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: 63% [?]

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: 66% [?]

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: 55% [?]

“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: 53% [?]

Every good investment banker knows the value of having a client represented by an experienced transaction attorney. The absence of one can cost your client a deal or worse yet, cement a bad one. What about an investment banker though? First time sellers will often ask what value a good investment banker adds to a transaction. “Why can’t I go it alone”, they may ask.

I have a long list of answers, but I thought I would reach out to several respected transaction attorneys for their comments. In their practices they work for clients who are represented by investment bankers and clients who are not. From their third party perspective they are well positioned to offer valuable insight.

Cliff Pearl, a transaction attorney with the Denver firm of Hensley Kim & Holzer, LLC, believes that, “The biggest value a good investment bank adds is properly orchestrating the process…. Many sellers believe that the only thing they need is someone to find the buyer willing to pay the highest price, and if they find that buyer themselves they think they don’t need the help of an investment banker. They are wrong. Transactions fail in many instances because there is nobody properly orchestrating the transaction process and acting as the shepherd of the transaction…something the participants and lawyers typically can’t do….” Read more »

Popularity: 43% [?]

Case Study

Situation: In 1991 Carol and Jim Townsend acquired a small employment agency and entered the world of entrepreneurs. Quickly, they moved into providing temporary employees and eventually built their business into a regional powerhouse. Their company, Sunrise Enterprises, based in Dubuque, Iowa had 13 offices in a three-state area and billed over 2 million hours of work per year.

Solution: Based on a referral from their CPA, Carol and Jim retained CFA to sell their business to a buyer who would continue to develop Sunrise. Ultimately, CFA found a complementary, strategic buyer who would not only acquire the business, but would, in turn, sell part of the company to Sunrise’s key executive. The sellers got the value they wanted for the business and achieved their retirement goal.

Popularity: 34% [?]

Or Is It A “Real” Business?

Many self-employed people consider themselves “business owners”, but are they really? There is an important distinction between owning a business and owning a job. Does it really matter which category your enterprise falls into? Yes, it matters a lot if the owner plans to exit the business at some point in the future by selling it.

Every closely-held business owner grossly underestimates the significance of his or her own, personal value to their business. This includes the value their contacts, their relationships, their reputation, their experience, and their personal efforts. They talk about how “great” their employees are, and say things like, “this business could run on its own without me”. Ninety-nine times out of a hundred, they are wrong! In fact, most of these businesses would be severely impaired, if not destroyed, upon the unplanned exit of the owner. Read more »

Popularity: 36% [?]

Business owners considering a sale of their business often ask us, “When is the best time to sell my company?” It is a fundamental and age-old question.

Sellers always want to “time” the sale of their businesses to maximize their return, either through a higher price, lower taxes, or, hopefully as we have seen in the last eight years, a combination of both.

Since President Bush lowered the Federal tax on long-term capital gains to 15%, there has never been a better time to sell a business, at least in terms of tax implications. Combine low tax rates with a very strong economy, and you know why M&A deals were so predominant from 2004 through the first part of 2007.

Will taxes go up in 2009? Mr. Obama and Mrs. Clinton have both promised, if elected, to raise taxes on long-term capital gains to 28% or 25%, respectively. However, this is a promise, not a guarantee. Read more »

Popularity: 40% [?]

Many entrepreneurs start businesses because they either:

1. Tired of working for the corporate world
2. Were outsourced, out placed or downsized from the corporate world
3. Learned a skill and knew that they could do it better.
4. Got angry at their boss and left their employer
5. Made the decision to work for themselves.
6. etc., etc. , etc.

Entrepreneurs were successful sellers, manufacturers, or creative/design/engineers who loved the enjoyment of doing it better than everyone else. Most started on a shoestring. They “bootstrapped the business” by borrowing from family, friends, credits cards, etc. They rapidly learned that building a business is a “stair step process”… i.e. at $1mm revenue, hire an office clerk/receptionist/order processor… at $2mm, hire a controller, move to a new location… at $5mm, hire a general manager and a salesman… and on and on. The more successful the business is… the more the founder will drift away from his first love… that which motivated him first to start the business. Instead of being able to spend his time calling on customers, now he’s reviewing insurance plans, studying risk management, trying to understand new OSHA regulations. As he realizes that it is time to begin building an exit strategy, not only does he want to “take some chips off the table”, he really doesn’t want to retire, he wants to do what he enjoys and move into the next stage of his life. Read more »

Popularity: 31% [?]

Case Study

Situation: Portland, Maine is home to several colleges, yet most feature limited housing. Rockport, Maine based developer Joseph M. Cloutier saw a need for a high-end apartment complex aimed specifically at the city’s 15,000 college student population. He asked CFA to arrange financing for the 100 suite complex designed to house 400 students. Bayside Village will meet the needs of students’ busy schedules, with amenities like sheltered parking, wireless internet, a fitness room, and bicycle storage.

Solution: Corporate Finance Associates designed a multi-layered capital structure including development stage funding, construction financing, term debt, and municipal tax increment financing totaling $26mm through a combination of short term investors, private equity, and bank financing timed to meet the projects funding milestones.

Popularity: 20% [?]