InSight

Exit and Growth Strategies for Middle Market Businesses

Buying Out A Controlling Partner

By George Walden | May 14, 2018

As an advisor for companies, I regularly encounter the situation of a minority owner wanting to buy out a controlling partner. This scenario, if handled poorly, can end in significant value destruction to the company. Owners should have a buy-sell agreement in place defining the actions that need to occur for one partner to buy out the other. Depending on the buy-sell agreement, there are a number of things a minority owner can do to make a smooth transition. Remember, this is not a situation where you’re trying to discount the value of the company. Fairness to your partner should be your first thought.

Number one, agree in advance how you both are going to measure the value of the company. What is the fair market value, should be assessed constantly? Number two, how will you and the company be able to pay for the buyout? This is an interesting dilemma for the business. This is not a situation where you’re borrowing funds to improve the company by adding equipment or funding a growth initiative. This is capital to be exchanged for equity. Banks don’t like situations that aren’t accretive. Is the company buying out the stock of the controlling shareholder or is the individual buying the stock?

A common solution to handle this situation is to have the company buy back the shares from the controlling partner in some form of structured payout, usually cash, a long term note, and occasionally, a performance upside. Another solution is to look at private equity to fund the buyout. Done with the right people, this can be a very attractive alternative because PE groups often have access to additional capital, providing financial stability, and they usually initiate growth strategies to accelerate company value.

Finally, the third, keep the conversation civil and positive. Strive to make the situation a win-win. Change is difficult for all parties in a negotiation. A poor attitude and arrogance can be very destructive to the company and to the current relationship. In closing, this is a situation where I advise using a third party negotiator such as your investment banker to facilitate the process especially if both principals trust the intermediary.


M&A Quarterly News In The Industrials Sector

By Steve Hauser | May 10, 2018

The report below presents you with a good overview on the second Quarter M&A activity in the Industrials  sector. M&A activity for North American based target companies in the Industrials sector for Q1 2018 included 60 closed deals, according to data published by industry data tracker FactSet.

One of the notable transactions of the quarter was announced in March when Tooling Technology LLC, a portfolio company of GenNx360 Capital Partners, acquired Century Tool & Gage Co, a portfolio company of First Capital Partners LLC, Broadgate Capital LLC (Texas) and Highline Equity Partners LLC, for an undisclosed amount. The transaction also includes Century Tool & Die and CTG Bel-Kur. The acquisition complements Tooling Technology LLC’s existing operations.

Manufacturing continues to adopt automation technologies to enhance quality, labor productivity and safety. While the population of robots in U.S. factories has increased dramatically the potential for further growth is enormous considering the size of the U.S. and our machine/worker ratio vs. traditional global peers Japan and Germany.

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Collaborative Transactions

By George Walden | May 09, 2018

Recently, I was asked the question, “Can a transaction be a WIN/WIN?”

In sport’s we see winners and losers and assume business is that way. If someone wins then someone must lose. Too many sellers go into a transaction with the mindset, it is my company so it is my way or the highway. Strangely enough that mindset introduces risk into the equation. Risk is usually associated with a lower valuation. Unfortunately, for sellers with that mindset buyers have other options and tend to take their moneys somewhere else.

So, what can you as a seller do to make a transaction Win/Win.

1. Know your objective:
Before you decide to sell, get the expertise and advice needed to understand what you are trying to accomplish. The sale of a privately held company is a complicated process requiring knowledge, expertise and strong negotiation skills. Few business owners possess these traits at a level sufficient to complete a transaction. Have your company evaluated and prepared for the process of going to market. Understand,” what is” a fair market value for your company. Understand in advance what is important to a buyer. How they look at your business. Surround yourself with your team of professionals, accountants, attorneys, wealth advisors and M&A advisors before you go to market. Use them to assist you in filling in the gaps in your company. Allow them to do their job.
Remember: Negotiations commenced from a position of knowledge have a greater probability of achieving the desired outcome.

2. Full Disclosure:
Be an open book. If you have prepared your company properly you should be able to provide detailed information that is both accurate and verifiable. Be candid about the strengths and reveal early in the process any weaknesses.

3. Collaborate:
Be collaborative. The best deals are those where buyers and sellers are working together for the greater good. Negotiations about price are certainly a part of all transactions. But once price is established there are many things that can usually be done to facilitate the ease of transition and ensure additional value creation.

In closing, know your objective, be candid about both the strengths and weaknesses of your company and then work collaboratively to facilitate a better outcome.


M&A News In The Business Services Industry Sector

By Brad Purifoy | May 09, 2018

The report below gives a good overview of the second 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 Q1 2018 included 897 closed deals, according to data published by industry data tracker FactSet.

One of the notable transactions of the quarter was Sentinel Capital Partners, a private equity firm that invests in companies at the lower end of the midmarket, announced the acquisition of UBEO Business Services, a provider of printer, copier and related office equipment sales and services in Texas. Terms of the deal were not disclosed. UBEO is the largest independent provider of document management equipment and related services in Texas. Through seven sales branches in the greater Austin, Dallas-Fort Worth, and Houston metropolitan areas, UBEO sells printers, copiers and other document management equipment bundled with premium maintenance contracts to mid-sized businesses, schools, municipalities and other customers.

The US business services sector generates combined annual revenue of about $1.7 trillion according to the US Census Bureau. The four largest business services segments are IT services (about 20% of industry revenue), architectural and engineering services (15%), legal services (15%), and consulting services (15%). Accounting services and scientific research each generate about 10% of revenue. Other segments include advertising and specialized design services.

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M&A News In The Healthcare Industry Sector

By Daniel Sirvent | May 08, 2018

The report below provides a good overview of the second Quarter  M&A activity in the Healthcare Industry Sector. M&A activity for North American based target companies in the Healthcare sector for Q1 2018 included 131 closed deals, according to data published by industry data tracker FactSet.
One of the notable transactions of the quarter was announced in March when Akcea Therapeutics, Inc. acquired assets related to the Inotersen and ACKEA-TTR drug licenses from Ionis Pharmaceuticals, Inc. for approximately US$1.7 billion in stock and US$90 million in contingent payout. Akcea Therapeutics, Inc. is a late-stage pharmaceutical company, which engages in the development and commercializing of drugs for the treatment of cardio metabolic diseases caused by lipid disorders.

Spending on major federal health care programs (Medicare, Medicaid, and the Affordable Care Act’s exchange subsidies) has declined as a result 23 percent drop in the cost of Medicare Part D and a 15 percent decline in the projected costs of the Affordable Care Act’s (ACA) coverage through Medicaid and the exchanges.

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M&A Quarterly News In The Energy Industry Sector

By Roy Graham | May 07, 2018

The report below presents you with a good overview on the second Quarter M&A activity in the Energy Industry SectorM&A activity for North American based target companies in the Energy sector for Q1 2018 included 58 closed deals, according to data published by industry data tracker FactSet.

One of the notable transactions of the quarter was announced in February when Fieldwood Energy, LLC acquired the deep-water Gulf of Mexico oil & gas business from Noble Energy, Inc., for US$580 million in cash and contingent payout, via insolvency. Under the terms of transaction, Fieldwood Energy paid US$480 million in cash and would pay an additional US$100 million in contingent payout. Additionally, Fieldwood Energy assumed all abandonment obligations associated with the properties, which were recorded at a book value of US$230 million as of December 31, 2017. Fieldwood Energy funded the acquisition from the proceeds from its Rights Offering. The transaction enhances Fieldwood Energy’s portfolio of oil and gas business.

The price of oil remained relatively flat in Q1 2018 fluctuating from the high to low $60s.
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M&A Quarterly News In The Hospitality and Leisure Industry Sector

By Robert Decker | May 04, 2018

The report below presents you with a good overview on the second 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 Q1 2018 included 41 closed deals, according to data published by industry data tracker FactSet.

One of the notable transactions of the quarter closed in March when Host Hotels & Resorts LP, a subsidiary of Host Hotels & Resorts, Inc., acquired Andaz Maui at Wailea Resort, Grand Hyatt San Francisco and Hyatt Regency Coconut Point Resort and Spa from Hyatt Hotels Corp for US$1 billion in cash. As part of the agreement, the three acquired hotels would continue to operate under the Hyatt brand and would be operated by Hyatt under a long-term management agreement. The transaction enables Hyatt Hotels Corp to maintain its brand presence in key markets and support the execution of its recently announced initiative to reduce real-estate ownership to unlock shareholder value.

The hospitality sector has been significantly affected by technology when it comes to bookings. This is especially evident in the booking of short-term rentals, but has been prevalent across the board. One of the key areas has been improving guest experiences including speeding up check-in and check-out times.
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M&A Quarterly News In The Financial Services Industry Sector

By David Sinyard | May 04, 2018

The report below presents you with a good overview of the second quarter M&A activity in the Financial Services Industry Sector.  M&A activity for North American based target companies in the Financial Services sector for Q1 2018 included 163 closed deals, according to data published by industry data tracker FactSet.

One of the notable transactions of the quarter was announced in January when Imperalis Holding Corp. acquired The Crypto Currency Mining Co, Inc. for US$175.3 million in stock. The acquisition would enable Imperalis Holding Corp to expand its crypto business. The Crypto Currency Mining Co. provides bitcoin mining services. Bitcoin is a peer-to-peer electronic cash system and is operated by a software that process transactions, secure the network, and keep the system synchronized.

Crypto currency trading was uneven in Q1 as prices swung heavily from month to month.

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ESOP

By George Walden | Apr 26, 2018

I’m going to talk about ESOP’s as a potential structure to be used by a business owner trying to sell his business. Why would you look at an ESOP, otherwise known as an employee stock ownership plan? Two major reasons.

One, legacy for your employees. Strategic and financial buyers often look to move businesses to make them more synergistic with other investments they have. If you form an ESOP, the company stays there, all those jobs stay there. All those people that helped you build that business, stayed there. Also there’s some empirical evidence that shows that employee owned companies do better and there’s fewer layoffs during recessions.

On a tax basis, the ESOP is a tax exempt entity. Therefore, no taxes are paid on the earnings that are generated through the company. This gives the company a significant advantage in terms of its cost of capital as it builds, as it builds its business going forward. Sellers can take advantage of certain other tax opportunities, such as a 1042 Exchange. So, from a ownership perspective, is something to really be considered. Particularly, if the business is a professional service business or has a specific contract with some vendor that they have to keep.


M&A News In The Commercial Real Estate Industry Sector

By Peter Moore | Apr 23, 2018

The report below gives a good overview of the second quarter M&A activity in the Commercial Real Estate Industry Sector. According to data released by Ten-X Commercial, a leading transaction platform for commercial real estate, commercial real estate transaction volume edged down to $117.4 billion in Q4 2017 representing a 0.5 percent decline from the prior quarter.
Following two quarters of growth, the minor drop can be linked to a $6.7 billion decline in deal volume in the industrial sector. In comparison to the same period a year earlier, investment activity plunged by 13.2 percent.

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