CEOs and CFOs of middle market companies regularly make important decisions to engage a variety of Professional Service Organizations (PSO) to perform necessary corporate, transactional and financial planning tasks.  Yet, the engagement decision to hire a particular investment bank, wealth management advisor or consulting firm, is often made without examining whether the new PSO has an existing working relationship with the referring PSO already providing services to the company.   

Asking for a referral from an existing professional service provider is the common way that most CEOs and CFOs begin their search for another service provider with a distinct specialization.   However, if the referral discussion focuses on a particular PSO firm’s isolated attributes, this does not necessarily correlate with the prospective PSO firm being a “good fit” within the context of all the PSOs serving the company. 

The effectiveness of the PSO vetting process (the so-called “beauty contest”) can be improved by inquiring whether the referring firm (e.g., an accounting firm) regularly conducts business with the referred firm (e.g., an investment bank).  If a formal Strategic Alliance is found to exist between the PSO firms, then established methods and processes help ensure that the PSOs provide complimentary resources, expertise and advice, in order to deliver collaborative solutions to the client company.   Read more »

Popularity: 12% [?]

A lot successful business owners are reeling from the combined effects of the expanding credit crunch and economic slowdown we are currently experiencing.  Many owners who had “been thinking” about selling their companies and creating long-term financial security and more free time for themselves now feel trapped and  unable to pursue their dream.

As a middle market investment banker and exit strategy advisor, I have recently observed an overriding temptation in business owners to simply ride out the current storm and wait for the next wave of M&A activity—the next valuation peak—and then return to their thoughts to selling their business.  The problem is, if they wait until the next wave comes, it will be too late to maximize their opportunity, and they risk missing it altogether (again!).

My advice to middle market business owners is this: don’t just wait for the next wave to arrive. Expect it and Read more »

Popularity: 37% [?]

Recently, Fortune Small Business magazine conducted a survey of owners of privately-held, small & mid-sized businesses in the USA. Two questions were asked:

• How critical to your business’ survival is succession planning?
• Have you done anything about formalizing a succession plan?

The results were extremely interesting. More than 95% of the respondents said a succession plan was critical to the long-term survival of their business, but a staggering 85% had not done anything to formalize their succession plans.

This survey reinforces information we learned first-hand several years ago when Read more »

Popularity: 40% [?]

“I will sell if I receive the right offer, but I don’t want to market the business!”

Despite its obvious flaws, the above statement reflects the position taken by a surprising number of business owners. In fairness, marketing your business is time consuming and may jeopardize a hard-earned market position if “word gets out”, so the position is understandable. It just doesn’t make a lot of sense!

The “strategy” is flawed because it results in a reactive positioning, yielding all control to the buyer. It suffers from two serious deficiencies: Read more »

Popularity: 41% [?]

Corporate Buyers Should Answer 5 Key Questions When Preparing a List of Acquisition Criteria

Corporate buyers appreciate that acquiring another company is an effective way of achieving growth, which can compliment organic growth. However, before proceeding with any acquisition process, research in the area of Pre-Acquisition Best Practices has shown that 5 key questions should be considered by acquirers.

By answering these fundamental questions, a corporate buyer is then more readily able to detail a List of Acquisition Criteria. In turn, the List of Acquisition Criteria shapes the buy-side mandate given to an investment bank, which will then proceed to systematically contact both sellers that are actively for sale, as well as the much larger group of off-market target sellers.

• Acquisition Purpose. First, what is the purpose, motivation or intent that causes an acquirer to undertake buying another firm? Acquisitions are often employed by acquirers to achieve economies of scale, to expand existing product/service lines, or to penetrate additional markets. These goals are a reflection of the broader corporate strategy for how you want to grow your company. Read more »

  Popularity: 69% [?]

Many taxpayers have heard about or even utilized the 60-day Individual Retirement Account rollover rule at one time or another.  Did you know there is a 60-day rollover rule in connection with the sale of qualified small business stock (”QSB stock”)?  Essentially, within a 60-day period and if other requirements are met (e.g., the stock was held for at least 6 months), the taxpayer can purchase other QSB stock in order to defer all or part of the gain associated with a QSB stock sale.   

In 1997, as part of the Taxpayer Relief Act of 1997, a new section 1045 was added to the Internal Revenue Code that provides for the rollover of gain from the sale of QSB stock.  In the following year, the IRS Restructuring and Reform Act of 1998 provided some amendments to section 1045 including the expansion of the gain rollover treatment to additional taxpayers, other than corporations.

Read more »

Popularity: 76% [?]

Maybe you have read that the market has peaked and deals are tougher to get done. You feel like you have missed your perfect chance. On the other hand, you are not getting any younger, you still have most of your wealth tied up in your business, and you can not get the thought of possible capital gains tax increases out of your head. What should you do?

Think recapitalization. While not for everyone, a recapitalization or “recap” as often referred to, can provide an attractive option for sellers. A recap enables a seller to sell a portion of a business now, while keeping an ongoing equity stake, maintaining an active management role, sharing in the growth of the company, and retaining the opportunity to participate in better markets which may be ahead. Read more »

Popularity: 61% [?]

A former partner (and highly successful serial entrepreneur) taught me that the two best ways to prosper in a slack period is to feed your winners and cut your losers. Year-to-date 2008 trends in global mergers and acquisitions (‘M&A’) reflect this; corporate ‘pruning’ is very much in evidence today.

How can this benefit you? Several ways, if you act aggressively:

1. Divestiture of ‘Non-Core’ Assets:
   This is a particularly good time to escape the accumulated time-wasters, by selling them at reasonable prices and terms, either in the US or abroad. This will allow your management team to focus. Cut your losses—stop wasting precious manpower and money.
2. Sale to International Acquirers:
   The weak US dollar means offshore buyers now recognize American M&A is a bargain. You can achieve a full and fair value at favorable terms if your advisor knows how to (i) access strategic buyers, (ii) capture their attention and (iii) hold it long enough to properly showcase your business.
3. Strategic Acquisitions:
   This is a great time to acquire technology, product lines, extend geographic reach, customer lists, etc., on favorable terms if you can fund the deal largely from generally available corporate funds.
4. Create Your Exit Strategy:
   With day-to-day activity softening, this is a perfect time to craft, adopt and begin to implement a carefully coordinated, value maximizing exit plan. A professional M&A advisor would be pleased to discuss this with you, begin to identify an action plan, do a preliminary valuation as your benchmark, and provide additional consultative input, all at no cost to you. The actual exit process could take several years, so it is never too early to start.

Popularity: 71% [?]

Case Study

Situation: John Rockey started his company in 1983 with a single truck. Twenty-four years later, he had grown it into a highly successful transcontinental provider of logistics services to the United States military. Rockey realized however, that he was on the verge of losing control as the company continued to grow. Believing that he had advanced the company as far as he could, he decided he would have to sell. A financial services provider saw that he needed experienced guidance and introduced him to CFA.

Solution: Upon understanding Rockey’s true desires, CFA outlined a recapitalization process which allowed him to extract wealth from his company, while still retaining an attractive ownership position and active involvement in his company. CFA identified a strong investment group willing to invest and commit to active management in the company. With the needed expertise to institute sophisticated systems and controls while bringing new resources and strategic insight, Rockey’s new partners form the foundation for future growth of even greater opportunities.

Popularity: 72% [?]

“I’d be interested in selling for the right price” seems like a very reasonable position for a business owner to take. How can we reconcile that need with a buyer who says: “I am willing to pay a price which will yield a return on my investment, commensurate with the risk I am taking.”

As a general rule, a buyer of a privately-held middle market company will look for a return of around 30% before tax. It follows, therefore, that privately-owned businesses are returning 30% IRR to the owners who “hold” those investments. At the “market” price, therefore, the seller must liquidate a 30% investment (in his business), pay taxes on any gain, and re-invest the net proceeds at a lower rate of return commensurate with the lessened risk and aggravation.

Let’s look at an example. My company is growing at 10% and currently generates (adjusted) cash flow of $5 million after paying me a market salary as President. Buyers in the market will pay $25 million for my Read more »

Popularity: 81% [?]