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
Showing posts with label sell company. Show all posts
Showing posts with label sell company. Show all posts
Wednesday, September 16, 2009
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.
Wednesday, August 19, 2009
New Mergers and Acuisitions Data: Fresh Wave of Equity Capital
Fresh Wave of Private Equity Capital Available
New Data from Preqin, Dow Jones, PwC and IFS
We bring you the latest industrial manufacturing M and A data from PwC further down the page, but we start today with breaking news and data from the Private Equity arena.
The last couple of months have seen private equity firms stepping up their marketing efforts to source new investment opportunities.
In response to the growing number of calls and emails we have been receiving from private equity firms, we thought we would dig into the numbers to see if the latest industry data confirmed our observations.
Dry Powder = Fresh Capital
According to Preqin, a London-based research firm, the global private equity industry's dry powder (uncommitted and available cash to invest) currently exceeds $1 trillion, or $1,000 billion.
So, the next time that someone tells you there is little money available to invest in companies, you can let them know that there is over $1,008,000,000,000 fresh cash currently looking for a new home.
Where has the money come from?
The principal investors (known as limited partners) are pension funds, university endowments, foundations, hedge funds and other investors who have continued to invest in new funds.
First Half 2009 Investment Levels
A report published on Monday by International Financial Services in London, estimates that only $189 billion of private equity was invested in 2008, down by 40% from 2007 (we picked this up from today's Financial Times blog: ft.com/alphaville).
Investment in the first half of 2009 was estimated to be down 80%, representing a 12-year low.
The chart below speaks volumes.
Look at the huge dollar difference between funds raised and funds invested.
US Private Equity has largest share of cash
According to Prequin, the US accounts for $609 billion of the $1,080 billion in dry powder, with the rest of the world sharing the remaining $471 billion. Of the $1,080 billion, $507 billion is specifically for acquisition targets, $194 billion for real estate and $153 billion for venture funds.
Returns for Private Equity
Returns for Private equity as an asset class are down 27.6% year-over-year, which reflects the impact of poor performance of the broader economy, bailouts, bankruptcies, credit tightness and company collapses.
It is important to note, however, that short-term performance has not dampened investor confidence in the sector. Most Private Equity investments will ride through the storm with a longer time horizon than other investments (typically 5 to 7 years).
New fundraising levels
According to a recent Dow Jones study, during the first 6 months of 2009, 179 private equity funds raised "only" $55 billion, 64% less than the $153 billion raised by 261 funds during the first half of 2008. The additional $55 billion joins the mounting pile of fresh cash.
Impact of Tight Credit Markets
Average debt levels in buyouts fell to 42% in 2008 from 47% in 2007 (the lowest level since 1994).
Banks have been more reluctant to fund leveraged buyouts with higher debt leverage and are also reluctant to offload distressed assets unless absolutely necessary.
Although banks continue to be the largest lenders to private equity firms, $500 billion in loans are due to be refinanced in the next few years, so other participants will be able to pick up some of that debt.
Best time to invest + Wave of fresh capital
Historically, private equity has made the highest returns from buyouts made through the down cycle.
Most firms are anxiously looking for healthy acquisition opportunities to deploy their cash and there is significant competition for investment opportunities in attractive middle market companies.
ClearRidge recommends that you consider planning the sale of your company if it has performed comparatively well through this down cycle. There are myriad creative ways to structure a deal to ensure you get a fair sale price for your company today and also benefit from upside over the coming years.
Sources: Dow Jones, Preqin, International Financial Services, Financial Times blog (ft.com/alphaville)
Industrial Manufacturing M and A Activity - PwC Update
Getting down to more industry specific data, PricewaterhouseCoopers released their latest "Assembling Value" quarterly report this week on Mergers and Acquisitions in the Industrial Manufacturing industry.
Relevant highlights are below:
Decrease in number of deals as well as their value
US as a Proportion of Global Activity
PWC Report
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.
New Data from Preqin, Dow Jones, PwC and IFS
We bring you the latest industrial manufacturing M and A data from PwC further down the page, but we start today with breaking news and data from the Private Equity arena.
The last couple of months have seen private equity firms stepping up their marketing efforts to source new investment opportunities.
In response to the growing number of calls and emails we have been receiving from private equity firms, we thought we would dig into the numbers to see if the latest industry data confirmed our observations.
Dry Powder = Fresh Capital
According to Preqin, a London-based research firm, the global private equity industry's dry powder (uncommitted and available cash to invest) currently exceeds $1 trillion, or $1,000 billion.
So, the next time that someone tells you there is little money available to invest in companies, you can let them know that there is over $1,008,000,000,000 fresh cash currently looking for a new home.
Where has the money come from?
The principal investors (known as limited partners) are pension funds, university endowments, foundations, hedge funds and other investors who have continued to invest in new funds.
First Half 2009 Investment Levels
A report published on Monday by International Financial Services in London, estimates that only $189 billion of private equity was invested in 2008, down by 40% from 2007 (we picked this up from today's Financial Times blog: ft.com/alphaville).
Investment in the first half of 2009 was estimated to be down 80%, representing a 12-year low.
The chart below speaks volumes.
Look at the huge dollar difference between funds raised and funds invested.
US Private Equity has largest share of cash
According to Prequin, the US accounts for $609 billion of the $1,080 billion in dry powder, with the rest of the world sharing the remaining $471 billion. Of the $1,080 billion, $507 billion is specifically for acquisition targets, $194 billion for real estate and $153 billion for venture funds.
Returns for Private Equity
Returns for Private equity as an asset class are down 27.6% year-over-year, which reflects the impact of poor performance of the broader economy, bailouts, bankruptcies, credit tightness and company collapses.
It is important to note, however, that short-term performance has not dampened investor confidence in the sector. Most Private Equity investments will ride through the storm with a longer time horizon than other investments (typically 5 to 7 years).
New fundraising levels
According to a recent Dow Jones study, during the first 6 months of 2009, 179 private equity funds raised "only" $55 billion, 64% less than the $153 billion raised by 261 funds during the first half of 2008. The additional $55 billion joins the mounting pile of fresh cash.
Impact of Tight Credit Markets
Average debt levels in buyouts fell to 42% in 2008 from 47% in 2007 (the lowest level since 1994).
Banks have been more reluctant to fund leveraged buyouts with higher debt leverage and are also reluctant to offload distressed assets unless absolutely necessary.
Although banks continue to be the largest lenders to private equity firms, $500 billion in loans are due to be refinanced in the next few years, so other participants will be able to pick up some of that debt.
Best time to invest + Wave of fresh capital
Historically, private equity has made the highest returns from buyouts made through the down cycle.
Most firms are anxiously looking for healthy acquisition opportunities to deploy their cash and there is significant competition for investment opportunities in attractive middle market companies.
ClearRidge recommends that you consider planning the sale of your company if it has performed comparatively well through this down cycle. There are myriad creative ways to structure a deal to ensure you get a fair sale price for your company today and also benefit from upside over the coming years.
Sources: Dow Jones, Preqin, International Financial Services, Financial Times blog (ft.com/alphaville)
Industrial Manufacturing M and A Activity - PwC Update
Getting down to more industry specific data, PricewaterhouseCoopers released their latest "Assembling Value" quarterly report this week on Mergers and Acquisitions in the Industrial Manufacturing industry.
Relevant highlights are below:
Decrease in number of deals as well as their value
- Overall number of US deals declined from 27 in 1H2008 to 7 in 1H2009 for deals worth $50 million or more.
- Overall value of US deals worth $50 million or more has declined from $8 billion in 1H2008 to $1 billion in 1H2009, representing a decline of 88%.
- Average deal value during 1H2009 was $129 million versus $268 million in 1H2008, representing a 52% decline.
- US-based private equity firms raised $55 billion in 173 funds in 1H2009, representing a 64% decline compared to $153 billion raised by 261 funds in 1H2008
US as a Proportion of Global Activity
- Deal Activity is still largely driven by North America, which accounted for 27% of all first half 2009 worldwide deals with a transaction value of $50 million or more.
PWC Report
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.
Tuesday, July 28, 2009
7 Challenges of Selling a Privately-Owned Business
If you are considering selling your business in the next few years, you may want to take a few minutes to read through some of the most common challenges and decisions you are likely to face.
1) Leave or Stay
Let's put it another way: Sell 100% or Recapitalize your Company by Selling a Minority or Majority Stake.
You need to consider whether you want to leave the company entirely or whether you want to remain for some time after the sale. And if you leave, how quickly do you want to transition out of the business: 3 months or 3 years?
If you stay to work for someone else and retain a minority stake, you may see your company change direction and the new owners may make decisions you don't agree with.
On the plus side, if you stay and retain a minority stake, there is a strong chance that you can sell the company for a higher price than selling 100% today. Buyers reward your confidence and pay a higher price, because among other things, they have less risk. You also get to enjoy seeing your company grow and then earn a significant second pay day in a few years.
But, you have to ask yourself if you can handle someone else steering your ship in the meantime. Consider how their decisions could put your remaining investment at risk?
2) Protecting Your Employees
Over the years, your employees have relied upon you to do the right thing and consider not only their lives, but also the lives of their families who also depend on you.
Many of your employees have become part of your business family and you want to treat them with the care and respect they deserve. You want to reward them for their loyalty and hard work.
In some cases, you may be able to negotiate employee protection clauses that will calm your employees' fears during the transition. At a minimum, you can make sure that you not only get a great price when it's time to sell, but that the new owners are going to do the right thing for the future of your Company and all those who have a stake in its success.
3) Letting Others Take a Look at Your Books
In many cases, this could be the first time you have opened up your books to anyone who is not in your inner circle. When you sell your company, you have to go beyond your attorneys, accountants, managers and financial advisors. If you want to get the best deal, you are going to need to open up your books to a number of prospective buyers.
Not only are they going to look deep into your financials to determine and validate their purchase offer price. They also need to gain a deeper insight into the way you have run your company, look at how you have made your decisions and how those decisions may affect the future, as well as determine the financial strength and stability of your company.
Before anyone looks at your books, however, you need to have an independent expert go through them thoroughly to identify any issues or problems that a buyer may be concerned with.
There is often plenty of time to resolve the problems before anyone sees your financials. It also makes sense to better organize your financial information and make some adjustments for non-recurring and discretionary expenditures, which may distort the true cash generation capability of your company to a new owner.
4) Determining a Fair Price for Your Business
It makes sense before you get too far down the road to get a reasonable indication of what your company could sell for. You should probably hire an independent firm to appraise and value your business.
Not only will give this you a better idea of what to expect, but it will also help in planning for your future. The valuation will be contingent on the terms that you insist upon in the sale, as well as prevailing industry and market conditions, but a valuation expert should be able to make adjustments and produce a range of valuations for those variables.
5) Structuring the Sale
How will the purchase price be paid to you: in cash, stock, earn out, warrants, options, or a combination of all? Deciding on the right deal for you has advantages and disadvantages that an expert should help you understand in advance. An expert can also explain how your decisions could affect your net proceeds from the sale.
Anything is possible and you will be in control of all negotiations. It is a good idea, however, to have a clear plan of your ideal exit before you start the sale process.
6) Maximizing Sale Price
There are many books and thousands of pages written on all the steps you should go through to maximize the sale price of your Company. A common theme throughout is to start early, prepare very thoroughly before going to market and keep your cards close to your chest. You should only discuss progress, updates and strategy with your advisors in the sale. You have a valuable and unique asset in high demand. Hard work and the right sale strategy will deliver a higher and broader range of purchase offers for you to choose from.
7) Choosing the Right Team to Represent You
You are the expert at running your business. No one has more experience and nobody is better informed. You have been through the highs and lows of multiple business cycles and you understand the challenges of your business better than anyone.
So, it makes sense that when it comes time to sell your business to look for the same qualities in a firm to represent you in the sale. You need to find a team who has experience in your industry, who is well informed with extensive buyer relationships and who will work hardest to bring you the best deal possible. Let them do their job.
Experience in marketing your Company and structuring a sale is critical to bringing you the highest price. An Merger and Acquisition intermediary will also work closely with your legal and tax experts to minimize your liabilities post-acquisition and maximize the after-tax proceeds to you and your family.
When it comes time to engage a firm, you need to do your homework. Interview all the team members who will be working on your project, check references and view examples of their previous work. As a final check, you should also call their former clients to see how they performed in the past.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Restructuring, Corporate Finance, Merger and Acquisition and Turnaround services for midsize companies.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.
Mergers and Aquisitions includes buying, selling, merging and valuing midsize companies.
Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.
ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.
We have directly owned, operated and managed midsize companies. We know the business from your perspective.
1) Leave or Stay
Let's put it another way: Sell 100% or Recapitalize your Company by Selling a Minority or Majority Stake.
You need to consider whether you want to leave the company entirely or whether you want to remain for some time after the sale. And if you leave, how quickly do you want to transition out of the business: 3 months or 3 years?
If you stay to work for someone else and retain a minority stake, you may see your company change direction and the new owners may make decisions you don't agree with.
On the plus side, if you stay and retain a minority stake, there is a strong chance that you can sell the company for a higher price than selling 100% today. Buyers reward your confidence and pay a higher price, because among other things, they have less risk. You also get to enjoy seeing your company grow and then earn a significant second pay day in a few years.
But, you have to ask yourself if you can handle someone else steering your ship in the meantime. Consider how their decisions could put your remaining investment at risk?
2) Protecting Your Employees
Over the years, your employees have relied upon you to do the right thing and consider not only their lives, but also the lives of their families who also depend on you.
Many of your employees have become part of your business family and you want to treat them with the care and respect they deserve. You want to reward them for their loyalty and hard work.
In some cases, you may be able to negotiate employee protection clauses that will calm your employees' fears during the transition. At a minimum, you can make sure that you not only get a great price when it's time to sell, but that the new owners are going to do the right thing for the future of your Company and all those who have a stake in its success.
3) Letting Others Take a Look at Your Books
In many cases, this could be the first time you have opened up your books to anyone who is not in your inner circle. When you sell your company, you have to go beyond your attorneys, accountants, managers and financial advisors. If you want to get the best deal, you are going to need to open up your books to a number of prospective buyers.
Not only are they going to look deep into your financials to determine and validate their purchase offer price. They also need to gain a deeper insight into the way you have run your company, look at how you have made your decisions and how those decisions may affect the future, as well as determine the financial strength and stability of your company.
Before anyone looks at your books, however, you need to have an independent expert go through them thoroughly to identify any issues or problems that a buyer may be concerned with.
There is often plenty of time to resolve the problems before anyone sees your financials. It also makes sense to better organize your financial information and make some adjustments for non-recurring and discretionary expenditures, which may distort the true cash generation capability of your company to a new owner.
4) Determining a Fair Price for Your Business
It makes sense before you get too far down the road to get a reasonable indication of what your company could sell for. You should probably hire an independent firm to appraise and value your business.
Not only will give this you a better idea of what to expect, but it will also help in planning for your future. The valuation will be contingent on the terms that you insist upon in the sale, as well as prevailing industry and market conditions, but a valuation expert should be able to make adjustments and produce a range of valuations for those variables.
5) Structuring the Sale
How will the purchase price be paid to you: in cash, stock, earn out, warrants, options, or a combination of all? Deciding on the right deal for you has advantages and disadvantages that an expert should help you understand in advance. An expert can also explain how your decisions could affect your net proceeds from the sale.
Anything is possible and you will be in control of all negotiations. It is a good idea, however, to have a clear plan of your ideal exit before you start the sale process.
6) Maximizing Sale Price
There are many books and thousands of pages written on all the steps you should go through to maximize the sale price of your Company. A common theme throughout is to start early, prepare very thoroughly before going to market and keep your cards close to your chest. You should only discuss progress, updates and strategy with your advisors in the sale. You have a valuable and unique asset in high demand. Hard work and the right sale strategy will deliver a higher and broader range of purchase offers for you to choose from.
7) Choosing the Right Team to Represent You
You are the expert at running your business. No one has more experience and nobody is better informed. You have been through the highs and lows of multiple business cycles and you understand the challenges of your business better than anyone.
So, it makes sense that when it comes time to sell your business to look for the same qualities in a firm to represent you in the sale. You need to find a team who has experience in your industry, who is well informed with extensive buyer relationships and who will work hardest to bring you the best deal possible. Let them do their job.
Experience in marketing your Company and structuring a sale is critical to bringing you the highest price. An Merger and Acquisition intermediary will also work closely with your legal and tax experts to minimize your liabilities post-acquisition and maximize the after-tax proceeds to you and your family.
When it comes time to engage a firm, you need to do your homework. Interview all the team members who will be working on your project, check references and view examples of their previous work. As a final check, you should also call their former clients to see how they performed in the past.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Restructuring, Corporate Finance, Merger and Acquisition and Turnaround services for midsize companies.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.
Mergers and Aquisitions includes buying, selling, merging and valuing midsize companies.
Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.
ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.
We have directly owned, operated and managed midsize companies. We know the business from your perspective.
Wednesday, June 24, 2009
FOR AND AGAINST RECAPITALIZATION
Recapitalization is the financial reorganization of a company's debt and equity mix. The aim is to improve a firm's capital structure. Essentially, the process involves the exchange of one form of debt or equity for another.
FOR RECAPITALIZATION
Stabilizing the Corporate Capital Structure
In distressed situations, a recapitalization can stabilize your firm's capital structure and cash position. This can be achieved by renegotiating terms with lenders by trading existing debt for new debt with lower interest rates or longer maturity; or by simply exchanging debt for common stock.
Providing Liquidity
By raising debt or equity a company consequently increases its liquidity that may be needed to finance further investments, or even an owner's partial or full exit.
Partial Sale of Your Company
A recapitalization gives you the possibility of taking cash out of the business, by selling a minority or majority stake in your company. In particular, owners may consider this option a few years ahead of retirement.
You can earn a pay day today, along with another pay day in a few years time after new investors have hopefully grown the company and increased the value of your retained equity stake. As an owner, you get to take cash off the table, reduce your risk and diversify your investments. An owner would typically be tied to a management position in the company for a period of time.
Bringing in a Capable Partner
In an equity recapitalization, you benefit from the strength of a new owner. It is important to take time to identify the right investor to partner with. You should investigate their previous experience, track record, credibility, motivation and financial stability.
If both parties share the same vision for the future growth of your company, you can benefit from the new equity investors' broad range of operational and strategic experience, as well as their investment dollars.
Increasing Management Discipline
Increasing your company's debt leverage often has a disciplining effect on management as a result of the financial and operational restrictions involved. This discipline can trigger more thorough financial analysis before major decisions.
AGAINST RECAPITALIZATION
Operational and Financial Restrictions
If you choose to raise debt rather than equity, it will bind your company to financial covenants in the credit agreement and place restrictions on investments and distributions to owners imposed by the lenders. Furthermore, costs increase as lenders charge monitoring and maintenance fees on the loan.
Loss of Control
New equity investors (even minority investors) are going to be involved in important strategic and financial decisions. Owners can become frustrated with the direction of new investors. As part of your due diligence, you may even want to talk to other entrepreneurs who have partnered with your new investors or sold companies to them in the past.
Loss of Strategic Focus
In some cases, new equity investors will focus almost entirely on the financial performance of the business. Often, they have limited partners in their equity fund, who expect a minimum rate of return on their investment. On the plus side, their focus on financial rewards should lead to a great second pay day in a few years. On the downside, you may feel that you are abandoning the way you have successfully run your business over many years.
In summary
Recapitalizations are a great tool and often provide the dream exit for a business owner. However, it is a lengthy and time-consuming process, so you may be well served by seeking advice from professionals who have been through the recapitalization process countless times before.
ClearRidge has a strong track record in recapitalizations. Our team works together on every project and we can all pool our ideas to help you determine if a recapitalization is the right tool for you and your stakeholders.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.
Mergers & Aquisitions includes buying, selling, merging and valuing midsize companies.
Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.
ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.
We have directly owned, operated and managed midsize companies. We know the business from your perspective.
Thursday, June 11, 2009
Poor M&A Environment and Credit Defaults - 2009 Review & Predictions
Two reports this week.
The first is the ACG and Thomson Reuters' Survey that was released last week.
The second is an extract from Carlyle Group's recently published 2008 Annual Report.
These reports give an insight into the state of Mergers & Acquisitions activity and the performance of Private Equity companies.
As always, we add our ClearRidge summary, review and interpretation.
FIRST UP - ACG Reuters Report
ACG and Reuters announced last week their latest report on the state of middle market Mergers & Acquisitions.
The survey comprised 703 middle market investment bankers, private equity professionals, lawyers, accountants, corporate development officers and business consultants.
Poor M&A Environment
88% responded that the current M&A environment is Fair or Poor. This is worse than the 86% who responded fair or poor in December last year.
Covenant default on credit agreements
14% responded that 25% to 50% of portfolio companies are in covenant default on credit agreements with their lenders.
3% responded that more than half of their portfolio companies are in covenant default.
Turnaround Professionals
40% of private equity firms have retained chief restructuring officers, turnaround consultants, or operating partners to help their portfolio companies, with 16% of private equity firms hiring all three.
In the next 6 months
* 52% predict M&A Activity will increase moderately, 34% predict activity will remain the same, while 10% expect a further decline.
* Half of those surveyed predict that 26% to 50% of M&A deals will be distressed sales. 14% predict over half of M&A deals will be distressed sales. Manufacturing and Distribution: 22% predict that manufacturing and distribution will experience more M&A activity than any other sector and 36% predict manufacturing and distribution will present best opportunities for buyouts.
In the next two years
* Consolidation in private equity firms: 72% predict "Significant Consolidation" in the number of private equity firms.
Private Equity Insight from The Carlyle Group 2008 Report
The following is an extract from Carlyle Group's recently published report. The Carlyle Group is a global private equity investment firm, based in Washington, D.C., with more than $91.5 billion of equity capital under management. While this is not necessarily a reflection of all US Private Equity firms or our views at ClearRidge, these three paragraphs certainly make interesting reading.
"In 2008, the financial landscape changed-and it will remain changed for the foreseeable future. Operating conditions for our portfolio companies will remain challenging. Transactions will be fewer and smaller. More equity will be required and debt terms will be less favorable. And hold periods will increase while returns will decrease. To be sure, these are extraordinary times."
"On its face, the private equity industry doesn't appear to have altered much. But look closer and the changes begin to appear: deal flow has slackened; exits are fewer; investors are hesitant to commit fresh capital; stock prices are down; and debt and equity valuations have been hard hit. Some portfolio companies have restructured, sought bankruptcy protection and even liquidated."
"We continue to believe that within every challenge lies opportunities. Our mission is clear: we must deploy our resources to protect the investments we have already made while seeking ways to profit from the extraordinary opportunities that exist in the new environment. This we pledge to do, all while maintaining the discipline and diligence that are hallmarks of this firm."
The Carlyle Group operates four fund families, focusing on leveraged buyouts, growth capital, real estate and leveraged finance investments. The firm employs more than 575 investment professionals in 21 countries with several offices in the Americas, Europe, Asia and Australia; its portfolio companies employ more than 415,000 people worldwide. Carlyle has over 1200 investors in 68 countries. Source: Carlyle Group website.
ClearRidge View on M&A and Business Valuations
Distressed Mergers & Acquisitions
The reality is that there are many distressed deals on the street right now.
Buyers are seeing many opportunities. It is a real challenge to determine, which "cheap" deals represent good value investments.
Historically, acquisitions made in a downturn result in the highest returns for acquirers, but thorough business due diligence is more important than ever to make sure a deal makes sense.
You need to be confident there is a viable core business.
Acquiring a company for a great price is not a good enough reason for an acquisition.
Middle Market Company Valuations
Surprisingly, valuations of healthy companies remain strong, but as we have discussed before, there is a difference between a sale price multiple of a company's EBITDA and the sale price.
If EBITDA was $5 million last year and the valuation multiple was 6x EBITDA, then in the most simple terms, you could anticipate a sale price of $30 million.
However, if your revenues have dropped 30% in 2009 and your projected EBITDA for 2009 is down 50% to $2.5 million, then the same 6x EBITDA valuation multiple will give a sale price of $15 million. Are you going to sell a $30 million company for $15 million? Unlikely. Unless you have to.
In which case, fewer healthy companies with a short-term dip in EBITDA are going to sell in 2009. Most will wait to see what the world looks like in Spring 2010 when sales and profits are hopefully growing again. Sell the company in Spring 2010 on full-year 2010 projections and you could get close to $30 million again.
So, most companies that are selling in 2009 now are those that have to - those that are in distress.
If you want to sell a healthy company in 2009, you need to be more creative. Instead of requiring cash payment at closing, you need to consider a combination of cash, seller financing, stock and warrants.
Where possible, try to further increase price (cash, stock, warrants) for special consideration and intangibles, which could include significant market share, customer relationships, brand name recognition, or other intangible that sets your company apart from the rest.
Getting your deal done is an art not a science. Every company is different, every situation is different and every deal is different.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.
Mergers & Aquisitions includes buying, selling, merging and valuing midsize companies.
Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.
ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.
We have directly owned, operated and managed midsize companies. We know the business from your perspective.
Two reports this week.
The first is the ACG and Thomson Reuters' Survey that was released last week.
The second is an extract from Carlyle Group's recently published 2008 Annual Report.
These reports give an insight into the state of Mergers & Acquisitions activity and the performance of Private Equity companies.
As always, we add our ClearRidge summary, review and interpretation.
FIRST UP - ACG Reuters Report
ACG and Reuters announced last week their latest report on the state of middle market Mergers & Acquisitions.
The survey comprised 703 middle market investment bankers, private equity professionals, lawyers, accountants, corporate development officers and business consultants.
Poor M&A Environment
88% responded that the current M&A environment is Fair or Poor. This is worse than the 86% who responded fair or poor in December last year.
Covenant default on credit agreements
14% responded that 25% to 50% of portfolio companies are in covenant default on credit agreements with their lenders.
3% responded that more than half of their portfolio companies are in covenant default.
Turnaround Professionals
40% of private equity firms have retained chief restructuring officers, turnaround consultants, or operating partners to help their portfolio companies, with 16% of private equity firms hiring all three.
In the next 6 months
* 52% predict M&A Activity will increase moderately, 34% predict activity will remain the same, while 10% expect a further decline.
* Half of those surveyed predict that 26% to 50% of M&A deals will be distressed sales. 14% predict over half of M&A deals will be distressed sales. Manufacturing and Distribution: 22% predict that manufacturing and distribution will experience more M&A activity than any other sector and 36% predict manufacturing and distribution will present best opportunities for buyouts.
In the next two years
* Consolidation in private equity firms: 72% predict "Significant Consolidation" in the number of private equity firms.
Private Equity Insight from The Carlyle Group 2008 Report
The following is an extract from Carlyle Group's recently published report. The Carlyle Group is a global private equity investment firm, based in Washington, D.C., with more than $91.5 billion of equity capital under management. While this is not necessarily a reflection of all US Private Equity firms or our views at ClearRidge, these three paragraphs certainly make interesting reading.
"In 2008, the financial landscape changed-and it will remain changed for the foreseeable future. Operating conditions for our portfolio companies will remain challenging. Transactions will be fewer and smaller. More equity will be required and debt terms will be less favorable. And hold periods will increase while returns will decrease. To be sure, these are extraordinary times."
"On its face, the private equity industry doesn't appear to have altered much. But look closer and the changes begin to appear: deal flow has slackened; exits are fewer; investors are hesitant to commit fresh capital; stock prices are down; and debt and equity valuations have been hard hit. Some portfolio companies have restructured, sought bankruptcy protection and even liquidated."
"We continue to believe that within every challenge lies opportunities. Our mission is clear: we must deploy our resources to protect the investments we have already made while seeking ways to profit from the extraordinary opportunities that exist in the new environment. This we pledge to do, all while maintaining the discipline and diligence that are hallmarks of this firm."
The Carlyle Group operates four fund families, focusing on leveraged buyouts, growth capital, real estate and leveraged finance investments. The firm employs more than 575 investment professionals in 21 countries with several offices in the Americas, Europe, Asia and Australia; its portfolio companies employ more than 415,000 people worldwide. Carlyle has over 1200 investors in 68 countries. Source: Carlyle Group website.
ClearRidge View on M&A and Business Valuations
Distressed Mergers & Acquisitions
The reality is that there are many distressed deals on the street right now.
Buyers are seeing many opportunities. It is a real challenge to determine, which "cheap" deals represent good value investments.
Historically, acquisitions made in a downturn result in the highest returns for acquirers, but thorough business due diligence is more important than ever to make sure a deal makes sense.
You need to be confident there is a viable core business.
Acquiring a company for a great price is not a good enough reason for an acquisition.
Middle Market Company Valuations
Surprisingly, valuations of healthy companies remain strong, but as we have discussed before, there is a difference between a sale price multiple of a company's EBITDA and the sale price.
If EBITDA was $5 million last year and the valuation multiple was 6x EBITDA, then in the most simple terms, you could anticipate a sale price of $30 million.
However, if your revenues have dropped 30% in 2009 and your projected EBITDA for 2009 is down 50% to $2.5 million, then the same 6x EBITDA valuation multiple will give a sale price of $15 million. Are you going to sell a $30 million company for $15 million? Unlikely. Unless you have to.
In which case, fewer healthy companies with a short-term dip in EBITDA are going to sell in 2009. Most will wait to see what the world looks like in Spring 2010 when sales and profits are hopefully growing again. Sell the company in Spring 2010 on full-year 2010 projections and you could get close to $30 million again.
So, most companies that are selling in 2009 now are those that have to - those that are in distress.
If you want to sell a healthy company in 2009, you need to be more creative. Instead of requiring cash payment at closing, you need to consider a combination of cash, seller financing, stock and warrants.
Where possible, try to further increase price (cash, stock, warrants) for special consideration and intangibles, which could include significant market share, customer relationships, brand name recognition, or other intangible that sets your company apart from the rest.
Getting your deal done is an art not a science. Every company is different, every situation is different and every deal is different.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.
Mergers & Aquisitions includes buying, selling, merging and valuing midsize companies.
Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.
ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.
We have directly owned, operated and managed midsize companies. We know the business from your perspective.
Tuesday, May 12, 2009
Resizing a Business in a Downturn
Resizing a Business in a Downturn
Taking Positive Action to Add Stakeholder Value
Taking Positive Action to Add Stakeholder Value
We are all looking for some good news right now and the subject of this letter suggests the theme is negative.
Opposite.
This is a wake up to take positive action and encourage others to do the same.
"In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing."
- Theodore Roosevelt
The most successful businesses are those that anticipate early and react to changes quickly.
In good times, that may mean investment in hiring, expansion, new product lines and new geographies.
In tough times, that may mean resizing the business, slimming down operations and focusing on cost controls, debt and creditor relationships.
There is no way to tell if the economy has bottomed out, but we do know that eventually it will bounce back. When it will happen, how it will happen and what the new economy will look like is the million dollar question.
Even without that information, you should be taking positive steps to ensure that your business survives and thrives.
In this article, we will consider 9 Success Factors to downsize your business, look at socially responsible ways to increase loyalty and performance and look at Restructuring and Reconditioning.
Please keep emailing us your questions and suggestions for articles you would like us to cover. Please also follow this link to sign up friends or colleagues who you think would like to receive ClearRidge emails.
10 Success Factors to Downsizing your Business
To start with, we need to remember critical lessons from previous downturns: trust, reputation and communication. The community, customers and employees will judge your business on its behavior during these tough times.
1) Redesign the Organization to Create Value, Not just to cut costs
Revenue growth covers the flaws in an organization's structure and business model. If a company is failing, because of poor strategy, firing employees doesn't fix the problem. You'll lower payroll costs, but still have the same problems.
2) Consider Tactical Improvements
Hiring and pay freezes, reduce travel, re-evaluate all departmental budgets, reduce discretionary spending, reduce other identified SG&A costs and make incremental process improvements.
3) Get more value from your employees
Identify areas to improve efficiencies in the business operations. Create standard operating procedures. Create Key Performance Indicators. Incentivize each employee to create new ways to improve their department's efficiency.
4) Improve openness and communication during downsizing
Now is the time to be clear, open and honest about your intentions and reasons for the changes. If you withhold information from your stakeholders which include your employees, misinformation will prevail. More often than not, the rumor mill will be worse than the real story.
5) Involve mid-level and lower-level managers
If they participate in the downsizing process, they are more likely buy into the process and more likely to communicate a positive story and effectively implement the new plan. They are on the front line and have valuable knowledge on the workings of the operations. Encourage them to challenge your plans, but mandate they provide an alternative solution.
6) Think carefully about which employees to let go.
A percentage cut across the board does not fix the problem. Carefully select those to go and create increased responsibility, increased opportunities and increased efficiency for those who remain. Everyone needs to feel like a team to pull through the tough times together.
7) Give advanced notice or severance pay
This may cost more in the short-term, but those still working for you need to understand that you will look after them if the worst happens. Again, make your employees feel as safe as possible about what the future may hold.
8) Tell employees in person
Losing a job is humiliating and hurts an employee's confidence and pride. Be considerate in how you communicate layoffs. Your employees will judge you on how you treat their former co-workers. Moreover, at some stage in the future, talent may be scarce again and you need to be the employer of choice to attract ex-employees and new hires.
9) Consider alternatives to layoffs
Reduction of hours, redeployment to another employer, job redesign, or partially paid sabbaticals with benefits and contributions.
10) Time to be a responsible leader
If the time has come that you and other stakeholders would be able to make better choices with the assistance of experts, it is time to make the call. Consider the value of being able to brainstorm with experts who have been through troubled business situations many times before. Consider how much value they can bring from lessons they have learned. It takes confidence and strength of character to ask for help, but sometimes it is the smartest, most responsible and valuable course of action.
Being Socially Responsible Increases Loyalty and Performance
Few companies will avoid the need to reorganize, restructure, downsize, acquire, divest, outsource or enter into joint ventures. For most industries and most companies, if the recession has not already caused a significant decline in demand, it almost certainly will at some point. For some companies, the worst may be yet to come.
If you need to resize your company, you need to think about how you are going to make the cuts and how you will deliver the news to stakeholders in your business. The process of change can determine the success and long-term benefits of the restructuring process, as much as the substance of what is actually done.
There are positive steps you can take today to ensure, not only that you can pick up market share while other companies fail, but also structure your company so that you exit the recession on a firm footing, in a lean condition and ready to accelerate revenue growth and improve your margins.
Points to remember:
* Show commitment to stakeholders (including employees) and you will reap the rewards when the economy turns around.
* Consider the values of your own company when making tough decisions.
* Focus on MAXIMIZING VALUE for all stakeholders.
Restructuring and Reconditioning
If you owned a sports franchise and your team had just won the championship, you should spend your off season analyzing why you succeeded last year and finding new ways to improve next year.Your athletes need to train even harder in the off season to win by a higher margin next year.
Maintaining last year's performance does not win championships. You need to improve every year.
Whether or not you have made tactical improvements in recent years, you need to spend some time considering tactical changes that can and should be made. You are playing a different game on a different field. You need to make wholesale changes to adapt to the new game.
Remember that doing nothing can quickly lead to failure. You need to consider every option you have open to you and brainstorm every structural change that you could make. Talk through all of your options and ideas.
You need to be able to make changes for the sake of your company and for the sake of your employees.
You need to be able not only to survive, but also to outperform your competitors during a time of reduced volume.
Out of every recession, new market leaders will emerge. There are always a few surprise winners and a few surprise failures. If your company fails, everyone loses except your competitors.
One thing is critical. You need to Act Now. Structural changes can start delivering changes immediately.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.
Mergers & Aquisitions includes buying, selling, merging and valuing midsize companies.
Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.
ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.
We have directly owned, operated and managed midsize companies. We know the business from your perspective.
Wednesday, March 4, 2009
M&A Data - Making Sense of Conflicting Reports
In 2009, the financial newswires are sending us mixed messages.
1) PricewaterhouseCoopers just released a report showing huge declines for global deals in the Industrial Manufacturing sector.
2) The same week, GF Data Resources reported that middle market deal volume for transactions valued between $10 million and $250 million remained strong in 2008.
So, on one hand we have terrible numbers for 2008 acquisition activity and the next report tells us everything is fine.
We highlight the data from both reports and then explain what it means for middle market companies in the US.
PWC Reports Negative M&A Activity
Last week, PricewaterhouseCoopers LLP ("PWC") came out with their report of 2008 M&A Data in the Industrial Manufacturing Sector, analyzing mergers and acquisitions with a disclosed value over $50 million.
The number of Mergers and Acquisitions in the industrial manufacturing sector dropped 32% in 2008 compared to 2007, with total dollar amount of deals declining 57%.
The research appeared in PWC's report: "Assembling Value: Fourth-quarter 2008 Mergers and Acquisitions Analysis" released last week.
In 2008, there were 141 deals above $50 million, compared to 206 deals in 2007 and 169 deals in 2006.
Total dollar amount of deals reached $39 billion in 2008, less than half of the $88 billion in 2007.
The average dollar amount of deals dropped to $275 million per deal in 2008, compared to $424 million in 2007 and $545 million in 2006.
Fourth Quarter 2008 shows steepest declines
Q4 2008 showed a particularly steep decline with only 11 deals, compared to 71 deals in Q4 2007 and the dollar amounts in Q4 2008 were only $3 billion, compared to $40 billion in Q4 2007.
$1 billion+ deals
In 2008 there were only 5 deals with a disclosed value over $1 billion, compared to 17 in 2007 and 23 in 2006.
Financial buyers
Financial buyers, who are typically very active in the manufacturing sector, only acquired 37 companies in 2008, compared to 72 in 2007 and 58 in 2006.
Strategic buyers
Strategic buyers acquired 104 companies in 2008, compared to 134 deals in 2007 and 111 deals in 2006.
PWC's data does not include most of the middle market deals under $50 million and many of the deals under $100 million where deal terms and sale prices remained confidential, but it is a good indicator of recent trends across the middle market.
Source: PricewaterhouseCoopers LLP
GF Data Resources reports High Valuations and Strong Deal Volume
GF Data Resources released its Middle Market M&A Valuation Report for the fourth quarter of 2008 the same week. GF Data Resources is a proprietary database that collects data on Private Equity transactions valued between $10 million and $250 million.
According to GF, Middle Market deal volume and valuations held steady across all industries from Q3 2008 to Q4 2008.
Deal Volume
114 Private Equity firms contributed to the report and they completed 25 deals in the fourth quarter of 2008. 27 deals were completed in Q3 2008, compared to 50 deals the first half of 2008. This confirms steady acquisition volume through all four quarters of 2008.
A driver for this deal volume is the substantial availability of cash at Private Equity firms. Many of the Private Equity firms ClearRidge has worked with in the last few months have confirmed that they are sitting on up to 90% of the capital they raised in 2007 and 2008 and they are being encouraged by their limited partners (investors) to keep the money, go ahead and source new acquisitions.
This untouched cash is often referred to as "dry powder" and the substantial stock piles of cash will prove to be a significant driver to Acquisition volumes by Private Equity firms in 2009.
Valuations
"Fourth quarter valuations remained in line with quarterly averages dating back to mid-2007, when the mortgage lending crisis first affected public equity markets," according to Andrew Greenberg, CEO of GFDR.
The primary valuation metric - Total Enterprise Value as a multiple of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA) was 5.9x for Q4 2008, down from 6.3x in Q3 2008.
Debt Levels
The biggest change in 2008 was a decrease in debt levels for the acquisitions. "Debt levels fell sharply, a result of the tightening credit markets and the lack of available cash needed to finance these deals," according to Mr. Greenberg.
"Total debt and senior debt declined dramatically, falling to 2.4x Adjusted EBITDA and 1.9x, respectively," said Greenberg. "Those number were 3.4x and 2.6x, respectively, in the third quarter, and averaged 3.4x and 2.5x respectively for the first half of 2008. As a result of declining debt levels, average equity contributions soared to 59.9 percent, up almost 20 percentage points from the third quarter of 2007."
Debt Pricing
Debt spreads widened, as the 90-day LIBOR interest rate (a benchmark for commercial lending) dropped from 4.1 percent on September 30 to 1.4 percent at year end. Average initial pricing on senior debt declined only slightly (from 7.4 percent to 7.2 percent), causing the average spread on senior debt to jump from 4.3 percent to 5.8 percent. Spreads on subordinated debt also increased.
Individuals and companies interested in subscribing to the Middle Market M&A Valuation Report can contact GF Data Resources by visiting their website, www.gfdataresources.com. Source: PEP Digest.
The Truth Behind The Numbers
Acquisitions are still happening. Deals are getting done.
For an acquisition to get to the finish line, it needs to make sense for the acquirer and make sense for the company being acquired. Nothing has changed there.
The Sale Price of Your Company
It is true that companies are still selling for high valuation multiples. However, acquirers are forward-looking in their valuation, so last year, they would have used your 2007 full-year EBITDA number and then paid a multiple on their projection for full-year 2008 EBITDA.
Moving to the present, if your EBITDA was $7 million for 2008 and a company like yours should sell for 5x, then if you anticipate 2009 EBITDA remaining at 2008 levels then you could still anticipate that your company should sell for $35 million. Good news.
However, many companies are likely to face a tough 2009. Let's say you expect your 2009 revenues to decline and as a result you project your 2009 EBITDA to come in around $4.5 million. Well, it is still reasonable to expect a 5x multiple or more, but now that 5x may is worth around $22.5 million on projected numbers.
So, how do you get back the additional $12.5 million your company could have sold for last year? You need to be more creative and more flexible.
Instead of requiring full cash payment at closing, you should consider a combination of seller financing, stock and warrants, in order to get closer to last year's expected sale price of $35 million.
Even if the buyer tried to negotiate a reduced multiple to maybe 4.5x, that could be acceptable if they are willing to add further consideration (cash, stock, warrants) for special consideration and intangibles, which could include high market share, significant customer relationships, brand name recognition, or any other intangible that sets your company apart from the rest.
Getting your deal done is an art not a science. Every company is different, every situation is different and every deal needs to be different.
Deals are getting done. Debt financing is still available for buyers. You just need to work smarter and harder in the current environment to get your deal done.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.
M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.
Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.
1) PricewaterhouseCoopers just released a report showing huge declines for global deals in the Industrial Manufacturing sector.
2) The same week, GF Data Resources reported that middle market deal volume for transactions valued between $10 million and $250 million remained strong in 2008.
So, on one hand we have terrible numbers for 2008 acquisition activity and the next report tells us everything is fine.
We highlight the data from both reports and then explain what it means for middle market companies in the US.
PWC Reports Negative M&A Activity
Last week, PricewaterhouseCoopers LLP ("PWC") came out with their report of 2008 M&A Data in the Industrial Manufacturing Sector, analyzing mergers and acquisitions with a disclosed value over $50 million.
The number of Mergers and Acquisitions in the industrial manufacturing sector dropped 32% in 2008 compared to 2007, with total dollar amount of deals declining 57%.
The research appeared in PWC's report: "Assembling Value: Fourth-quarter 2008 Mergers and Acquisitions Analysis" released last week.
In 2008, there were 141 deals above $50 million, compared to 206 deals in 2007 and 169 deals in 2006.
Total dollar amount of deals reached $39 billion in 2008, less than half of the $88 billion in 2007.
The average dollar amount of deals dropped to $275 million per deal in 2008, compared to $424 million in 2007 and $545 million in 2006.
Fourth Quarter 2008 shows steepest declines
Q4 2008 showed a particularly steep decline with only 11 deals, compared to 71 deals in Q4 2007 and the dollar amounts in Q4 2008 were only $3 billion, compared to $40 billion in Q4 2007.
$1 billion+ deals
In 2008 there were only 5 deals with a disclosed value over $1 billion, compared to 17 in 2007 and 23 in 2006.
Financial buyers
Financial buyers, who are typically very active in the manufacturing sector, only acquired 37 companies in 2008, compared to 72 in 2007 and 58 in 2006.
Strategic buyers
Strategic buyers acquired 104 companies in 2008, compared to 134 deals in 2007 and 111 deals in 2006.
PWC's data does not include most of the middle market deals under $50 million and many of the deals under $100 million where deal terms and sale prices remained confidential, but it is a good indicator of recent trends across the middle market.
Source: PricewaterhouseCoopers LLP
GF Data Resources reports High Valuations and Strong Deal Volume
GF Data Resources released its Middle Market M&A Valuation Report for the fourth quarter of 2008 the same week. GF Data Resources is a proprietary database that collects data on Private Equity transactions valued between $10 million and $250 million.
According to GF, Middle Market deal volume and valuations held steady across all industries from Q3 2008 to Q4 2008.
Deal Volume
114 Private Equity firms contributed to the report and they completed 25 deals in the fourth quarter of 2008. 27 deals were completed in Q3 2008, compared to 50 deals the first half of 2008. This confirms steady acquisition volume through all four quarters of 2008.
A driver for this deal volume is the substantial availability of cash at Private Equity firms. Many of the Private Equity firms ClearRidge has worked with in the last few months have confirmed that they are sitting on up to 90% of the capital they raised in 2007 and 2008 and they are being encouraged by their limited partners (investors) to keep the money, go ahead and source new acquisitions.
This untouched cash is often referred to as "dry powder" and the substantial stock piles of cash will prove to be a significant driver to Acquisition volumes by Private Equity firms in 2009.
Valuations
"Fourth quarter valuations remained in line with quarterly averages dating back to mid-2007, when the mortgage lending crisis first affected public equity markets," according to Andrew Greenberg, CEO of GFDR.
The primary valuation metric - Total Enterprise Value as a multiple of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA) was 5.9x for Q4 2008, down from 6.3x in Q3 2008.
Debt Levels
The biggest change in 2008 was a decrease in debt levels for the acquisitions. "Debt levels fell sharply, a result of the tightening credit markets and the lack of available cash needed to finance these deals," according to Mr. Greenberg.
"Total debt and senior debt declined dramatically, falling to 2.4x Adjusted EBITDA and 1.9x, respectively," said Greenberg. "Those number were 3.4x and 2.6x, respectively, in the third quarter, and averaged 3.4x and 2.5x respectively for the first half of 2008. As a result of declining debt levels, average equity contributions soared to 59.9 percent, up almost 20 percentage points from the third quarter of 2007."
Debt Pricing
Debt spreads widened, as the 90-day LIBOR interest rate (a benchmark for commercial lending) dropped from 4.1 percent on September 30 to 1.4 percent at year end. Average initial pricing on senior debt declined only slightly (from 7.4 percent to 7.2 percent), causing the average spread on senior debt to jump from 4.3 percent to 5.8 percent. Spreads on subordinated debt also increased.
Individuals and companies interested in subscribing to the Middle Market M&A Valuation Report can contact GF Data Resources by visiting their website, www.gfdataresources.com. Source: PEP Digest.
The Truth Behind The Numbers
Acquisitions are still happening. Deals are getting done.
For an acquisition to get to the finish line, it needs to make sense for the acquirer and make sense for the company being acquired. Nothing has changed there.
The Sale Price of Your Company
It is true that companies are still selling for high valuation multiples. However, acquirers are forward-looking in their valuation, so last year, they would have used your 2007 full-year EBITDA number and then paid a multiple on their projection for full-year 2008 EBITDA.
Moving to the present, if your EBITDA was $7 million for 2008 and a company like yours should sell for 5x, then if you anticipate 2009 EBITDA remaining at 2008 levels then you could still anticipate that your company should sell for $35 million. Good news.
However, many companies are likely to face a tough 2009. Let's say you expect your 2009 revenues to decline and as a result you project your 2009 EBITDA to come in around $4.5 million. Well, it is still reasonable to expect a 5x multiple or more, but now that 5x may is worth around $22.5 million on projected numbers.
So, how do you get back the additional $12.5 million your company could have sold for last year? You need to be more creative and more flexible.
Instead of requiring full cash payment at closing, you should consider a combination of seller financing, stock and warrants, in order to get closer to last year's expected sale price of $35 million.
Even if the buyer tried to negotiate a reduced multiple to maybe 4.5x, that could be acceptable if they are willing to add further consideration (cash, stock, warrants) for special consideration and intangibles, which could include high market share, significant customer relationships, brand name recognition, or any other intangible that sets your company apart from the rest.
Getting your deal done is an art not a science. Every company is different, every situation is different and every deal needs to be different.
Deals are getting done. Debt financing is still available for buyers. You just need to work smarter and harder in the current environment to get your deal done.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.
M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.
Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.
Monday, February 16, 2009
Supply and Demand – Maximize Sale Price
Supply
You own a unique company with its own distinctive characteristics and competitive advantages. There is a very low supply of privately-held midsized companies. You may only have a handful of competitors in your space. So, if an entrepreneur, strategic buyer or investor wants to enter your industry, they either have to either overcome what may be significant barriers to entry or buy one of the current market participants. Companies in your industry are few in number.
Demand
1) Consider how many thousands of corporations, financial buyers, wealthy investors and operators want to get into your industry.
2) Of the thousands of buyers for midsized companies in the US, there may be as many as a few hundred who would have real motivation to buy a company like yours and would be prepared to pay at least a fair market price.
3) Of these several hundred, there may be thirty or more who would enter into a bidding competition any pay a very attractive price to buy your company. First of all, however, they need to know that the opportunity exists.
Only a few logical buyers?
It is a regular statement from owners of successful businesses that there are only a few logical buyers for their company. This may be true for your company, but nine times out of ten, you just need to think outside of the box to identify who else might offer the highest price with the terms you are looking for.
When a large public company is acquired, there is information available to every potential suitor in the world. In most cases, you can be sure that a public company has sold for the highest price possible on that given day. Why? Because every possible buyer had information available to allow them to bid on the company.
And remember, just like a public company, you own a valuable asset in short supply.
Unfortunately, when it comes to selling a midsize company, you don't want to let the whole world know you are selling your company. The downside of keeping it a secret and only talking to a handful of buyer prospects is that you give the buyers the power and negotiating strength when in fact you should be the one in control.
Unless you take a direct, pro-active approach, you are going to be at the mercy of luck coming along at the right time and after a few phone calls, having the right buyer take an interest. Even if the best buyer came along, they’re not going to pay you the highest price, because they don’t have to.
If a buyer suspects that there are only a few others competing to acquire your company, they have limited competing bidders to worry about. Statistically, there is such a remote chance that any of the other buyers are going to pay a premium price, that all they have to do is wait until you are worn down and ready to accept a reduced offer. At most, they will only pay a fair market price. Why would they pay any more if they don’t have to?
And, even after they have signed a Letter of Intent to buy your company, they can always stall the process by giving it enough time during due diligence and highlighting some weaknesses. Every company has faults, and they’ll just use some of yours to pretend that they are less interested and less willing to honor their initial offer. As long as potential buyers play the waiting game, chances are you’ll end up selling to them for a significantly lower price than what they are able and willing to pay.
Watching and Waiting
Unfortunately, as we have all learned in life, simply waiting for something good to happen, rarely rewards us. Instead, we need to make sure that every prospective buyer who could have a real interest in acquiring your company is at least made aware that there is a company of your size, type and approximate location available to buy.
They won’t know the name of your company, you won’t compromise confidentiality, but you will learn which prospective buyers are really motivated.
There is demand, but it’s up to you to find it
Remember, there is demand out there for your company, but unless you are proactive and carefully consider your approach, buyers won’t come to you in sufficient volume to give you the negotiating strength necessary to enhance the value of your company. Over 80% of clients who hire ClearRidge ultimately choose to sell to a buyer they have never heard of and almost certainly not one that appeared on their shortlist of the best buyer candidates.
Plan of action
So, what should your plan of action be? First of all, search for the hundreds of strategic or financial buyers who could have an interest in your company’s type, profile and industry (of course, without them knowing who you are).
Second, before they find out which company is for sale, make the prospective buyers jump through a few hoops and prove their motivation (i.e. with examples of previous acquisitions they have completed, capital they have available, an estimate of terms they would be prepared to offer and their experience in your industry). That will get the list down to a more manageable number.
Third, get them all to sign a confidentiality agreement.
Only then do you share the identity of your company.
What is the result?
It is not easy to perfect this process, but the logic is very clear.
Put yourself in a position of negotiating strength and you will be amazed at how you can achieve a significantly higher price, agree to better terms, and also ensure that the deal process is completed in an efficient and timely manner.
Just ask a friend who has sold their business the wrong way, and they’ll tell you all about the missed opportunities, complications and problems that occurred along the way.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.
M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.
Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.
You own a unique company with its own distinctive characteristics and competitive advantages. There is a very low supply of privately-held midsized companies. You may only have a handful of competitors in your space. So, if an entrepreneur, strategic buyer or investor wants to enter your industry, they either have to either overcome what may be significant barriers to entry or buy one of the current market participants. Companies in your industry are few in number.
Demand
1) Consider how many thousands of corporations, financial buyers, wealthy investors and operators want to get into your industry.
2) Of the thousands of buyers for midsized companies in the US, there may be as many as a few hundred who would have real motivation to buy a company like yours and would be prepared to pay at least a fair market price.
3) Of these several hundred, there may be thirty or more who would enter into a bidding competition any pay a very attractive price to buy your company. First of all, however, they need to know that the opportunity exists.
Only a few logical buyers?
It is a regular statement from owners of successful businesses that there are only a few logical buyers for their company. This may be true for your company, but nine times out of ten, you just need to think outside of the box to identify who else might offer the highest price with the terms you are looking for.
When a large public company is acquired, there is information available to every potential suitor in the world. In most cases, you can be sure that a public company has sold for the highest price possible on that given day. Why? Because every possible buyer had information available to allow them to bid on the company.
And remember, just like a public company, you own a valuable asset in short supply.
Unfortunately, when it comes to selling a midsize company, you don't want to let the whole world know you are selling your company. The downside of keeping it a secret and only talking to a handful of buyer prospects is that you give the buyers the power and negotiating strength when in fact you should be the one in control.
Unless you take a direct, pro-active approach, you are going to be at the mercy of luck coming along at the right time and after a few phone calls, having the right buyer take an interest. Even if the best buyer came along, they’re not going to pay you the highest price, because they don’t have to.
If a buyer suspects that there are only a few others competing to acquire your company, they have limited competing bidders to worry about. Statistically, there is such a remote chance that any of the other buyers are going to pay a premium price, that all they have to do is wait until you are worn down and ready to accept a reduced offer. At most, they will only pay a fair market price. Why would they pay any more if they don’t have to?
And, even after they have signed a Letter of Intent to buy your company, they can always stall the process by giving it enough time during due diligence and highlighting some weaknesses. Every company has faults, and they’ll just use some of yours to pretend that they are less interested and less willing to honor their initial offer. As long as potential buyers play the waiting game, chances are you’ll end up selling to them for a significantly lower price than what they are able and willing to pay.
Watching and Waiting
Unfortunately, as we have all learned in life, simply waiting for something good to happen, rarely rewards us. Instead, we need to make sure that every prospective buyer who could have a real interest in acquiring your company is at least made aware that there is a company of your size, type and approximate location available to buy.
They won’t know the name of your company, you won’t compromise confidentiality, but you will learn which prospective buyers are really motivated.
There is demand, but it’s up to you to find it
Remember, there is demand out there for your company, but unless you are proactive and carefully consider your approach, buyers won’t come to you in sufficient volume to give you the negotiating strength necessary to enhance the value of your company. Over 80% of clients who hire ClearRidge ultimately choose to sell to a buyer they have never heard of and almost certainly not one that appeared on their shortlist of the best buyer candidates.
Plan of action
So, what should your plan of action be? First of all, search for the hundreds of strategic or financial buyers who could have an interest in your company’s type, profile and industry (of course, without them knowing who you are).
Second, before they find out which company is for sale, make the prospective buyers jump through a few hoops and prove their motivation (i.e. with examples of previous acquisitions they have completed, capital they have available, an estimate of terms they would be prepared to offer and their experience in your industry). That will get the list down to a more manageable number.
Third, get them all to sign a confidentiality agreement.
Only then do you share the identity of your company.
What is the result?
High Demand (30 or more buyers) + Very Limited Supply (only your company available)
= Significantly Higher Sale Price.
= Significantly Higher Sale Price.
It is not easy to perfect this process, but the logic is very clear.
Put yourself in a position of negotiating strength and you will be amazed at how you can achieve a significantly higher price, agree to better terms, and also ensure that the deal process is completed in an efficient and timely manner.
Just ask a friend who has sold their business the wrong way, and they’ll tell you all about the missed opportunities, complications and problems that occurred along the way.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.
M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.
Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.
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