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.


Will You, and Your Business, Be Ready?

By Jim Gerberman, Managing Director
San Antonio/Austin Office
Corporate Finance Associates

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In a song dedicated to his son, John Lennon once wrote "Life is what happens to you while you're busy making other plans." Though his "message" can be (and has been) interpreted in many ways, he seems to be saying "Don't let distractions keep you from what's important". Every business owner has, at some point, looked into the mirror and asked some version of the question: "What's next?" It's a daunting question- particularly in the context of exit or succession planning. "Exit" implies an end to what has been known and familiar. "Succession" also implies some paths that rely on things not within your control. Fundamentally, the "next steps" come down to readiness- for you, your lifestyle, and your business. What can and should you do NOW to prepare for the inevitable separation of you and your business? How to get started? I submit that a good place to begin is by adopting a "READINESS" mindset...

The difference in value from being ready and not being ready can be substantial. Our firm has had the opportunity to work with and represent two manufacturing businesses that were similar in their offerings, their served market and their geographic location…and their willingness to sell. Their transactions closed within 30 days of each other. What differed was their "readiness to sell". Business 1 had actually approached us several years earlier and our "brutal honesty" suggested that they had some work to do-which they did, addressing issues related to customer concentration, management team depth, systems that captured their processes and leveraged their intellectual capital. Business 2 was dealt a different hand. The owner had unexpectedly developed a serious health issue and was forced to sell…without being ready to do so. Fortunately, we were able to find buyers for both businesses. But the valuation that buyers placed on these businesses were markedly different - the EBITDA multiple of business 2 was 60% of business 1…mainly because prospective buyers saw a different risk profile. Read more »


Is The Timing Right To Sell My Business?

 

By Craig Allsopp, Managing Director
Portland Office
Corporate Finance Associates

The first question for retiring business owners is about timing. Is now a good time to sell my business or are better days ahead?

A recent report by GF Data indicates the current market is strong. The report for Q1 2015 shows the average price paid for middle market companies increased to 6.8 times adjusted EBITDA versus 6.4 a year ago.

But not every middle market business sells for 6.8 times earnings. So the next question is what makes one business sell for more?

One answer is size. The GF results show companies at the lower end of the middle market, i.e. $10 million to $25 million in sales, sell for less than middle market companies with sales in the $25 million to $250 million range.

Another answer is relative performance. Irrespective of size, companies that out-performed their peers earned a premium from investors. So the question now becomes: what characteristics lead to the kind of better performance that makes one company more attractive than another?

To answer that, we talked with principals from three different private equity groups. Read more »


Featured Transaction - CFA Minneapolis

The Situation:

In March 2014 CFA Minneapolis was engaged by Trissential, LLC, a Midwest based IT consulting company to effect the sale of the company. CFA contacted a number of high-value buyers and received seven initial offers based on the company's historical performance. Just prior to management meetings, the company revealed that their sales and profits were in a three-month decline and were unlikely to recover in the near term. All the buyers except one dropped out of the deal. We continued to negotiate with the remaining strategic buyer that had a serious interest in the company. That negotiation dragged on for another four months, when that buyer backed out and suggested they may come back to complete a deal six months later.

The Solution:

The company shifted into preparing for the next approach from that strategic buyer in Q2'15. During this quiet period, a company named Software Quality Solutions approached Trissential to discuss "working together" in the U.S. SQS is a $300 million German based international IT consulting company publicly traded on the London exchange. The owners quickly were informed that "working together" really meant that SQS wanted to acquire our client. The deal was an opportunity for SQS to establish a foothold in the U.S. market which they were anxious to penetrate. We met in New York to work out a deal, signed a term sheet at the end of January, signed the purchase agreement at the end of April and closed the deal on the 3rd of June. Due diligence was complicated by the international aspects of the transaction and the fact that a large portion of the transaction consideration would be in the form of SQS stock. Two weeks before closing the CEO of the buyer who left the company at the altar at the end of 2014 called to re-start the negotiations. Our client smiled as he told him that he was too slow, -- the company had just been sold to a different buyer.

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