Wednesday, October 4, 2017

Q3 2017 M&A Update: Who Will Buy Your Business?

Businesses with enterprise values above $10 million are primarily sold to institutional investors. Those acquirers fall into two broad categories: financial and strategic. This article discusses the four most common types of financial buyers, sources of funding, and investment horizons.  

Private Equity Group, or PEG. A private equity group, or firm, is an investment management company that provides financial backing and makes investments in operating companies through a variety of investment strategies including leveraged buyout, venture capital, and growth capital. The PEG is responsible for finding suitable business opportunities, screening those opportunities, and selecting ones to pursue. A Committed Fund is the most common of the following three PEGs.
PEG Committed Fund or a fund with committed capital has set up a “Fund” which receives money from institutional investors, such as pension funds, college endowment funds, and high net worth individuals. Corporate Investment recently worked with a private equity fund that invested money from a high profile college’s endowment fund. The private equity group reviews the acquisition candidates, selects the desirable ones, manages the acquisition, and monitors the investment in the business. Each “Fund” typically has a defined investment horizon, which is typically 5 - 7 years, meaning the investors anticipate receiving their capital back and related returns in that time frame. The managers of the “Fund” are typically paid a management fee and participate in the gains realized on the investments made by the “Fund.”

A Fundless Sponsor or independent sponsor is a type of capital group or individual seeking acquisition candidates without having the equity financing required to complete the transaction up front (hence, they are “fundless”). Fundless sponsors raise the equity required to fund an acquisition after they have executed a letter of intent (“LOI”). Fundless sponsors may consist of a single individual or group of individuals with years of experience in investment banking and traditional private equity, who accumulated a significant amount of capital. They will then split off and operate a small office, and with their track record, there are other investors that will invest alongside them in business acquisitions. The typical investment horizon for fundless sponsors is also 5 - 7 years, but may be longer.

Search Funds are vehicles for entrepreneurs to raise funds from investors interested in making private equity investments. In the first two examples shown here, the PEG wants to rely on existing  management to continue to run the business day-to-day. In the search fund model, a small group of investors back an operating manager(s) to search for a target company to acquire. The manager typically has an established track record in a specific industry, and wishes to take over day-to-day management. Search funds may have a longer investment horizon, and be more flexible.

Now – the new kids on the block:

Family Offices are a relatively new entrant into the financial acquirer mix. These are private wealth management advisory firms that serve ultra-high-net-worth investors. They are different from traditional wealth management shops in that they offer a total outsourced solution to managing the financial and investment side of an affluent individual or family. Family offices serve multi-role functionality as well as wealth management, including, accounting, security, and property management. Family Offices can be Single Family or more recently, Multi Family offices. More recently, many family offices have hired an experienced professional from a traditional private equity firm to search for companies to acquire. Corporate Investment recently dealt with two large family offices who have hired individuals from private equity firms to help them source, acquire, and manage their acquisitions of entire companies. They typically have a longer investment hold period than traditional funded private equity firms.

Our client, the seller, must align their objectives in the transaction with the right type of purchaser.  Knowledge of the type of funding, risk of being able to close, and investment time horizon of purchasers must be taken into account for us to successfully achieve our client’s goals.

An understanding of the types of institutional buyers is very important, as private equity buyers are now actively investing in lower middle market companies. Over the past 8 years, significant institutional funds have been committed to private equity firms, and the competition for middle market companies (revenue above $100 million) has increased dramatically, leading many firms to lower their sights and seek investments in lower middle market companies. 

There are about 350,000 companies with annual revenues between $5 million and $100 million, compared with less than 30,000 companies with revenues above $100 million, according to Forbes magazine. “Interest in the lower middle market has grown substantially,” according to Probitas Partners Private Equity Institutional Investors Trends for 2017 Survey. “In 2017, 63 percent of institutional investors said they are focusing on the U.S. small market buyout sector.” (Mergers & Acquisitions magazine, October 2017). 

This development is extremely positive for Central Texas business owners, as the competition for a well managed, profitable business to acquire leads to attractive transactions.

Wednesday, July 19, 2017

Experienced Austin Financial Executives Robert (Bob) Kay and Laine Holman Affiliate with Corporate Investment

Robert (Bob) Kay, an experienced executive in finance, investments, private equity intermediary, banking, and private business management, and his long-time business associate, Laine Holman, a seasoned CFO, have joined Corporate Investment, an Austin-based financial advisory firm specializing in mergers and acquisitions and business sales.

“We are excited to join Corporate Investment and use our years of experience in business operations, deal making, capital raising and private equity investing to help our clients,” said Kay. “Corporate Investment has a well earned reputation in the region as business intermediary and merger and acquisition experts. With mergers and acquisitions picking up steam in Central Texas, we are in the right place to help owners get the most value from their transactions,” Kay added.

Most recently, Mr. Kay has led Excelleration Partners, an early stage growth company consultancy and capital raising advisor, after having served for six years as EVP/COO/CFO at Drilling Info, Inc., an online oil and gas data provider. While at Drilling Info, Bob partnered with CEO Allen Gilmer in leading the company through an explosive growth phase and eventual control sale to a NYC-based private equity fund.  

Prior to his most recent career stop as Consulting CFO to Durbin and Bennett Tax Advisors, Mr. Holman served as CFO to The Kucera Companies, a full-service commercial real estate company from 2003-2011. Kay and Holman partnered during the 1980s and 1990s within several business entities controlled by Robert W. Hughes and the Prime Cable family of companies.

Serving as a M&A team at Corporate Investment, Kay and Holman will lead clients through the sale preparation and sale of their businesses. Their diverse and combined business experiences have provided them deep experience and insight into the business sales process.

A native of Austin, Mr. Kay earned a BBA in General Business with an accounting concentration from The University of Texas in 1974. Mr. Holman is a native of Taylor, Texas, and is an Honors graduate in Accounting from UT Austin in 1981.

About Corporate Investment

Corporate Investment, founded in 1984, is a leading merger & acquisition firm based in Austin, Texas, representing companies throughout Texas. Corporate Investment works primarily with the owners of private companies in a variety of industries, and their potential acquisition or merger partners.

Robert (Bob) Kay

Laine Holman

Monday, February 20, 2017

Q4 2016 M&A Update: When a Business Owner Receives “The Call”

When a Business Owner Receives “The Call”

As a business owner, perhaps the most flattering event that may occur is an unsolicited call from a “buyer” who asks, “Would you like to sell your business?” Do you turn down that call? Certainly not! Someone is calling to pay you lots of money, perhaps top dollar, for your business that you have worked so hard to build. So you take the call, and the buyer asks to set up an introductory meeting. The buyer could be a strategic or financial buyer that believes, “Your business is a great fit for our acquisition strategy.” That statement translates in the business owner’s mind to, “This buyer will pay top dollar for my business.” However, the business owner is about to begin an extremely complex and emotionally taxing process that will engage him/her in many, many hours of data gathering, meetings, information exchange, financial questions, legal questions, intense negotiation, and hopefully, a positive outcome. Although that outcome will more likely occur 6-9 months down the road, if at all.

So the real question the business owner needs to think about is, “Am I really ready to sell my business?”

Most of the time, the seller will not have really thought about the answer to that question, which is much more complex. Do you have the answers to each of the following questions?

  • What is my business really worth?
  • What will the net proceeds of a transaction total, after paying off the business debt and income taxes?
  • What amount will I need to net from the transaction to maintain my current lifestyle, and achieve my financial goals? 
  • What will I really do after the sale (extremely important)?
  • Are there issues in my business that may cause problems during due diligence (management team, customers, suppliers, legal, etc.)? 

The problem with negotiating with only one buyer

However, the question that most sellers have not considered is this, “If I only negotiate with one buyer, will I ever know if I received the best price?” There is a very old saying in the M&A world, “If you only have one buyer, you don’t have a buyer, they have you!” The buyer controls the timeline, controls the information flow, and controls the process – they have all of the leverage. At a minimum, the business owner should engage an M&A professional to level the playing field. The best case would be for the seller to engage an M&A professional to run a “limited process” in parallel with the unsolicited offer.  The investment banker prepares a brief outline of the business, and contacts 6-10 of the best possible buyers, and will usually find other interested parties. This strategy shifts the leverage back to the seller, and allows the business owner to “keep the buyer honest.”

One of the strategies of a buyer who is in an exclusive process with a seller is to stretch out the process, which is emotionally taxing to the business owner, emotionally draining over time, and results in “deal fatigue.” The buyer may keep asking for pieces of information, delay in actually putting a written offer together, or ask for concessions after the offer is made. Without any leverage, the seller’s only option is to walk away from the table and terminate the process, which is very difficult after significant time, energy, and emotions have been invested over 6-9 months. Most of the time the seller has invested so much time, energy, and resources in the transaction that they agree to concessions just to get to closing.

The worst result can be a transaction that does not meet the seller’s financial needs, falls apart at the eleventh hour after the buyer has obtained sensitive information, or the seller does not have any real plans for life after closing.

Case study

We met with the owners of an excellent business about 15 months ago, who had been approached by a strategic buyer. The owners are at retirement age, and very open to a transaction.  Almost 50% of the consideration for the business in the buyer’s current offer was in the form of an “earnout”, however, and that was a real concern. We suggested engaging our firm to work with that buyer to improve the terms of that offer, while also contacting 6-8 other possible buyers to solicit additional offers, for two important reasons. First, to gain leverage with the one buyer, and keep that process moving, and second, to let the seller know what other buyers might offer for the business. The seller chose to “go it alone” with the one buyer. Their CPA called us 10 months later and said that the deal never closed, and the seller is back to square one, weighing their options. The seller has now invested significant time, energy, and emotions into a process that did not produce a result, and will probably be starting all over again.


Selling a business is a significant event in the life of a business owner, and must be planned well in advance to achieve the best result. While it’s very flattering to receive “the call” from a buyer wanting to discuss buying your business, the reality is that a business owner should not begin the exit process without:

  • Clearly establishing their exit goals (including timeline) and financial needs
  • Knowing what their business is really worth
  • Knowing what they will net from a transaction
  • Having a team of top-flight advisors
  • Possessing a clear understanding of what they want to do after closing. 

Our firm is routinely contacted two or three times a year by attorneys and CPA’s introducing us to business owners that received “the call,” and the transaction did not happen. They are now ready to engage in a well-planned, well-executed, competitive process designed to close a transaction at a fair price in the open market.

Friday, December 9, 2016

Q3 2016 M&A Update: Earn-outs: Uses, Pitfalls, and Opportunities

Earn-outs: Uses, Pitfalls, and Opportunities

What is an "Earn-out" as it relates to the sale of a business? An earn-out is a contingent payment agreement whereby the buyer agrees to pay additional money for the business upon the attainment of certain post-closing performance targets. An earn-out is a financial tool used to bridge the gap between the seller's price expectations and the buyer's perceived value for the business. The most common reason for a gap between the offer and the seller's price expectations results from the two parties to the transaction having differing views of "business risks." The sale of a business is extremely complex, and involves risk factors related to revenue, customer retention, the management team, and many others, which are viewed through different lenses by the buyer and seller.  

Let's remember - in an "all cash" purchase, the buyer has all the risk, therefore the selling price will usually be at the lower end of the spectrum. In a transaction with cash plus a promissory note to seller, there is some level of risk tied to the promissory note - so the seller can justify a price that is a bit higher than "all cash." If an earn-out is included in the transaction structure, the seller expects to receive more for their business, but the last piece of the consideration is tied to future events, so both parties share the risk.

Earn-out structures will be very specific to each transaction. A typical earn-out structure may start with "If revenue in year #1, year #2 and year #3 after closing is equal to or above these targets,  "X", "Y", and "Z", then the seller is paid a certain amount each year."  As simple as that concept sounds, each earn-out structure will be as unique as the business itself. Many times the seller wants the earn-out tied to gross revenue, while the buyer typically wants the earn-out tied to EBITDA. At that point, the negotiation begins, and the actual measured performance often ends up tied to a metric somewhere in between revenue and EBITDA. In our experience, the least amount of computations that must be made to compute the earn-out will result in the most desirable structure.
Our firm recently represented the seller in a transaction whereby approximately $6,000,000 of the price was fixed, and another $3,000,000 of the consideration was based upon an earn-out tied to gross profit earned each year for the first twenty four months after closing. This company was in a cyclical industry, and the seller believed that the industry would maintain their momentum for several years. The buyer was not willing to pay the full price without some part being tied to future performance. The seller was willing to stay with the business through the term of the earn-out, to insure that it would be met. This client has now collected the targeted payments for year one, and is now completing year two.

One tip to remember is that earn-outs should not be "all or none," but rather based upon incremental levels of the performance metric. They should also be structured whereby meeting the target on a cumulative basis over multiple years will still trigger payments, even if one year was below the target (a "lookback provision").

Our firm does not begin marketing a business with an earn-out in mind, but it may be an appropriate financial tool used to facilitate a transaction in certain situations. Earn-out structures are complex and require the seller to evaluate the risk they are willing to assume in utilizing that structure to achieve the maximum consideration. A seller will need an experienced M&A professional and transactional lawyer to carefully negotiate the earn-out and make sure their agreements are well drafted.

Thursday, October 27, 2016

Join us on 11/2/16 for an talk and wine and cheese reception with John Brown, Business Owners Taking Ownership of Their Future

Join Corporate Investment, Statesman Corporate Finance, Plains Capital Bank and RSM to learn more about optimal exit planning strategies.

Our speaker John H. Brown, is a renowned author and expert on exit planning.

John Brown is the founder of Business Enterprise Institute, and author of three books, the latest, Exit Planning: The Definitive Guide, published in 2016. John will explain how to sell your business when you want, for the money you need, to the person you choose.

Free copies of the book for all attendees!

After the talk, enjoy our wine and cheese reception.

We hope to see you there!

November 2, 2016
Talk: 3 pm to 5 pm
Wine and Cheese Reception: 5pm - 7 pm

Canyon View Event Center
4800 Spicewood Springs Rd
Austin TX 78749

Visit our website to find out more.

Friday, July 29, 2016

Q2 2016 M&A Update: Favorable Market

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.