Friday, July 29, 2016

Second Quarter M&A Update

We are in an extremely favorable market for business sellers. Buyers have abundant capital to deploy, interest rates are low, and the economy in Texas is doing well – even with the pull back in oil prices. However, the best advice to a business owner that is thinking of an exit, is to “take control and start planning today”. Engaging experienced advisors who understand the business sale process will prove invaluable to the business owner who wants a successful outcome.

Two key issues to consider before beginning the process are outlined below:

Deal killers
As a business owner, your opportunity for the greatest influence on maximizing sale proceeds occurs before you go to market. Once you start the process of marketing your business to qualified buyers, the ability to correct the “deal killers”, is extremely limited due to the time factor. These must be solved before going to market. The most common “deal killers” are listed here:*

1.     The belief that you can sell your business today for enough money to satisfy your financial independence needs and wants. ( without knowing what your business is really worth and how much income you will need from the sale)

2.     The failure to reconcile your need for value with the market value of your business before going to market. (see #1)

3.     An exclusive focus on top line sales price.  ( i.e., have you done any tax planning, and analysis of net proceeds  from a transaction, including retained assets, and net working capital conveyed?)

4.     The failure to preserve a company’s most valuable asset. ( do you have “stay bonus plans” or other agreements in place for key employees?)

5.     The belief that you can negotiate alone. ( i.e., responding to an inquiry from an unsolicited buyer, and starting the process on your own. The sale process is a taxing and emotionally draining process for an owner, many times resulting in deal fatigue and a realization after closing that significant dollars were left on the table. A strong deal team and competitive process is the only method to realize the true market value.)

6.     An unwillingness to recruit the best possible players for your Deal Team. ( buyers will have experienced accounting, legal, deal, and tax advisors on their team. You need the same on your team.)

7.     The belief that owner-initiated pre-sale due diligence isn’t worth the time, effort or cost. (Conduct Seller due-diligence before going to market. This gives your deal team time to address and fix the issues that a buyer may uncover when it conducts its due diligence. Reducing the time between letter of intent and closing is key to a smooth transaction. )

8.     Seller remorse (The owner needs to be comfortable that they will not feel empty and insignificant after the sale, and need to be emotionally ready to turn over the company to a new owner. A recapitalization transaction may solve this issue. )

*As presented in Exit Planning: The Definitive Guide, by  John H. Brown, CEO of Business Enterprise Institute

Wednesday, June 29, 2016

Multiples of EBITDA – What Factors Turn a 3x into a 5x?

We all know that “money doesn’t grow on trees.”  And neither does business value.  You can’t just wait until you are ready to leave your business to find out how much “value” you need or want and how much “value” exists in your business.  By then it will be too late.  The tree metaphor is relevant, though.  Value is something that you can grow, nourish and ultimately harvest in your business.  Let’s look at an example.

Picture three identical companies each engaged in moving time-sensitive freight for customers. All have a national presence, $2M in EBITDA (Earnings Before Interest, Tax Depreciation and Amortization) and about $25M in annual sales. It would be logical to assume that they all have about the same value. 

In fact, one had little value, one sold for 3.5 times EBITDA and one sold for 5.5 times EBITDA.  The difference in value was $3M to $7M to $11M.

Neither gross sales nor EBITDA alone determined the price and terms of these deals.  The key to the variation in purchase prices was the presence or absence of value drivers in the companies as well as the ability of these value drivers to survive the owner’s departure.

Value drivers are internal characteristics of a company that buyers look for in acquisitions. You’ll see that it doesn’t matter if you plan to keep your business forever, transition it to family members, sell it to your management team or find an outside buyer - value drivers can give you more options, more flexibility and more money from your ownership interest. Strong value drivers are those that are effective and will continue to operate once the original owner departs.  Consequently, those are the value drivers that increase both EBITDA and the multiple of EBITDA buyers may be willing to pay.

We may measure the effectiveness of value drivers in two ways:  1) their positive contribution to cash flow and 2) their ability to continue to contribute to cash flow under new ownership.

Think of it this way: why would anyone want to buy your business if its continued success is dependent on you-the departing owner? Buyers are more likely to pay top dollar for businesses that will not miss a beat when the original owner is no longer in charge.

Success in business is determined not by how well you run the business, but by how well the business runs without you.

Let’s look at the three freight-moving companies more closely to see what motivated buyers either to open their wallets or walk on by.

Company A:  The owner/operator was responsible for management, operations and his personal and industry contacts were the source for new business. All roads ran through the owner so without him, the business had little value.

Company B:  This company had a capable management team.  Many of its systems and procedures were state-of-the-art.  There was, however, one glaring weakness: the major customer, responsible for over 50 percent of the company’s revenue, had a decades’ long relationship with the company’s owner, not with the company.
Buyers are much less likely to pay millions for customer accounts that can, and indeed often do, go elsewhere the day after they find out the owner has sold the business.

Company C:  Finding the owner of Company C wasn’t easy.  She spent weeks on vacation or visiting grandchildren and when she was in town, was engaged in a variety of civic and charitable activities.  She made workplace appearances only sporadically and left operations in the hands of her stable, effective management team.
She had deliberately created plenty of diversification in her company’s customer base knowing that one day she’d sell the business.  She had thought about what she would look for in an acquisition so had included customer diversification as one of many attributes or value drivers she wanted in her company. She understood that value drivers were necessary to maximize sale-ability as well as the sale price and amount of cash she could demand from a buyer.

Interested buyers were delighted that she had changed her role in the company over the years so that a new owner could step in, almost unnoticed.  

There are a number of value drivers that are critically important to today’s buyers.  The value drivers that are most important to your business may or may not be the same as those that were identified for Company C.  What we can say with some certainty is that value drivers can help your business value grow to bring you closer to the value that you need.  If you are interested in learning more about them, we will be happy to sit down with you and talk about how value drivers might improve your business value.

Corporate Investment is unique in that we take a holistic approach to working with business owners. Exit planning is a part of our process. We help business owners plan for one of the biggest financial events of their lives - the transition out of their business. 

For more information on exit planning services - please contact one of our professionals at Corporate Investment.   512-346-4444

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need. Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity. 

Monday, April 11, 2016

Lower Middle Market Provides Bright Spot in Slowing M&A Climate

Firms that focus on the smaller end of the market, including Audax Private Equity, boasted success in 2015, says Audax MD Jay Jester.

Here's an excerpt from a great article on Mergers & Acquisitions:

Although the big picture for middle-market M&A may be dimming, there are still lots of bright spots, including the lower middle market – which we define as deals valued at between $10 million and $250 million.

Many private equity firms that focus on the lower middle market say 2015 has been a great year. In a symbol of the sector’s health, Audax Private Equity celebrated the firm’s 500th closed deal in September, when portfolio company Advanced Dermatology & Cosmetic Surgery added Dermatology of Northern Colorado.

Read more:

Tuesday, March 1, 2016

Corporate Investment adds Exit Planning Services for business owners.

Since 1984, our firm has worked with business owners in over 250 business sale transactions. These businesses had between 10 and 250 employees. Unfortunately, we found that prior to meeting us, very few of our clients had a well-defined, well-executed strategy for the transition out of their business. They had not taken the time to develop a plan to address issues like:
  • How much longer did they want to work in their business?
  • How much annual after tax income would need during retirement, and where was it going to come from?
  • What would happen to the business, and their family members who relied on it for their livelihood, if an unforeseen event happened and they couldn't work? 

Most business owners have not taken the time to understand that there are ONLY three options for their transition out of their business:     
  • Transition to Insiders ( family or employees )
  • Sale to Outsiders
  • Transition after Death of Owner to their estate, leaving it to their heirs to handle
Each of these paths has its own unique set of issues and tax concerns that must be addressed well in advance of the transition. The process of addressing these concerns is aptly named "Exit Planning." All three options depend upon converting the business value to cash in some manner, over some period of time. The sooner a business owner identifies their objectives, engages advisors, develops a plan and takes action to implement that plan, the more control they will have over the outcome. A universal ownership objective is to generate an income stream that you ( the owner ) and your family will need  to support a future lifestyle.

We also found that all of our business owners had one thing in common: "I want to receive the highest value for my business!" Value in this context may include not only the actual price, but other objectives such as minimizing risk, minimizing taxes, and insuring a successful transition of the business (whether insiders or outsiders).

The business owner's objectives form the basis of the plan, and while each business and owner has a unique set of facts, the defined process means the business owner does not have to reinvent the Exit Planning wheel themselves. The owner's clearly defined objectives will direct the planning and actions, and help optimize the net proceeds. A team of advisors, which includes an attorney, CPA, financial planner, insurance professional and M&A advisor, will support and guide the business owner throughout the process.  Our firm will coordinate the team of advisors on behalf of the business owner, to maintain accountability and progress towards the owner's successful outcome.

We help our business owner clients plan for the most critically important financial event of their lives – the transition out of their business.

Find out more about our exit planning service.

       "In any moment of decision, the best thing you can do is the right thing. The worst thing you can do is nothing."  
Theodore Roosevelt

Creating value in your business to get top dollar when you leave it

Did you ever wonder why one business has buyers lined up willing to pay top dollar while another sits on the market for months, or even years? What do buyers look for in a prospective business acquisition?

There are many opinions about what attributes or characteristics buyers seek, but here’s what we know: the characteristics buyers seek must exist before the sale process even begins and it is your job as the owner to create value within your business prior to the sale. We call characteristics that impact value “Value Drivers.”

Walk A Mile In A Buyer’s Shoes

To get an idea of the importance of Value Drivers when preparing to sell your business, it is important to put on the buyer’s shoes for a minute. Let’s look at a hypothetical case study that illustrates how a buyer might compare two similar companies with a different emphasis on Value Drivers.

The A Factor Company has EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $2 million, an owner who runs the business and the systems and processes that create growth. The A Factor Company doesn’t have a real management team in place and the owner generates a majority of its sales. The owner is the center point of the company, holding both the CEO and CFO positions. With this level of responsibility, the owner is burning out quickly.

In comparison, The B Factor Company also has EBITDA of $2 million and a solid management team that runs the business, systems and processes. The management team creates efficiencies within the business and the owner vacations for six weeks a year.

If you were a buyer comparing these two companies, which would provide a more attractive business opportunity? How much more would you pay for a business with a strong management team (one of the most important Value Drivers)? Would you even be interested in buying a business whose management team (the owner) walks out when you walk in?

Investment bankers understand that companies that lack strong Value Drivers also lack a bevy of buyers. Those buyers that do come to the table do not arrive with pockets full of cash.

Let’s look at several of the more important Value Drivers common to all industries:
  • A stable and motivated management team. If you can wait a year to sell your business, we suggest that you consider an incentive compensation system, cash or stock-based, that rewards key employees as the company performs (usually measured by increases in pre-tax income). Sophisticated buyers know that with a solid management team in place, prospects are good for continued business success. Without a strong management team, it may be very difficult to sell your business to a third party or transfer it to an insider.
  • Operating systems that improve sustainability of cash flows. Operating systems include the computerized and manual procedures used in the business to generate its revenue and control expenses, (i.e. create cash flow), as well as the methods used to track how customers are identified and how products or services are delivered. The establishment and documentation of standard business procedures and systems demonstrate to a buyer that the business can be maintained profitably after the sale.
  • A solid, diversified customer base. Buyers typically look for a customer base in which no single client accounts for more than 10 percent of total sales. A diversified customer base helps insulate a company from the loss of any single customer. If the majority of your customer base is made up of only one or two good customers, consider reinvesting your profits into additional capacity that will make developing a broader customer base possible.
  • A realistic growth strategy. Buyers tend to pay premium prices for companies with realistic strategies for growth. Even if you expect to retire tomorrow, it makes sense to have a written plan describing future growth and how that growth will be achieved based on industry dynamics, increased demand for the company’s products, new product lines, market plans, growth through acquisition, and expansion through augmenting territory, product lines, manufacturing capacity, etc. It is this detailed growth plan, properly communicated, that helps to attract buyers.
  • Effective financial controls. Financial controls are not only a critical element of business management, but they also safeguard a company’s assets. Effective financial controls support the claim that a company is consistently profitable. The best way to document that your company has effective financial controls and that its historical financial statements are correct is through a certified audit or perhaps a verified financial statement by an established CPA firm.
  • Stable and improving cash flow. Ultimately, all Value Drivers contribute to stable and predictable cash flow. It is important, especially in the year or so preceding the sale of the business, that cash flow be substantial and on an upswing. You can begin increasing cash flow today by simply focusing on ways to operate your business more efficiently by increasing productivity and decreasing costs.

You can install these Value Drivers and better position your company to secure a premium price upon your exit with the help of a trained Exit Planning Advisor. Find out more about exit planning today.

Thursday, January 7, 2016

A race against time: Exit Planning

Successful, active business owners seldom slow down. Many business owners are both great at planning (for their businesses) and terrible at planning (for themselves).  There are so many great business challenges to tackle, planning for your personal ownership future can get pushed to the back burner.  We all know that the only things likely to reduce your pace are death or terminal burn-out. This is not to imply that you are not well intentioned; quite the contrary. You may be so well intentioned that you’ve taken on more responsibility than you can possibly complete.

Today, our goal is not to alter the number of hours in your workday but to alter your mindset. To do that, let’s look at a fictional business owner.

Renaldo LeMond owned a growing hospitality services business. As business increased, he hired more employees and learned to delegate. Both these improvements freed up time to sell more, to manage more, and to grow the business more.

No matter how much Renaldo delegated, there were always additional tasks and new priorities. Renaldo’s daily activities left no time to plan. Even if he had had the time, Renaldo really didn’t know how to create a plan founded on a clear vision, backed by definite plans that created definable steps subject to deadlines and accountability.

This was Renaldo’s situation when he was approached by a would-be buyer for his business. Renaldo hadn’t actively considered selling his business, but at age 49, he was beginning to think that life after work might have something to offer. He was open to talking about and exploring the idea of selling his business because business growth, and more importantly, profitability, had been slowing for years.

Renaldo found an hour in his schedule to talk to the interested buyer. In only 60 minutes, Renaldo’s blinders were removed and his priorities were turned upside-down.
The buyer turned out to be a large national company seeking to establish a presence in Renaldo’s community. It was interested in Renaldo’s business because of its reputation as well as its broad and diversified customer base. The buyer was looking to acquire a business that could grow with little other than financial support.

Naturally, it sought a business with a good management structure because, like most buyers, it did not have its own management team to place in the business. Renaldo, however, had not attracted or retained solid management (nor had he created a plan to do so). His business lacked this most basic Value Driver.

Like many buyers, this buyer also looked for two additional Value Drivers: increasing cash flow and sustainable systems throughout the organization (from Human Resources to marketing and sales to work flow). Renaldo quickly realized that his business was a hodgepodge of separate systems each created to patch a particular problem.

Finally, the buyer asked Renaldo to describe his plans for growing the business. Renaldo had none. What this buyer and Renaldo now understood was that this business revolved around Renaldo.

As Renaldo left the meeting, he expected that, given his company’s deficiencies, he would receive a low offer from the buyer. He waited weeks but no low offer was forthcoming. In fact, the buyer simply disappeared.

The message to all of us is clear: Unless a business is ready to be sold, many buyers, especially financial buyers, are not interested. They have neither the time nor the in-house talent to correct deficiencies. The look for (and pay top dollar for) businesses that are poised for ownership transition.

It is a fact of life for owners that unless you work on your business, rather than in your business, you will never find time to plan for your future and for the future of the business.

Is there a way to change your priorities before your 60 minutes with a prospective buyer? Of course. You simply acquire new knowledge (about Exit Planning) and apply it to your life.

Exit Planning requires time: time not only to create the plan but also time to implement it and to achieve measurable results. That timeline may be considerably longer than you anticipate because, in creating an Exit Plan, you need to rely on others who are also busy (minimally an attorney, CPA, and financial planning professional). Additionally, you can not anticipate all of the issues that might arise, and it is unlikely that everyone you work with is as motivated or experienced as you are. Finally, and inevitably, not everything will go as planned.

Exit Planning encompasses all sorts of planning: your growth, strategic, tactical and ownership succession planning for your business, as well as your personal financial, and estate planning. By wrapping business, estate, and personal (or family) planning into one process, Exit Planning is all-encompassing rather than a subset of the planning that you are sure you will one day undertake. In short, there is much to do.

It may be helpful here to recognize that planning, properly undertaken, can help enrich your business as well as your personal life. According to Brian Tracy, "A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power." And, in the case of Exit Planning, it works, too. Find out more about exit planning.
The example provided is hypothetical and for illustrative purposes only. It includes fictitious names and does not represent any particular person or entity. Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

Thursday, October 8, 2015

Signature Glass, Inc. is acquired by Binswanger Glass

Signature Glass, Inc. ("Signature Glass"), a contract glazing business in Houston, TX has been acquired by Binswanger Glass. Signature Glass is a leading commercial glazing contractor in the Houston metropolitan area with focused expertise in curtain wall and window wall systems, storefront and entrance systems, and in-house fabrication of aluminum framing systems. John Fincher with Corporate Investment faciltiated the transaction and advised Mike and Sandy Skobla, the owners of Signature Glass.

“Signature Glass was an excellent acquisition target for Binswanger Glass," stated John Fincher, Senior Associate of Corporate Investment. "Binswanger Glass can now build on the great reputation Signature Glass has earned in the Houston area. Corporate Investment was pleased to represent Mike and Sandy Skobla in this transaction.”

Signature Glass has been in operation since 1999, when it was founded by Mike and Sandy Skobla. The Skoblas built the business by consistently exceeding expectations of both general contractors and business owners on construction projects ranging from storefronts to mid-rise commercial and institutional buildings.

"Being a part of the Binswanger Glass family is the right fit for our company, our customers, and our employees," said Mike Skobla, President of Signature Glass Holdings, LLC, the newly-formed subsidiary of Binswanger. "We have developed great relationships with general contractors and business owners within the Houston area, and now being a part of an organization with a contract glazing presence throughout all of Texas and 14 other states will allow us to continue to grow profitably."

Signature Glass will continue to operate under the Signature Glass name as a division of Binswanger Glass.

"We are privileged to partner with Mike and Sandy Skobla and all of Signature Glass's employees to continue providing excellent glazing service to customers throughout the Houston metropolitan area," stated Tim Curran, CEO and President of Memphis, TN-based Binswanger Glass. "This acquisition is representative of the strategic growth plan for Binswanger Glass, which comprises bolstering our presence in growing markets such as Houston, expanding into new geographies outside of our current footprint, and partnering with strong operators that have built a dependable team of glaziers."

Binswanger Glass is the largest full-service designer, retailer, and installer of architectural glass and aluminum products within the construction, residential, and automotive markets in the United States. Binswanger Glass is an affiliate of Boulder, Colorado-based private equity firm Grey Mountain Partners.