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: http://bit.ly/1YpVZ4l

http://www.corpinvest.com

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

http://www.corpinvest.com

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.

http://www.corpinvest.com

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.

http://www.corpinvest.com

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.

http://www.corpinvest.com

Q1 2015 M&A Market Update

Predictions for 2015

The January issue of Mergers & Acquisitions magazine reported that 2014 was the best year for the middle market since 2007. It went on to say: "Confidence in the economy, cash on corporate balance sheets, dry powder in private equity funds, low interest rates and high stock prices all combined to create a nourishing ecosystem for deals throughout 2014." 

Our firm's experience in 2014 was consistent with this thought, and the first 90 days of 2015 have begun with robust buyer activity.

Valuations in Austin

A September 2014 white paper co-authored by Mark Jansen, PhD candidate, and Adam Winegar, at the McCombs Business School, UT Austin, concludes that business valuations in desirable cities such as Austin average 16% more than in other locations. This analysis is based upon a study of over 16,000 transactions. The study states: "The 16% premium is robust to controls for local economic characteristics, industry concentration, and the liquidity and availability of capital in the local transaction market. We introduce a new measure based on how noneconomic characteristics of a city affect its desirability and find that firms located in cities with higher values of our measure sell for a significant price premium."

The paper goes on to explain: "Unlike a public firm, the largest shareholder of a private firm is often the firm's CEO. This makes the location's desirability, even the portion unrelated to the cash flows and risks of the firm, important to at least one of the shareholders of the private firm. In a competitive environment, the entrepreneur pays a premium for a firm in a desirable location and this premium represents the value that the entrepreneur places on desirability."

Austin is consistently on lists of desirable cities in the U.S. The study says: "Using the inclusion of a city on a 'best places' list as our initial proxy for desirability, we find that entrepreneurs pay an economically meaningful 16% premium for firms located in areas that have desirable features that are distinct from local characteristics that would affect firm cash flows or risks. This indicates that entrepreneurs' valuations of private firms are different from valuations of purely financial assets."

The white paper notes that transactions with enterprise values greater than about $20 million, when acquired by a public company or private equity group, do not have this premium. 

At Corporate Investment, our conversations with M & A advisors in other parts of the country confirm the results of this study. The velocity of buyers on engagements in Central Texas, versus a transaction in other areas, is also much greater. Buyers from many other areas of the country, specifically California and Illinois, exhibit significant interest in Texas businesses driven by to their desire to relocate to Texas. 

http://www.corpinvest.com

  

Q3 2014 M&A Market Update

As we reflect on the third quarter of 2014, we have seen several trends develop that are impacting valuations as well as the number of sale/recapitalization transactions of closely held businesses. Some of this industry data was also developed from the recent M&A Source conference held in Austin November 17- 21. 56 private equity firms were in Austin for the Expo, plus 180 M&A intermediaries from across the U.S.

Two trends were noted at the conference: 

First, contract terms that previously were reserved for the upper middle market are now appearing in lower middle market transactions. Items such as representation and warranty insurance policies, previously only used in the upper middle market, were now being employed in lower middle market transactions. We recently were involved in a $15,000,000 EV transaction in which the private equity buyer, based in New York, was purchasing a "representation and warranty insurance" policy from AIG. These policies had normally only been used in larger transactions. Items such as "clawback" provisions may now appear in the purchase agreements of lower middle market transactions. In addition, many acquirers are engaging accounting firms to perform a "quality of earnings" review as part of due diligence.

Second, minority recapitalization transactions are becoming much more popular in current transactions. Business owners who are not ready to retire or give up control of the business, are able to cash out some of their equity, diversify their net worth, but continue to run the company, as well as maintain control. As the company grows, the eventual sale in 7-10 years may yield a substantial premium over current valuations, due to increase in EBITDA, as well as multiple expansion based upon the increased revenue and earnings. EBITDA multiples for well-run operations, with deep management teams and EBITDA in excess of $3,000,000 are seeing multiples between 5 and 6 times adjusted EBITDA in some cases.

http://www.corpinvest.com