InSight

Exit and Growth Strategies for Middle Market Businesses

M&A News In The Consumer And Retail Industry

By Joe Sands | Sep 08, 2017

The report below gives a good overview of the third quarter M&A activity in the Consumer and Retail Industry Sector. M&A activity for North American based target companies in the Consumer and Retail sector for Q2 2017 included 118 closed deals, according to data published by industry data tracker FactSet. The average purchase price was $268 million.

The brick-and-mortar retail sector continues to suffer and shoppers buying habits shift toward online sales.

Retailers who rely on 0% financing deals to encourage big-ticket purchases are facing leaner profits or the possibility of lost sales as interest rates rise, according to The Wall Street Journal. Historically low interest rates since 2009 have enabled US retailers to effectively cover the financing costs for customers by paying a bank or finance company a few percentage points of a product’s purchase price upfront: a practice known as “buying down the rate to zero.” As the US economy improves, the Federal Reserve Bank has begun raising rates, most recently in March 2017.

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Q3 – 2017 Business Services | M&A

By Brad Purifoy | Sep 01, 2017

M&A activity for North American based target companies in the Business Services sector for Q2 2017 included 590 closed deals, according to data published by industry data tracker FactSet.

One of the largest middle market deals of the quarter was announced in April when Belgacom International Carrier Services SA, a subsidiary of Proximus SA, ultimately owned by the Government of Belgium, entered into a definitive agreement to acquire TeleSign Corp, a portfolio company of Summit Partners LP, Adams Street Partners LLC, March Capital Partners and Telstra Ventures, for US$230 million in cash with an undisclosed amount in contingent payout. TeleSign provides internet, mobile and cloud authentication and verification services. The company was founded in 2005 and is headquartered in Marina del Rey, CA.

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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.


What is a Strategic Buyer?

By George Walden | Jul 05, 2017

A strategic buyer is typically an operating company that usually has some relationship in the product line or service sector you are in. You would often consider them a competitor, supplier and perhaps even a customer of your company. Bottom line is they usually have strong industry knowledge.

Strategic buyers are looking for synergies or additions. These synergistic benefits are often the motivation behind the acquisition. As a result, valuations can be higher for a strategic buyer, because the synergies created can bring greater returns. There is an expression in my industry, solve a problem for a strategic buyer and the solution can create very different valuation math.

    • 1. Expansion can be vertical, such as acquiring a supplier or customer or
    • 2. Horizontal, expanding in news markets or products.

Strategic acquisitions tend to be accretive. Economies of scale and scope usually come into play in strategic acquisitions.

As I implied during the last M&A minute. The Strategic buyer doesn’t always need your management team, personnel, facilities, or back room services. They often bring their own capabilities to the table. Where there is duplication, those positions, services and processes are often consolidated or eliminated. Their goal is usually one of integration to their existing systems. As a general rule, they tend to be all or nothing in the acquisition meaning they will typically buy only a 100% of the company.

Strategic acquirers are just one of the two primary types of buyers. Next month we will dig deeper into the other primary group and that is Financial buyers.


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.


4 Ways to Maximize the Proceeds from the Sale of Your Business

By Brian Ballo | Jun 27, 2017

Naturally, business owners believe that their business can be sold at the higher end of the pricing range. However, an attractive Letter of Intent to purchase a business typically does not come unsolicited. Therefore, to increase the odds of maximizing the price and proceeds from the sale of your business, the following tactical steps can be taken:

1. Focus on Increasing EBITDA

If corporate and private equity group buyers are focused on EBITDA, then you should be also. Cash flow is king. That means, improving your income statement is the best way of maximizing the price at which the business sells.

Owners who have structured business operations to benefit themselves and their families, through above-market salaries or tax treatments, should prepare recasted financial statements to exclude certain perks in order to present the company as a profit-generating engine to potential new owners. Items such as personal expenses, charitable contributions, and significant non-recurring expenses can also be added-back to earnings.

Real EBITDA can be bolstered by focusing on the business’ core competency, or the most profitable income streams, which is also more appealing to a buyer than a company going in many different directions at once. Obtain profit and loss statements by division, or by customer-type, then address weaknesses, before such risks are identified by potential buyers.

Buyers seek a return on investment, and pay a premium for a company with a healthy growth trend. A strong brand, loyal customers, and competitive market positioning, are all attractive. Mitigating risks such as customer concentration and product diversity will also enhance value.

2. Assemble Accurate Financial and Operational information

Buyers pay more when they are comfortable that historical and pro-forma financial statements are accurate. Three years audited financial statements is a best practice, although some buyers may accept reviewed financials instead.
Having updated and accurate financial and operational information will also enable you, as a business owner, to understand and make pre-sale improvements. In addition, good documentation will also permit your advisory team to identify relationships or transactions which could have purchase price implications, such as assets on the balance sheet that have been valued on a historical basis that need to be adjusted to reflect market prices.
The buyer’s due diligence requests are coming. To give the buyer confidence, and to assist your advisors in responding to the buyer’s requests, having accurate financial data assembled, will make the buyer feel he knows what he is getting, and likely result in an increased purchase price. Your investment banker will summarize the company’s numbers and story in an initial Confidential Descriptive Memorandum, then, organize the data in a Virtual Deal Room password protected access.

3. Strengthen the Management Team and Operational Systems

Buyers pay more when they are comfortable that the company’s earnings trend will continue post-transaction. The challenge is that if the seller CEO – who has been making all the key decisions, and has the primary relationships with key customers – will be transitioning out of the business, with part of the purchase price paid an earn-out.

The CEO owner can mitigate the risks to the company, and himself, by strengthening the management team, including, identifying a replacement CEO, who will remain with the company post sale. This way, the existing CEO can move to a less demanding new position, while the probability remains good that projected earnings estimates will be to hit.

Part of improving housekeeping should also focus on systems and procedures, particularly, the information technology network. Outdated technology and processes, will negatively impact value. A good IT system will create the favorable impression that the company is poised to move into the future. The procedures manuals should also be updated, so the buyer is able to operate the business without you.

4. Achieve Teamwork Throughout the Sale Process

Corporate Finance Associates, a major investment banking services firm, works to implement NextStep, a systematic, team-driven, sale of business program, which guides business owners through the process of extracting both themselves and their wealth from the business. CFA approaches exit planning in a systematic way, working as part of a team of advisors to ensure that the process addresses all options, and is focused on pursuing the goals and objectives established by the business owner.

As the investment banker, CFA focuses on creating a competitive bidding environment amongst multiple buyer candidates. The other team member, including a Wealth Advisor, Tax Attorney, and an Accountant, provide expert counsel in their respective disciplines to help ensure the business owner is fully informed as to the merits and demerits of proposed strategies.

An effective team will support the ongoing performance of your company during the sales process. If the owner selects a capable team of advisors, then he can focus on maintaining the financial performance of the company, while the advisory team handles all the details of closing the sale transaction.


“Who Will Buy My Business?”

By George Walden | Jun 22, 2017

Who Will Buy My Business?

As a Merger and Acquisition advisor I am often asked, “Who will buy my business?” As a rule, they fall into two primary generic categories and then several additional categories.

Mergers & Acquisitions Minute #12

A strategic buyer is typically an operating company that usually is competing in the product line or service sector you are in. You would often consider them a competitor, supplier and perhaps even a customer of your company. Bottom line is they usually have strong knowledge of your industry. They are usually looking for synergies or additions.
Strategic buyers don’t always need your management team, facilities, or back room services. They often bring their own capabilities to the table. Their goal is usually one of integration to their existing systems. They tend to be all or nothing in the acquisition meaning they will typically buy only a 100% of the company.

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.
Often they buy additional companies to gain market share, mimicking a strategic buyer, and increase their return when they exist the investment. They are not operators and often want to get behind a management team to protect the operational viability of their investment.

An ESOP (Employee Stock Ownership Plan) is used to provide a market for the shares of a departing owner of a profitable, closely held company. The Company sets up a trust fund for their employees and contributes either cash to buy company stock, contributes shares directly to the plan, or have the plan borrow money to buy shares. There are usually favorable tax consequences to an ESOP benefitting both the owner exiting and for the company continuing forward.
Interestingly, there is a lot of anecdotal evidence that empowering your people often causes better performance of the company accelerating growth and earnings. You should consider an ESOP, when you want your company to continue through your people. When you want your employees to have a long term stake in the company. With an ESOP you can sell any portion of the company you want and even in certain instances retain control.

Sponsor your management team. Consider an MBO, a management lead buyout. If your team is capable and has the in house expertise to run your company, they are a terrific option for selling some or all of your company. The financial community likes nothing better than getting behind a team with a plan.
While traditional bank financing or debt can occasionally be difficult to obtain, private equity groups and seller financing can often bridge the gap and facilitate this form of transition.

Generational transition- I have had the privilege to represent company’s transitioning, by passing the company on to the next generation. They can be the perfect vehicle for continued legacy transition.
However, just because you were born into a business does not make you the best qualified to run it. The most common mistake I see in this form of transition is not treating the next generation as a true buyer for the company. In my opinion there should be an investment into company with the next generation buying their way into the family business.

There are many ways to transition your company when the time to sell occurs. The next few episodes we will dig deeper into what these types of transitions look like and at their individual characteristics.


Avoid the Hazards of Single Suitor Negotiation

By Jeff Wright | Jun 20, 2017

Here is an issue we see all the time. A company owner gets an attractive “offer” lobbed over the transom. He’s flattered, intrigued. He’s been thinking of scaling back, maybe even selling the business and this top dollar overture has his attention. He starts to invest in the possibility and decides there is no harm in taking a meeting. This sounds like a path to a big payday and happy outcome. Right? Well, probably not.

There is a saying in our business that “one buyer is no buyer.” And while that’s a bit black and white, it does reflect the importance that we as M&A Advisors place on having multiple buyers and competition.

Back to our company owner. He meets with this suitor. He shares financials and other information. He’s getting hooked into a process and invested in an outcome. The potential buyer asks for an exclusivity period. They ask for more and more information. Our seller has now invested significant time and psychic energy in this process. The buyer finds some dings in the business and begins to adjust the price (really, downward is the only direction the price goes in situations like this). Even after many months of this cycle of information requests and price reduction, our owner is reluctant to give up, given all work and hope he has into this. Most of the leverage is with the buyer, little with the seller.

Oh, the owner has also taken his eye off the business and performance is slipping.

In our experience, most situations like this never close, waste a lot of time and may even taint the company for future sale opportunities. We believe that receiving an attractive “offer” is the perfect time for an owner to take a step back and get some professional help. Strategic and financial buyers know how to buy companies. They have teams of experts. They love the opportunity to scoop up acquisitions without competition. The playing field is lopsided in their favor as most company owners have never sold a business and when they do, it will be a “first time/last time transaction involving their biggest asset.

At CFA, our mission is to work with company owners to see that they are fairly paid for their lifetime of work, the value they have created and the risks they have taken. Hiring CFA does several things to advance this cause.

  • We bring competition to the table. With our contacts and research, we can invariably find multiple qualified buyers that will be competitive on price and terms, and do so confidentially.
  • We create a sense of urgency, keeping all buyers on a tight timeline simultaneously throughout the process.
  • The owner can focus on the company’s performance as we manage the process and interactions with buyers.
  • Valuation can be driven UP, because we don’t put a price on the company. We let the buyers do that, and drive up valuation in an auction with each other.
  • Owners have an M&A expert on their side to help structure an advantageous transaction and navigate the numerous deal traps in the definitive agreements (escrows, indemnities, working capital adjustments, consulting agreements, earn-outs, etc.)

Buyers are particularly aggressive right now, with trillions of dollars to deploy and a limited supply of sellers in the market. Buyers are contacting owners directly more than ever with enticing “offers.” We advise owners to use this sellers’ market to their advantage and hire an M&A expert to help them achieve a high value and expeditious transaction.


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