Only talk directly with their buyer. If they want the broker on the phone, O.K.
  • Do not give the broker any more information until the buyer signs your NDA and says the broker is covered.
  • DO NOT allow the broker to introduce you to more buyers Be adamant!

Talking with the prospective Buyer

Once you are talking directly to the decision maker at a buyer, then pay attention. Let them know you are considering your options and are discussing those options with your professionals. This gives them the impression they may have competition. Not being objective, we suggest you engage an Investment Banker to either work on just one prospective deal, or to assist you on any contact and create real competition. Qualify that buyer by determining if he can make an acquisition this size (without giving up your desired value.) Pose questions like,

  • What do know about my company?
  • Why are you interested in my company?
  • What other acquisitions have you made? Be industry specific with a PEG.

Now it is time to get your NDA signed before giving any more information

Creating Competition

  • Now, hopefully you still have more than one viable dog in the hunt and you have established the appropriate sense of competition. As you move forward, note the following:
    • Always let the elephant in the room be “other buyers”, but never name those buyers.
    • Never reveal specifically what other offers or value discussions may be.
    • Never let a buyer tell you that you should only be talking to him. It is perfectly ethical and appropriate to talk to multiple parties at once prior to your signing an LOI.

Hiring Professionals

It is obviously hard for me to stay objective when discussing this option because it involves employing an intermediary. Some form of an M&A professional whether it is an Investment Banker, a Business Broker or an M&A attorney. An Investment Banker can manage your process whether you choose to speak with one or multiple prospects and he will be able to bring even more buyers to the table.
An Investment Banker will:

  • Give you a realistic valuation
  • Respond and cull the herd without those parties knowing you might consider a sale.
  • Create a credible environment of competition
  • Be in a better position to look at your business through the eyes of the buyer.
  • Bring “Been there and Done that” expertise to the table
  • Save you and your team countless hours
  • Bring even more valid buyers to the table
  • Negotiate as a third party, preserving the relationship with the buyer
  • SELL your company so you don’t have to sound braggadocios.

Moving Forward

  • With their NDA in hand, have another informal phone call and answer most of their questions. The caveat is making sure you do not give specific customer or employee names. You can also avoid giving up any IP.
  • Let them know you have a data room prepared and that many of their answers will be there.
  • Be prepared to give up fairly detailed financial information, customer information (no names), growth plans, management staff, etc.
  • Talk about his plans for you. Would he want you to stay or phase out?
  • Now you give him access to the data room and give him some time to review that information before moving forward.

To be continued in Part III of this three-part post.

Selling your business is not an event… It is a strategic Process – PART I

By Terry Fick | Nov 13, 2018



Selling your business is not an event… It is a strategic Process.


  1. Always establish a sense, or better yet, a reality of competition for your company.
  2. Never, unless… No Never, give a prospect a price or tell them what you think the company is worth.
    1. Giving a price only sets a ceiling from which to negotiate downward.
    2. Terms are as important as price, and giving a price ignores this all-important element.
    3. Even in negotiations, until the very end, your response to a formal or informal offer is “I don’t think that offer will get you to the pole position…”
    4. At the very end you may have to counter with a definite value and set of terms.

First, let us define the possible responses to unsolicited offers to buy your company by type of buyer.


SELLING TO INDIVIDUALS? Unless your company is so small no private equity group (PEG) or corporation buyer would be interested, do not even talk to them.

Corporate Buyers

  • There are direct competitors and those that do not butt heads with you. Non-competitors are better buyers than direct competitors.
  • Ask them why they are interested. If they have a good reason, they may well be your best bet.
  • They usually want 100% and often allow (or even want) you to leave soon after a sale.
  • Don’t assume they are well funded enough to make this acquisition. Ask the right questions.

Private Equity (PEGs)

  • PEGs come in many flavors and can be very good buyers for those that would like to stay and continue to run the business… on their dime. A large majority of them are “The good guys” and can make great partners going forward. Their success rate for growing companies is outstanding.
  • A great vehicle that allows you to take almost all your chips off the table, eliminate your debt and still manage and grow your company.
  • They allow you to take, say, 90% of the true value of your business out in cash, but keep 20-25% of the equity for your second bite of the apple.
  • A good vehicle to allow you to pass on some equity to your management team or kids.
  • Make sure they are funded. There are thousands of PEGs out there that have millions and billions of cash. Be careful of relying on those that must raise the money after you committing to a sale.

Regardless of the type(s) of company you seek, there are three different paths to take:

  1. One is to be reactive and consider each contact one at a time, starting with the one that looks most likely.
  2. Another is to reach back out to all of them at once, and once you have culled the herd, open dialogues with multiple options at the same time until you eliminate all but one.
  3. The third is to let a professional quarterback the process of talking to one, several or even reaching out to more.

To be continued in Part II of this three-part post.

M&A Quarterly News In The Industrials Sector

By Steve Hauser | Nov 09, 2018

The report below gives a good overview of the fourth quarter M&A activity in the Industrials  sector. M&A activity for North American based target companies in the Industrials sector for Q3 2018 included 95 closed deals, according to data published by industry data tracker FactSet.

Fully one-third of the transactions had a Non-U.S. company as either the direct acquiror or the acquiror’s ultimate parent. Canadian and German firms were the most active buyers, and Sandvik AB from Sweden was involved in two transactions. Several of these are in the highlighted transactions table below. We believe the robust U.S. economy and more now-attractive corporate tax rates will auger well for strong additional in-bound investment.

Another six of the transactions were in the Oil & Gas industry, specifically drilling and development goods and equipment.

Read more »

M&A News In The Business Services Industry Sector

By Brad Purifoy | Nov 08, 2018

The report below gives a good overview of the fourth quarter M&A activity in the Business Services Industry Sector. M&A activity for North American based target companies in the Business Services sector for Q3 2018 included 256 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in August when Intertek Group Plc acquired Alchemy Systems LP, a portfolio company of Riverside Partners LLC, for US$480 million in cash. The deal was funded through Intertek Group Plc’s cash and debt facilities. The transaction would allow Intertek Group Plc to expand its assurance services into food and retail industry. Founded in 2003, Alchemy Systems LP is located in Austin, Texas and provides workforce training, coaching and communications programs to food companies.

Business process outsourcing, which can be a cheaper and more effective option for many businesses, continues to grow as emerging markets like India and the Philippines offer cost-effective alternatives to full-time employees.

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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, a Columbia, Missouri based investment firm, on its web site and it is republished by CFA with approval.

M&A News In The Healthcare Industry Sector

By Daniel Sirvent | Nov 01, 2018

The report below gives a good overview of the fourth quarter M&A activity in the Healthcare Industry Sector.  M&A activity for North American based target companies in the Healthcare sector for Q3 2018 included over 200 closed deals, according to data published by industry data tracker FactSet, PitchBook and CFA research.

One of the notable middle market transactions closed in September when HCA Houston Healthcare, a subsidiary of HCA Gulf Coast Division, which is ultimately owned by HCA Healthcare, Inc., acquired North Cypress Medical Center for $148 million. The acquisition complements HCA Houston Healthcare’s medical services. North Cypress Medical Center is located in Houston, Texas.

Read more »

M&A Quarterly News In The Energy Industry Sector

By Roy Graham | Oct 26, 2018

The report below gives a good overview of the fourth quarter M&A activity in the Energy Industry Sector. M&A activity for North American based target companies in the Energy sector for Q3 2018 included 130 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in July when Independence Contract Drilling, Inc. acquired Sidewinder Drilling. LLC for US$148.8 million in stock. The acquisition complements Independence Contract Drilling’s existing pad-optimal drilling fleets and operations focused in the Permian Basin, Haynesville region and other basins in Texas. Independence Contract Drilling engages in the provision of land-based contract drilling services for oil and natural gas producers. Founded in 2011, Sidewinder Drilling is located in Houston, Texas and owns and operates a fleet of premium land drilling rigs and provides contract drilling services.

During the past decade, the U.S. trade gap for energy products narrowed. From 2003 to 2007, the value of energy imports was about 10 times greater than the value of exports.

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M&A News In The Wholesale Distribution Industry Sector

By Jeremiah Hughes | Oct 23, 2018

The report below gives a good overview of the fourth quarter M&A activity in the Wholesale Distribution Industry Sector. M&A activity for North American based target companies in the Wholesale and Distribution sector for Q2 2018 included 112 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in September when DCC Technology Ltd, a subsidiary of DCC Plc, acquired JAM Industries Ltd for CAD220.5 million (US$170 million). The acquisition expands DCC Technology’s service offering and business presence in Canada. JAM Industries is located in Baie-D’Urfé, Québec, Canada and distributes musical instruments and accessories. It had revenue of approximately CAD418.8 million (US$323 million) and has 570 employees in April 30, 2018.

Despite the current administration’s renegotiation of NAFTA, exports and imports between the United States and Canada have climbed relatively steadily over the past three decades.

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M&A Quarterly News In The Hospitality and Leisure Industry Sector

By David Hulett | Oct 23, 2018

The report below gives a good overview of the fourth quarter M&A activity in the Hospitality & Leisure Industry Sector.  M&A activity for North American based target companies in the Hospitality and Leisure sector for Q3 2018 included 43 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in August when Xenia Hotels & Resorts Inc acquired the business and assets related to the Ritz-Carlton hotel in Denver from The Ritz-Carlton Hotel Co LLC, a subsidiary of Marriott International Inc for US$100.2 million in cash. Funding for the transaction was provided by Xenia Hotels’ existing cash resources. The acquisition expands Xenia Hotels & Resorts Inc’s hotel management business. The Ritz-Carlton Denver is located in Colorado and owns and operates hotels and resorts.

Both business travel and leisure travel have been on a solid upward trend for decades now. This is driven, in part, by a growing economy and increased efficiencies in booking travel.

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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.