Exit and Growth Strategies for Middle Market Businesses

A Primer on Non-Control Capital: A Large Class of Flexible Investors That Don’t Want to Control Your Company

By Billy Amberg | Apr 08, 2021

We will cover the following topics in this short blog post:

1) Business Owners and Private Equity – The Old Paradigm

2) What is Non-Control Capital? How Prevalent is it?

3) The 11 Primary Uses of Non-Control Capital



Business Owners and Private Equity – The Old Paradigm

For many Vistage members, there are few goals that rank higher on the priority list than leaving a legacy and securing their financial future. Among the higher ranked are the classic family, health, and faith-related goals. Unfortunately, this blog post will not help you in the faith department, but it could illuminate a relatively new path to the other goals through Non-Control Capital.

Non-Control Capital has not always been popular. In fact, the very name of this relatively new kind of investment capital is indicative of business owners’ fears of investors, usually Private Equity Funds, that buy controlling stakes of companies using some or no debt. These LBO (Leveraged Buyout) and Control investors, which have been growing extremely rapidly since the 1980s, have a reputation for bending companies (sometimes painfully) to fit their target return-on-investment criteria. Many of these investors deserve this reputation, many do not. Nonetheless, business owners generally tend to be leery of these investors due to the simple fact that they are giving up control.

Enter Non-Control Capital.

What is Non-Control Capital? How prevalent is it?

Here are a few quotes everyone should pay attention to as it relates to the growth of Non-Control Capital and how it has become mainstream:

“Often characterized as a middle ground between venture capital and change-of-control acquisitions, Non-Control Capital is now firmly established as a mainstream investment strategy. Non-Control Capital was a standout strategy in 2020, reaching the highest deal value on record despite the dip in dealmaking overall. The strategy notched $62.5 billion in deal value, up 8.8% from 2019.”

Almost all that deal value occurred in the middle market, where Vistage member businesses typically fall in terms of revenues.

“Private Equity firms are clearly warming to the idea of Non-Control investments. A greater proportion of Private Equity funds now target or are willing to target Non-Control investments.”

Around 75% of the Private Equity firms Corporate Finance Associates maintains relationships with have told us in the last two years that they are now considering Non-Control investments.

“The classic Non-Control Capital target is still founder-owned, with organic growth potential and a proven business model.”

How many of your businesses could be described like this?

The 11 Primary Uses of Non-Control Capital

Of the many reasons to take investment from a Non-Control Capital (NCC) investor, 11 stand out as the most useful to business owners:

  1. Growth: NCC Is used to organically expand a business. New hires. New facilities, etc.
  2. Acquisitions: NCC is used to acquire one or more competitors or to acquire new capabilities
  3. Partner/Shareholder Buy-Out: NCC is used to buy-out an inactive or retiring partner/shareholder
  4. Management Buy-Out (MBO): NCC is used for the incumbent management to buy most or all of the ownership from a inactive founder or executive
  5. Management Buy-In: NCC is used for an external, experienced executive to buy a business from one or more inactive owners and needs more capital to affect the investment
  6. Family Ownership and Wealth Transfer: NCC is used so that a junior generation can acquire most or all of the ownership, allowing the company to remain in family name
  7. Balance Sheet Recapitalization: NCC is used to change the debt and equity mixture to a more optimal capital structure
  8. Refinancing: NCC is used to replace one form or type of debt with another or paid off outright
  9. Senior Lender Enhancement or Transition: NCC is used to facilitate growth when a company has outgrown its bank’s lending capacity
  10. De-Lever Balance Sheet: NCC is used when a company has taken on too much debt to replace some or all with equity
  11. Owner Dividend: NCC is used to pay one or more owners a non-life changing cash distribution, typically to diversify the owners’ net worth(s)

(Pitchbook, 2020 Annual US PE Breakdown)
(Seacoast Capital Partners)

Closing a Deal with a Private Equity Firm – Failure in the Finer Points

By David Sinyard | Apr 02, 2021

We recently had a large deal collapse just before closing, yielding four key takeaways.


Our client retained us last year to consider multiple options:

1) 100% sale

2) Selling a controlling interest

3) Debt financing

4) A minority investment

Our client tasked us with identifying prospects for all four options/outcomes. Because the company had only recently become profitable, many buyers, investors and lenders were concerned about sustainability of growth in both revenue and profit margins.  This feedback was enough to wind down the 100% sale and control investment efforts and focus on the other two alternatives.  Several groups expressed interest in providing senior debt financing but ultimately demurred because the Company was asset light.  We identified numerous parties interested in the minority investment option and ultimately narrowed the field to one potential partner, a well-known and long-established Private Equity Group (PEG) focused exclusively on minority investments.  An acceptable term sheet was negotiated and executed.

Deal Execution

As part of the due diligence process, we conducted interviews with CEOs of companies who had closed deals with PEG investors and members of our client’s Board of Directors and senior management were involved in those CEO calls. The PEG Investor’s due diligence process included a Quality of Earnings review, a deep dive into our client’s IP, operations, and a very thorough review of our client’s industry.  Once these reviews came back supporting the investment, the lawyers were instructed to draft closing documents. In our opinion, the work of the PEG Investor’s counsel was not supervised particularly well by the PEG Investor and as a result the documentation process dragged on for an unnecessarily long time.  Unfortunately, the PEG Investor’s counsel included terms in the final documents which were not present in the original term sheet, commonly referred to as a “re-trade” in the investment industry.  Understandably, our client was not happy about the “re-trade.”

Our client and their counsel pushed back on the points not included in the original term sheet.  Days turned into weeks of sometimes tense negotiations between opposing counsel, which turned into intense negotiations/discussions involving us, our client and the PEG Investor.  We believe the PEG Investor intended to honor the original term sheet, but poor communication with counsel as well as from the PEG Investor and our client and its Board members ultimately led to the demise of this transaction.


Several issues underpin this transaction:

  • Our client’s Board chose not to be involved in any of the discussions held between the PEG Investor and our client’s management team members. If key Board members had chosen to be involved in these discussions, it would have helped the Board get more comfortable with their potential new partner as well as facilitating better lines of communication when there were “tough” points to discuss
  • Neither our client nor the PEG Investor provided their respective legal counsel with adequate direction and oversight
  • COVID-19 exacerbated the communication/direction issues because none of the parties involved were able to physically get together to work out the issues
  • Time works against getting deals closed: and time literally killed this deal. One member of our client’s Board, who was not involved in the transaction, said, “This has taken way too long,” and helped lead the effort to stop the deal

Investment Banking Experience

Once an LOI or a term sheet is provided by an investor, it is rarely withdrawn by that investor.  They want to close on their deals and seek market credibility.  Once a LOI or term sheet is executed, the only legitimate reasons to not close are related to significant changes in the company’s financial performance or material findings during the due diligence process.  Buyers/Investors typically work to get through all the issues without changing the deal terms.  LOIs are sometimes terminated by the client, usually because of changes in their management’s strategy or because the seller’s Board is not fully committed to the chosen course of action.

The cost of  killing a deal is extensive and expensive including the client’s legal and professional support, internal time, and the investor’s costs – legal and third-party experts.  As such, a decision to execute a full or partial sale, an acquisition, or a financing requires initial and ongoing commitment from buyer/investor and seller above and beyond what is required in the normal course of business.

CFAW Celebrates 65th Anniversary

By Kim Levin | Mar 05, 2021

Corporate Finance Associates Worldwide (CFAW) is excited to celebrate its 65th anniversary providing best in class M&A advisory services to middle market companies around the globe.

CFAW was founded in Columbia, South Carolina in 1956 with a focus on serving the M&A needs of entrepreneurs. Over the years, CFAW expanded globally and now has offices in Austria, Belgium, Denmark, France, Germany, Italy, India, Ireland, Mexico, the Netherlands, Portugal, Spain, Switzerland, the United Kingdom, and throughout the USA.

CFAW is a member-owned corporation based in Los Angeles, California. “In 1956, few people would predict from our humble beginnings but with our entrepreneurial vision, our founder, Mike Rothberg, was launching a company with the ’right stuff’ that would be celebrating 65 years of successfully helping businesses owners buy and sell middle-market companies, said Jim Zipursky, CFAW’s Chairman and CEO, “Our continued success as a world leader in M&A advisory is a testimony to both the wonderful clients we serve and the world-class investment bankers working at CFAW.”

A Tax Issue Associated with PPP Loan Forgiveness

By David DuWaldt | Dec 01, 2020

In response to the U.S. economic challenges associated with the coronavirus pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted on March 27, 2020. Section 1102 of the CARES Act established the Paycheck Protection Program (PPP) whereby federal guaranteed loans were made to businesses with not more than 500 employees, as well as nonprofit organizations, veterans organizations, tribal concerns, and self-employed individuals.

Initially, the covered period of the PPP loan was for eight weeks beginning on the day the loan was funded; however, the covered period was later expanded to twenty-four weeks. Qualified expenditures made during the covered period can lead to loan forgiveness after the expiration of the covered period. Section 1106(i) of the CARES Act specifically provides that any forgiveness of the loan is excluded from gross income for income tax reporting. The CARES Act did not include any language with respect to the tax treatment of expenses paid from the PPP loan proceeds.

On April 30, the Internal Revenue Service released Notice 2020-32. Basically, the notice provides that, to the extent of the loan forgiveness, expenses paid from proceeds of the PPP loan are not deductible. The reason why the pertinent deductions are not allowed is due to the application of IRC Section 265, which essentially states that expenses allocable to tax-exempt income are not deductible.

The House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) on May 15; however, the bill was not well received by the Senate. Included in the HEROES Act was language that allowed expenses paid from the proceeds of a PPP loan to be deducted even if the loan is forgiven. It is worth noting that in early May, the Senate introduced the Small Business Expense Protection Act of 2020, which includes a provision that expenses paid from proceeds of a PPP loan can be deducted even with loan forgiveness. That bill was not approved by the Senate. Based on the foregoing proposed legislation, it appears that Congress intended to allow the expenses paid from proceeds of forgiven loans to be deductible.

In early October, a revised version of the HEROES Act was passed by the House of Representatives, which again included the allowance of deductions paid from PPP loan proceeds even with loan forgiveness. On November 18, the Internal Revenue Service issued Revenue Ruling 2020-27 and then supplemented it with Revenue Procedure 2020-51. Again, the position of the IRS is that the pertinent expenses, to the extent of loan forgiveness, are not deductible.

Here is an illustration which highlights the tax reporting issue: Assume there is a C corporation taxpayer that has a tax year which ends on August 31. The corporation taxpayer took out the PPP loan in late June and the covered period based on 24 weeks has not expired at the end of August. The loan is still outstanding on August 31 and the corporation taxpayer has not yet filed the loan forgiveness application. The Federal income tax return is due by December 15. If the return is going to be filed timely by December 15, should the expenses paid with loan proceeds be deducted? This is a situation where it is probably best to extend the return and wait to see if a portion or the entire loan amount will be forgiven. However, enough tax needs to be paid with the extension to avoid an underpayment penalty plus interest when the return is filed. It seems prudent for the extension payment to be determined based on the assumption that the pertinent expenses will not be deductible due to anticipated PPP loan forgiveness.

There will probably be a substantial number of business-related taxpayers, with a calendar tax year, filing extensions in 2021 to see if legislation passes and clears up this tax deduction issue associated with PPP loan forgiveness.

Investment Bankers’ Impact on Acquisition Premiums

By Robert St. Germain | Nov 09, 2020

In previous blogs, my colleagues and I have discussed the many “qualitative” benefits of business owners using investment bankers (IB) to facilitate the sale of their companies. Among those cited sellers’ benefits are:

1.) Realistic valuations;

2.) Experience and expertise in the competitive and protocol driven M&A process;

3.) Access to the universe of potential buyers;

4.) Insulation during negotiations; and

5.) Reduced distractions from continuing to manage their enterprises during the process.

Importantly, implicit in the above is the expectation that using IBs also results in positive impacts on the selling prices i.e. the associated “quantitative” benefit. Proof of the reasonableness of that expectation can be derived from the study titled “Does Hiring M&A Advisers Matter for Private Sellers?” by Anup Agrawal, Tommy Cooper, Qin Lian, and Qiming Wang with the current draft dated November 2018.

The study is statistically rigorous and I recommend readers explore it on their own. However, the findings, which are based on 1,554 acquisitions of private companies during the period 1993-2010, are very enlightening as highlighted below:

1.) Private sellers that hire advisers receive significantly higher acquisition premiums (i.e. from 6% to 25%);

2.) The presence of sell-side advisers in deals involving private sellers has a negative effect (i.e. -7%) on announcement returns to (public) acquirers, consistent with the idea that advisers increase the bargaining power of private sellers; and

3.) M&A advisers, especially top investment banks, can find and negotiate better deals for private sellers.

In combination, the qualitative and quantitative benefits make for a compelling case to hire IBs to assist in the selling of private companies.

If participating in a professionally run sale process to maximize the return on your life’s work is of interest, contact your local CFA office, which is staffed with senior, securities licensed investment bankers operating in the context of a worldwide organization with over six decades experience assisting business owners sell their companies.

Covid Can’t Beat This Seller’s Market

By Terry Fick | Oct 02, 2020

There is good news in the air for anyone thinking about or in the process of selling a business. While the Moody’s graph below depicts, the North American M&A results fell off a cliff in April, you also see that activity has almost returned to last August levels in number of deals and surpassed that level in total value of deals!

Surprised? Let’s look at the “Why?” and “What does it mean?”.

The Why may lie just below the Covid press, but the answers we continue to get from buyers and lenders is threefold:

  1. There is simply too much capital (corporate and Private Equity) looking for good acquisitions for them to sit still. Corporations are finding it even harder to grow today, so the solution is growth via acquisition. The slowdown in the second quarter puts extra pressure on PE to find and close acquisitions. When they raised their new funds last year and early this year, they did not promise their investors “if we don’t have a pandemic, we will perform and put your money to work.”
  2. Buyers now feel they can more clearly see the real impact of Covid on the targets they are considering and as we move further through that chaos, they can also get a better picture as to what a target may look like at the end of this period.
  3. Buyers and seller are getting more comfortable with the new rules and limitations on face to face meetings. Zoom is taking deals further into the process that before Covid, and buyers are getting more comfortable traveling when necessary. Life goes on.

Outside valuation professional are telling CFA that values for good companies are holding to pre Covid levels across the board. Other factors include some level of deal structure when that can maximize value for the seller and lower risk for the buyer. Also good seller are simply holding their ground and telling prospective buyers they won’t take lower offers due to this temporary environment. The buyers know there is competition for the attractive targets.

So what does this mean to sellers? The market for sellers is surprisingly good. At some point, the laws of supply and demand will start to even the odds as more and more companies get ready and come to the marketplace. Now don’t get me wrong. It takes time for that shift to come to fruition and there will still be plenty of capital to go around. The difference will be that just as sellers enjoy the competition of many buyers, the buyers will start to have more options relative to where to put their money.

What about those companies that are not doing so well during this Pandemic but don’t want to be valued on a more cloudy rebound from Covid? You might look into selling some part of the company to bring in some new capital and boost your growth curve. That way you create even more value later on and gives you time to look for a better window to sell the balance at higher prices.

I guess the main takeaway is that most sellers can defeat Covid, at least financially. And you may just pull one over on the Tax Man while you are at it.

The Value of Middle Market Investment Bankers

By Robert St. Germain | Sep 03, 2020

During these challenging COVID-19 times, most long-tenured business owners are likely shouting, if not out loud then in their minds, “Oh no, not again!!!” as they are reminded of the Great Recession of 2008 and the many years it took for them to recover from that downturn. Today’s uncertainties may have them thinking that it is finally time to consider an exit.

The decision to exit from a business is very personal and generally results from answering questions like: “Do I have the energy/interest/health to continue running my business?”; “Do I have tolerance for the continued financial risk of supporting my business?”; and “Do I have a well-defined post-close life plan that I know I would enjoy as a ‘former business owner’?”.

When answering those questions leads to the decision to sell the business, the typical next question is “Should I sell my business on my own or hire an investment banker to help me do what I (likely) have never done before?”

The answer to the question of using an investment banker (IB) or not can be informed by revisiting a study titled The Value of Middle Market Investment Bankers published by Fairfield University in October 2016. The study’s purpose was to answer two basic questions of its own: a.) Do IBs add value to the business sale process?; and b.) Which IB service do business sellers value most?

The study surveyed 85 business owners who utilized IBs to sell their privately held companies or majority stakes therein for between $10M and $250M during the period 2011 to 2016. The results were quite illuminating.

To the study’s first question of whether or not IBs added value to their respective sale processes, 100% of the surveyed owners indicated their IBs did add either moderate (31%) or significant (69%) value to their processes and the achievement of successful transactions.

To the study’s second question, the owners were asked to rank by value to them eight specific services provided by their IBs. The owners ranked first and foremost the management of the complex M&A process and its associated strategy setting as the most important service of their IBs in support of their companies’ sales.

For the uninitiated, that M&A process and strategy setting typically include: a.) establishing pricing/valuation expectations; b.) crafting compelling marketing documents; c.) identifying all suitable strategic and financial potential buyers; d.) conducting the outreach campaign to those potential buyers; e.) establishing a virtual data room to house due diligence information appropriate for each stage of the process; f.) creating and maintaining competition between potential buyers to maximize shareholder value in the outcome; g.) calling for and negotiating indications of interest (IOI) to down-select to the sub-set of most viable buyers; h.) managing the post-IOI seller/buyer interface to include conference calls, management presentations and on-site visits; i.) calling for and negotiating letters of intent (LOI) to down-select to an exclusive potential buyer; j.) facilitating final due diligence during the post-LOI period; k.) assisting in the negotiation of the sale/purchase agreement and its associated documents; and l.) maintaining confidentiality throughout the entire process.

If participating in a professionally run sale process to maximize the return on your life’s work is of interest, contact your local CFA office, which is staffed with senior, securities licensed investment bankers operating in the context of a worldwide organization with over six decades experience assisting business owners sell their companies.

Measuring Growth and Profits

By Dan Vermeire | Aug 21, 2020

Business owners often face a crossroads. Should I invest to create growth? Or should I keep expenses in check and generate profits? It is usually hard to have both.

This question gets compounded in an M&A opportunity – Will my valuation be penalized because I invested for growth, rather than profits? How can I keep running my business-as-usual when I want to maximize the valuation?


The Rule of 40

In the technology sector, there is a handy equation that helps assess a company and considers both growth and profits – called the Rule of 40.
Simply stated: Revenue Growth % PLUS EBITDA Margin % should be 40 or more.
An example: Revenue growth over last year is 20% and the adjusted EBITDA margin is 25%. That equals 45, which is more than 40.

Looking more closely, you can see that a high investment in expenses like sales and marketing should generate higher revenue growth, though profits may be lower. This is particularly true of start-ups and younger companies. If the revenue growth isn’t that good, then perhaps rethink where the investment is made. Conversely, keeping expenses low and foregoing those investments should yield a higher bottom line. This could be the case of more mature companies with well established market relationships and product lines.

This rule can be applied to a variety of companies, both startups and mature, because it considers both growth and profitability. Most analysts will do this measurement over multiple years and also apply it to the forecast. While the number 40 is a recognized benchmark in the software sector, other benchmarks can apply to other sectors such as manufacturing, processing, services, and distribution.

If you are considering an M&A transaction, be sure to talk to a professional and discuss the balance between growth and profitability.

First Half 2020 M&A Surprisingly Active

By Roy Graham | Aug 04, 2020

While there were significant regional differences, first half 2020 M&A transaction numbers are in and they are better than many would expect. Refinitiv™ reports there were 20,728 deals under US$500 million closed globally and 5,152 deals in that size range closed in the US. As the chart shows, the second quarter was lower than the first but also not by as much as many might have expected.

Refinitiv™ reported that worldwide M&A total value declined by 15% compared to the first half of 2019. In the US, the decline was only 6% in both total value and number of transactions. Other regions were hit harder with Europe off 26% in number of transactions and 31% in total value.

With so much COVID related disruption in the economy, how do we explain why activity has not declined more? Firstly, except for the energy sector, the COVID impact did not hit most sectors until the tail of Q1. Additionally, Q2 was not down to the extent many would have expected with 2,514 US closed deals reported in Q2 vs 2,638 reported in Q1.

Technology has proven to be highly resistant to COVID’s impact and was barely down at -3% compared to a year ago. The technology sector represented 17% of all deals to lead all sectors while real estate related M&A totaled 15% of first half deals. There are also some deals that are being driven by necessity though US government assistance programs have clearly helped to limit the number in the US, at least for now.

While some companies are electing to defer their plans to go to market, others are moving forward. Companies that are going to market are generally finding many interested but cautious buyers as buyer demand remains keen while the number of sellers has diminished. In fact, PwC reported a surge in enterprise multiples during Q2 as investors rushed to invest in technology, media and telecom companies.

As government assistance programs taper off, we expect to see more interest in non-control equity and debt investments from private equity sources. Many private equity sources are actively promoting their existing non-control interests and others are rolling out new programs in anticipation of companies that need to strengthen their balance sheets to address bank concerns.

For more information contact your local Corporate Finance Associates investment banker. We will be pleased to discuss your questions without obligation.

Scenario Planning

By Andrew Baird | Jun 03, 2020

In January 2019, how many of us could have envisaged the type of difficulties which have hit our businesses in the last few months? Scenario planning helps you to review what you can control and what you cannot – Dick Cheney’s famous “Unknown unknowns”. It helps you to test and challenge the assumptions you make about the future shape of your business – even more important when there is a global pandemic!

A starting point is to try to define what you don’t know about the future and consider which issues would have the biggest impact on your business.

Go Back To The Basics

REVENUE – Customer numbers, what might affect supply, can you satisfy likely demand?
COSTS – How to price changes, impact of changes to credit terms.

Don’t make it too complicated – too many uncertainties will drive you mad!

Have Current Information

CASH FLOW – Accurate forecasts -both weekly and monthly are an essential tool.
SENSITIVITY ANALYSIS – Changing the key drivers in your cash flow forecast will show how the shape of your business could change.

Develop Your Scenarios

Don’t just plan for the worst – it’s good to know exactly how things could be if your assumptions are sound.
Is that “Ideal World” a serious possibility in the current environment?
If not – how might Covid-19 affect your assumptions? In that case, what do you need to do to achieve an acceptable outcome?

Best Case

What does that “Ideal World” look like? What needs to change and are those changes within your control (e.g. how to control customer numbers!)
Use your cash flow as a basis to change policies and procedures to support the “Ideal World”.
Never forget – it’s still going to be an unpredictable world, so conserve cash to be able to deal with a sudden reversal.

Medium Case

Planning what’s between the “Ideal World” and your worst case (so arguably what’s most likely to happen!)
If your business looks unlikely to survive a medium case, now is probably the time to seek some restructuring advice (and perhaps reconsider the components of your medium case scenario!)

Reconsider the basics – for example:

If you only have 75% capacity, can you break even?
Can you introduce other cost savings?
If not, then…

Worst Case

Less likely if you can recognise early, but you know what it looks like!
Where would be the point of no return? This probably depends on cash reserves, creditor and banking relationships, asset position, etc.
A wind-down reserves calculation is invaluable – what is the minimum cash required to pay all the businesses liabilities and avoid needing an expensive insolvency process.
If you have any concerns, insolvency advice is best taken early, before insolvency seems inevitable.

Scenario Planning is a valuable means of assessing your business and could be considered as important a part of regular review as examining the P&L and Balance Sheet.