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Capital Ideas for Middle Market Businesses

Welcome to this issue of Capital Ideas, our newsletter dedicated to business selling, business buying and financial resources for mid-market companies.

Overcoming the "Private Firm Discount"


By David Sinyard, Managing Director
Atlanta Office
Corporate Finance Associates

Overcoming the “Private Firm Discount”We live in an age of information and investors are influenced by the amount of information available on a given opportunity... be it a publicly traded stock or a private company. One of the first steps to selling a business is to determine its value. If the company for sale is private vs. public, valuation may be a complex exercise.

Publicly traded firms are highly regulated and required to provide snapshots of their financial health on a quarterly basis to all shareholders. There is significant information available on a public company including SEC filings, investor relations departments, analyst reports, etc. A company whose stock trades daily on an active exchange can be valued more easily than a privately held concern whose information remains confidential and private. In the case of a private business, the lack of readily available information works to the seller's detriment as prospective buyers are limited in the amount of due diligence they can perform, which ultimately results in a lower valuation. This is called the "Private Firm Discount". Private firms are typically sold at a significant discount when compared to the sale price of similar public companies. Is there any way to overcome the "Private Firm Discount"? Possibly... given time and a smart strategy.

Adding experienced investment bankers to your M&A team is a smart decision when attempting to overcome the "Private Firm Discount". They will compile a complete list of potential buyers, identify those that offer the best fit and work with you to prepare and take your company to market. They will also be able to help disseminate information in the most effective manner and provide guidance when negotiating with a potential buyer. All these efforts will positively impact the ultimate valuation received by the private business owner. Read more »

The Site Visit - Tips from the Trenches


By Greg McKinley, Managing Director
Nashville Office
Corporate Finance Associates

The Site Visit – Tips from the Trenches When the physical facilities of a company are an integral part of the assets in a business sale, a buyer's due diligence team will usually insist on a site visit. For the buyer, this visit provides the opportunity to see the day to day operations of the business first hand. From the seller's perspective, the site visit should be well planned, well executed and focus on the little things that can add value to a transaction.

At a very basic level, a site visit validates what the seller is representing about the business... the size of the facility, inventory, machinery and equipment, etc. In addition, a buyer may insist on seeing maintenance logs to ensure the equipment has been well cared for and that all permits and licenses are current. But the buyer's due diligence team is also looking for subtle clues that may point to the success or failure of the merger or acquisition as a whole. Will the cultures of these businesses mesh? Is there redundancy? Do these businesses have the same focus on quality and integrity and if not, will these businesses be able to overcome their differences?

Before the site visit, the seller and his investment banker should conduct a walk through of the facility and make note of any cosmetic details that can be improved upon. During the site visit stage, the facility should be as uncluttered and clean as possible. Bathrooms and lunch rooms should be clean. Desks should be neat. Floors should be swept. Machinery or equipment no longer in use should be stored out of sight. These small acts of cleanliness are not economically burdensome, so they should be mandated. If there are resources to allocate, redecorate the lobby, replace the worn carpet or furniture. If you do own the real property, make sure the grass has been mowed, the weeds removed and the fences painted. You'd be surprised how small things tend to make a big impression. Conversely, it's also the small things that can make a bad impression. If the buyer is used to a spotless facility, and the site visit reveals a messy plant, the two organizations just might not be a match.Read more »

Feature Acquisition

Situation: Designed Conveyor System’s owners ran two successful, unrelated businesses, and when the recession hit, both were negatively impacted. One year into the recession, the owners made the decision to engage CFA Nashville to sell one of the businesses. When Designed Conveyor went to market, there was considerable interest from both strategic buyers and private equity firms. And then something interesting happened: orders started pouring in. So, with an upsurge of orders, two questions needed answering. One, how do you properly value a project based business taking into account a surge of new orders, and, two, how can the deal terms fairly compensate both parties with revenues from this order windfall?

Solution: One potential buyer stood out among all the potential suitors. Ambassador Enterprises, LLC and Designed Conveyor Systems shared similar business philosophies and cultures. In this case, the whole was greater than the sum of the parts and negotiations began. Ambassador was willing to work with Designed Conveyor to make sure a large part of the earnings from the order surge was retained by the seller. The two companies experienced a long courtship before finally tying the knot, but the result was truly a win-win for all parties to the transaction.


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