Q3 2014 M&A Market Update

As we reflect on the third quarter of 2014, we have seen several trends develop that are impacting valuations as well as the number of sale/recapitalization transactions of closely held businesses. Some of this industry data was also developed from the recent M&A Source conference held in Austin November 17- 21. 56 private equity firms were in Austin for the Expo, plus 180 M&A intermediaries from across the U.S.

Two trends were noted at the conference: 

First, contract terms that previously were reserved for the upper middle market are now appearing in lower middle market transactions. Items such as representation and warranty insurance policies, previously only used in the upper middle market, were now being employed in lower middle market transactions. We recently were involved in a $15,000,000 EV transaction in which the private equity buyer, based in New York, was purchasing a "representation and warranty insurance" policy from AIG. These policies had normally only been used in larger transactions. Items such as "clawback" provisions may now appear in the purchase agreements of lower middle market transactions. In addition, many acquirers are engaging accounting firms to perform a "quality of earnings" review as part of due diligence.

Second, minority recapitalization transactions are becoming much more popular in current transactions. Business owners who are not ready to retire or give up control of the business, are able to cash out some of their equity, diversify their net worth, but continue to run the company, as well as maintain control. As the company grows, the eventual sale in 7-10 years may yield a substantial premium over current valuations, due to increase in EBITDA, as well as multiple expansion based upon the increased revenue and earnings. EBITDA multiples for well-run operations, with deep management teams and EBITDA in excess of $3,000,000 are seeing multiples between 5 and 6 times adjusted EBITDA in some cases.

Phillip Wilhite Receives Fellow of the M&A Source Award

Phillip Wilhite of Austin, Texas received the prestigious Fellow of the M&A Source Award during the M&A Source Educational Conference and Middle Market Expo in Austin, TX, November 17, 2014.

The M&A Source® is the world’s largest international organization of experienced, dedicated merger and acquisition intermediaries representing the middle market.  Fellowship is a lifetime award that is one of the highest honors bestowed by the M&A Source.  The Fellow Award recognizes and honors M&A Source members who have made sustained and significant contributions to the Association. Mr. Wilhite’s award demonstrates exemplary commitment and experience as a professional M&A intermediary.

Since 1991, the M&A Source has addressed professional issues of merger and acquisition specialists.  The organization has over 300 cooperating intermediaries active in middle-market transactions across the U.S., Mexico, Europe and other international locations.  It provides education, networking, conferences, member tools, peer-to-peer roundtables, deal making expos and other support, all specific to M&A specialists.

Wilhite is a Managing Director of Statesman Corporate Finance’s Austin office and Managing Director of Corporate Investment. He has devoted his professional career to assisting buyers and sellers of businesses.  Wilhite is seasoned in business sales & acquisitions of mid-market companies with over 13 years of experience.

About Corporate Investment
Corporate Investment, founded in 1984, is a leading merger & acquisition firm based in Austin, Texas, representing companies throughout Texas.  Phillip Wilhite, with Corporate Investment, advised the seller, and facilitated the transaction. Corporate Investment has completed multiple transactions in the healthcare services sector.

Q1 2014 M&A Market Update

As we complete the first quarter of 2014, we have seen several trends develop in M&A that are impacting valuations, as well as the number of sale/recapitalization transactions of closely held businesses. In 2013 and Q1 2014, we closed numerous transactions across the state, in varied industry sectors, including an Austin-based client company that was acquired by a public company based in Europe. Our opinion is that the M&A market is extremely favorable to sellers today. This was reinforced by a recent article by Andy Greenberg, CEO of GF Data, who stated:

"The primary drivers of middle-market deal flow - company and industry performance, capital availability, macro-economic conditions, and public equity values - are more favorable to the private business seller than at any time since the mid-2000s, but the volume of change-of-control deal activity is just not on par with these favorable market conditions."

In addition, an article in the New York Times on February 11, 2014, contained the following:

 "The market is further constrained by a lack of companies willing to sell, as they wait for the economy to improve further", said Milton J. Marcotte, head of the national transaction advisory services practice at McGladrey, an accounting, tax and consulting firm for private equity. "That intensifies competition among buyers. We've been doing this awhile, and I don't remember a time when it was really quite this competitive," said Mr. Marcotte.

We also know from our industry sources that private equity firms are collectively sitting on about $1 trillion in capital that they must invest. So, with well-capitalized buyers in the market, what is holding back sellers of closely held businesses? We believe that many sellers are skeptical when we discuss what is clearly a "sellers' market". They have heard this before. However, we can verify that multiple offers for good businesses, especially in Central Texas, is the norm rather than the exception.

So, is now the time for business owners to ask themselves if it is a good idea to have a significant amount of their net worth tied up in their privately-held business? We have noticed businesses have recovered from the 2008-2009 recession, and now the business is doing quite well, and thus, the owners ask "why sell now?" Unfortunately, history shows that recessions happen in 7-10 year cycles, and most of us cannot predict the future very well. Selling at the top may have appeal as the smart move. But we know that it is difficult to accurately predict the ideal time. Our message to business owners is don't wait for uncontrollable factors, such as health issues or other personal factors, to force you into an exit strategy. The better course of action is to take control and plan your exit in a way that maximizes value. We believe that the only way to maximize value upon the sale of a privately held business is to run a well-managed process that leads to multiple offers.

So if it's a "sellers' market", what impact is that having on valuations? It varies, of course, by industry and size of company, but some broad parameters do apply. The following appeared in the GF Data article:

"The non-institutionally-owned businesses offering neither above-average financial characteristics nor a management solution post-close that continued the march towards closing in the first months of 2013 traded at an average of 4.4 TTM Adjusted EBITDA."   GF Data, March 2014.

 Two salient points in that statement: These businesses were neither above average, nor did they have a strong management team after acquisition, yet were still getting a multiple of 4.4 times TTM Adjusted EBITDA. So if a business has better than average financial performance and a solid management team, it should command an even higher multiple. This is supported by a recent New York Times article, in which David Humphrey, a managing director at Bain Capital, noted:

"Valuations for clean, easily extractable businesses are quite high."

So going forward in 2014, we expect continued high demand for Central Texas businesses with upward pressure on pricing for well-managed, profitable businesses. There were over 150 Private Equity Groups at the recent ACG conference in Houston, intensely focused on finding solid acquisitions of both platform and add-on businesses.

Five Key Issues to Address in a Business Sale Transaction

Austin M&A Advisory

These five issues are key to consider when you are contemplating selling your business.

1. Non-Disclosure Agreement

This agreement contains a few key elements that may easily be overlooked by an uninformed Seller. The first of these is the “non-solicitation” of employees, which should be coupled with a time frame of a minimum of two years, we suggest three years. A second important provision will state that “all obligations under this agreement shall survive for a period of ___ years (we suggest three), except that sections _ , _, _, and _ shall continue at all times. One of these specifically enumerated provisions states that the entire discussion must remain confidential. When a business owner goes to market, if they do not sell, they surely want that fact to remain confidential, even after two years, so this provision is extremely important. Buyers sometimes strike this provision, and a Seller must understand its importance.

2. Excluding Certain Types of Buyers from the Marketing Process

The goal of the business owner is to receive maximum value in the sale of their business. Strategic buyers typically pay a premium of 10% – 20% ( or more ) than pure financial buyers. A Seller should let their M&A professional contact the universe of qualified acquirers, including strategics, to insure that they receive the maximum value. If strategics are not included in the marketing effort, the Seller will never know if they received the highest price that was possible.

3. Letter of Intent – Timeline

One of the pitfalls that a Seller may experience when dealing with only one buyer, is the buyer’s total control of the timeline of the transaction. “Time is the enemy of a transaction.” That is not to say that the parties should rush to closing, but stretching out the timeline of due diligence and closing typically benefits the buyer, not the seller. The letter of intent should include a timeline of critical dates for important milestones, such as confirmation from the bank that a loan is approved, date for buyer to deliver initial contract draft, and closing date. The letter should contain language that the binding provisions of the LOI are contingent upon the buyer’s adherence to the timeline.

4. Letter of Intent – No Shop Provisions

Most Buyers insist upon a “No-shop” provision in the letter of intent. The Buyer is committing time, energy, paying CPA’s and attorneys, and as a reasonable request, typically asks the Seller for exclusivity (as long as the timeline is met !). However, many Buyers will include an additional sentence in the no-shop provision that the Seller must inform the Buyer if they are contacted by another party during the due diligence period, including the name of the potential buyer. We do not recommend our clients accept this specific provision.

5. Contacting Employees Early in the Due Diligence Process

Many Buyers will ask to speak to key employees early in the process – this should not happen. Discussions with key employees should only occur after financial due diligence is complete, a draft of the contract is received, evidence that financing is in place is received, and we are at the 11th hour. The Seller should always attend these meetings, which can be an issue for the Buyer. This is an extremely sensitive issue and must be handled carefully.

 Considering selling your business? Corporate Investment M&A Advisors can advise you in how to start the process.

Dominion Care Home Health, Inc. Acquired by Jordan Healthcare

Dominion Care Home Health, Inc., based in San Antonio, Texas, has been acquired  by Jordan Healthcare, based in Mount Vernon, Texas. Dominion Care Home Health is one of the leading Medicare certified home healthcare providers in San Antonio and Central Texas.  The company was founded in 2001 by Elcee and David Cortez and Adrian Martinez.

Jordan Healthcare, based in Mt Vernon, Texas, is a diversified healthcare operation, operating Community care, Hospice care, Skilled care, and Pediatric care facilities in 30 cities across Texas.

Phillip Wilhite, Managing Director of  Corporate Investment, stated “Jordan Healthcare was an excellent fit for Dominion. Jordan is able to leverage Dominion’s award winning reputation in the San Antonio and central Texas markets, coupled with Jordan’s suite of healthcare services, to grow the business. Dominion’s reputation in the medical community is excellent, providing Jordan with an outstanding platform. Our firm was pleased to represent the owners of Dominion Healthcare in this transaction.”

About Corporate Investment
Corporate Investment, founded in 1984, is a leading merger & acquisition firm based in Austin, Texas, representing companies throughout Texas.  Phillip Wilhite, with Corporate Investment, advised the seller, and facilitated the transaction. Corporate Investment has completed multiple transactions in the healthcare services sector. 

A J Brauer Stone, Inc. Acquired by Materials Marketing Limited

A J Brauer Stone, Inc.,which operates a 320 acre stone and building materials quarry near Jarrell, Texas, has been acquired by Materials Marketing Limited. A J Brauer Stone produces chopped stone, landscape boulders, patio stones  and architectural stone veneer, as well as block and large slab modules. Lawrence (Larry) Schumann, with Corporate Investment, advised the seller, and facilitated the transaction.

A J Brauer Stone was founded 35 years ago and will continue to operate under the A. J. Brauer Stone name. Materials Marketing Limited, a RAF Industries, Inc. portfolio company, is an architectural stone and natural stone flooring supplier based in San Antonio, Texas.

“A J Brauer Stone  is an attractive addition to Materials Marketing Limited ,” Larry Schumann, Managing Director of  Corporate Investment, stated. “With this acquisition, Materials Marketing plans to  add new stone building materials to their line and benefit from improved U.S. based manufacturing capabilities. Our firm was pleased to represent A.J. Brauer Stone Company in this transaction.”

About Corporate Investment
Corporate Investment is a financial advisory firm specializing in business sales, mergers and acquisitions. Founded in 1984 in Austin, Texas, Corporate Investment works primarily with the owners of middle-market businesses in a variety of industries, and their potential acquisition or merger partners.

Legiant Acquired by Asure Software

Legiant, a software company based in Austin, Texas, has been acquired by Asure Software, Inc. (NasdaqCM:ASUR). Legiant sells time and attendance solutions that deliver improvements in workforce productivity through a software-as-a-service (SaaS) platform. Lawrence (Larry) Schumann, with Corporate Investment, advised the seller and facilitated the transaction.

Asure Software, headquartered in Austin, Texas, offers intuitive and innovative technologies that enable companies of all sizes and complexities to operate more efficiently. The company ensures a high-performing work environment by integrating its "keep it simple" solutions and expertise to more than 3,500 clients worldwide. Asure Software's suite of solutions range from time and attendance workforce management solutions to asset optimization and meeting room management.

“Legiant is a great fit with Asure’s cloud growth strategy,” Larry Schumann, Managing Director of Corporate Investment, stated. “There are many synergies that Asure should benefit from with this acquisition. Our firm was pleased to represent Legiant in this transaction.”

About Corporate Investment
Corporate Investment is a financial advisory firm specializing in business sales, mergers and acquisitions. Founded in 1984 in Austin, Texas, Corporate Investment works primarily with the owners of middle-market businesses in a variety of industries, and their potential acquisition or merger partners.