Welcome to this issue of Capital Ideas, our
newsletter dedicated to business selling, business buying and
financial resources for mid-market companies.
Can 2011 Be a Good Year for Private Company M&A?
By John Hammett , Managing Director
Minneapolis, Corporate Finance Associates
The lost years of 2008, 2009 and 2010: As most private company owners know directly, or have heard from their customers, suppliers, bankers, advisors and friends, the opportunity to sell private companies has been challenging since the ’08 financial market meltdown. Over the last two years, the business climate was marked by declining sales and earnings, evaporating bank credit and poor visibility into future business conditions. Company owners had little confidence in projecting demand, capital availability, government regulation and taxes.
Because trailing earnings is the largest determinant of current sale value for private companies, savvy owners stayed away from actively looking for buyers until the future became more positive and more predictable. Many advisors to owners recommended waiting to sell companies until earnings had begun to recover and the outlook became more stable. The result is that deals for companies valued below $50 million slid from more than 1,000 transactions in 2006 and 2007 to a rate of less than 500 deals expected in 2010.
The accompanying chart divides deals by the type of buyer. Financial buyers buy private companies as investments and help them grow to be re-sold later to industry buyers or large financial buyers. Strategic or industry buyers acquire private companies to expand their business into new products, markets, technologies or geographies. The black line shows the percentage of deals that are made by strategic buyers. While overall deal activity has declined in the last three years, strategic buyers have maintained a higher level of activity while financial buyers have pulled back more. The reason is that industry buyers find value in the strategic fit and they understand the industry better. Financial buyers are more dependent on historical earnings and less comfortable taking industry risks.
Deal Overhang: Before the economy softened, deals in the under $50 million range averaged close to... Read more »
When it Makes Sense to Sell to Private Equity
A Few Points to Keep in Mind
By David Sinyard , Managing Director
Atlanta Office, Corporate Finance Associates
Approximately $1 trillion dollars of capital is managed by private equity funds worldwide. Roughly two-thirds of this amount is invested in buyout funds and the balance is devoted to venture capital. As private equity is a signifi-cant source of investment capital, how does private equity work and when does it make sense for business owners to seek out private equity to buy part or all of their business?
Private equity is risk capital that is employed in a wide variety of situations and, by its nature, not readily tradable on a public stock market. The majority of the capital in this market is provided by institutional investors who invest as limited partners in partnerships sponsored by professional managers; the general partners, who source the deals, negotiate the capital structure and oversee the operations of the portfolio companies. Returns are provided to the investors in the form of operational cash flows, operational improvements and an exit at a higher multiple than originally paid for the company. The limited partners commit a specific amount of capital while the general partners agree to a specified time period within which to invest, typically five years. The parties further agree that the capital will be returned to the partners in a 10-12 year period from the date of committing the capital... Read more »
Situation:Paula and Jerry Pollart, the owners of Heartland Ag, acquired the Company in 1994 and built it into one larger and more successful than they ever dreamed. When it came time to move into the retirement phase of their lives, after careful consideration they decided to sell the business to an outside buyer. This was not a simple task considering the cyclical nature of the agriculture industry as well as the need for any acquirer to be approved by Heartlandís key vendor, Case IH.
Solution: The Pollarts enlisted the services of CFAís Jim Zipursky and his team, who lined up a number of qualified potential buyers and assembled a group of professionals to handle the legal, tax and estate issues such a sale would create. The Pollarts accepted an offer from HA Holdco and Case approved the transaction. The sale was completed in August, 2010. The buyer inserted its own management team and Jerry and Paula expect to be fully retired within a year, a reasonable transition period. The legal side of the transaction came off without a hitch with the proceeds fully protected. CFA was able to solve all of the Pollartís exit goals.
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