M&A Transactions require one in 2010.
A Rainmaker is described as one who is known for achieving excellent results in a profession or field, or who is believed to be capable of producing rain, as through magical or ritual actions. And whether you’re the owner or another key person in your organization, you need to be beating the drum for rain these days after our year of drought. We all know the worth of water when the well runs dry. Certainly in the M&A Transactional market of 2009, the M&A Advisor has become Chief Rainmaker for 2010.
We wear the scars of survival inflicted by the effects of little rain during the financial pandemic that has swept through small business in our nation. The edge we have earned is that we’re still breathing. The assault on our business life comes in the form of pressures of federal regulators on our Main Street lenders. The very guardians designed to protect us, are driving the values of our businesses into the ground on asset quality and cash flow while we try to survive. But 2009 did have some showers.
Though not widely known, many privately-held transactions did close in 2009, mostly for strategic reasons, and at reasonable multiples. Generally, these businesses were in the M&A process for 18-24 months that became somewhat elongated by the economic troubles of late 2008 and early 2009. The expectations are now for the financial markets to gradually return to normalcy in 2010, also raising expectations that it will be a strong year for M&A. Here are a few options we see for business owners to counter-balance today’s financial circumstances with a planned transaction for 2010 and beyond.
For a sale to a third party or an insider, the best way to improve value is to prepare for it using a process. The business owner desiring to maximize value needs to understand that it’s not a DIY project or for the inexperienced. It’s true that in the early phases of preparation, data gathering requires owner involvement, which can be tedious at times. Understanding what to do in cleaning up the balance sheet and financials now, can be valuable later and clearly worth the effort.
A formal valuation or appraisal of assets may be a very good starting point in preparation to establish a value baseline. The valuation/appraisal report provides an internal foundation for the ultimate plan to exit. It’s important to have a credentialed professional provide the valuation/appraisal report and include an M&A Rainmaker who can give insight into the market conditions.
At the forefront of every business owner’s consideration to exit is Purchase Price, a business’s expectation of value developed as a Multiple of Cash Flow or EBITDA. But Purchase Price describes only one view of value. Transaction Value takes into consideration structured components — how much one gets paid for how long — and is a more important ingredient to evaluate. Always a matter of negotiation, in the hands of a seasoned Rainmaker, structured components can be very meaningful.
One creative option we have seen work very well in sales to a third party to maximize value in a down economy is re-capitalization. What that means is 70% to 80% of the business is sold and the business owner is able to take out a lump sum of cash and significantly reduce liability and exposure. The owner may get a “second wind” to cash out at a higher value in the future on the remaining interests, which may have been unrealized because of current market conditions. Getting paid now and getting paid later may represent an opportunity to counter-balance timing in a transaction.
Another type of transaction that can yield a higher return to a business owner in a difficult economy is a strategic fold-in, especially if business relocation isn’t of concern. Fold-in value is higher than a standalone purchase since machinery & equipment assets are re-located to a centralized facility to eliminate duplicate rent, back office and redundant operating costs. To that end, a fold-in can provide higher value and improved cash flow to the new owner quickly and therefore would provide a higher value to the exiting owner. It may make a breakeven business valuable.
And if you are leading a family business, where exit and succession plans are being considered, an option may be to use a “bootstrap” acquisition as a leveraged buyout mechanism. Depending upon the circumstances and desires of the founder, next generation successors, remaining owners, or key employees can buy ownership without raising a lot of cash.
Other future value options for maximizing Transaction Value include establishing future targets based on EBITDA (along with cost contingencies) to pay out a portion of value to an owner over time. Another option provides fixed certain cash from the transaction over timed intervals with a sum paid upfront. This technique helps to reduce up front drain on cash required to execute the transaction, and as synergies create added revenue and profits, the cash is paid out as the company performs.
The above options above are designed to offset less than ideal market timing. As Main Street America business owners, we must prevail on driving sanity back into the banking system or the very thread of capitalism in America is at risk. The keepers of the great cistern who congregate in Washington need to act on solutions for Main Street, which drives a high percentage of the growth of new jobs in America. Wall Street is supposedly our first bellwether. We also know that Wall Street is not the way out for the 6 million or so privately-held businesses in America. The Street part is right. But now it’s time to make it rain on Main.
David W. Wimer, CBI®, M&AMI® - is Principal of Marathon Business Group, LLC an investment banking firm where Mr. Wimer provides insightful business transition expertise to owners of privately-held businesses. He can be reached at Mobile: 484-269-7700 or Email: david@davidwimer.com .
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Interesting article David and I agree with your observations which hold true for the Uk aswell. I have referred to your article on my blog which I hope is ok Regards, Chris
Hi Chris,
Sorry for the delay in responding. Been quite busy in M&A space and Family Office Advisory. EU is going through a delayed economic ripple. Hopefully it weathers the waves better than US has in unemployment and business. Best wishes for 2010…
David