For more information on Matthew (Matt) Bristow in Tulsa, Oklahoma you can see the following websites:
http://www.matthewbristowtulsa.com/
Matthew (Matt) Bristow in Tulsa, Oklahoma:
http://www.clearridgecapital.com/mattbristowtulsa.htm
Matthew (Matt) Bristow in Tulsa, Oklahoma:
http://www.linkedin.com/pub/dir/Matt/Bristow
Matthew (Matt) Bristow in Tulsa, Oklahoma:
https://twitter.com/#!/MBristowTulsa
Matthew (Matt) Bristow in Tulsa, Oklahoma:
http://www.tulsaworld.com/business/article.aspx?subjectid=495&articleid=20120217_495_E4_CUTLIN651630
Matthew (Matt) Bristow in Tulsa, Oklahoma:
http://journalrecord.com/author/matthewbristow/
Matthew (Matt) Bristow in Tulsa, Oklahoma:
https://plus.google.com/100639068898851451931#100639068898851451931/posts
Matthew (Matt) Bristow in Tulsa, Oklahoma:
http://www.facebook.com/pages/ClearRidge-Capital-LLC/145575510691
Matthew (Matt) Bristow in Tulsa, Oklahoma:
http://www.linkedin.com/in/matthewbristow
Matthew (Matt) Bristow in Tulsa, Oklahoma:
http://www.clearridgecapital.com/corporatefinanceblog.htm
Matthew (Matt) Bristow in Tulsa, Oklahoma:
http://twitter.com/#!/clearridge
Matthew (Matt) Bristow in Tulsa, Oklahoma:
http://tulsabusiness.com/Main.asp?SectionID=3&SubSectionID=50&ArticleID=53468
Matthew (Matt) Bristow in Tulsa, Oklahoma:
http://journalrecord.com/2012/06/06/ma-blog-stock-markets-volatile-%E2%80%93-time-to-sell-my-business/
Matthew Bristow is a Certified Merger and Acquisition Advisor and a federal and state registered investment banking agent.
Matthew co-founded ClearRidge in Tulsa with Bruce Jones and has a range of banking experience from London, England.
For further information, visit www.clearridgecapital.com or www.matthewbristow.net.
All rights reserved.
Copyright: ClearRidge Capital, LLC, 2012.
Showing posts with label clearridge. Show all posts
Showing posts with label clearridge. Show all posts
Thursday, June 7, 2012
Wednesday, June 6, 2012
Business Brokers and Merger Acquisition Advisors operate illegally –
protect yourself and your business.
When you sell your company a private company or raise capital
for your company, you need to ensure that you only use a business or M&A
advisor who is properly licensed by state and federal securities agencies to
represent you and your business. Your advisor should be registered in your
state and any other state where he or she does business, as well as registered with
FINRA, through a securities broker-dealer, a member of FINRA/SiPC. Your advisor
needs to have passed a combination of state and federal securities tests,
including Series, 62, 63, 7 and 79.
What are the implications if you hire an unlicensed advisor
to sell your company? If your advisor is operating illegally, then you, your
company and your advisor have all violated securities laws. Most people think
that this is a gray area and not a cause for concern, but that’s not accurate.
It is black and white, it is just that most advisors choose not to comply with
the stringent regulations in the hope that they don’t get caught.
If you hire an intermediary that is unlicensed to sell your
business or raise capital for your business and you plan to pay them a success
fee for doing so, most of the time the sale will include some piece of the
capital structure that is either an exempt security or a non-exempt security.
It is important to note that an exempt security is only exempt from
registration as a security. It does not exempt the issuer or advisor from
securities laws.
There are numerous civil and criminal penalties if you are
prosecuted and in a worst case scenario, it could result in a voidable
transaction whereby the buyer or investor has the right of rescission, even
many years down the line, which effectively grants them a “put” right. If the
acquisition or investment doesn’t perform as they expected, then they have the
legal right to come back and ask for their money back.
Even if you hire an unlicensed advisor to represent an asset
sale, your business still needs to comply with securities laws if the final
deal includes any kind of seller note, seller financing, the sale of membership
interest in an LLC, stock, options, warrants, or any other security, including
many debt issuances.
The simple way to find out if your advisor is licensed is to
look at their website or marketing materials. If you are a licensed investment
banking agent or securities representative, you are required by law to disclose
that fact in any marketing materials, including a website. You would likely
find this disclosure in the document footer, or the bottom of a website – you
look for a notice that states: “member FINRA/SiPC.”
Exemptions: For the most part, if operating within their
normal course of business and if they are paid only on an hourly fee
basis, then accountants, lawyers and financial planners are typically exempt,
so long as they do not receive any success or contingency fee payment.
Matthew Bristow is a Certified Merger and Acquisition Advisor and a federal and state registered investment banking agent. Matthew co-founded ClearRidge Capital, LLC, an Oklahoma Investment Banking firm.
For further information, visit www.clearridgecapital.com or www.matthewbristowtulsa.com.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2012.
Tuesday, March 29, 2011
Clear Ridge Capital Matt Bristow Blog has moved
Our blog has moved to:
journalrecord.com/category/corporate-finance/
Matt Bristow, Managing Director of Clear Ridge Capital, was invited to write a weekly column for The Journal Record, Oklahoma's Statewide daily business newspaper.
You can read each blog at the link above, or take a look at our website, for links to other articles and information:
http://www.clearridgecapital.com
Thank you for checking in.
journalrecord.com/category/corporate-finance/
Matt Bristow, Managing Director of Clear Ridge Capital, was invited to write a weekly column for The Journal Record, Oklahoma's Statewide daily business newspaper.
You can read each blog at the link above, or take a look at our website, for links to other articles and information:
http://www.clearridgecapital.com
Thank you for checking in.
Thursday, July 1, 2010
Bank Lending Troubles – Continued Uncertainty
According to a recent article in CFO magazine, the Bank for International Settlements, “the bank for central banks,” issued its annual report published Monday. The article “Banks Not Out of the Woods“ highlighted several points about the state of banks in the US:
1) Concerns over the impact of new regulations on the health of banks
2) Writing down losses – balance sheets are generally weaker than reported, as banks have not been forced to write down the real value of many assets.
3) Commercial real estate portfolios: In the US, more than 100 community and retail banks have a ratio of commercial real estate to total loans of more than 50%. Delinquency rates on these loans rose to more than 8% in the U.S. last year, double the rate a year ago. Congress is even considering inserting a provision in the financial reform bill that gives 7,800 banks permission to spread their losses on real estate loans over a 6-to-10-year period.
4) The BIS is doubtful that banks will be able to refinance their huge funding needs, given that funding maturities for banks are at their shortest in 30 years. In the United States, hundreds of small banks have yet to repay Troubled Asset Relief Program funds, and some have also failed to make required dividend payments to the government.
5) The Spread between the interest rates that banks can borrow at and the rates that banks are actually charging consumers for mortgages represents one of the largest profit margins banks have had for a long time. However, this may be providing false support as it cannot continue forever.
Oklahoma perspective
As we have written before, we are fortunate in this state that most of our banks have had more conservative lending practices and have therefore been less susceptible to the scope and scale of banking problems elsewhere. However, the entire banking system is linked together, so we need to keep our eye on the big picture.
Business Bank Lending Declines
Current state of Bank Lending – Business Lending
US Bank lending (Commercial & Industrial Lending) as reported by the Federal Reserve Bank continues to decline and was down 18% in May year-over-year. This 18% decline is twice as severe as the previous worst decline in history of 9.3% in 1949. And the monthly declines show little signs of slowing. See chart in this story, which shows percentage year-over-year declines in lending.
Current state of Bank Lending – Real Estate Lending
The picture is even worse for real estate lending at US banks. For the first time on record, we are seeing annual declines in real estate lending, down 4.6% over the same period last year. Until 2009, there had never been a year-over-year decline in real estate lending in the US and this may continue to worsen.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2010. About ClearRidge Capital ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms. ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada. Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values. For further information, visit www.clearridgecapital.com.
Tuesday, January 19, 2010
Cost of Debt and Equity Capital in 2010
Source: Pepperdine University Private Cost of Capital Survey
Pepperdine University, along with research contributor Robert Slee, conducted the first ever private cost of capital survey (PCOC), which was the first survey of its kind to provide information on the capital markets for small to midsized US companies.
They surveyed senior lenders (typically banks), asset-based lenders (ABLs), mezzanine capital, private equity and venture capital as they relate to midsized private companies.
This survey may be useful for your business, as the results highlight the benchmarks that must be met to qualify for capital, along with the required investment returns for the capital providers.
Armed with this information, you should be better able to plan your budget, your ideal capital structure and determine the likely cost of capital in 2010.
We are going to summarize what we think are some of the most important points, but would also encourage you to download the full 67-page survey.
At the end of this email, we provide a link to go to Pepperdine University's website to download the complete survey.
BANKS (Cash-Flow Lending)
Interest Rates
According to Pepperdine's survey, over half of banks responded that their current all-in interest rate (including spreads over prime and LIBOR) is between 6% and 6.5%, with the remainder lending at rates between 6.5% and 7.5%.
44% of loans were refinancing existing debt as opposed to loans for working capital, acquisitions, new equipment and other purposes. While they didn't expect lending rates to increase significantly, most banks expect lending to become more restrictive through the middle of 2010.
ClearRidge: Please take action early in preparation to refinance debt. A major concern is the number of business owners that are going to be surprised by higher loan costs and tighter credit requirements when it comes time to replace debt. That, coupled with declining bank lending levels throughout 2010 will likely lead to liquidity problems for thousands of US businesses.
Fixed or Variable Rates - 38% use fixed rate and 62% use variable rates, of which most are pegged to prime.
Median Credit Ratios
Fixed-Charge Coverage (Min): 1.2
Funded Debt to EBITDA (Max) 3.0
Debt Service (Max) 1.25
Debt to Net Worth (Max) 3.0
Covenant Thresholds
Max Debt/ Total Assets 3x
Min Cash Flow Percentage 125%
Min Fixed-Charge Coverage 1.2x
Max Debt/EBITDA 2.75x
You will notice that these ratios and thresholds are more restrictive than in recent years when many businesses last refinanced debt.
ASSET-BASED LENDING (includes some banks)
Asset-Based Lending focuses mainly on collateral and liquidity; whereas a traditional bank loan focuses mainly on cash flow. An ABL is a loan secured against the assets of a company - mainly inventory and accounts receivable, but sometimes also machinery and equipment, intellectual property or trademarks.
[Banks also operate within this category and sometimes offer a blend of cash flow and asset-based loan.]
Asset-based loans are typically categorized into three tiers depending on loan dollar amount:
Tier 1 loans : >$10M; Tier 2 loans: $3-$10M; Tier 3: <$3M
Interest Rates
According to Pepperdine's survey, variable interest rates in 2009 and 2010 are ranging from prime plus 0.5% to prime plus 16%. For larger loans typically pegged to LIBOR, rates range from LIBOR plus 3.5% to LIBOR plus 6%.
Other fees
ABLs may also have closing fees ranging from 0.5% to 4% of the loan amount; modification fees from 0.1% to 3%; commitment fees from 0.5% to 1.5%' collateral monitoring fees from 0.1% to 12%; unused-line fees from 0.25% to 1%, as well as audit fees, attorneys' fees, insurance, annual and due diligence fees.
ClearRidge: In other words, it's important to look beyond the headline rate and determine the all-in cost of an ABL, which will likely cost you north of 10% and can be as high as 35%.
Over half of Asset-Based Lenders expect prime rate to increase, LIBOR to increase and credit spreads to widen through mid 2010.
Median Credit Ratios
Fixed-Charge Coverage (min): 1.0
Funded Debt to EBITDA (max) 4.25
(compared to bank lending max at 3.0)
Debt Service Ratio (min) 1.2
Lending Advance Rates
Accounts Receivable: 85.0%
Inventory - Low quality: 22.5%
Inventory - Intermediate quality 35.0%
Inventory - High quality 55.0%
Equipment 67.5%
Real Estate 65.0%
Land 50.0%
Firm's Cash Flow 65.0%
Marketable Securities 80.0%
Refinancing accounted for over half of ABLs, followed by acquisition and growth financing. In spite of rising costs, almost every asset-based lender expects demand for ABLs to increase through 2010.
ClearRidge: When traditional bank lending becomes too restrictive or is unavailable, many businesses will turn to ABLs to refinance their debt.
MEZZANINE CAPITAL
According to Pepperdine's survey, all-in interest rates for mezzanine loans are currently running at around 18%.
Mezzanine is most often used to fund a management buyout, growth or acquisition financing, with only about a third for refinancing.
Most mezzanine capital loans would be made to firms with more than $10M in annual sales and for loan amounts between $1M and $10M. One in three mezzanine loans are straight interest, with two thirds comprising interest plus stock warrants.
Pre-funding Median Ratios
Total Debt to EBITDA (max) 3.75
Senior Debt to EBITDA (max) 2.5
Fixed-Charge Coverage (min) 1.2
Median Financial Ratios
Maximum Multiple of Recast EBITDA 4.0
Maximum Multiple of Operating Cash Flow 4.0
Maximum Total Debt to EBITDA 4.0
Maximum Senior Debt to EBITDA 2.5
Minimum Fixed-Charge Coverage 1.2
PRIVATE EQUITY
According to Pepperdine's survey, Private Equity in today's market has an expected annual rate of return of between 20% and 30% on new investments.
Only 7.5% of private equity funds will consider an equity investment of $1M or less, but around 40% will consider an investment smaller than $5 million. Two-thirds are control investments and one third are non-control.
The median targeted equity ratio as a percentage of invested capital in each deal is 41%, with a range between 20% and 50%.
ClearRidge: This equity ratio is in contrast to the easier credit days in 2007 and 2008 when private equity would rarely need to contribute much more than 20% equity to the capital structure.
VENTURE CAPITAL
According to Pepperdine's survey, VCs currently have an expected rate of return on investment of 40% to 43% for each investment they make. However, the average rate of return for realized investments in prior funds is between 24% and 29%.
Below is the Pepperdine Survey's summary of VC investment stages:
Stage 1: 22.5% of VC investments fall into this category.
No product revenues to date and limited expense history, typically an incomplete management team with an idea, plan, and possibly some initial product development. Expected exit by VC in 6.2 years.
Stage 2: 17.0% of VC investments.
Still no product revenue but substantive expense history, as product development is underway and challenges are thought to be understood. Expected exit by VC in 5.8 years.
Stage 3: 17.8% of VC investments.
Significant progress in product development; key development milestones met and development is near completion, but generally no product revenue. Expected exit by VC in 5.1 years.
Stage 4: 28.3% of VC investments.
Additional key development milestones met and some product revenue, but still operating at a loss. Expected exit by VC in 4.8 years.
Stage 5: 10.9% of VC investments.
Product revenue and operating profitability or breakeven/positive cash flows. Expected exit by VC in 4.0 years.
Stage 6: 3.5% of VC investments.
Established financial history of profitable operations or generation of positive cash flows. Expected exit by VC in 3.5 years.
Summary of Capital for Business in 2010
To reiterate what we said in 2009, we would urge you to be thoroughly prepared when it comes time to refinance or recapitalize debt. The credit markets and equity markets are open for business, but it will take better preparation than in the past to get through the loan committee and get your loan approved.
If you need to look at alternatives, raise some capital or replace debt, please give ClearRidge a call and we would be happy to talk through your options with you.
Tax Credits
If you would like to learn about business incentives and tax credits that may be available for your business, you may find the following useful:
Pepperdine Survey
Download a PDF of the full Private Capital Markets report from Pepperdine's website:
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.
ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Wednesday, December 16, 2009
Management Buyouts and Buyins
Are you thinking whether or not you should raise capital or sell your company or in 2010?
ClearRidge Management Buyouts
Tulsa Oklahoma
Now, more than ever, you need to consider all your options. Most business owners typically see two options when it comes time to raise new equity or sell their company: 1) strategic buyer or 2) financial buyer. In reality, you have many more options open to you.
In fact, an outright sale rarely yields the highest price, so consider these 9 alternatives before making up your mind:
i) sell to employees;
ii) take the company public
iii) sell to family members;
iv) sell to co-owners;
v) sell through a charitable trust;
vi) sell majority interest and immediately exit the business;
vii) sell minority interest to new investors and use their capital to grow the business;
viii) enter a joint venture to test the water with a possible acquirer;
ix) merge your business with another company.
The important point here is that there are many options available and it makes sense to work through the merits, advantages, challenges and tax implications of each one before starting down the road.
How about a Deal with Management?
Today, we are going to discuss one of the more favorable options in this climate: Management Buyouts (MBOs) and Management Buyins (MBIs). Over the last few months, MBOs and MBIs have become increasingly popular for a variety of reasons.
The first thing to do is assess the likely value that the transfer could bring. In a climate where the majority of midsized companies have seen revenues and earnings fall in the last 18 months, a transfer to management can be the best way to sell for the highest price and realize the most value.
Transfer Ownership to Managers
Management transfers (buyouts and buyins) typically occur when: i) the owner of a privately-held company decides to sell; or ii) a larger company sells off a division; or iii) a bankruptcy forces liquidation of a failed business.
Differences between an MBO and MBI
Management buyouts occur when existing management of a company acquire majority ownership from the owners. Management buyins take place when external financial investors back an outside manager/operator with key industry knowledge and experience to lead and grow the company.
Will an MBO or MBI work for your company?
Below is an outline of the characteristics that would typically favor a MBO or MBI.
Industries
Management deals often occur in mature industries that require low levels of capital investment. Ideally the company would have a loyal customer base. Non-cyclical businesses with reasonable to high margins are favored.
Management Team
Management experience, track record and credibility are paramount. Time and again it is proven that investors back a management team above most everything else. Management needs to have some skin in the game and should be able to raise their own funds or pledge assets. To avoid future headaches, you should only involve managers who are critical to the success of the business. The fewer the better.
Company
The Company should have predictable and stable cash flows with profit margins above industry averages. Financial reporting should be process driven, clear and efficient. Proprietary or defensible products and services are preferred.
Investor and Deal Structures
MBOs and MBIs are often backed by private equity investors and are typically structured either as an Equity sponsored buyout or a Leveraged buyout:
1) Equity-sponsored buyout (ESB). In the current climate, equity-sponsored buyouts typically consist of 2%-10% management equity, 40%-50% private equity capital and 40%-60% bank or asset-based lending. So, in effect, majority equity ownership is taken up by the private equity sponsor, with debt funding about half of the proceeds to the Seller. It is possible that equity sponsors may also require up to 10% in a Seller note.
Management may contribute a token investment of equity and earn additional equity interest based on company performance, as well as the right to acquire further equity pari-passu to the equity sponsor's contribution.
2) Leveraged buyout (LBO). In the free-wheeling, easy credit days (pre-2008), many management buyouts were structured through a leveraged buyout. A LBO would typically consist of 5%-15% management equity, 10%-25% seller note, 5%-20% mezzanine capital and 40%-60% bank or asset-based lending. So, in effect, it would be seller debt, mezzanine debt and bank debt that funds the acquisition.
In the near term, it is unlikely that a LBO will be used to fund a management buyout. Not only is there a higher failure rate than with an ESB, but it would also be difficult to secure the financing with so much leverage.
Advantages of an MBO for Seller:
An MBO will likely have a more efficient and cooperative due diligence process. Management knows the business intimately and may even know more about the business than the Seller.
Management's desire to have skin in the game shows their confidence in the Company's future, which in turn increases investor confidence in the deal. Higher confidence and less perceived risk may allow a higher sale price.
Difficulties to overcome for Seller:
There is an inherent conflict of interest in a MBO. Management is in a position to reduce the sale price or block competitive offers leading up to the sale. Management may also not agree to stay if a competing offer is accepted.
The Seller may have less information about the business and less leverage in negotiations because of the management's role in the business.
Timing is critical. At the closing table, there could be management, private equity, a bank, mezzanine lender and the seller all having to sign off on the deal at the same time. Each group has their own agenda and is represented by different counsel. It is a real challenge to accommodate each party's needs in a timely and professional manner. From the outset, a MBO should be a well planned and carefully orchestrated effort to get the deal closed and each party needs to enter the process with a willing attitude to make some compromises to get the deal done.
Hiring advisors from a specialist M&A firm who have extensive MBO experience will increase the odds of getting a deal done, as well as help to satisfy the needs of all parties and smooth negotiations. Our team at ClearRidge would welcome the opportunity to represent you in your management buyout.
Difficulties to overcome for Management:
Time view of investors vs. managers: 5 years for equity sponsors vs. possibly 10 to 15 years for managers. Management and equity sponsors need to resolve these differences early in the process.
Investors want the company to be run to maximize returns within a short time-frame. Managers may have alternative ideas about long-term appreciation of the Company. There needs to be a common agreement and clear plan agreed between managers and equity sponsors before entering an agreement.
Managers need to understand the implications of the new capital structure and be comfortable that they will support the transaction. Management need to determine if the new capital structure will allow sufficient runway for the newly acquired company to succeed.
This brief overview of management buyouts only scratches the surface of everything you are likely to encounter. If you would like to dig deeper, you can call our team at ClearRidge to arrange a no-cost consultation to discuss how a management buyout could work for your Company.
This is our last newsletter before the holidays and we would like to wish you and your family a Merry Christmas and a Peaceful and Prosperous New Year.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge Management Buyouts
Tulsa Oklahoma
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
ClearRidge Management Buyouts
Tulsa Oklahoma
Now, more than ever, you need to consider all your options. Most business owners typically see two options when it comes time to raise new equity or sell their company: 1) strategic buyer or 2) financial buyer. In reality, you have many more options open to you.
In fact, an outright sale rarely yields the highest price, so consider these 9 alternatives before making up your mind:
i) sell to employees;
ii) take the company public
iii) sell to family members;
iv) sell to co-owners;
v) sell through a charitable trust;
vi) sell majority interest and immediately exit the business;
vii) sell minority interest to new investors and use their capital to grow the business;
viii) enter a joint venture to test the water with a possible acquirer;
ix) merge your business with another company.
The important point here is that there are many options available and it makes sense to work through the merits, advantages, challenges and tax implications of each one before starting down the road.
How about a Deal with Management?
Today, we are going to discuss one of the more favorable options in this climate: Management Buyouts (MBOs) and Management Buyins (MBIs). Over the last few months, MBOs and MBIs have become increasingly popular for a variety of reasons.
The first thing to do is assess the likely value that the transfer could bring. In a climate where the majority of midsized companies have seen revenues and earnings fall in the last 18 months, a transfer to management can be the best way to sell for the highest price and realize the most value.
Transfer Ownership to Managers
Management transfers (buyouts and buyins) typically occur when: i) the owner of a privately-held company decides to sell; or ii) a larger company sells off a division; or iii) a bankruptcy forces liquidation of a failed business.
Differences between an MBO and MBI
Management buyouts occur when existing management of a company acquire majority ownership from the owners. Management buyins take place when external financial investors back an outside manager/operator with key industry knowledge and experience to lead and grow the company.
Will an MBO or MBI work for your company?
Below is an outline of the characteristics that would typically favor a MBO or MBI.
Industries
Management deals often occur in mature industries that require low levels of capital investment. Ideally the company would have a loyal customer base. Non-cyclical businesses with reasonable to high margins are favored.
Management Team
Management experience, track record and credibility are paramount. Time and again it is proven that investors back a management team above most everything else. Management needs to have some skin in the game and should be able to raise their own funds or pledge assets. To avoid future headaches, you should only involve managers who are critical to the success of the business. The fewer the better.
Company
The Company should have predictable and stable cash flows with profit margins above industry averages. Financial reporting should be process driven, clear and efficient. Proprietary or defensible products and services are preferred.
Investor and Deal Structures
MBOs and MBIs are often backed by private equity investors and are typically structured either as an Equity sponsored buyout or a Leveraged buyout:
1) Equity-sponsored buyout (ESB). In the current climate, equity-sponsored buyouts typically consist of 2%-10% management equity, 40%-50% private equity capital and 40%-60% bank or asset-based lending. So, in effect, majority equity ownership is taken up by the private equity sponsor, with debt funding about half of the proceeds to the Seller. It is possible that equity sponsors may also require up to 10% in a Seller note.
Management may contribute a token investment of equity and earn additional equity interest based on company performance, as well as the right to acquire further equity pari-passu to the equity sponsor's contribution.
2) Leveraged buyout (LBO). In the free-wheeling, easy credit days (pre-2008), many management buyouts were structured through a leveraged buyout. A LBO would typically consist of 5%-15% management equity, 10%-25% seller note, 5%-20% mezzanine capital and 40%-60% bank or asset-based lending. So, in effect, it would be seller debt, mezzanine debt and bank debt that funds the acquisition.
In the near term, it is unlikely that a LBO will be used to fund a management buyout. Not only is there a higher failure rate than with an ESB, but it would also be difficult to secure the financing with so much leverage.
Advantages of an MBO for Seller:
An MBO will likely have a more efficient and cooperative due diligence process. Management knows the business intimately and may even know more about the business than the Seller.
Management's desire to have skin in the game shows their confidence in the Company's future, which in turn increases investor confidence in the deal. Higher confidence and less perceived risk may allow a higher sale price.
Difficulties to overcome for Seller:
There is an inherent conflict of interest in a MBO. Management is in a position to reduce the sale price or block competitive offers leading up to the sale. Management may also not agree to stay if a competing offer is accepted.
The Seller may have less information about the business and less leverage in negotiations because of the management's role in the business.
Timing is critical. At the closing table, there could be management, private equity, a bank, mezzanine lender and the seller all having to sign off on the deal at the same time. Each group has their own agenda and is represented by different counsel. It is a real challenge to accommodate each party's needs in a timely and professional manner. From the outset, a MBO should be a well planned and carefully orchestrated effort to get the deal closed and each party needs to enter the process with a willing attitude to make some compromises to get the deal done.
Hiring advisors from a specialist M&A firm who have extensive MBO experience will increase the odds of getting a deal done, as well as help to satisfy the needs of all parties and smooth negotiations. Our team at ClearRidge would welcome the opportunity to represent you in your management buyout.
Difficulties to overcome for Management:
Time view of investors vs. managers: 5 years for equity sponsors vs. possibly 10 to 15 years for managers. Management and equity sponsors need to resolve these differences early in the process.
Investors want the company to be run to maximize returns within a short time-frame. Managers may have alternative ideas about long-term appreciation of the Company. There needs to be a common agreement and clear plan agreed between managers and equity sponsors before entering an agreement.
Managers need to understand the implications of the new capital structure and be comfortable that they will support the transaction. Management need to determine if the new capital structure will allow sufficient runway for the newly acquired company to succeed.
This brief overview of management buyouts only scratches the surface of everything you are likely to encounter. If you would like to dig deeper, you can call our team at ClearRidge to arrange a no-cost consultation to discuss how a management buyout could work for your Company.
This is our last newsletter before the holidays and we would like to wish you and your family a Merry Christmas and a Peaceful and Prosperous New Year.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge Management Buyouts
Tulsa Oklahoma
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Thursday, November 19, 2009
Acquisitions Should Compliment, Not Substitute, Good Corporate Growth Strategy
If you own or manage a business and intend to use the current softness in your industry as a springboard to pick up market share in 2010 and 2011, you need to carefully consider your growth strategy.
Organic Growth
To what extent can you fund and develop growth internally? What are your risks and returns on any capital investment you make? What access do you have to different types of capital and what are the overall costs? And, perhaps most importantly, how will your growth strategy affect future cash flows?
Growth through Acquisition
Will 2010 and 2011 provide some exceptional acquisition opportunities for your business? More than likely, yes. But the most successful business owners will only use mergers and acquisitions as one tool in their overall growth strategy. Acquisitions should be used to gain access to new markets, products or intellectual property where organic growth would be a less effective alternative, but only if it also complements a company's strategic plan.
Challenge your assumptions
As you are considering an acquisition, you need to challenge every assumption you have about the market and the opportunity before proceeding. In times like this, there is a rebalancing of the market. The days of easy credit and pure financial engineering will likely be replaced with one where organic growth, operational strength, smart planning and business acumen are more important.
Acquisitions are often rationalized as a faster and more cost effective way of growing, but that typically doesn't take into account the planning, time, disruption, financial and organizational resources that are required to successfully integrate companies after an acquisition. Synergies on paper are not realized without a thorough integration plan with detailed and realistic profitability targets. We'll talk more about that in the coming weeks.
Does it add value?
An important rule to remember is accretion and dilution. After integrating the two companies, will the acquisition add incremental value to the combined companies? Will it increase the overall value of the group (accretion) or dilute the value of the combined companies? Accretion is good. Dilution is bad.
Go for Growth
A little over 2000 years ago, Virgil told our ancestors that
Fortune Favors the Bold.
However, if Virgil were a business owner today, maybe he would a few caveats to that statement:
Fortune Favors the Bold ... so long as you have scrubbed the numbers, appropriately analyzed the risk, developed the most cost effective capital structure and are confident that your growth and profitability strategy will add value to your company.
There are going to be some great acquisition opportunities next year and we are already seeing buyers setting up for the start of 2010. Our message today, however, is to make sure that any acquisition fits your overall growth strategy. Now is the time to plan that strategy and then find the acquisition opportunities before anyone else does.
This is the first in our series of Secrets to Successful Mergers & Acquisitions.
Next post - Transferring Business Ownership (Part I)
Following post - Business Growth through Acquisition (Part II)
Call ClearRidge for impartial and expert advice on your corporate growth strategy: (918) 392-2900.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Organic Growth
To what extent can you fund and develop growth internally? What are your risks and returns on any capital investment you make? What access do you have to different types of capital and what are the overall costs? And, perhaps most importantly, how will your growth strategy affect future cash flows?
Growth through Acquisition
Will 2010 and 2011 provide some exceptional acquisition opportunities for your business? More than likely, yes. But the most successful business owners will only use mergers and acquisitions as one tool in their overall growth strategy. Acquisitions should be used to gain access to new markets, products or intellectual property where organic growth would be a less effective alternative, but only if it also complements a company's strategic plan.
Challenge your assumptions
As you are considering an acquisition, you need to challenge every assumption you have about the market and the opportunity before proceeding. In times like this, there is a rebalancing of the market. The days of easy credit and pure financial engineering will likely be replaced with one where organic growth, operational strength, smart planning and business acumen are more important.
Acquisitions are often rationalized as a faster and more cost effective way of growing, but that typically doesn't take into account the planning, time, disruption, financial and organizational resources that are required to successfully integrate companies after an acquisition. Synergies on paper are not realized without a thorough integration plan with detailed and realistic profitability targets. We'll talk more about that in the coming weeks.
Does it add value?
An important rule to remember is accretion and dilution. After integrating the two companies, will the acquisition add incremental value to the combined companies? Will it increase the overall value of the group (accretion) or dilute the value of the combined companies? Accretion is good. Dilution is bad.
Go for Growth
A little over 2000 years ago, Virgil told our ancestors that
Fortune Favors the Bold.
However, if Virgil were a business owner today, maybe he would a few caveats to that statement:
Fortune Favors the Bold ... so long as you have scrubbed the numbers, appropriately analyzed the risk, developed the most cost effective capital structure and are confident that your growth and profitability strategy will add value to your company.
There are going to be some great acquisition opportunities next year and we are already seeing buyers setting up for the start of 2010. Our message today, however, is to make sure that any acquisition fits your overall growth strategy. Now is the time to plan that strategy and then find the acquisition opportunities before anyone else does.
This is the first in our series of Secrets to Successful Mergers & Acquisitions.
Next post - Transferring Business Ownership (Part I)
Following post - Business Growth through Acquisition (Part II)
Call ClearRidge for impartial and expert advice on your corporate growth strategy: (918) 392-2900.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Signs Point to Tight Business Lending in 2010
October is when many companies are preparing budgets and business plans for the following year, so it seems a good time to consider the credit environment for 2010.
While there is no crystal ball, we do have 100 years of historical data from the Federal Reserve to give us clues to business lending levels and business failures coming out of a recession.
The good news is that there are some clear patterns that have occurred after every recession.
To apply historical data to the future, we need to know when this recession ended, and industrial production has proved to be a consistent marker. More accurately, a reduction in year-over-year declines in industrial production defines the end of a recession.
So, unless there is a "double dip" in the coming months, the recession likely ended in July.
Before we consider future business lending levels, we need to understand the current business lending landscape. In the last 30 years, even at the fastest pace of growth, it has typically taken 10 or more years to double commercial and industrial lending levels. However, it took less than half that time for C&I lending to double from May 2004 to a peak in November 2008, according to the Federal Reserve Bank of St. Louis.
C&I lending has been declining since December, and history suggests it will continue to decline - year-over-year - for up to three years after the end of this recession.
And not only is business lending declining, but the pace of the decline is increasing. Typically, the pace of declines has increased for up to 18 months after the end of a recession, so it is likely that this time we are going to break the 1949 record of a 9.3 percent year-over-year decline.
If C&I lending follows the historical pattern, lending levels could drop from $1.64 trillion in October 2008 to less than $1.3 trillion at some time in 2011. Assuming no change in supply and demand for loans, that would be a shortfall of approximately $350 billion.
The demand for new and replacement debt will likely increase in the next two years. Many stronger companies that previously carried little or no debt will start to take on new debt. Banks are competing for this business.
This will be combined with medium- and higher-risk business loans that were made to what appeared to be strong companies at competitive rates a year or so ago, when less stringent credit was available. At a minimum, these weaker companies are going to need to renew or replace their existing debt and there are not as many banks competing for this business.
The supply of new and replacement debt will likely fall over the next two years. As a result, there will be a widening gap between supply and demand, and it will be the weaker companies that will suffer when they are unexpectedly unable to replace or renew their debt.
This could trigger three things: a) Lenders will increase interest rates and fees to compensate for the additional risk of these medium to high risk loans, thus putting further pressure on companies' already weak balance sheets; b) some businesses will have to switch to more costly forms of debt; or c) a shortfall in supply will lead to an increase in defaults on C&I loans, which leads us to review historical business failures after a recession.
According to the American Bankruptcy Institute, U.S. Business bankruptcy filings have now risen every quarter for 13 straight quarters since the bankruptcy rules changed in 2005. To compound this trend, business bankruptcy filings have kept increasing for between two years to five years after the end of each previous recession.
Below is the data from the American Bankruptcy Institute.
Quarterly Business Filings by Year (1994-2009)
Our intention is not to spread doom and gloom, but to raise awareness that the economic battle is not yet over. As a CEO or CFO, you may want to consider professional advice, assistance or even a confidential sounding board to renew, raise or replace debt next year.
If you would like a confidential sounding board to discuss your debt and budget plans for 2010, we are happy to sit down and discuss any options. You don't have to hire us as your advisor, we just want to provide a structure and framework to shape your thinking. If you want us to advise you on restructuring or corporate finance, that's an engagement and we can talk about hiring ClearRidge. (918) 392-2900
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
While there is no crystal ball, we do have 100 years of historical data from the Federal Reserve to give us clues to business lending levels and business failures coming out of a recession.
The good news is that there are some clear patterns that have occurred after every recession.
To apply historical data to the future, we need to know when this recession ended, and industrial production has proved to be a consistent marker. More accurately, a reduction in year-over-year declines in industrial production defines the end of a recession.
So, unless there is a "double dip" in the coming months, the recession likely ended in July.
Before we consider future business lending levels, we need to understand the current business lending landscape. In the last 30 years, even at the fastest pace of growth, it has typically taken 10 or more years to double commercial and industrial lending levels. However, it took less than half that time for C&I lending to double from May 2004 to a peak in November 2008, according to the Federal Reserve Bank of St. Louis.
C&I lending has been declining since December, and history suggests it will continue to decline - year-over-year - for up to three years after the end of this recession.
And not only is business lending declining, but the pace of the decline is increasing. Typically, the pace of declines has increased for up to 18 months after the end of a recession, so it is likely that this time we are going to break the 1949 record of a 9.3 percent year-over-year decline.
If C&I lending follows the historical pattern, lending levels could drop from $1.64 trillion in October 2008 to less than $1.3 trillion at some time in 2011. Assuming no change in supply and demand for loans, that would be a shortfall of approximately $350 billion.
The demand for new and replacement debt will likely increase in the next two years. Many stronger companies that previously carried little or no debt will start to take on new debt. Banks are competing for this business.
This will be combined with medium- and higher-risk business loans that were made to what appeared to be strong companies at competitive rates a year or so ago, when less stringent credit was available. At a minimum, these weaker companies are going to need to renew or replace their existing debt and there are not as many banks competing for this business.
The supply of new and replacement debt will likely fall over the next two years. As a result, there will be a widening gap between supply and demand, and it will be the weaker companies that will suffer when they are unexpectedly unable to replace or renew their debt.
This could trigger three things: a) Lenders will increase interest rates and fees to compensate for the additional risk of these medium to high risk loans, thus putting further pressure on companies' already weak balance sheets; b) some businesses will have to switch to more costly forms of debt; or c) a shortfall in supply will lead to an increase in defaults on C&I loans, which leads us to review historical business failures after a recession.
According to the American Bankruptcy Institute, U.S. Business bankruptcy filings have now risen every quarter for 13 straight quarters since the bankruptcy rules changed in 2005. To compound this trend, business bankruptcy filings have kept increasing for between two years to five years after the end of each previous recession.
Below is the data from the American Bankruptcy Institute.
Quarterly Business Filings by Year (1994-2009)
Our intention is not to spread doom and gloom, but to raise awareness that the economic battle is not yet over. As a CEO or CFO, you may want to consider professional advice, assistance or even a confidential sounding board to renew, raise or replace debt next year.
If you would like a confidential sounding board to discuss your debt and budget plans for 2010, we are happy to sit down and discuss any options. You don't have to hire us as your advisor, we just want to provide a structure and framework to shape your thinking. If you want us to advise you on restructuring or corporate finance, that's an engagement and we can talk about hiring ClearRidge. (918) 392-2900
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Tuesday, October 6, 2009
ClearRidge was quoted on likely trends in 2010 for bank lending and business bankruptcy filings.
Matthew Bristow, Managing Director was quoted on bank lending and business bankruptcy filings after a recession in Oklahoma's Statewide newspaper, Journal Record. VIEW FULL NEWSPAPER ARTICLE
Has recession turned into recovery?
October 2, 2009
TULSA – Oklahoma State University economist Russell Evans believes the national recession could bottom out late this year.
BOK Financial Chief Investment Officer Jim Huntzinger is far more optimistic.
“I think it ended at the end of June this year,” said the 27-year veteran of Oklahoma’s largest bank.
Although some national observers agree with Huntzinger, Bob Dauffenbach doesn’t buy it. While he’s seen some indications of improvement, the University of Oklahoma economist expects lingering problems to keep the U.S. recession in a sustained flat bottom well into 2010.
“There’s just a wide, wide variance of opinion about where things are headed,” said Dauffenbach, director of the OU Price College of Business Center for Economic and Management Research.
“You may be having the blue-chip economists forecasting a big rebound, but they didn’t predict the downturn, so why should we trust them?
“It’s just an upside-down world and I fear it’s going to remain so for a while,” he said in a phone interview Thursday. “It’s going to stabilize, but I don’t think that’s the end of the story. My sort of best-guess as to what we’re going to look at for the next two years is periods of positives and periods of negatives. We’re going to kind of oscillate a lot around the lower edge.”
All agree on one thing: When it comes, the U.S. will endure a mild, restrained recovery, with Oklahoma continuing to perform above national standards despite today’s still-low natural gas prices and slowly recovering oil prices.
“Knock on wood, we’ve made it through this recession in pretty good shape,” said Huntzinger.
But several potential time bombs could derail both trains. While rising unemployment brings immediate concern, with Huntzinger and others anticipating national levels could reach 10 percent,many wounded retailers fear the worst from shaken consumers heading into the key holiday sales season.
Looming over those issues are worries concerning the nation’s $700 billion-plus mortgage-backed securities nightmare, rising bank failures and bankruptcies, revenue-stressed state and municipal governments, mounting war debt and military reinvestment costs, health care reform questions and the looming bill for President Barack Obama’s multitrillion-dollar economic stimulus package.
“This has been a very different set of circumstances that have set up this problem in our economy,” said Matthew Bristow, managing director of ClearRidge Capital of Tulsa. “So this could be a very different outcome.”
Those many governmental issues spiking the federal deficit raise what is, to some, the supreme chill of increased taxes – a budget-freezing point for executives even in Oklahoma.
“Clearly taxes have got to go higher,” Huntzinger said in an office interview Thursday. “The medicine we took to help get us through the recession and the economic meltdown one year ago came at a very high cost.
“But higher taxes would be problematic for the economy, as weakened as it is,” he continued. “We’ve got to find some ways around that.”
While BOKF’s executive vice president agrees the national economy’s not out of danger, Huntzinger takes his recovery position from several months of improving data topped by the Conference Board’s leading indicator index.
“They have been up five months in a row now,” Huntzinger said of the 12-element index. “And not just slightly, but rather significantly higher.” While indicators charted by the OU Price College of Business mirror some of that, Dauffenbach attributed some key spikes to Obama’s temporary stimulus, including the Cash for Clunkers program. He fears those improvements may not sustain themselves, as Thursday’s report of declining national auto sales suggest.
“Calling the recession at an end just because you bounced off the bottom is kind of an incomplete picture in my view,” he said. “There’s a lot of cheerleading going on to keep the consumer spending, to keep the consumer borrowing.”
Both Dauffenbach and Huntzinger noted positive movement in both consumer saving and spending trends, although the OU economist said the improvement needs to be stronger. Huntzinger said some of the negative data that continues to churn concerns in the press, such as rising unemployment, reflect lagging results that always trail real economic activity. He suggested national unemployment stats might show continued volatility through next year even as they slowly improve.
As for the number of troubled real estate loans and securities, which some analysts chart at more than $1 trillion, Huntzinger said falling property values have adjusted for many of those problems.
“We’re not out of the woods yet,” he said. “However, I think the market has priced itself appropriately for the magnitude of the problem.”
The lingering credit crunch remains a concern for Bristow, who like Huntzinger feels the economy bottomed out this summer. But his studies of past recessions indicate the nation’s banking system may face a $350 billion shortfall in capital needed for commercial and industrial loans vital to any recovery.
Huntzinger doubted that, although like Dauffenbach, he foresees a muted turnaround on the horizon.
A normal expansion following a recession of this magnitude might lift the nation’s gross domestic product by 6 to 8 percent, he said. Huntzinger expects this recovery to chart at just a third or fourth of that.
That paralleled Dauffenbach’s expectations, as well as an outlook of a midyear economic update issued last month by Evans and Kyle Dean at the OSU Spears School of Business Center for Applied Economic Research.
“The consumer is still overleveraged,” said Huntzinger. “He needs to pay down debt and is already doing so. He has taken the proper steps.”
Bristow’s studies indicate business bankruptcy filings, already up 64 percent in the second quarter from a year ago, could continue to increase two for five years after the recognized end of the recession, dampening any recovery efforts. Dauffenbach fears this may prove true.
Like unemployment statistics, Huntzinger suggested bankruptcies could represent trailing data to economic activity, not withstanding the key recovery role bankruptcies play in recycling capital and resources.
But he understood how the negative public perceptions brewed by that activity hampers consumer and business confidence, which Huntzinger sees as one of two key foundations for a sustained recovery.
All that led Dauffenbach to question the method of defining how or when a recession turns its corner.
“There’s all these different kinds of ways of measuring it,” he said. “One of the ways you can look at it is how long it takes you to return to the prior level of employment you had in the economy at the time when the recession began. From the year 2001 recession, that took 47 months. It took an extended time from the ‘91 recession to return to your previous end of employment.”
Under that standard, with unemployment levels increasing, today’s proposed turnaround could mark a false bottom, or no turnaround at all. Or historians may glance back and consider it a retooling period, when employment standards revised themselves.
Huntzinger expects a sustained recovery to hinge on two factors: improved consumer and business confidence, and how the federal government works through its building funding crises.
“It’s clear that we’ve got to have a plan as well thought-out as it can possibly be to take the economy out of the government’s hands and put it back in the hands of private business,” he said, expecting that to evolve over the next three to five years.
While everything from health care reform to Social Security to military infrastructure will play into how Congress and the president untangle the growing deficit, Huntzinger focused on the still burgeoning stimulus package as a prime foundation for his recovery views.
“In many cases I think it was appropriate for the government to do some of what we did, because we are clearly in better shape today than we were in September 2008,” he said. “So far, so good.
“It was the worst period of extended market conditions that I’ve seen in my life,” he said. “Much of the corporate infrastructure had ceased to operate. That’s how serious it was.”
As one who questioned several of the stimulus policies, Dauffenbach fears these approaches point to more short-term solutions. To the OU economist, the real issue reflects America’s standard of living and economic role in a growingly global economy.
“I think the cure is America waking up to the opportunities of the future, to begin saving again and investing again, making things, drilling the earth for energy and growing the economy,” he said.
“There’s this thing we call the real standard of living that we enjoy in this increasingly global economy. That’s increasingly under debt when you’re the top dog.
“It’s competitiveness, and in the long term, how do we remain competitive in a world economy?” he said. “Those are ultimately the issues we have to examine. Our standard of living is based on the real stuff we consume. That’s the malaise I see. I see us remaining on top, but on a relative sense less so in comparison with the rest of the world. I don’t know what you do about it, except you do what those countries do, which is save more.”
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Has recession turned into recovery?
October 2, 2009
TULSA – Oklahoma State University economist Russell Evans believes the national recession could bottom out late this year.
BOK Financial Chief Investment Officer Jim Huntzinger is far more optimistic.
“I think it ended at the end of June this year,” said the 27-year veteran of Oklahoma’s largest bank.
Although some national observers agree with Huntzinger, Bob Dauffenbach doesn’t buy it. While he’s seen some indications of improvement, the University of Oklahoma economist expects lingering problems to keep the U.S. recession in a sustained flat bottom well into 2010.
“There’s just a wide, wide variance of opinion about where things are headed,” said Dauffenbach, director of the OU Price College of Business Center for Economic and Management Research.
“You may be having the blue-chip economists forecasting a big rebound, but they didn’t predict the downturn, so why should we trust them?
“It’s just an upside-down world and I fear it’s going to remain so for a while,” he said in a phone interview Thursday. “It’s going to stabilize, but I don’t think that’s the end of the story. My sort of best-guess as to what we’re going to look at for the next two years is periods of positives and periods of negatives. We’re going to kind of oscillate a lot around the lower edge.”
All agree on one thing: When it comes, the U.S. will endure a mild, restrained recovery, with Oklahoma continuing to perform above national standards despite today’s still-low natural gas prices and slowly recovering oil prices.
“Knock on wood, we’ve made it through this recession in pretty good shape,” said Huntzinger.
But several potential time bombs could derail both trains. While rising unemployment brings immediate concern, with Huntzinger and others anticipating national levels could reach 10 percent,many wounded retailers fear the worst from shaken consumers heading into the key holiday sales season.
Looming over those issues are worries concerning the nation’s $700 billion-plus mortgage-backed securities nightmare, rising bank failures and bankruptcies, revenue-stressed state and municipal governments, mounting war debt and military reinvestment costs, health care reform questions and the looming bill for President Barack Obama’s multitrillion-dollar economic stimulus package.
“This has been a very different set of circumstances that have set up this problem in our economy,” said Matthew Bristow, managing director of ClearRidge Capital of Tulsa. “So this could be a very different outcome.”
Those many governmental issues spiking the federal deficit raise what is, to some, the supreme chill of increased taxes – a budget-freezing point for executives even in Oklahoma.
“Clearly taxes have got to go higher,” Huntzinger said in an office interview Thursday. “The medicine we took to help get us through the recession and the economic meltdown one year ago came at a very high cost.
“But higher taxes would be problematic for the economy, as weakened as it is,” he continued. “We’ve got to find some ways around that.”
While BOKF’s executive vice president agrees the national economy’s not out of danger, Huntzinger takes his recovery position from several months of improving data topped by the Conference Board’s leading indicator index.
“They have been up five months in a row now,” Huntzinger said of the 12-element index. “And not just slightly, but rather significantly higher.” While indicators charted by the OU Price College of Business mirror some of that, Dauffenbach attributed some key spikes to Obama’s temporary stimulus, including the Cash for Clunkers program. He fears those improvements may not sustain themselves, as Thursday’s report of declining national auto sales suggest.
“Calling the recession at an end just because you bounced off the bottom is kind of an incomplete picture in my view,” he said. “There’s a lot of cheerleading going on to keep the consumer spending, to keep the consumer borrowing.”
Both Dauffenbach and Huntzinger noted positive movement in both consumer saving and spending trends, although the OU economist said the improvement needs to be stronger. Huntzinger said some of the negative data that continues to churn concerns in the press, such as rising unemployment, reflect lagging results that always trail real economic activity. He suggested national unemployment stats might show continued volatility through next year even as they slowly improve.
As for the number of troubled real estate loans and securities, which some analysts chart at more than $1 trillion, Huntzinger said falling property values have adjusted for many of those problems.
“We’re not out of the woods yet,” he said. “However, I think the market has priced itself appropriately for the magnitude of the problem.”
The lingering credit crunch remains a concern for Bristow, who like Huntzinger feels the economy bottomed out this summer. But his studies of past recessions indicate the nation’s banking system may face a $350 billion shortfall in capital needed for commercial and industrial loans vital to any recovery.
Huntzinger doubted that, although like Dauffenbach, he foresees a muted turnaround on the horizon.
A normal expansion following a recession of this magnitude might lift the nation’s gross domestic product by 6 to 8 percent, he said. Huntzinger expects this recovery to chart at just a third or fourth of that.
That paralleled Dauffenbach’s expectations, as well as an outlook of a midyear economic update issued last month by Evans and Kyle Dean at the OSU Spears School of Business Center for Applied Economic Research.
“The consumer is still overleveraged,” said Huntzinger. “He needs to pay down debt and is already doing so. He has taken the proper steps.”
Bristow’s studies indicate business bankruptcy filings, already up 64 percent in the second quarter from a year ago, could continue to increase two for five years after the recognized end of the recession, dampening any recovery efforts. Dauffenbach fears this may prove true.
Like unemployment statistics, Huntzinger suggested bankruptcies could represent trailing data to economic activity, not withstanding the key recovery role bankruptcies play in recycling capital and resources.
But he understood how the negative public perceptions brewed by that activity hampers consumer and business confidence, which Huntzinger sees as one of two key foundations for a sustained recovery.
All that led Dauffenbach to question the method of defining how or when a recession turns its corner.
“There’s all these different kinds of ways of measuring it,” he said. “One of the ways you can look at it is how long it takes you to return to the prior level of employment you had in the economy at the time when the recession began. From the year 2001 recession, that took 47 months. It took an extended time from the ‘91 recession to return to your previous end of employment.”
Under that standard, with unemployment levels increasing, today’s proposed turnaround could mark a false bottom, or no turnaround at all. Or historians may glance back and consider it a retooling period, when employment standards revised themselves.
Huntzinger expects a sustained recovery to hinge on two factors: improved consumer and business confidence, and how the federal government works through its building funding crises.
“It’s clear that we’ve got to have a plan as well thought-out as it can possibly be to take the economy out of the government’s hands and put it back in the hands of private business,” he said, expecting that to evolve over the next three to five years.
While everything from health care reform to Social Security to military infrastructure will play into how Congress and the president untangle the growing deficit, Huntzinger focused on the still burgeoning stimulus package as a prime foundation for his recovery views.
“In many cases I think it was appropriate for the government to do some of what we did, because we are clearly in better shape today than we were in September 2008,” he said. “So far, so good.
“It was the worst period of extended market conditions that I’ve seen in my life,” he said. “Much of the corporate infrastructure had ceased to operate. That’s how serious it was.”
As one who questioned several of the stimulus policies, Dauffenbach fears these approaches point to more short-term solutions. To the OU economist, the real issue reflects America’s standard of living and economic role in a growingly global economy.
“I think the cure is America waking up to the opportunities of the future, to begin saving again and investing again, making things, drilling the earth for energy and growing the economy,” he said.
“There’s this thing we call the real standard of living that we enjoy in this increasingly global economy. That’s increasingly under debt when you’re the top dog.
“It’s competitiveness, and in the long term, how do we remain competitive in a world economy?” he said. “Those are ultimately the issues we have to examine. Our standard of living is based on the real stuff we consume. That’s the malaise I see. I see us remaining on top, but on a relative sense less so in comparison with the rest of the world. I don’t know what you do about it, except you do what those countries do, which is save more.”
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Wednesday, September 16, 2009
Making Sense of the Letter of Intent
Making Sense of the Letter of Intent
We first explain what can be included in an LOI, then go into the standard requirements and suggested best practices further down the page.
An Letter of Intent is often misunderstood in the sale process of a company.
The purpose of an LOI is to establish a general framework for the price and key terms of a potential transaction.
An LOI would often be executed following a verbal offer of price and terms from a buyer prospect and would be executed before due diligence starts.
While an LOI resembles a written contract, they are typically non-binding on the parties in their entirety. You could think of it as a letter of understanding to continue the process.
It is important to make sure that a potential buyer submits
an LOI before allowing them to start the due diligence process. The main reason is to ensure that you have a general understanding and agreement with the terms of their offer.
There is no sense in stalling the sale process for 90 days and giving exclusivity to negotiate contract terms with only one buyer if their terms are not going to be acceptable to you.
Why you should request an LOI
The act of submitting an LOI requires higher level approval and signature, which indicates that it is a serious offer and that the buyer representative has the appropriate authority. At the same time, the buyer is not committed to deliver those terms and is not committed to complete the transaction.
When both sides are acting in good faith, an LOI sets up the outline of an offer and allows you to contemplate whether you want to open up your company to an exclusive period of due diligence where the buyer prospect would gain complete access to your company's financials and operations.
When sellers don't request an LOI
In an informal sales process where both parties know each other well, some sellers feel that they can gauge both the motivation and indicative terms without requesting an LOI from the buyer. We believe these situations make it even more important to require an LOI.
LOI Content
The basic provisions of an LOI typically include details of the deal structure, its terms and conditions, exclusivity and obligations of the parties. The financial terms comprise the price and terms of the deal, which may include cash, stock, earn out, warrants, options, minority or majority ownership. It should also include an overview of financing sources and leverage for the deal.
It will often also set out a general timeline of when the agreement and contract would be finalized if due diligence is completed to the buyer prospect's satisfaction.
Nonbinding Nature
Even though LOIs are considered serious agreements, many of the most important parts of the agreement are not binding. Often the only binding provision is the non-disclosure or "no-shop" provision.
Exclusivity Agreements
In consideration for the time, effort and money spent by the potential buyer during the due diligence process, exclusivity agreements are standard. The seller agrees not to market the business to other interested parties which as a consequence provides the buyer with some sort of security against competing offers. Different terms essentially all mean the same: "no-shop", "stand-still" etc.
Unfortunately for the seller, if the deal falls through after the due diligence stage, it inevitably means a loss of momentum in the sale process. This is why it is so important to have a clear understanding of a buyer's track record, financial means and motivation to complete the deal in a timely manner, as well as have some other buyer prospects in reserve if the current buyer falls through. Without that assurance, many sellers tie themselves into "no-shop" agreements with buyer prospects that talk a good game, but are unlikely to ever get to the finish line.
Reliable Financial Data
Even though an LOI is a significant step towards the sale of your business, it is just the first step in negotiations. As price and terms of the LOI are not binding, this is when the work really begins to provide accurate and reliable data in a timely manner. If you have an acceptable buyer prospect, you need to increase their confidence in your company by pre-empting their due diligence requests with thorough preparation and a secure data room available to them with information they are likely to request.
And a final note. If a buyer requires you to disclose sales forecasts before the LOI is signed, make sure that they are reasonable. If you are too optimistic, the buyer will often use your non-achievement of the forecasts as leverage to renegotiate the purchase price, worsen the terms or both.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com
We first explain what can be included in an LOI, then go into the standard requirements and suggested best practices further down the page.
An Letter of Intent is often misunderstood in the sale process of a company.
The purpose of an LOI is to establish a general framework for the price and key terms of a potential transaction.
An LOI would often be executed following a verbal offer of price and terms from a buyer prospect and would be executed before due diligence starts.
While an LOI resembles a written contract, they are typically non-binding on the parties in their entirety. You could think of it as a letter of understanding to continue the process.
It is important to make sure that a potential buyer submits
an LOI before allowing them to start the due diligence process. The main reason is to ensure that you have a general understanding and agreement with the terms of their offer.
There is no sense in stalling the sale process for 90 days and giving exclusivity to negotiate contract terms with only one buyer if their terms are not going to be acceptable to you.
Why you should request an LOI
The act of submitting an LOI requires higher level approval and signature, which indicates that it is a serious offer and that the buyer representative has the appropriate authority. At the same time, the buyer is not committed to deliver those terms and is not committed to complete the transaction.
When both sides are acting in good faith, an LOI sets up the outline of an offer and allows you to contemplate whether you want to open up your company to an exclusive period of due diligence where the buyer prospect would gain complete access to your company's financials and operations.
When sellers don't request an LOI
In an informal sales process where both parties know each other well, some sellers feel that they can gauge both the motivation and indicative terms without requesting an LOI from the buyer. We believe these situations make it even more important to require an LOI.
LOI Content
The basic provisions of an LOI typically include details of the deal structure, its terms and conditions, exclusivity and obligations of the parties. The financial terms comprise the price and terms of the deal, which may include cash, stock, earn out, warrants, options, minority or majority ownership. It should also include an overview of financing sources and leverage for the deal.
It will often also set out a general timeline of when the agreement and contract would be finalized if due diligence is completed to the buyer prospect's satisfaction.
Nonbinding Nature
Even though LOIs are considered serious agreements, many of the most important parts of the agreement are not binding. Often the only binding provision is the non-disclosure or "no-shop" provision.
Exclusivity Agreements
In consideration for the time, effort and money spent by the potential buyer during the due diligence process, exclusivity agreements are standard. The seller agrees not to market the business to other interested parties which as a consequence provides the buyer with some sort of security against competing offers. Different terms essentially all mean the same: "no-shop", "stand-still" etc.
Unfortunately for the seller, if the deal falls through after the due diligence stage, it inevitably means a loss of momentum in the sale process. This is why it is so important to have a clear understanding of a buyer's track record, financial means and motivation to complete the deal in a timely manner, as well as have some other buyer prospects in reserve if the current buyer falls through. Without that assurance, many sellers tie themselves into "no-shop" agreements with buyer prospects that talk a good game, but are unlikely to ever get to the finish line.
Reliable Financial Data
Even though an LOI is a significant step towards the sale of your business, it is just the first step in negotiations. As price and terms of the LOI are not binding, this is when the work really begins to provide accurate and reliable data in a timely manner. If you have an acceptable buyer prospect, you need to increase their confidence in your company by pre-empting their due diligence requests with thorough preparation and a secure data room available to them with information they are likely to request.
And a final note. If a buyer requires you to disclose sales forecasts before the LOI is signed, make sure that they are reasonable. If you are too optimistic, the buyer will often use your non-achievement of the forecasts as leverage to renegotiate the purchase price, worsen the terms or both.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com
Thursday, September 3, 2009
Anja Ritchie joins ClearRidge Capital’s Team from Frankfurt, Germany
Anja Ritchie joins ClearRidge Capital’s Team from Frankfurt, Germany.
TULSA, OK – September 3, 2009 – ClearRidge Capital, a leading provider of restructuring, merger and acquisition and corporate finance services for midsize companies, has expanded its mergers and acquisitions team with the addition of Anja Ritchie, a professional with industry experience from PricewaterhouseCoopers and Commerzbank in Germany.Anja was born and raised in Berlin, Germany. She graduated with an MSc from one of the top 3 German business schools, HHL-Leipzig Graduate School of Management, majoring in Corporate Finance and Business Strategy. She earned her Bachelor’s degree in International Business Administration from the European University Viadrina in Germany and the Ecole Superieure de Commerce in Montpellier, France.
Anja worked in the valuation advisory division at PricewaterhouseCoopers in Frankfurt, Germany, where she contributed to a wide range of European MandA deals. Prior to this, she also worked in corporate restructuring and financial modeling at Commerzbank, headquartered in Frankfurt.
Anja met her husband, who is originally from Pryor, Oklahoma while they were traveling in Turkey. After living in Europe for several years, they decided to move back to the US and settle in Tulsa.
According to Matthew Bristow, Managing Director, “Anja adds to the international experience of our team, who between us have lived and worked in over 15 countries around the world. Our clients benefit from a breadth of industry experience and geographic relationships that are unavailable to most Midwest companies. Anja adds to the strength and diversity of the ClearRidge team, as well as bringing new lender, investor and business relationships from Central Europe.
At ClearRidge, Anja’s main focus is research, analysis and financial modeling.
According to Bruce Jones, Managing Director, “The addition of Anja to our team will further strengthen our firm enabling us to expand our services to the growing Midwest market for corporate financial and strategic advice.”
Before Anja embarked upon her investment banking career, she was a professional volleyball player, winning the Berlin Championship title numerous times with her team and placing 2nd in a German national championship. Anja still enjoys playing beach volleyball today, but she now spends more time perfecting her Salsa dancing.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Wednesday, September 2, 2009
Critical Pre-Sale Due Diligence - Maximize Business Sale Price and Terms
Due Diligence preparation is often overlooked, yet is critical to maximizing sale price and ensuring a smooth transaction. Now more than ever.
Credit markets are tight and despite a recent rebound, Mergers and Acquisitions activity is still down.
Buyers are targeting acquisitions - but now with a heightened degree of scrutiny.
Even if a buyer has plentiful cash available, they are still likely to leverage the acquisition to increase their percentage returns.
Leverage brings lenders to the table. Even if lenders are familiar with the deal, they need to provide detailed support for their loan.
With the tighter credit environment, tougher reporting requirements and more stringent data and due diligence requirements, you need to do more today to ensure a smooth sale process.
A report on your company's financial results from your accountant or even an independent auditor is not sufficient.
Your best option is to conduct in-depth analysis of your Company by an independent due diligence expert to identify areas that will have a direct impact on the sale price.
Firstly, a buyer needs a thorough review of your financial accounts and reported financials with supporting detail, consolidated data as well as data by location, product categories and other relevant categories for historical and forecasted periods.
They also need in depth analysis and a report on the quality of earnings, accounting systems, methodologies and compliance with or departures from GAAP. They need to see normalized sales, gross margin, and operating expenses, as well as feedback regarding compliance with debt instruments. They need analysis on AR, Inventory, CAPEX, working capital, debt and coverage, and profitability.
Buyers will also require due diligence on liabilities, operations, tax compliance, legal issues, reputation, industry analysis and forecasts, competition, customers, suppliers, people, PP&E, integration risks, environmental, health, internal controls, lease, zoning and permits, in addition to other business issues.
CLICK HERE for ClearRidge Capital's website section with expanded information on due diligence requirements.
This is not something that is easy to compile and typically requires strong financial modeling skills, trained analytical skills and specific acquisition due diligence and corporate finance experience.
Whether it is a midsized privately held company or a single division of a large public company, it is rare that this data is tracked routinely by the lean accounting staff that is focused on daily operations and normal reporting needs.
Take Action to Better Position your Company
This doesn't need to be an obstacle to a successful sale, but it does take planning and clear forethought. Most sellers proceed too quickly at the start of the process and skip critical steps, only to suffer later on while attempting to close the deal.
Unfortunately for many sellers, starting later in the sale process can reduce the sale price or cause the deal to fall apart.
Your best solution is to prepare a thorough due-diligence report before talking to buyers. Proactively offering answers to their likely information requests not only speeds up the process, but also inspires confidence in the acquisition opportunity.
If you want to secure the highest price and the best terms, you are going to need at least two buyers competing in a confidential auction process.
By providing a due diligence report in advance, you are saving time and also providing potential buyers and their lenders with sufficient information for them to submit an LOI (purchase offer) and close the deal in a timely manner.
Professional preparation also enhances the image of your company.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
Maximizing Enterprise Value as a business, financial and strategic advisor to midsized US companies.
ClearRidge’s Directors have completed over 200 M and A transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies.
Restructuring includes financial, operational and strategic restructuring.
Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital.
Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.
We provide top tier advice and relationships with Middle America values.
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