Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Investment Banking’ 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.

Banking Relationships and the Small Business Owner

By David Sinyard | Apr 16, 2020

I have previously written about the importance of maintaining good banking relationships.  The recent Covid-19 emergency financing reinforces this need.  As of today, April 16, 2020 the program is out of money unless the government agrees to additional funding.  Millions of applications were filed under this program.  Many will not receive funding.  Those that will are companies that have very good banking relationships.  Their bankers made it a priority to get these loans approved.  A friend of mine is a senior executive with a regional bank.  Their staff worked through the Easter weekend to process loans – ultimately 6000 loans worth $1.2 billion will be funded.  Anecdotally, I know of many who applied and were not processed.  Why?  The importance of the relationship.  These PPP loans are 100% guaranteed by the government, meaning the banks will not suffer any losses. Much is being made currently about the “Main Street Loan” program.  These loans require the banks share 5% of the risk.  The effect of this requirement will be that these loans will be made to borrowers with whom the bank has good relationships.  Good luck to those who don’t.

Are You Running Your Business as a Lifestyle or as an Investment?

By Robert St. Germain | Nov 26, 2019

As M&A advisors to privately held businesses in the lower middle market, we see companies generally divided into two camps i.e. those being operated as “lifestyles” and those being operated as “investments”.

Wikipedia describes a lifestyle business as “[one] set up and run…..primarily with the aim of sustaining a particular level of income and no more; or to provide a foundation from which [the owner can] enjoy a particular lifestyle.” Key indicators of such a business are sequential P&L statements showing little or no growth in revenues over an extended period of time. Businesses operated as investments, on the other hand, tend to have P&Ls showing a consistent upward trajectory in revenues over time.

How owners choose to operate their businesses is entirely their choice and for which there is no right or wrong answer. However, that choice should be informed and made with a full understanding of its potential implications in light of the fact that all business owners will eventually exit their businesses… is only a question of how and when.

Given that an exit is inevitable, an important consideration in how one chooses to run a business is how much value one wants to extract from or build up in the business over the owner’s tenure in preparation for that exit. Lifestyle businesses often have value depressing characteristics e.g. little/no revenue growth as cited above; focus on organic growth only; owners operating in the business and not on the business; underinvestment to increase cash flow to the owner; reliance on a concentrated set of customers/clients; contentment with being a “me too” enterprise; etc.

Businesses operated as investments typically have value enhancing characteristics e.g. consistent growth over time as noted above; focus on growth via both organic and non-organic means; strong second tier management teams; debt and/or equity infusions as required to maintain growth; broad customer/client diversity; niche leadership; etc.

Just as these two types of businesses are differentiated by their operating characteristics, so are their outcomes at the time of exit. The lifestyle business may have been very lucrative for the seller; but its very nature represents a risk to the follow-on buyer who will have to scale from a sub-optimized platform to generate an acceptable ROI. All other things being equal, that risk will be reflected in a lower valuation than that for the business run like an investment where the latter’s attributes make it more readily scalable and more likely to generate an acceptable ROI for the buyer.

Again, there is no right or wrong answer to the question of how, between the lifestyle or investment paths, owners should run their businesses. However, they should fully understand the implications of their choice. An investment banker can provide an objective view of the business by examining it as through the eyes of a buyer to help in that choice and advise on mid-course corrections to meet the owner’s objectives for the inevitable exit.

The Good, The Bad, and The Ugly in Mergers & Acquisitions

By John Holland | Nov 14, 2019

In the classic Western film The Good, The Bad, and The Ugly, the “good” character portrayed by Clint Eastwood rode off in the sunset with bags of gold after arduous escapades. After working for years to build their businesses, many business owners dream to sell the businesses and then head off in the sunset with the well-deserved wealth. Some business owners achieve that dream with financial security, but many business owners are unable to ever attract a buyer for their businesses. The private equity groups and strategic buyers (large corporations) that acquire businesses are sophisticated, discerning, fastidious, and fickle. Let’s explore the criteria that buyers consider when they distinguish “good” businesses from “bad” or “ugly” businesses. Business owners who understand buyers’ acquisition criteria are in a better position to build up the “good” aspects of their businesses while purging the “bad” or “ugly” aspects of their businesses over time and thereby making their businesses more attractive and more valuable.

The Good
As an international investment banking firm, CFA receives hundreds of email messages each month from private equity groups and strategic buyers searching to acquire businesses with the following features: consistently growing revenues and earnings, recurring revenues, high switching costs for customers, earnings (EBITDA) above a certain level such as $5 million, low capital expenditures, low customer concentration, and solid management. Some of these buyers focus upon “hot” industries like cyber security or software-as-a-service, but there are private equity groups and strategic buyers searching for acquisitions in every industry.

In general, businesses with higher earnings attract a larger audience of buyers. Hence, businesses with higher earnings tend to sell for higher multiples on earnings. For example, according to the Q2 2019 Market Pulse Report from Pepperdine’s Graziadio Business School, businesses with EBITDA of $2 million to $5 million sold for an average multiple on EBITDA of 4.0 in Q2 2019, while businesses with EBITDA of $5 million to $50 million sold for an average multiple on EBITDA of 5.9. In the information technology (IT) industry, we can observe this phenomenon on a larger scale by comparing the largest IT solutions player in the industry, CDW (CDW) with $17.5 billion in annual revenues and a multiple on EBITDA above 16, to an IT solutions company named Dyntek (DYNE) with roughly $200 million in annual revenues and a multiple on EBITDA of merely 4.

The Bad and the Ugly
Strategic buyers and private equity groups are repulsed by businesses that are plagued with litigation, unreliable accounting records, labor unrest, extraordinarily high insurance or workers compensation claims, or investigations by governmental authorities for matters such as infractions of labor or environmental regulations. Buyers discount or reject businesses with high customer concentration, unstable or declining revenues or earnings, elevated customer turnover or churn, weak management teams, and high sensitivity to economic cycles. A business valuation report might show a theoretical value for a particular business with a multiple on EBITDA consistent with previous sales of similar businesses in that industry, but the reality is that companies with “ugly” problems rarely find a buyer.

Just as the character “Blondie” portrayed by Clint Eastwood persevered through dehydration in the desert and incarceration in a Union Army prison and achieved his goal of riding off in the sunset with his bags of gold, business owners can overcome their businesses’ deficiencies by inviting objective investment bankers, management consultants, and CPAs to identify the deficiencies of the business while charting a path of corrective action. For example, a business with one customer representing 50% of revenues could develop and execute an aggressive business development and marketing strategy to attract new customers. Likewise, a business with irregular accounting practices could find a reputable CPA firm and recruit a Chief Financial Officer to review and refine accounting processes and improve the quality of the financial statements. With a concerted effort over a few years, a business owner can overcome such “ugly” business deficiencies to make a business very attractive for buyers and thereby very valuable.

Re-Casting of Earnings Analyses v. “Just the Facts Ma’am”

By Peter Heydenrych | Jun 10, 2019

In his May 15 Wall Street Journal Article “Tech Firms’ Creativity Meets Investor Reality”, Rolfe Winkler looks at the creative ways in which recent big startups going public, have come up with unusual, alternative ways for measuring their performance.

Uber and Lyft, Mr. Winkler’s examples, seem to be explaining their losses by offering up an IPO version of “the dog ate my homework” excuse for poor performance. Uber had a $3 billion operating loss last year, but presented an argument, that, on a “core platform contribution” basis, it actually made a profit of $940 million!

Comments on Mr. Winkler’s article include views that suggest some acceptability of the “alternative metrics”, provided that full and clear disclosure is made of how the conclusions were reached.

In the private M&A market, calculating earnings/profits by adjusting historic booked and even future earnings is very common. Is it a fair practice? GAAP provides detailed rules for calculating earnings, and FINRA holds its Broker-Dealer members to strict account on the question of “making promises about benefits including future profits.” Yet almost every private M&A transaction is negotiated around arguments that the “Re-Cast EBITDA”, a number often materially different than the booked EBITDA, should be used in place of the booked EBITDA.

For purposes of presenting “alternative ways to present performance”, private M&A transactions hold one significant advantage over the public buying and selling of securities, including IPOs, because private transactions are generally negotiated with full disclosure to buyer and seller and the Investment Banking, Legal and Tax professionals who advise them. Ample opportunity exists for the buyer to conduct a self-designed due diligence investigation which, in turn, will usually include scrutiny by the other professionals mentioned above.

Regarding “alternative metrics” or “Re-Cast EBITDA”, there is only one rule: “There are no rules!” Of course, both parties must agree, so that becomes the rule. The “Re-Cast Adjustments” that the seller seeks to present, and the buyer must accept for there to be an agreement, usually fall into 4 categories:

  1. Revenues and costs which will not continue after the sale
  2. Revenues and costs which were booked historically as a result of an extraordinary, non-recurring event
  3. Revenue and cost adjustments which will result from the engagement of synergistic benefits which the transaction will trigger
  4. Revenues and costs which the buyer will eliminate as a result of implementing strategic decisions (which the buyer won’t necessarily want the seller to be aware of)

Sometimes GAAP will even come to the rescue, permitting the capitalization of costs which can be demonstrated to build asset value with future benefit, such as the funding of IP creation with a view to generating earnings over subsequent years. For this and other reasons, often relating to the patterns of capital expenditure required to sustain the business model, the buyer will look at cash flows instead of or in addition to EBITDA earnings.

Re-Cast Adjustments are generally made to the historic results. The buyer is working to estimate future results, but is relying on historic results as an indicator. The buyer will also want to negotiate a purchase price based on historic results, arguing that he is paying only for what has already been created. The seller, on the other hand, is looking to paint as rosy a picture of the future as possible, arguing that the future is what the buyer is really getting and should be paying for. Again, there are no rules, only the need for the parties to agree.

A second measure to protect the buyer is often employed when the Parties are not, or are not equally, confident about the future and the valuation it will yield. An “Earn-Out” construct is not available to public market Parties, but is often used by private transaction parties. In an Earn-Out, the buyer promises to pay more money, but only if certain future performance or other criteria are met.

So, in a private sale of a business, there would seem to be a good argument supporting the idea that the seller should have the opportunity to claim an, as yet, unrealized vision, or to offer an alternative measure of the pro forma profitability of the company. The buyer can check the claims thoroughly and can even set aside some part of the consideration pending the successful achievement of a future milestone. Of course, this approach is justified only by the engagement of two fully advised, experienced and knowledgeable parties, who can, and do, engage in a thorough examination and negotiation of a transaction in circumstances which can be argued to be fully transparent.

EBITDA Adjustments in M&A Transactions

By Robert Decker | Nov 08, 2018

At least once a week, we find ourselves looking through adjustments made to earnings before interest, taxes, depreciation and amortization (EBITDA) on a business for sale, and saying, “What in the world…?”
Adjustments can be perfectly acceptable. Owners run excess personal expenses through their business that would not be assumed by a future owner (i.e., fun trips, memberships). Sometimes, family members are paid far-above-average salaries and will not be continuing with the company. On justifiable adjustments, you’ll hear no contest from us. However, just because adjustments are justified, doesn’t mean they’ll leave a good impression on investors. We recently saw a business barely breaking even with a sizable adjustment for private air travel; such adjustments speak volumes about priorities.
Lately, we’ve started tracking some of the bogus adjustments people try to deduct out of companies. Here are some anecdotes illustrating how wishful thinking intersects with the bottom line.

Owner Compensation
The most common add-back is completely subtracting owner compensation, boosting the supposed bottom line by between $200,000 and more than $1 million. Yet, they are usually the leader(s) of the company.
Some owners work full-time, while others are serving in more of an advisory capacity, but unless they permanently reside in another state without any oversight of or contact with the business (including financial), they are doing something worth a dollar amount. That figure may not be the same amount they’ve been paying themselves, but it’s definitely not $0.

Leadership Compensation
A 150-person company had a leadership team of five people. All the leaders were paid quite well, based on below-market salaries and generous performance-based incentive compensation. The Confidential Information Memorandum (“CIM”) argued that they were paid too well for the industry. So, each person’s salary was adjusted down to an industry average, reducing the overall leadership compensation pool by more than $600,000. When we inquired as to whether the current team would be staying post-transaction and under what conditions, the intermediary explained that the adjusted salaries were meant as a starting point and that each leader expected to renegotiate his/her total compensation with the new owner, including base salary, incentives, and equity.

Imagine walking into a company and saying to one of the key leaders, “Hi, we’re your new owners. We’ve heard you’re an essential leader within this company we need to work hard to keep, but we’re going to reduce your salary down to the industry average.” Would you stay? Why should a buyer account for less than anticipated compensation?

Sub-Contracted Labor Costs
A manufacturing company kept a lean full-time team, and used sub-contracted labor during seasonal periods, which is perfectly reasonable. What was not reasonable was the more than $200,000 adjustment for “excess costs of sub-contracting.”
A company can’t have it both ways. A bigger team means bigger year-round operational costs. A lean team means you take a hit when extra labor is required. Pick the operating style and own it.

Marketing Expenses
A particularly courageous CIM presented a list of adjustments that included more than $200,000 in marketing expenses. We immediately requested further explanation and were told that it was an ineffective online marketing campaign the company had run the previous year for a new product line introduction.
Ineffective spending is still real spending. Enough said.

“One-Time” Expenses
Adjustments related to one-time expenses are quite common. Two examples of creative implementation include the cost to develop a company’s website and inventory write-offs conducted every year.
There are occasional one-time expenses that should be adjusted out, but they are rare. We often find lots of recurring non-recurring expenses. More often, these expenses represent necessary costs of doing business above and beyond the line items that normally appear on a company’s annual income statement. The bottom line is that, regardless of whether it’s normal, if it’s a necessary cost of doing business, it shouldn’t be adjusted out.

Research & Development Expenses
Companies seeking to grow must engage in ongoing investment, including R&D. In one recent case, the revenue from a new product line was included, but the associated costs of developing that line were adjusted out.

New revenue streams aren’t delivered by stork. Sustainable businesses require ongoing investment, which a buyer will have to invest in as well.

Retroactive Change Benefit
Two recent CIMs added back projected savings from recent, or even yet-to-be-fully-implemented, changes in process or software retroactively to previous years.
You can’t change the past. The best way to present effective change improvement is to provide evidence of its actual impact and how it might look in the future.

Legal Fees
A company had an unfortunate two-year legal battle. The CIM adjusted out over $700,000 in legal fees related to the “one-time litigation event.”
If a company must enforce its position by legal action, or if its customers, suppliers, or competitors initiate suits against it, the company must spend real money. That won’t change with ownership, and evidence of a substantial legal history will tell a prospective buyer that such events must be accounted for in projections and valuation.
A productive question to ask in making EBITDA adjustments is whether a public company could deduct such expenses to boost earnings presented to shareholders. Can a CEO be adjusted out? Can a leadership team’s salaries be calculated as industry averages rather than what a company actually pays them? Can a website exist, be regularly updated, but not actually cost anything? No, unless you’re Enron.
Including unreasonable EBITDA adjustments may help you feel like you’re presenting a better illustration of the company’s earnings potential for a prospective buyer, but it’s counterproductive. These types of adjustments create distrust with prospective buyers. If you leave a gap, such as assuming there will be no acquisition costs in hiring competent leadership, the buyers will inevitably insert a big round figure into their formula to cover all unknowns.
The best advice on creating a list of adjustments? Be honest and conservative. The relationship with buyers will start out on a much warmer and productive path.

Note: This article was originally published by, a Columbia, Missouri based investment firm, on its web site and it is republished by CFA with approval.

Environmental Liability in M&A

By Dan Vermeire | Oct 23, 2018

Environmental concerns can be hugely important in an M&A deal, and are typically investigated as part of the due diligence process. But, for a business owner, that may be too late.

What’s at stake for your business?
It’s important to know that PLL (Pollution Legal Liability) can affect both the property owner and the tenant. Yes, a business that leases the property can still be responsible for environmental problems. Further, PLL can be from the historic uses, well before you owned or leased the property. And PLL can affect you because of an adjacent property, even if you don’t operate there.

PLL costs can be significant to identify and remediate problems. This may involve drilling and digging at the property, through the floors, parking lots, and open ground, to remove and dispose of contaminated soil. Far worse, if the environmental issue isn’t properly managed, it can be disruptive to your business if customers, employees and regulatory agencies draw the wrong conclusions.

How does the process work?
It is a three-step process, starting with a simple assessment and, if problems are found, progressing to more rigorous efforts. The initial step, Phase 1, reviews the property and creates the Environmental Site Assessment (ESA), which identifies potential or existing environmental contamination liabilities. Various engineering firms specialize in the practice of these reports, according to guidelines from the EPA. The assessment will look for any visible signs of contamination and review the historic uses of the property. If the ESA identifies areas of significant concern, then a Phase 2 is recommended which involves further analysis such as boring, collecting soil samples, and installing ground water monitoring wells. If the Phase 2 identifies significant issues, then a Phase 3 project will remediate the site. As you can see, each step costs more money, takes more time, and may create further disruption to your business.

How can you protect your business?
It is important that the business or property owner’s attorney order the ESA, not the buyer. Why? Because the report can be protected by attorney-client privilege. Should the ESA identify problems, then the information can be kept confidential. Most good law firms will have a working relationship with an engineering firm and keep the owner’s interests in mind, thereby avoiding overly aggressive, or “make work” recommendations.

There are several areas of the ESA that are somewhat subjective, such as the classifications of risks. Professional opinions can vary – one group may think action is needed, while others may not. For this reason, ESA’s are initially produced in a draft form and issues can be discussed. If it is warranted, you can get a second opinion, perhaps more favorable. If the process continues, eventually a report becomes final, and then can be made available to the buyer, banks, and regulatory agencies. A clean ESA has value to both the buyer and seller.

To stay ahead of any issues, you should consider ordering an ESA well before you start the M&A process. In that way, you can be aware of any potential risks and solve them before they become bigger problems.

Other ways to manage environmental risk include indemnification from the seller to the buyer. This approach may often require some meaningful security, such as continued equity, a note, escrow or insurance. Leasing may be considered as an alternative to buying property in an M&A deal. There may be other business reasons to control the property and leasing does not completely eliminate risk for the new owner, but this approach can help in many cases.

Last, but certainly not least, environmental insurance is a very good way to eliminate risk and should be considered in any PLL situation. Policies have been used for many years, are available from many respected providers and can have customized coverage. Many policies are transferrable to the new owner and will cover pre-existing conditions, both onsite and offsite contamination, claims for bodily injury and legal costs. In certain cases, policies will exclude voluntary digging, that is, don’t go looking for trouble. This restriction can be included in the lease or purchase agreement, too. Environmental insurance is affected by the findings in an ESA, so it is important to consider insurance before starting the process. Always work with your advisor to control the process and manage the information flow to the insurance market.

Environmental concerns continue to gain attention, as we move closer to a green planet. Any business that involves owning or leasing property should have an effective strategy to manage environmental risk. Our CFA professionals regularly lead programs that successfully avoid environmental pitfalls.

M&A Trends in 2018

By Terry Fick | Jul 12, 2018

I was recently interviewed by Andy Jones of Private Equity Info about recent trends in mergers and acquisitions. Below are the highlights of our conversation.

Valuation Trends
The most prominent trend is in valuations over the past 3 years. We always see cycles, but this cycle has pushed company valuations higher than they have been in the 30+ years I have been in the industry. From businesses generating $2-3 million in EBITDA all the way up to $50 million in EBITDA, every company’s valuation is higher than in the past.

Baby Boomer Bulge in the M&A Pipeline
Being a baby boomer myself, I expected the past several years to have been almost a glut of sell-side opportunities. But it hasn’t happened. I think we all thought it would come to pass. The baby boomers are aging better than their parents did. Many are still having fun working 50-60 hours per week.
This is a friendly industry. We frequently talk to our competitors and we generally get the same feedback that we see ourselves. That is, when it was about time for the baby boomers to exit, the economy started doing well. So, these baby boomers’ businesses are making good money. Right or wrong, (mostly wrong), they tend to say, “If things are going great right now, why would I sell?”.
Sooner or later they are going to transfer their businesses. At some point, not only will their age start to make it more imperative, but the economy may start to turn down as well. If we are right, and it happens when the economy isn’t great, their valuations are going to plunge. If the seller-to-buyer ratio starts to shift (in favor of the buyer), that will drive valuations down further. For those that hang on until the last minute, all I can say is “looking back won’t be fun”.

I tell people, if I had a brother or sister or child with a business that was doing well right now and it wasn’t for sale, I would hit them with a two-by-four… unless they want to keep it for another 10 or 20 years.

Increased Valuations Impact on Deal Structure
I don’t think higher valuations are impacting deal structure. We don’t see any more or less earn-outs or notes than we used to as a percentage of transactions. But increased valuations have impacted two things:

One, due diligence is much tougher than before. With buyers paying high multiples, they are making sure to look under every rock, that it’s a squeaky-clean deal.

And two, there is more renegotiation of price than there used to be during the due diligence phase. The rubber band is so tight, the deal has no flexibility. If one little thing is out of place, the buyer wants to re-trade. We see this from both corporate buyers and private equity firms.

Main Challenges in Closing Deals
Most deal challenges now are related to due diligence. It’s almost to the point of being silly. There are a lot of questions being asked and analyses being done that really aren’t relevant.

Quality of Earnings (QE) is the driver of due diligence… and it has become onerous. It can be a difficult process because so much of it is a matter of opinion, not fact. That is the biggest challenge of any deal, the buyer’s QE.

We encourage our clients to do their own due diligence prior to entering the sale process, to have more robust data rooms and to hire someone to do a Quality of Earnings analysis. The buyers are still going to do their own due diligence work. But if the seller has a reputable firm do QE in advance, then the seller has some ammunition to fight gray-area claims that come from the buyer’s QE later. Furthermore, if there’s a real issue, like a revenue recognition issue that needs to be addressed, the seller can address it early in the process rather than having a surprise in the third month of due diligence.

Difference in Contract Terms
The biggest difference in contract terms now is the use of rep & warrants insurance. This insurance is becoming a significant piece of offers and is now used on a larger percentage of deals (including smaller deals). We are seeing a lot of contracts include reps & warrants insurance to give both sides a better feeling about who is going to pay for any future problems with the deal.

Reps & warrants insurance takes the risk off the seller for future discoveries where a rep & warrant is breached. With this insurance in place, instead of having a $5 million cap on reps & warrants going forward, the seller might only have a $500,000 cap. Anything above this is taken care of by the insurance company.

The buy-side usually purchases this insurance because it is easier to collect from an insurance company if a claim is valid than from someone who may now be your partner. So, there’s also a social reason for it. You hate to sue your partner. Buyers now use this as an extra bit of ammunition when they are bidding on a deal.

There are probably a dozen companies aggressively offering reps & warrants insurance for M&A transactions. There were perhaps as many as 3,000 policies written last year (2017). Now, with sufficient history with these policies, the underwriters are realizing there are very few claims.

We are also seeing heftier letters of intent (LOI), meaning that more of the detail that used to be reserved for the final purchase documents is at least addressed in the LOI due to sellers’ concerns about re-trading.

Capability and Capacity: Inseparable Components of Growth Strategy

By Peter Moore | Apr 12, 2018

As investment bankers to a wide variety of closely held companies we sometimes witness business owners investing heavily in new production output “capacities” (new equipment, new hires, plant expansions, or even acquisitions) well before they’ve properly established the full “capability” to put that new or expanded capacity to work on an optimized basis.

Generally the goal of creating new production or service capacity is to take advantage of a market opportunity, stay competitive, and create increased enterprise value in the business.

In this context “capability” is the condition of being sure your key team members have the know-how to produce the expanded product or service output. It also means having codified the processes employed to produce your product or service, so that new members to the team can also generate the product or service without any diminution in the quality or effectiveness to the customer. And it means you have the disciplines in place to continue producing the product or service with the same or better level of customer satisfaction, product integrity, and product reliability. It may also mean that you are continuously keeping an eye out for product relevance in your industry and marketplace, as well as being aware of what your competitors are doing and alternatives to your product or services.

Without being sure the capabilities are in place to get the greatest benefit from your new investment, you risk losing the financial advantage you expected. That new capacity (higher production rates, faster throughput, better engineering or design, or systems to reduce materials procurement costs, labor inputs, or transportation and logistics expenses) should be able to deliver measurable improvement in key financial metrics soon after the new investment in the capacity has been made.

While both capability and capacity can sometimes be developed concurrently it is often not advisable to make large capacity investments before you are sure you can provide the associated capability to optimize use of that new equipment, factory addition, acquisition, or expensive new talent.

Taking the time to plan on incorporating these two key elements of growth will help you more confidently achieve the goals you envision by adding new capacity.

For more information on this topic or assistance in expanding your company’s capabilities and capacities, and confidence, please contact your nearest CFA investment banker.

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