Exit and Growth Strategies for Middle Market Businesses

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.

Succession Planning Adds Value

By Terry Fick | Jul 01, 2021

Many think of Succession as a strategy if you plan to keep your company, i.e., who will run my company after I retire?

Succession is also an important element of your strategy when preparing to SELL a company.  Look at your scenario as the buyer will see it. “Who’s going to run this company after we buy it?” If you, as the owner and CEO plan to stay on as CEO or President long term, then that will work for most buyers.  However, if you want to leave upon, or soon after, the sale, you need a credible plan in place.   A strategy of “It is up to the buyer to replace me”, will probably turn many buyers away and certainly drop your value in the eyes of buyers. This strategy will significantly lower the number of buyers you may attract to buy the company and those that are willing to put their own person in place will know your options are limited and lower their offer.

A better strategy is to ask yourself,

  • Do I have a #2 that wants to and can step into my shoes?
  • Can I demonstrate that he/she is capable?
  • Can I demonstrate that the company can move forward without me?

If the answers to all are yes, then you might consider promoting that person to President as you prepare the company for sale.  If the answers are no, then a couple of options might be your Plan B:

  • Decide to stay on long enough to help the buyer find, hire and prove out a new person to lead the company. This is usually a one to two-year commitment.
  • If you have time before you go to market, you might consider looking outside the company and hire a credible leader to fill your shoes. You will need time to hire and assimilate this new “President”.

If none of the above work for you and you simply want to find a buyer that will accept a short-term commitment from you, then you need to really hone your buyer search efforts to make sure you have the right players at the table when you are considering and comparing offers.

It is always hard for an owner to see his company through the eyes of buyers (and not all buyers are alike) so listen to your Investment Banker’s thoughts and advice on this matter.

The long and short of it is that the management team you bring to the table will have a significant impact on your strategy and your value.

Spring 2021 | M&A Report In The Transport, Logistics and Supply Chain Industry Sector

By Peter Heydenrych | Jun 24, 2021

The report below gives a good overview of the Spring 2021 M&A activity in the Transport, Logistics and Supply Chain Industry Sector. The Logistics Market is estimated to grow by USD 77.28 billion, progressing at a CAGR of almost 2% during 2021-2025 as per research published by Technavio. The industry had a decline in activity because of Covid 19, with numerous travel restrictions, nightly curfews, border closures, and flight cancellations imposed by various countries.

The Suez Canal blockage in March 2021, happened due to grounding of the container ship Ever Given, further escalated the impact. The shipping journal Lloyd’s List estimated that goods worth $9.6 billion pass through the canal every day. The blockage delayed a range of parts and raw materials for European products such as cotton from India for clothes, petroleum from the Middle East for plastics, and auto parts from China. The impact on global supply chains is expected to last for several months.

Posted by Peter Heydenrych.

Read the Entire Spring 2021 Transport, Logistics and Supply Chain Report Here

Spring 2021 | M&A Report In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | Jun 24, 2021

The report below gives a good overview of the Spring 2021 M&A activity in the Technology, Media and Telecom Industry Sector. The pandemic has ushered in a new reliance on tech, connectivity, and e-commerce. While many industries have been severely affected by the crisis, for the Technology, Media and Telecom sector (TMT) the economic impact has been largely neutral, or even positive for some industry segments.

With surges in online gaming, video streaming, mobile data consumption, remote working models, voice traffic, and residential broadband; the industry saw companies make several operational improvements in network infrastructures to cope with increased technological demands. The pandemic has shifted the spending toward resources that support digital methods of workforce collaboration, sales and customer experience delivery. The big data technology and rising number of connected devices across enterprises are increasing the demand for IT service management and information security management platform.

Posted by Dan Vermeire.

Read the Entire Spring 2021 Technology, Media and Telecom Report Here

Spring 2021 | M&A Report In The Engineering & Construction Industry Sector

By Dean Durbin | Jun 22, 2021

The report below gives a good overview of the Spring 2021 M&A activity in the Engineering & Construction Industry Sector. The pandemic made its presence felt cross the engineering and construction market in 2020. This caused the Associated Builders and Contractors’ Construction Confidence Index (CCI) to plummet to 38.1. In a few short months during 2020, the industry lost $60.9 billion in GDP and total jobs decreased to roughly 6.5 million, effectively wiping out two years of GDP gains and four years of job gains. However, by June the CCI rose to 55.1, indicating expansion in sales.
The global construction market data from the Business Research Company’s latest research showed that the market is expected to grow at CAGR of 7.5% from 2021 and reach $15 trillion by 2023. The top ten players constitute about 4.7% of the market. The possible reason for this is that there are large number of small players in E&C industry who cater to customers which are closer to their locations. Despite the impacts due to pandemic, there are reasons to be optimistic for the industry. The industry has applied learnings from the 2008 recession and is positioned to make the best out of 2021.

Posted by Dean C. Durbin, PE, MBA.

Read the Entire Spring 2021 Engineering and Construction Report Here

Spring 2021 | M&A Report In The Business Services Industry Sector

By Brad Purifoy | Jun 22, 2021

The report below gives a good overview of the Spring 2021 M&A activity in the Business Services Industry Sector.
The global demand for the business services reached an all-time high in the first quarter of 2021 as per research published by Information Services Group. The Business Services industry is poised for faster growth in 2021 as the economy begins to recover from the pandemic and enterprises continue to make digital transformation. The global annual contract value (ACV) in the first quarter of 2021, which is a measure of outsourced contracts, reached a record of $17.1 billion, which is up by 11% over 2020 and up by 4% from the fourth quarter of 2020. Service providers are focused on meeting needs of the customer by focusing on cloud modernization, cost optimization, and helping customers create resilient and agile operations along with personalized omnichannel experiences.

The cloud-based as-a-service market increased by 15%, to a record $9.9 billion, in the first quarter of 2021, but growth decelerated from the fourth quarter of 2020, when it was up 26% year over year. Managed services ACV, reached $7.2 billion in the first quarter of 2021, up 7% year over year, due to strong growth in Europe. Infrastructure-as-a-service (IaaS) generated $7.2 billion of ACV, up 18% versus year over year and Software-as-a-service (SaaS) generated $2.7 billion of ACV, up 7% year over year. BPO ACV, increased 43% from the prior year, to $1.4 billion.

Posted by Brad Purifoy.

Read the Entire Spring 2021 Business Services Report Here

Spring 2021 | M&A Report In The Metal Fabrication Industry Sector

By Jim Zipursky | Jun 16, 2021

The report below gives a good overview of the Spring 2021 M&A activity in the Metal Fabrication Industry Sector. The global market for metal fabrication services is estimated at US$3.8 Billion in the year 2020 and is projected to reach a revised size of $4.3 Billion by 2027, growing at a CAGR of 2% over the period 2020-2027. China, the world second largest economy is forecasted to reach a market size of $676.5 million in the year 2027 trailing a CAGR of 3.1 % through 2027. The other notable geographical markets are Japan and Canada, each of these markets are forecasted to grow at 1.4% and 1.6% respectively over the period 2020-2027.

Moreover, within Europe, Germany is forecasted to grow at approximately at 1.6% CAGR while the rest of the European market will reach to $676.5 million by the year 2027. The growing demand for vehicles production and lightweight materials are the key contributing factors for the metal fabrication industry’s growth. Further, the rise in the sales of the hybrid and electric vehicles and global recognition of the hydroforming techniques has extended the opportunities in the Metal Fabrication market.

Posted by Jim Zipursky.

Read the Entire Spring 2021 Metal Fabrication Report Here

Spring 2021 | M&A Report In The Energy Industry Sector

By Roy Graham | Jun 15, 2021

The report below gives a good overview of the Spring 2021 M&A activity in the Energy Industry Sector. The Energy industry is poised for faster growth in 2021 and the global demand is set to increase by 4.6% offsetting the 4% contraction in 2020 as per research published by IEA. Almost 70% of the projected increase in global energy demand is in emerging markets and developing economies, where demand is set to rise to 3.4% above 2019 levels. Energy use in advanced economies will be 3% below pre-Covid levels according to IEA. Third waves of the pandemic continue to extend the restrictions on movement and global energy demand has been low. But stimulus packages and vaccine rollouts are boosting the outlook for economic growth.

Posted by Roy Graham.

Read the Entire Spring 2021 Energy Report Here

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.