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Capital Ideas for Middle Market Businesses

Welcome to this issue of Capital Ideas, our newsletter dedicated to business selling, business buying and financial resources for mid-market companies.


Is an Acquisition Strategy Viable For a Small Company?

By Terry Fick, Managing Director
Dallas Office
Corporate Finance Associates

Gears

Most small companies never think about acquisition as a viable strategy and many that do dismiss it as unfeasible. However, in some instances, a lower middle market privately held firm can reap huge benefits from acquiring one or more smaller companies or a company of equal size. That strategy is easier today than ever due to the availability, flexibility and cost of debt. Let’s take a look at one such success story implemented by a CFA client.

A B-to-B service company earning $5 Million of EBITDA on $20 Million of revenue saw acquisition as a strategy to address three issues that raised their risk profile and lowered their market value.

  1. They had a significant customer concentration issue.
  2. Their fortunes were tied to a less than stable industry.
  3. The company had likely reached capacity within their geographic market.

Read more »


Seller Notes: Magical Capital

By John Hammett, Managing Director
Minneapolis Office
Corporate Finance Associates

Why do we call Seller Notes “Magical Capital”? Because Seller Notes have different properties depending on who is looking. Buyers treat them as debt; banks think that they are equity.

The Seller Note

A seller note is a debt security that is issued by the buyer of a company to the seller as partial payment for the company. As a debt security, a seller note has a claim on the company’s assets before the equity owned by the shareholders, but the seller note is “subordinated” to the bank loans (“Senior Debt”).

To the buyer, a Seller Note is debt because they are borrowed funds, not equity. The buyer pays interest on the notes at a lower rate (10%) than the return the buyer will earn on his equity (25%).

To the banks the buyer will use to finance the deal, a Seller Note looks like equity because in the bank’s eyes the Seller Note is lower in priority than the Senior Debt. Company seller notes that are part of a 50/50 debt to equity ratio can look like to the bank like it is only 30% debt to 70% equity.

Read more »


Feature Acquisition

tombstone

Situation: Global Inventures is a specialized services provider that helps customers establish technology alliances and ecosystems to promote technology standards (e.g., HDMI). In addition to promoting standards by building the member base, the company provides a full suite of outsourced back-office services and is widely recognized as a leader in its space. The CEO and founder built the business over a twenty-year period, and recognized the need to be a part of a larger organization to offer scale and services to an increasing global customer base.

Solution: Discussions with SmithBucklin – the world’s largest alliance management company, based in Chicago, began in spring of 2012. The philosophies and cultures of both companies were compatible and each provided a unique set of attributes that were complementary and synergistic. Negotiating a buy-out of the equity interest of Inventure’s major shareholders and the orderly dissolution of their stock option plan in compliance with state securities laws and the satisfaction of option holders took some time and careful planning. In May 2013 the transaction was completed. SmithBucklin acquired Inventures in a private transaction.


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