Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Corporate Finance’ Category

Buying a company with equity? You might need a Purchaser Representative!

By Gunther Hofmann | Jul 20, 2021

Mergers and Acquisitions are on the rise again. After a surprisingly brief hiatus at the beginning of the global COVID outbreak, companies are buying each other at an impressive rate again.

And with the current elevated level of valuations, many companies take advantage of their equity as acquisition currency. They go shopping, and instead of paying with cash, they pay with their stock. And if that stock is not registered with the SEC (either because the company is private, or the public stock is not yet registered), this is a private placement – and the buyer needs to comply with regulations that allow for the issuance of restricted stock.

The most common exemption used in these cases is Rule 506 of Regulation D of the Securities Act of 1933. This allows for the sale of stock for an unlimited dollar amount from accredited investors in a non-public offering. However, the number of non-accredited investors is limited to 35.

Most investors in the target company are very well accredited. However, not all employees that have exercised stock options are accredited.

Furthermore, these 35 non-accredited investors need to be “sophisticated”. They may be sophisticated in many ways, but how the SEC describes it in Rule 506(b), they must have “either alone or with his purchaser representative(s) such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.”

To make sure that the sophistication requirement is fulfilled, many buyers insist that the seller hires a Purchaser Representative that helps the non-accredited investors to understand the risks and merits of the transaction.

The purchaser representative itself is defined in Rule 501 of the Securities Act:

He or she must have “such knowledge and experience in financial and business matters that he is capable of evaluating, alone, or together with other purchaser representatives of the purchaser, or together with the purchaser, the merits and risks of the prospective investment”.

The Purchaser Representative also needs to be independent of the issuer, meaning he can’t be an affiliate, director, officer or other employee of the issuer, or beneficial owner of 10 percent or more of any class of the equity securities or of the equity interest in the issuer (with some exceptions).

The Purchaser Representative also needs to be acknowledged by the purchaser in writing.

CFA regularly acts as Purchaser Representative during Mergers and Acquisitions, helping non-accredited shareholders of target companies to understand the risks and merits of a proposed transaction – and in the course helping buyers stay compliant with private placement rules.

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.

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.


By Kregg Kiel | May 04, 2020

Everyone wants an ending, a date on the calendar when all of this is “officially behind us”. However, that seems unlikely to occur in the foreseeable future. This crisis will resolve itself in fits and starts. What we will see is an M&A landscape that may be permanently changed. We’ll focus here on what will happen as the economy begins to re-awaken and what happens if we hit headwinds.

PE firms interested in acquisitions are already moving beyond the triage stage internally. At the outset of this crisis, firms were focused on the fiscal health of their portfolio companies, not acquisitions. That will change.

The internal laser focus on existing portfolio companies will lessen as PE firms stabilize the salvageable investments and cull those that are not. This will allow them to again turn their attention to deploying capital into acquisition targets – many of which have become more attractive due to the repricing of the market. Opportunities are likely to abound.

Some business owners who were considering selling their companies before COVID may hold off on exiting in order to avoid selling at a severe discount. Instead, they will focus on rethinking how they do business in a post-COVID world and implement those plans in hopes of increasing enterprise value. Alternatively, some sellers may choose to accelerate their plans to exit – especially those at risk in the Baby Boomer generation.

Debt is a key ingredient in most private equity transactions. Without lenders’ debt commitments, most deals have no chance of reaching the finish line. Banks are currently digging out from their government assistance workload which has demanded most of their attention over the past month. While this focus may change as we move into May, it is very unlikely that it will be business as usual anytime soon. Lenders are now very tentative given their inability to access economic risk and/or assign a value to potential transactions. They will also need to devote additional resources to distressed clients who begin to struggle with cash flow issues.

Public acquirers who can rely less on debt and more upon their own stock as currency for acquisitions may benefit the most during a debt tightening. Watch for public companies to become more aggressive in the post-COVID environment.

For all M&A participants, business development will still be essential in this new environment, however, it will be quite different. The basic ability to have face-to-face meetings has changed for the foreseeable future. Even if permitted, would you go out to lunch with a prospect next week? Even, if you are comfortable with face-to-face meetings, it makes good business sense to extend the courtesy of asking invitees if they are. There will be a varying level of discomfort with having face-to-face interactions for quite some time — until we have a vaccine.

The key to dealing with this new reality is to learn to excel in the virtual world. As much as we’ve learned to rely on virtual online meetings in the post-COVID world, most of those interactions have been with co-workers, business associations and other groups we are not actually selling to or negotiating with. Being able to successfully log into a meeting with sound and video actually working is no longer enough. The investment banking industry will need to grow comfortable with a slew of new practices. Getting transactions to closing (which very few have done during this crisis) will prove to be much more difficult. The need to read body language, make eye contact, and observe the myriad other non-verbal cues associated with interpersonal communications did not go away with the onset of the pandemic. They’ve merely been swept aside while we attempt to cope with the rapid developments that have occurred over the past two months. Be innovative in your use of remote technology. Having the ability to successfully leverage virtual tools for initial business development through the close of a deal is going to be what separates those who are successful from those who aren’t.

Many countries are beginning to cautiously roll back their stay at home rules. What happens if COVID spikes again just as the economy begins to regain its footing? This scenario has to be anticipated and planned for as a real possibility. Imagine that you had known in advance that the current crisis was going to happen. Now, assume a scenario where this “re-opening” of the economy fails at least once and think about what you would have done to prepare for it — because this time you can. Give serious thought to what will happen to the economy and how it will affect the climate for M&A transactions as well as your clients’ businesses. And, again, learn to excel in the virtual world. Developing a plan to address a potential economic relapse before it happens could be the difference between managing your way through another downturn and throwing in the towel. Be safe.

CFA is capable of providing assistance along the entire spectrum of M&A advisory services. We have over 60 managing directors in 30 offices (in the US and abroad) with broad expertise in a number of industry verticals. For more information, contact your closest CFA office.

Capital Markets and M&A | Under COVID-19

By Joe Sands | Apr 17, 2020


The unprecedented shut down of the US economy has jolted all industries and left only a few benefiting from the crisis such as select healthcare, food manufacturing, technology, ecommerce, grocery and mass drug stores.  The capital markets have been highly difficult from a logistical point of view with the ‘stay at home orders’ and firms having to restructure operations to serve clients and market participants unable to meet in person or visit the businesses.

The lack of transparency, liquidity, precedent or even the ability to predict when and in what form the economy will reopen makes the ability to value businesses and securities difficult to say the least, never mind assessing risk in a business or a transaction.  We are mindful that as fast as this crisis arose, it’s becoming more conceivable that a substantial, but not full reversal may occur in the near term over a couple of quarters. We are hopeful.


As rapid as the crisis hit, the US fiscal and monetary policy response has been equally rapid and unbelievably robust.  In addition to the government response, the responses from the medical & scientific communities and the private sector has been like nothing ever seen before.  The US government and the Federal Reserve provided in excess of $4 trillion of liquidity within weeks and before much of the damage, not months after the damage as in previous crises.  The public equity markets fell by an astounding 34% from their peak in only five weeks and bounced back in three weeks as a result of the fiscal and monetary policies and some encouraging signs of the virus subsiding or not even coming close to the disastrous scenarios previously forecast.


On a case by case basis, each client engagement is being evaluated based on the stage of the engagement, specific business issues, and industry dynamics.  As always, we are focusing on our clients’ best interests and focusing on presenting options and the benefits and risks of each option.  Our goal remains to maximize value, deal terms and the probability of closing in each of our engagements.  For most sell-side M&A and growth capital raise engagements, the general options being reviewed are (1) pause deal marketing until the capital markets settle down, (2) expand the depth of due diligence, (3) extend process timeline to allow for additional due diligence or expanding the marketing outreach, and (4) modify deal terms to reallocate risk sharing.  For buy-side M&A, additional efforts are implemented to the extent that more favorable valuations and targets may be available.  Experience and expertise are what is most important for clients to make informed decisions in these challenging times and that is our mission. Read more »

CFA | COVID-19 Financial Impact, Assessment and Strategy Tool

By Peter Moore | Apr 16, 2020

The Crisis in Business Context

While the health crisis is the threat the Coronavirus holds over each of us, the business consequences are financial and often felt before anyone’s health has been compromised by the virus. Our economy relies upon cash flowing from one person and organization to another, and another, and another and so on. This “cash flow” circulation throughout our entire economy, when  measured is the “velocity” of money. The faster it flows the more robust our economy becomes. Most of our business economic arrangements depend on the basic trust of each party to a transaction, no matter how small the sale or how large the contract. This trust is shaken right now because of the uncertainty of our businesses and our livelihoods. The Federal Government’s job with stimulus funding is an attempt to restore the trust that helps to keep our economy going. Let’s all try and do our part and keep the cash flow moving.   See: What Is Money Velocity and Why Does It Matter?

The worksheets on the following two pages provide a way of looking at your company’s situation through the lens of your financial statements – both balance sheet (your financial condition at a point in time) and your income statement (your financial performance over a period of time). Looking closely at each line item of your own unique financial statements provides an orderly way of considering what and where you may be able to positively impact your own financial circumstances. Can you reduce liability, collect on assets owed to you, reduce an expense, and eliminate some overhead? All of these you’ve probably already looked at somewhat, but as circumstances continue to change it might be helpful to look even more carefully by visiting this worksheet for your business and your home situation too. Read more »