Will appear on Buy-Side pages – RECENT BUYER ARTICLES

Market Pulse Survey: Deal Cancellations due to COVID-19

M&A advisors saw many of their business sale/acquisition deals delayed, put on hold or cancelled in March 2020 as a result of the COVID-19 Pandemic.  Who was cancelling these deals?  The following chart shows the results of this survey question from the latest Market Pulse Survey.

Presented by IBBA, M&A Source & in partnership with Pepperdine University

“Deal activity is always expected to constrict during times of uncertainty. Both sellers and buyers are being conservative right now, taking a wait-and-see approach,” said Scott Bushkie, managing partner, Cornerstone Business Services. “Once we have some clarity on when businesses will be allowed to reopen and in what capacity, some deals will continue to move forward.”

“For many business owners who had already put their businesses on the market, this is a temporary pause,” Bushkie continued. “Owners who were burned out or near retirement will still be looking to exit their business. The nature of that exit will look different now, but once you get so close to the finish line, it can be difficult to envision holding out for much longer.”


For further information on M&A market conditions, or to discuss a current business sale, acquisition or valuation need, contact Al Statz, 707-781-8580 or alstatz@exitstrategiesgroup.com.

Valuing a Business in Bankruptcy

According to data collected by the U.S. Bankruptcy Courts, business bankruptcies declined from 60,750 (or 4% of total filings) in 2009, just after the 2008 financial meltdown to approximately 22,750 in 2019 (or approximately 3%).[1]  With overwhelming challenges ahead as a result of the Coronavirus Pandemic, the question is not if these filings will go up over the next 12 months but by how much.

Before I dig into valuing a business in bankruptcy, let’s review the relevant “chapters” of the U.S. Bankruptcy Code. These “filings” are as follows;

  • Chapter 7 – a liquidation proceeding where assets are sold by a trustee to repay unsecured creditors and, in the case of a business filing, the Company ceases operation[2];
  • Chapter 11 – a reorganization where a Company (as well as individuals) negotiate a plan with its creditors to pay a portion of the amount outstanding while remaining in business.[3]

What is Value in a Bankruptcy?

The U.S. Bankruptcy Code defines “insolvent” as

“…financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation…”[4].

It is at this time, when a business is insolvent, that an appraiser comes in to determine the value of the Company’s assets. However, there is no definition of value in the U.S. Bankruptcy Code, only the guidance that;

“Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.”[5]

The value of the Company depends on the type of filing and the recovery plan if the company is to survive as a going concern. In a Chapter 7 filing, the asset value is based on a liquidation approach (orderly or forced) based on the expected timing set forth by a bankruptcy trustee. In a Chapter 11 filing, the value is based on a going concern approach, also dependent on the proposed timing, but tied to a financial and operational plan for reorganization that impacts the capital structure of the business.

Valuing a Business in Chapter 11 as a Going Concern

Under a Chapter 11 reorganization, the approval of a reorganization plan depends on whether the parties can negotiate a favorable outcome for the Company (or debtor) and the unsecured creditors. When this path to resolution fails, the U.S. Bankruptcy Court needs to rule on this insolvency and whether the reorganization plan proposed suggests that the value of the business is less than its liabilities. While this plan may include the sale of assets, subsidiaries or other court-mandated transactions, it always assumes that the Company will continue as a going concern that requires a valuation.

For example, in a recent court case, a valuation expert for the debtor concluded that the value of the business burdened with $317 million of debt was between $180 million and $220 million (midpoint of $200 million) while the expert for the unsecured creditors’ expert pegged the value between $335 million to $445 million (midpoint of $390 million). In effect, the unsecured creditors concluded that the business was solvent and that they are responsible for 100% of the liabilities of the business. The Court determined that both experts were highly qualified and used the same valuation methods and weightings. The differences came down to their selection of comparable companies. The final decision agreed with the debtor’s expert and the plan was approved and the terms “crammed down” to the unsecured creditors who had to take a haircut on the amount owed to them.[6]

Other key components or potential issues faced by an expert in valuing a business in bankruptcy include;

  • Forecast – The appraiser needs to determine the strength of the forecast in a proposed reorganization plan and whether a management-prepared projection shows bias towards a low case scenario.
  • Diligence – In court cases, either side will hire appraisers to determine the value of the Company as a result of the reorganization plan. This adversarial situation reinforces the importance of the appraisers’ diligence and strong support for key assumptions and inputs.
  • Comparables – As noted above, the question of comparability is key in the defense of the value determined using a market approach. Comparing a small niche software company to Google lacks, among other things, strength based on size, business model and portfolio of revenue streams. There is also a question as to how actively traded companies compare to a bankrupt company with inactive or no recent trading history.
  • New Debt – Determination of the interest rates available to the debtor and changes in the capital structure are key in determining the Company’s risk profile before and after the reorganization plan. Also important is the assumption of potential balloon payments and the need for asset sales or refinancing when these payments are due.
  • Hindsight – The court will accept a “known or knowable rule” but discourages the use of hindsight which may lead to bias.
  • Taxes – A consideration of the debtor’s tax situation including the possible utilization of NOLs and a change in ownership after the reorganization.

A Small Business in Bankruptcy

The above example underscores a frequent adage of appraisers that a big company is much easier to value than a smaller one. Whether it’s the lack of detailed financial information or the presence of operating agreements that may trigger a specific approach to and allocation of enterprise value, small businesses are almost always an extension of the individual owner operator and therefore always unique. In particular, professional service businesses in bankruptcy (such as an electrical contractor or a barber shop) may lack the ability to realize value, especially in Chapter 7 filings, for intangible assets that will remain with the business owner. Additionally, a market approach requires the use of different datasets that compare control transactions as opposed to publicly traded companies. Otherwise, the same issues above apply but with limited financial and management resources, a full detailed plan and forecast may not be part of an appraiser’s available information.

Unfortunately, the current health and economic crisis will likely cause an uptick in business bankruptcies and situations where appraisers need to determine value in unique and distressed situations.

Exit Strategies values control and minority ownership interests of private businesses for tax, financial reporting, ownership transfer, strategic and bankruptcy purposes. If you’d like help in this regard or have any related questions, contact Al at alstatz@exitstrategiesgroup.com.


[1] https://www.uscourts.gov/report-name/bankruptcy-filings

[2] https://www.usbankruptcycode.org/chapter-7-liquidation/

[3] https://www.usbankruptcycode.org/chapter-11-reorganization/

[4] https://www.usbankruptcycode.org/chapter-1/section-101-definitions/

[5] https://www.usbankruptcycode.org/chapter-5-creditors-the-debtor-and-the-estate/subchapter-i-creditors-and-claims/section-506-determination-of-secured-status/

[6] https://www.bvresources.com/articles/bvwire/bankruptcy-court-highlights-comparables-selection-in-assessing-experts-valuations

The Value of a Sell-Side M&A Advisor to Buyers

Al StatzStrategic and financial buyers often tell me how they appreciate the value that experienced, ethical and professional sell-side M&A advisors (a.k.a. business intermediaries, investment bankers, or business brokers) bring to a deal; even when that advisor represents the seller!

As a buyer, you can expect a sell-side M&A advisor to help by compiling, analyzing and serving up relevant business information, by bringing transparency to the process, by facilitating the process, by introducing funding sources and other resources, by anticipating and solving problems, and by being an unemotional conduit between you and the seller. The advisor will have an effective and transparent process for selling the business, and you will understand what that process is.

When you acquire a business through an experienced professional sell-side M&A advisor, here is how you benefit at each stage of the process:

  1. Confidentiality — Maintaining confidentiality is in your best interest as a potential owner, and the advisor’s sale process is designed to protect sensitive information. It starts with the advisor supplying an NDA on reasonable/market terms that is normally ready to sign.
  2. Screening — A good advisor will ask about your acquisition criteria and funding plans, and communicate the seller’s needs and expectations. They will make their own assessment of fit and confirm both parties’ commitment to moving forward in the process. When they don’t think the fit is right, they will tell you to avoid wasting everyone’s time.
  3. Discovery — You will receive a Confidential Information Memorandum (CIM)* with a detailed narrative and important facts and figures on the target company. The M&A advisor wants you to be able to make an informed and dependable decision; and therefore strives for accuracy, transparency and balance in the information presented. After you absorb the CIM, the intermediary will have answers to many of your follow up questions.
  4. Management Meeting — A seasoned intermediary makes site visits and management meetings more productive by establishing desired outcomes for the parties, co-developing an agenda, helping the seller prepare, facilitating important conversations, and following up post-event.
  5. LOI Negotiation — Based on my experience and feedback from transaction attorneys, letters of intent that are negotiated with the involvement of a seasoned M&A advisor tend to be clearer on economic deal points and stronger with respect to contingencies, process and time frames. They result in less renegotiation and are more likely to close.
  6. Due Diligence — The intermediary will set up and maintain a data room and help everyone organize, schedule and facilitate this phase; which saves you time and aggravation.
  7. Financing — The advisor can liaise with (and introduce) debt and equity capital providers. They can compile and summarize information for the application process. Their knowledge of what these parties need, and what they will and won’t do, helps them anticipate and resolve issues that arise and save you valuable time.
  8. Closing — A good M&A advisor works closely with the parties, their attorneys and CPA’s and other specialists throughout the acquisition process. They have great project management skills and attend to numerous details, anticipate and resolve roadblocks, and quarterback various activities to keep the process moving to a successful and timely closing, which is in everyone’s interest.

The bottom line is that professional and experienced sell-side M&A advisors save buyers time, effort and transaction costs, and increase the likelihood of getting from LOI to the closing table. Of course they will also make sure you pay a fair price.

* A CIM analyzes a company’s financial statements and covers its history, customers and markets, operations, personnel, facilities, key contracts, fixed assets, intangible assets, strategic relationships, competition, industry dynamics, growth opportunities, projections, and more.

For further information on the services of an M&A advisor on the sell-side or buy-side, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

 

‘No Shop’ Protects Buyer Investment in M&A

A no shop provision is an important part of M&A transactions. Also known as an exclusivity clause, a no shop clause prohibits the seller from sharing information or negotiating with other would-be buyers for a specified time frame.

Prior to this, the seller is negotiating with several buyers. The goal is to entertain multiple offers and figure out which buyer will ultimately provide the best deal for the seller.

Once the seller has identified their preferred buyer, both parties sign a letter of intent (LOI). At this point the buyer will begin more comprehensive due diligence to validate their assumptions and make sure the business is everything they believed it to be.

Due diligence is an intense process that could include FBI background checks, equipment appraisals, environmental studies, and more. Some buyer groups conduct industry studies or hire a consultant to call the business’s customers under the guise of a confidential customer satisfaction survey.

Financial due diligence will be a massive focus, of course. Securing a quality of earnings report could cost anywhere from $15,000 to $150,000, depending on the size and complexity of the target acquisition.

Then there’s the necessary legal fees. The buyer’s attorney will draft the asset or stock purchase agreement. This takes the framework of the LOI (typically five to seven pages) and puts it into comprehensive legalese (approximately 50 to 70 pages).

I’ve seen attorney fees as low as $15,000 for a small, routine deal and as high as $250,000 for a lower middle market acquisition (average range $30,000 to $50,000). Private equity firms, which make up a major buyer category, are not shy about spending fees to make sure they have the necessary protections in an acquisition.

At the end of the day, it might not be uncommon for the buyer to spend $100,000 to $500,000 in total transaction costs. That’s why most buyer groups are adamant that they get a no shop provision for 30 to 90 days.

That exclusivity period is the protection they have, ensuring that if they’re going to spend time and money going down this path, the seller is not going to negotiate the deal out from under them and sell to another group.

From a seller’s standpoint, a no shop period can help limit buyer’s remorse or post-deal litigation. If multiple buyers are trying to be the first to the closing table, buyers might skimp on due diligence. Rushing due diligence can lead to unexpected discoveries after the deal is closed, and that can lead to conflict and litigation.

Conversely, long no shop periods are not in the seller’s best interest as there is always a risk that a deal will fall through in due diligence. A shorter no shop period gives sellers a better chance of recapturing interest from a competing buyer if the transaction is terminated.

For further information on exclusivity and other common deal provisions, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

Nine Warning Signs Your Buyer Can’t Close the Deal

The proof is in the pudding. It ain’t over ’til it’s over. Don’t count your chickens before they’ve hatched. Pick your cliché. Just because someone makes an offer to buy your business doesn’t mean they will close the deal.

As a seller, you need to look at more than dollar signs on a purchase offer. Make sure your advisors are researching and asking questions to figure out which buyers are for real, and which ones are just talking a big game.

Sometimes buyers want to rope you in to an exclusive negotiation. They throw out a high price, fully intending to negotiate down as they conduct due diligence and “discover” weaknesses in your business.

Some buyers have big egos and want to be the big dog at the table. But their balance sheets or lending relationships can’t really support the promises they’ve made.

Still others make what they believe to be legitimate offers with good intent. But if they’re not the final decision maker — the person controlling the checkbook— their efforts might be scuttled by a higher up, or a lender, who simply doesn’t see the same advantages in the deal.

These things happen more often than you probably think.

Nine warning signs your buyer won’t follow through:

  1. Too good to be true. They offer a super high price and a 45-day closing “guarantee no risk” if you’ll sign their exclusivity agreement. Your buyer may have ulterior motives. They’ll get access to your sensitive information and get you off the market (weakening your position). Later, they’ll try to renegotiate a sizeable haircut or walk away when you don’t accept their lowball offer. Either way, they gained meaningful competitive intelligence which could significantly hurt your business or its value going forward.
  2. Too vague. They won’t estimate cash at closing. They say, “We’re going to try to get as much as we can.” Or, “We’re not quite sure yet.” A good buyer should have an idea of how much of the purchase price will be paid in cash at the closing.
  3. Unclear funding plan. They won’t disclose their lending sources. A buyer isn’t qualified if they can’t demonstrate financial ability to fund the deal.
  4. Lack of transparency. They won’t connect you to their prior business partners. If they’ve done acquisitions in the past, they should provide seller references. We want to know what the buyer is like to work with and if they do what they say they’re going to do.
  5. “Hidden” history. They won’t disclose anything about their acquisition history. A buyer who keeps their past business under wraps may not have as much experience as they say they do.
  6. No digital footprint. We’re looking for a website, press releases and announcements of past companies the buyer has acquired. Ideally, we’d like to see a few published news items, too. Active acquisition firms want to get their name out there.
  7. Fuzzy deal terms. Once you get to the letter of intent (LOI) stage, you need to strike a fine balance between strict detail and vague conditions. While this is generally not the time to demand all the deal specifics, unclear deal terms could put you in a position of weakness later on. Alternately, a vague LOI could be a sign your buyer is kicking tires and not really committed to a deal.
  8. Slow to respond. Perhaps your buyer was engaged and enthusiastic at the start of the process, but now they’re taking a long time to get back to you. If there’s a noticeable change in communication, that’s a signal you’re no longer a priority acquisition target.
  9. No control over the purse strings. Buyers reps and corporate development teams aren’t the final decision makers. Business owners without enough capital to fund their own deals aren’t the final decision makers. These buyers have to sell your deal to their lenders or other equity partners, and that introduces risk into the transaction.

As you evaluate offers for your company, you have to consider whether one buyer is more likely than another to get a deal over the finish line. Some buyers are just bad actors, looking to take advantage. In other cases it’s a lack of time, money, information, experience or authority that can derail a deal.

M&A advisors are skilled at recognizing these warning signs and helping you avoid these types of problems. Contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com for further information or to discuss a potential sale, merger or business acquisition need. Exit Strategies Group is a partner of Cornerstone International Alliance.

M&A Advisor Tip:  What Buy-and-Build Means for You

Private equity firms have increased their use of buy-and-build investment strategies.

A buy-and-build strategy involves bolting together several smaller companies into a larger business enterprise that will likely sell at a higher multiple. See our post on the size effect. This trend is affecting many industries, from healthcare clinics to niche business service companies.

The uptick in buy-and-build acquisitions could mean more buyers and more competition for your business than you expect. Contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com to learn more about consolidation trends in your market.

Exit Strategies Advises on Management Buyout of Carpenter Crane Hoist

MARE ISLAND, California – Exit Strategies is pleased to have recently served as financial acquisition advisor in management’s carve-out of the Carpenter Crane Hoist division from The Carpenter Group (TCG). The buy-out (MBO) was led by executives Dane Oliver and Ben Jones with the support of an equity partner. The acquisition marks the beginning of an exciting era for Carpenter Crane Hoist (CCH) as management implements plans to expand offerings and operations to address the needs of a growing specialty crane market.

Since its forming in 1996 as the seventh division of The Carpenter Group, CCH has designed and produced overhead cranes for clean rooms and harsh environments. CCH uses proprietary components and materials and customizes every system to satisfy the unique application requirements of its clients. Electronic controls and custom holding fixtures are typical. CCH produces cranes to 25-ton capacity for up to class 10 clean room environments for top semiconductor companies and research facilities across the U.S. For more information see www.carpentercranehoist.com.

The Carpenter Group, with six locations, distributes rigging products to OEMs and end users throughout California and the West Coast in the construction and marine industries and other sectors. The carve-out of CCH made sense for TCG because the business unit was not core to its overall strategy.  See www.carpenterrigging.com for more information.

How Exit Strategies Helped

Management contacted us on the advice of their attorney to determine if a buyout was feasible and to help put the deal on track. Exit Strategies’ role consisted of sizing up the situation, advising management on process and strategy with respect to the proposed carve-out, analyzing historical financials and helping develop projections, valuation calculations, finding a lender to preapprove financing, pitching the spin-off to The Carpenter Group, and working with management’s attorney to negotiate a favorable letter of intent. Umpqua Bank supported the deal with senior term debt. Deal terms are confidential.

About Us

Exit Strategies Group is a California-based M&A brokerage and business valuation firm. Founded in 2002, we mostly serve sellers in lower middle-market  transactions, representing them from start to finish. Our seasoned brokers and advisors have over 100 years of combined deal making experience spanning many industries.  In this instance we are very pleased to have facilitated a successful management buyout and spin-off that benefited all stakeholders.

To find out how Exit Strategies can help you complete a successful business sale, spin-off, merger or acquisition, contact President Al Statz at 707-781-8580, alstatz@exitstrategiesgroup.com.

Recent Changes to the SBA 7(a) Loan Program for Business Acquisition Financing

SBA 7(a) loans are a popular type of financing for small business acquisitions. These loans go up to $5,000,000 and can be used to buy a business, real estate or equipment.  Several changes to the SBA 7(a) program became effective in 2018 that are worth noting.

Some of those changes include:

  1. Lower down payment.  Required down payment has been reduced from 25% of the purchase price to 10% of the project cost (project cost = purchase price + operating capital borrowed + closing costs).
  2. Longer seller note stand-by period. The old SBA rule required a seller note to be on stand-by for 24 months if it was to be considered part of the purchase down payment. The new rule requires any seller note that is part of the down payment to be on stand-by for the entire term of the loan.
  3. Loan amortization length. The old SBA rule allowed the loan term to be equal to the amortization length for the largest portion of the loan proceeds category. The new rule requires 51% of the loan category be real estate if the loan is to be amortized at the real estate term of 25 years.

ESGI’s M&A brokers stay current with the market for business acquisition debt and equity funding, including changes in the popular SBA 7(a) loan program. Our business appraisers regularly provide business appraisals for acquisition funding purposes. We work closely with California and national lenders that actively fund business acquisitions, and would be pleased to help you apply for funding or connect you with a quality lender for your next business sale, acquisition, buy-out or merger.

For more information Email Louis Cionci at LCionci@exitstrategiesgroup.com or call him at 707-781-8582.

Current Market Multiples for Main Street Business Sales

Each quarter, The International Business Brokers Association (IBBA) and M&A Source together with Pepperdine Private Capital Markets Project and the Graziadio School of Business and Management at Pepperdine University publish a quarterly national survey of business brokers and M&A advisors called the Market Pulse Survey. Price multiples and other key metrics in the Main Street Market section of the Q3 2017 survey are presented below.

Main Street businesses are defined as those with enterprise values up to $2.0 million.

 

MEDIAN MULTIPLES PAID FOR MAIN STREET BUSINESSES

 

 

 

 

SDE is Sellers Discretionary Earnings, which is defined as earnings before owner/GM compensation (one full-time working owner), depreciation and amortization, non-operating income & expenses, nonrecurring income & expenses, interest income & expenses, and taxes.

 

PORTION OF SALE PRICE RECEIVED AS CASH AT CLOSE

 

 

 

 

WHY SELLERS WENT TO MARKET

 

 

 

WHAT WAS MOTIVATING BUYERS

First Steps to Buying a Business

I work with a lot of sellers and buyers of small to medium sized businesses in the North San Francisco Bay Area. Most potential buyers do not succeed in buying a business, largely because they lack a systematic approach. A few weeks ago a high-net-worth individual asked for my advice on acquiring a business, and my reply was along the lines of the following.

A simple five step plan that can help you target and invest in a business:

1. Evaluate yourself. Why do you want to own a business? Are you an empire builder or are you looking for a lifestyle business? How will the business impact your personal and family life? Are you a risk taker or do you prefer a steady salary?

2. Identify your expectations. How much income do you need to generate? How much time are you willing to devote to the business?

3. Assess your financial and professional capabilities. How much are you willing to commit to the purchase and startup of a business. Will you require financing? Do you have a financial statement and tax returns that will gain the confidence of a bank or private lender? Does your work and educational background qualify you for the type of business you are seeking?

4. Target your business. Develop an acquisition search with a scope restricted to your targeted industry, size, location and price.

5. Develop a team. Involve your spouse or partner. Collaborate with your C.P.A. and attorney. Contact a business broker /M&A advisor who can identify available businesses that fit your parameters.

For further information or for help buying or selling a business, Don Ross can be reached at 707-778-0210.