We talk to owners constantly who are ready to exit their businesses but think now is the wrong time because of the recession. We even have owners who received great offers for their businesses that assume the offer is depressed because of the current economy and reject the bid.  In some of these cases, the offer and deal structure is far superior to the one they received before the downturn. See our earlier blog entry for more information 2009 is a Horrible Time to Sell My Business, Isn't it? 

To these two groups of owners I would like to relate a true story, names changed to protect the (you fill in the blank), about a business owner we have been talking to over the last four years.  We first spoke to Ben Adams in 2005 after he had expressed interest in learning what his business was worth if he were to exit. Ben had an established family owned multi-tiered lumber business based in the Southeast, Adams Lumber. Adams Lumber was an integrated lumber business.  They owned the timberland, the saw mill and kilns and had set up an enviable regional and international network of distributors. They were on the top of the world in 2005 with the building boom having gross sales in excess of $30,000,000 and great margins based on owning the entire supply chain. They could optimize their business by supplementing their own resources in the most profitable areas. If logs were highly valued, they could cut more timber.  If logs went down in value, they would buy from others and use their processing/distribution for maximum profits while letting their trees get bigger.

We spoke to Ben Adams again in 2006 and growth was flat but profits were up through optimization of the supply chain. Ben had also finally made the move from his small local bank to a regional bank(that had been courting him for years) giving him larger credit lines at cheaper rates resulting in more dollars to the bottom line. Some of the timberland was worth more for residential development and he had it rezoned.  They considered selling the land, but were waiting until values were at there peak. Multiples and valuations were high, so we told him again this was a great time to sell especially if the growth had slowed he basically had maxed out the value of his business.

In 2007 when we spoke to Ben things had slowed in the lumber business as building in areas like Florida had stopped and some national builders were slowing down. We told him he should really think about getting out now based on two good years of financial data.  We told him the slow down would decrease the value of the business somewhat, but he was still way ahead of where he ever expected to be three years ago. Ben thought the slow down would be short lived and the demand for his products would come back in short order …“Hey, builders are always going to need 2 by 4's.”

Well, by 2008 Ben’s business had shrunk to pre-2003 levels and he was nervous about his window of opportunity.  We told him that some turnaround funds were rolling up lumber companies with a plan to take advantage of the economies of scale scenario and ride out the downturn.  At that point, we could still get him a decent price for his business.

Ben cut off all communications with us until March of 2009 when he contacted us out of the blue. We went out to lunch and learned that the $30,000,000 business was now a $3,000,000 dollar business. Adams Lumber had laid-off most of their employees and Ben and his son were directly involved in running the saw mill. Other timberland and saw mill owners were suffering and had to sell their products below their cost. Ben was buying green cut wood from other saw mills, drying it their lumber kilns and selling it to their distributors at some profit. There were problems though; their kilns were designed to run on the saw dust waste from the saw mill which wasn't there.  In fact saw dust was hard to find and expensive to transport. One of the kilns could run on propane, but that really cut into profits. The timberland they thought they could sell for development was now worth little for that purpose and they were considering selling it to a hunting club. Ben went to the regional bank he had changed over to in 2006, told them that business was slow and asked for a reduction in his interest rate to help him get through the downturn. The regional bank responded by asking Ben for full financial documentation to justify the credit line and would not respond when Ben asked if they were going to call in his balance…something he thought the small local bank never would have done. We talked to Ben about finding a buyer of distressed companies with the idea he could salvage more than a forced liquidation sale or bankruptcy.

Here we are in June 2009, Ben doesn't answer his cell phone and his e-mail address now bounces. We sincerely hope Ben was able to work something out with bank and we will hear from him again. Hopefully sharing this story will help some other owners who are on the fence realize that you never know what the future holds. It is 2009, we are in a recession, capital gains tax is at 15%, the stock market is up today, Europe is in worse shape than the US, China is buying oil and iron oar and “builders are always going to need 2 by 4's.”  I can tell owners what their business is worth now and bring them willing buyers, but is up to them to know when to hold them, know when to roll them, know when to walk away, or know when to run. If they are ready to walk away we can help.

        

Mad Money with Jim Cramer is one of CNBC's biggest hits. Every Thursday viewers call in to play "Am I Divesified?" they give Jim their 5 top stock holdings and he tells them based on business segment and specculative verses big cap, whether thier portfolio is diversified or not. Many Private Business owners may not realize they would loose this game miserably. We have found most private business owners have over 80% of their net worth tied up in their business and its assets. This means at least 4 of their five largest positions are tied up in one stock, ...<< MORE >>

Top Merger and Acquisition Intermediaries perform four very valuable functions when representing an owner selling his or her .company. First, they develop a defensible valuation based on EBITDA, Add-backs and Multiples. Second, the intermediary confidentially markets the business to a wide spectrum of potential acquirers. Third, they create competition to insure the owner receives the best possible price for their business. And finally, the intermediary negotiates a deal structure so the owner can keep the largest percentage of the hard fought proceeds after taxes. 

In my experience, Creating Competition is the most important step of the process and is often over looked by deal makers. This step adds the most value to the owner-intermediary relationship. A company owner simply can't create competition as credibly as a third party intermediary.  

Creating competition, or at least the impression a company is a sought after should be a component of every deal, and the intermediary is in the best position to do it honestly and ethically. Let me share personal anecdote to drive this point home. In my college days I was somewhat less than adept at meeting women to date. By the time I got over insecurity and was ready to ask a girl out, the opportunity had passed. I had developed a very close friendship with a very attractive woman (who I call Dawn), unfortunately my romantic interest in Dawn was not reciprocated. Dawn and I became extremely close friends, we took classes together, we ate lunch together, we played racket ball, we went to parties together and danced (you get the picture.) I noticed over time that people were treating me differently because of the assumptions they would make based on the appearance of my relationship with Dawn. Men were envious of their perception of my relationship with Dawn, and more importantly women, who had not really paid attention to me, suddenly began to want to meet me (hopefully this story begins to make sense.)  At no point did I think it was appropriate to discuss the precise nature of my relationship with Dawn with any third person. 

A small percentage of companies have the magic EBIT number, the right annual revenues, are in a sought after industry, and have two years of solid growth that make them attractive to any acquirer and create competition automatically. The vast majority of companies don't fit exactly into a potential acquirer’s ideal matrices and have a few warts on them; so acquirers are unlikely to fight over the opportunity bid up the price. The vast majority of companies need to be seen with "Dawn" to attract the right acquirer and bring the best offer; and it is up to a good intermediary to develop this perception for the company. This can be done entirely honestly and ethically over time. Confidentiality and ethics precludes an intermediary from giving any details concerning a potential acquirer to another potential acquirer, but an intermediary is not bound to deny the existence of the other acquirer. An owner simply would be viewed as disingenuous doing the exact same thing. The majority of deals I have been involved with would not have gotten the best price without competition. Many times when the acquirer was on the fence, they would not have issued a timely Letter of Intent unless they sensed competition for the deal.  

In modern M&A market place there are always at least two or three potential acquirers for every deal, a good intermediary knows how to find them and develop an atmosphere of competition to insure their client gets the best possible price and deal structure for their company.

 

        

If you own a business you presumably have a working knowledge of  business basics such as: supply and demand, supply chain dynamics, availability of capital, and valuation. As a Mergers and Acquisition Intermediary, I like to think I know how they apply to my business and how they can have a huge impact recapitalizing or exiting your business. I talk to business owners and groups who seek to buy established businesses every day. In this blog I will focus on the lower Middle Market businesses with annual revenues of $5-$75 million, but these concepts apply to larger and smaller businesses as well.

Supply and Demand and Supply Chain Dynamics: There is a huge industry called Private Equity that has thrived for last 10 years and they are still around, even in  a recession. Private Equity buys businesses, runs them, merges them, grows them, sells them and sometimes takes them public. There is a food chain in Private Equity: from groups that acquire businesses with as little as $2-3 million dollars in revenues-to The Carlyle Group, Blackstone, KKR, Goldman Sachs, and others who acquire multi billion dollar companies; and the thousands of groups that fall in between these ends of the spectrum. These groups all have one thing in common they need to acquire companies to keep their businesses running. Many business owners are currently afraid to sell in a recession creating a huge lack of supply of companies, short supply-same demand-raise prices. Bigger fish are paying more for bigger companies and it trickles all the way down to the lower middle market.

Availability of Capital: You say this is all nonsense Private Equity can't get capital from frozen Banks, you're right they can't so they are either buying bank assets (IndyMac acquired by a group lead by Dune Capital), or becoming banks like Goldman Sachs. The Private Equity business generates profits for private individuals and groups who invest capital with them. They have used banks for leverage in huge deals in the past but there are now more then enough alternative sources to replace bank capital at historical interest rates. No one wants to put investment capital into banks or very low fixed interest securities for the longer term. Most Private Equity have far more cash then can deploy in the current market, leading to a spike in demand for business to acquire.  Every day I have private equity groups calling me saying "We have to deploy capital", "30 day closings", "No bank financing", "No owner financing" there is simply too much cash and not enough product for Private Equity to conduct business.

Valuation: Business are valued on historical performance typically in a multiple of EBIT or EBITDA; and this multiple is set by what the market will pay. What the market will pay is based largely on the availability of companies. So the two questions you have to ask yourself are: Do I want my company valued base primarily on 2007-2008 EBIT or 2009-2010 EBIT? and, Do I want to sell my company when there is a huge shortage in the market or do I want to wait until 2011 and beyond when baby boomers start turning 65 and flood the market?

As you can read in previous blog entries, companies down 10-15% are widely considered to be thriving in the current economy and those that are flat are big growth stories. We consistently have demand for distressed companies and those in need of capital infusions, no matter what shape your company is in, now is the time to look to Private Equity. Finding private equity for middle market companies is what we do, click on the Transact Partners International link ( www.transactint.com ) and lets talk.

        

 

I have spoken with several potential acquirers recently about a business we are marketing that projects 2009 to a flat year. This business is an industrial manufacturer and is being evaluated by strategic acquirers. When I tell potential acquirers that business is flat and we believe it is going to stay that way in 2009, they are all somewhat amazed by this performance. One potential acquirer told me "Flat is the new Growth." These acquirers all hold a variety of other industrial companies that are down 15-25% off 2007-2008 levels, which seems to be the norm for most industrial companies. A business with flat sales or down less than 10% is viewed as a growth company in this economy. These companies are holding their 2007-2008 EBITDA and multiples, as there is a huge shortage of deals like this on the market. So if your business is flat or only down 10%; you are in a small minority and it is a great time to bring your company to market.

 

        

   We have been receiving unprecedented calls form Private Equity Groups (PEGs) seeking deals in March and early April 2009. There appears to be a real shortage of good companies on the market and plenty of cash on the sidelines looking to be deployed.  Many of the  PEGs we speak to have recently raised capital form private individuals and are looking to make acquisitions with out any bank or mezzanine financing. We even have seen private companies raise capital through private placements avoiding the necessity of involving a bank to an acquisition. 
    You may ask, Is this activity a result of bargains and distress sales? Our answer is a resounding NO, deals are holding 2007-2008 multiples. I recently received an e-mail from a PEG principal complaining there are no bargains sales due to the economy. Remember when you sell or extract capital from your private company you are doing it based on historical performance not the future, and current conditions make it a great time to maximize on your companies success in 2007-2008.

        

PEG deals are far more complex than those involving individual or strategic acquirers. Given the intricacies of the deal, and to combat the experience of the PEG, business owners need to have their own advocates (professional M&A Advisers) their own to ensure that the PEG does not take advantage of the business owner. Some of the things that business owners need to prepare for when dealing with a PEG:

-Clean up the books and have recasted financial statements developed. Clean books open the field of potential buyers, increase multiples, and maximize the value of a ...<< MORE >>