Capital Ideas | Corporate Finance Associates | Newsletter Q2 2018

Capital Ideas for Middle Market Businesses

Dear [[First Name]],

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

Still Not Licensed to Deal

By Robert P. St. Germain, Managing Director and Principal
Columbus Office
Corporate Finance Associates


Several years ago this author penned an article titled “Licensed to Deal”, which discussed the federal and state requirements for intermediaries (i.e. business brokers, M&A advisors, investment bankers) to legally facilitate business sale/purchase transactions having a security (i.e. stock, promissory note, earn-out agreement) in their deal structures.

That article described in detail what licenses and registrations were required by intermediaries party to such transactions; why many intermediaries refuse to become licensed and registered (i.e. to avoid the costs to set up and maintain a registered broker-dealer in full compliance with the various applicable federal and state regulations); and the potential onerous consequences of utilizing the services of an unlicensed and unregistered intermediary (i.e. under the Sarbanes-Oxley Act, an aggrieved party to an illegal securities transaction exercising their right of rescission up to five years post-close and also initiating legal proceedings against the parties to the transaction).

Since the publication of the original article, many intermediaries continue to practice without the required licenses and registrations while putting their clients at risk as described above. However, they do so more boldly today claiming they are now protected by the M&A Brokers No Action Letter published by the SEC staff on Jan. 31, 2014.

At first glance, it might appear that those unlicensed and unregistered intermediaries are now finally operating within the law and, in so doing, finally protecting the interests of their clients. Closer examination, however, tells a very different story.

Read more »

Overcoming Customer Concentration Issues When Selling Your Company


By Roy Graham, Managing Director & Principal
San Antonio & Austin Office
Corporate Finance Associates

To get top dollar when selling a middle market business, removing potential “red flags” before going to market should be a top priority. Customer concentration is one such risk factor that both a company owner and potential buyer must address when a business is for a sale. A business with only a few key customers runs the risk of extinction. If one key customer leaves, a business may be forced to close its doors. A high degree of customer concentration can not only devalue a business but can create an opportunity for the buyer to begin a “discounting the sale price” conversation. This can turn a multiple X EBITDA sale into a 1X or perhaps even less then 1X sale. The proverbial ‘do not put all your eggs into one basket’ applies here. A diverse customer base enables your company to survive and thrive, even if a few of your customers go away.

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Featured Acquisition - CFA Dallas

The Situation:

It sounds like a “fish story” but it’s true.

Seafood distributors are great businesses. As the “other protein”, seafood is healthy and is on a variety of menus, both at home and when dining out. Grocery meat markets and restaurants alike appreciate quality fish, shrimp, crabs and shellfish for their demanding customers, and a good distributor knows how to serve these clients. Competition is often limited by distance over-the-road and well-established distributor, with good customer service, can enjoy excellent repeat-customer business.

Seattle Fish Company of New Mexico has built a very nice business over 30 years, supplying all sorts of seafood throughout New Mexico and west Texas. They source from all over the world to bring products to match their customer’s clientele and taste. Talipia, sea bass, tuna, salmon, and tiger prawns are just a few of the hundreds of species that they supply – both fresh and frozen. The Company is very focused on food safety and responsible supply, both through marine stewardship and sustainable aquaculture.

SFNM has grown to about $35M revenues with 8-10% margins, very respectable for a distribution firm. The majority owner wanted to retire, but a solid team was in place and running the firm. Originally, we thought the opportunity would be attractive to both financial and strategic buyers.

A major blemish was their 60% customer concentration with a major grocery chain – equating to about 100 stores being served by SFNM. Didn’t seem like a huge problem at first because SFNM had been growing with this chain over many years. There were no other seafood distributors in the region that could compete and serve these customers.

Even with the mitigating circumstances, the 60% concentration was just too much for the financial buyers, at least without a protracted earnout structure. Some of the strategic buyers were put off by the geography, with relatively sparse population areas, and lots of miles in the delivery routes. Still, there were a number of good buyers considering the opportunity.

The Solution:

Then a miracle occurred! Through a broad and active process, we were able to find a large, strategic seafood supplier that had an extensive relationship with the same grocery chain. Our client served 100 stores and this buyer served 900 stores of the same corporation. This acquisition would expand their geographic footprint, improve efficiencies in supply and delivery, plus further enhance their relationship with their mutual customer. By keeping other buyers nibbling on the hook, we were able to drive a very good valuation, even though this match was the obvious choice.

Thanks to their excellent financial and HR team, SFNM was able to breeze through diligence and execute the purchase agreement in 60 days. They announced the deal at the industry’s major tradeshow and have been netting new customers ever since!


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