Q2 2016 M&A Update: Favorable Market

We are in an extremely favorable market for business sellers. Buyers have abundant capital to deploy, interest rates are low, and the economy in Texas is doing well – even with the pull back in oil prices. However, the best advice to a business owner that is thinking of an exit, is to “take control and start planning today.” Engaging experienced advisors who understand the business sale process will prove invaluable to the business owner who wants a successful outcome.

Two key issues to consider before beginning the process are outlined below:

Deal killers

As a business owner, your opportunity for the greatest influence on maximizing sale proceeds occurs before you go to market. Once you start the process of marketing your business to qualified buyers, the ability to correct the “deal killers,” is extremely limited due to the time factor. These must be solved before going to market. The most common “deal killers” are listed here:*

  1.  The belief that you can sell your business today for enough money to satisfy your financial independence needs and wants. ( without knowing what your business is really worth and how much income you will need from the sale)
  2.  The failure to reconcile your need for value with the market value of your business before going to market. (see #1
  3.  An exclusive focus on top line sales price.  ( i.e., have you done any tax planning, and analysis of net proceeds  from a transaction, including retained assets, and net working capital conveyed?
  4.  The failure to preserve a company’s most valuable asset. ( do you have “stay bonus plans” or other agreements in place for key employees?)
  5. The belief that you can negotiate alone. ( i.e., responding to an inquiry from an unsolicited buyer, and starting the process on your own. The sale process is a taxing and emotionally draining process for an owner, many times resulting in deal fatigue and a realization after closing that significant dollars were left on the table. A strong deal team and competitive process is the only method to realize the true market value.)
  6. An unwillingness to recruit the best possible players for your Deal Team. ( buyers will have experienced accounting, legal, deal, and tax advisors on their team. You need the same on your team.)
  7. The belief that owner-initiated pre-sale due diligence isn’t worth the time, effort or cost. (Conduct Seller due-diligence before going to market. This gives your deal team time to address and fix the issues that a buyer may uncover when it conducts its due diligence. Reducing the time between letter of intent and closing is key to a smooth transaction. )
  8. Seller remorse (The owner needs to be comfortable that they will not feel empty and insignificant after the sale, and need to be emotionally ready to turn over the company to a new owner. A recapitalization transaction may solve this issue. )

*As presented in Exit Planning: The Definitive Guide, by  John H. Brown, CEO of Business Enterprise Institute

Experienced Executive Robert Dicks Joins Corporate Investment

Robert Dicks, an experienced executive and entrepreneur, has joined Corporate Investment, an Austin-based financial advisory firm specializing in mergers and acquisitions and business sales.

"My new role with Corporate Investment is a natural fit with my skill set and experience," said Dicks. "I’m looking forward to helping business owners get the maximum valuation when selling their businesses. Mergers and acquisitions and business sales are on the rise in Central Texas, and Corporate Investment has a long track record of guiding owners through the selling process.”

His prior entrepreneurial experience from building and growing two transportation companies, uRide and Bliss Transit, provides him with insight into helping clients with their unique needs related to the transfer of their business.

As an associate at Corporate Investment, Dicks will be called on to use his strong track record in negotiation, mediation and deal-making, to help clients with the preparation and sale of their businesses at the best price and terms possible. Deep experience in multiparty negotiations has honed his ability to successfully bring buyers and sellers together and attain mutually beneficial outcomes.

Robert holds an MBA from Auburn University, a Master of Arts in Dispute Resolution from Southern Methodist University and a BBA in Finance from the University of Texas at Austin. He also served as an officer and aviator in the U.S. Air Force, operating from 2002 through 2005 in Iraq and Afghanistan.

About Corporate Investment
Corporate Investment, founded in 1984, is a leading merger & acquisition firm based in Austin, Texas, representing companies throughout Texas. Corporate Investment works primarily with the owners of private companies in a variety of industries, and their potential acquisition or merger partners.

Robert Dicks - Sell Side M&A Advisor

Robert Dicks

Lower Middle Market Provides Bright Spot in Slowing M&A Climate

Firms that focus on the smaller end of the market, including Audax Private Equity, boasted success in 2015, says Audax MD Jay Jester.

Here's an excerpt from a great article on Mergers & Acquisitions:

Although the big picture for middle-market M&A may be dimming, there are still lots of bright spots, including the lower middle market – which we define as deals valued at between $10 million and $250 million.

Many private equity firms that focus on the lower middle market say 2015 has been a great year. In a symbol of the sector’s health, Audax Private Equity celebrated the firm’s 500th closed deal in September, when portfolio company Advanced Dermatology & Cosmetic Surgery added Dermatology of Northern Colorado.

Read more: http://bit.ly/1YpVZ4l

Corporate Investment adds Exit Planning Services for business owners.

Exit planning

Since 1984, our firm has worked with business owners in over 250 business sale transactions. These businesses had between 10 and 250 employees. Unfortunately, we found that prior to meeting us, very few of our clients had a well-defined, well-executed strategy for the transition out of their business. They had not taken the time to develop a plan to address issues like:

  • How much longer did they want to work in their business?
  • How much annual after tax income would need during retirement, and where was it going to come from?
  • What would happen to the business, and their family members who relied on it for their livelihood, if an unforeseen event happened and they couldn't work?

Most business owners have not taken the time to understand that there are ONLY three options for their transition out of their business:    

  • Transition to Insiders ( family or employees )
  • Sale to Outsiders
  • Transition after Death of Owner to their estate, leaving it to their heirs to handle

Each of these paths has its own unique set of issues and tax concerns that must be addressed well in advance of the transition. The process of addressing these concerns is aptly named "Exit Planning." All three options depend upon converting the business value to cash in some manner, over some period of time. The sooner a business owner identifies their objectives, engages advisors, develops a plan and takes action to implement that plan, the more control they will have over the outcome. A universal ownership objective is to generate an income stream that you ( the owner ) and your family will need  to support a future lifestyle.

We also found that all of our business owners had one thing in common: "I want to receive the highest value for my business!" Value in this context may include not only the actual price, but other objectives such as minimizing risk, minimizing taxes, and insuring a successful transition of the business (whether insiders or outsiders).

The business owner's objectives form the basis of the plan, and while each business and owner has a unique set of facts, the defined process means the business owner does not have to reinvent the Exit Planning wheel themselves. The owner's clearly defined objectives will direct the planning and actions, and help optimize the net proceeds. A team of advisors, which includes an attorney, CPA, financial planner, insurance professional and M&A advisor, will support and guide the business owner throughout the process.  Our firm will coordinate the team of advisors on behalf of the business owner, to maintain accountability and progress towards the owner's successful outcome.

We help our business owner clients plan for the most critically important financial event of their lives – the transition out of their business.

Find out more about our exit planning service.

Creating value in your business to get top dollar when you leave it

Did you ever wonder why one business has buyers lined up willing to pay top dollar while another sits on the market for months, or even years? What do buyers look for in a prospective business acquisition?

There are many opinions about what attributes or characteristics buyers seek, but here’s what we know: the characteristics buyers seek must exist before the sale process even begins and it is your job as the owner to create value within your business prior to the sale. We call characteristics that impact value “Value Drivers.”

Walk A Mile In A Buyer’s Shoes

To get an idea of the importance of Value Drivers when preparing to sell your business, it is important to put on the buyer’s shoes for a minute. Let’s look at a hypothetical case study that illustrates how a buyer might compare two similar companies with a different emphasis on Value Drivers.

The A Factor Company has EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $2 million, an owner who runs the business and the systems and processes that create growth. The A Factor Company doesn’t have a real management team in place and the owner generates a majority of its sales. The owner is the center point of the company, holding both the CEO and CFO positions. With this level of responsibility, the owner is burning out quickly.

In comparison, The B Factor Company also has EBITDA of $2 million and a solid management team that runs the business, systems and processes. The management team creates efficiencies within the business and the owner vacations for six weeks a year.

The A Factor Company has EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $2 million, an owner who runs the business and the systems and processes that create growth. The A Factor Company doesn’t have a real management team in place and the owner generates a majority of its sales. The owner is the center point of the company, holding both the CEO and CFO positions. With this level of responsibility, the owner is burning out quickly.

In comparison, The B Factor Company also has EBITDA of $2 million and a solid management team that runs the business, systems and processes. The management team creates efficiencies within the business and the owner vacations for six weeks a year.

If you were a buyer comparing these two companies, which would provide a more attractive business opportunity? How much more would you pay for a business with a strong management team (one of the most important Value Drivers)? Would you even be interested in buying a business whose management team (the owner) walks out when you walk in?

Investment bankers understand that companies that lack strong Value Drivers also lack a bevy of buyers. Those buyers that do come to the table do not arrive with pockets full of cash.

Let’s look at several of the more important Value Drivers common to all industries:

  • A stable and motivated management team. If you can wait a year to sell your business, we suggest that you consider an incentive compensation system, cash or stock-based, that rewards key employees as the company performs (usually measured by increases in pre-tax income). Sophisticated buyers know that with a solid management team in place, prospects are good for continued business success. Without a strong management team, it may be very difficult to sell your business to a third party or transfer it to an insider.
  • Operating systems that improve sustainability of cash flows. Operating systems include the computerized and manual procedures used in the business to generate its revenue and control expenses, (i.e. create cash flow), as well as the methods used to track how customers are identified and how products or services are delivered. The establishment and documentation of standard business procedures and systems demonstrate to a buyer that the business can be maintained profitably after the sale.
  • A solid, diversified customer base. Buyers typically look for a customer base in which no single client accounts for more than 10 percent of total sales. A diversified customer base helps insulate a company from the loss of any single customer. If the majority of your customer base is made up of only one or two good customers, consider reinvesting your profits into additional capacity that will make developing a broader customer base possible.
  • A realistic growth strategy. Buyers tend to pay premium prices for companies with realistic strategies for growth. Even if you expect to retire tomorrow, it makes sense to have a written plan describing future growth and how that growth will be achieved based on industry dynamics, increased demand for the company’s products, new product lines, market plans, growth through acquisition, and expansion through augmenting territory, product lines, manufacturing capacity, etc. It is this detailed growth plan, properly communicated, that helps to attract buyers.
  • Effective financial controls. Financial controls are not only a critical element of business management, but they also safeguard a company’s assets. Effective financial controls support the claim that a company is consistently profitable. The best way to document that your company has effective financial controls and that its historical financial statements are correct is through a certified audit or perhaps a verified financial statement by an established CPA firm.
  • Stable and improving cash flow. Ultimately, all Value Drivers contribute to stable and predictable cash flow. It is important, especially in the year or so preceding the sale of the business, that cash flow be substantial and on an upswing. You can begin increasing cash flow today by simply focusing on ways to operate your business more efficiently by increasing productivity and decreasing costs.

You can install these Value Drivers and better position your company to secure a premium price upon your exit with the help of a trained Exit Planning Advisor. Find out more about exit planning today.

Signature Glass, Inc. is acquired by Binswanger Glass

Signature Glass, Inc. ("Signature Glass"), a contract glazing business in Houston, TX has been acquired by Binswanger Glass. Signature Glass is a leading commercial glazing contractor in the Houston metropolitan area with focused expertise in curtain wall and window wall systems, storefront and entrance systems, and in-house fabrication of aluminum framing systems. John Fincher with Corporate Investment faciltiated the transaction and advised Mike and Sandy Skobla, the owners of Signature Glass.

“Signature Glass was an excellent acquisition target for Binswanger Glass," stated John Fincher, Senior Associate of Corporate Investment. "Binswanger Glass can now build on the great reputation Signature Glass has earned in the Houston area. Corporate Investment was pleased to represent Mike and Sandy Skobla in this transaction.”

Signature Glass has been in operation since 1999, when it was founded by Mike and Sandy Skobla. The Skoblas built the business by consistently exceeding expectations of both general contractors and business owners on construction projects ranging from storefronts to mid-rise commercial and institutional buildings.

"Being a part of the Binswanger Glass family is the right fit for our company, our customers, and our employees," said Mike Skobla, President of Signature Glass Holdings, LLC, the newly-formed subsidiary of Binswanger. "We have developed great relationships with general contractors and business owners within the Houston area, and now being a part of an organization with a contract glazing presence throughout all of Texas and 14 other states will allow us to continue to grow profitably."

Signature Glass will continue to operate under the Signature Glass name as a division of Binswanger Glass.

"We are privileged to partner with Mike and Sandy Skobla and all of Signature Glass's employees to continue providing excellent glazing service to customers throughout the Houston metropolitan area," stated Tim Curran, CEO and President of Memphis, TN-based Binswanger Glass. "This acquisition is representative of the strategic growth plan for Binswanger Glass, which comprises bolstering our presence in growing markets such as Houston, expanding into new geographies outside of our current footprint, and partnering with strong operators that have built a dependable team of glaziers."

Binswanger Glass is the largest full-service designer, retailer, and installer of architectural glass and aluminum products within the construction, residential, and automotive markets in the United States. Binswanger Glass is an affiliate of Boulder, Colorado-based private equity firm Grey Mountain Partners.

Q1 2015 M&A Market Update

Predictions for 2015

The January issue of Mergers & Acquisitions magazine reported that 2014 was the best year for the middle market since 2007. It went on to say: "Confidence in the economy, cash on corporate balance sheets, dry powder in private equity funds, low interest rates and high stock prices all combined to create a nourishing ecosystem for deals throughout 2014." 

Our firm's experience in 2014 was consistent with this thought, and the first 90 days of 2015 have begun with robust buyer activity.

Valuations in Austin

A September 2014 white paper co-authored by Mark Jansen, PhD candidate, and Adam Winegar, at the McCombs Business School, UT Austin, concludes that business valuations in desirable cities such as Austin average 16% more than in other locations. This analysis is based upon a study of over 16,000 transactions. The study states: "The 16% premium is robust to controls for local economic characteristics, industry concentration, and the liquidity and availability of capital in the local transaction market. We introduce a new measure based on how noneconomic characteristics of a city affect its desirability and find that firms located in cities with higher values of our measure sell for a significant price premium."

The paper goes on to explain: "Unlike a public firm, the largest shareholder of a private firm is often the firm's CEO. This makes the location's desirability, even the portion unrelated to the cash flows and risks of the firm, important to at least one of the shareholders of the private firm. In a competitive environment, the entrepreneur pays a premium for a firm in a desirable location and this premium represents the value that the entrepreneur places on desirability."

Austin is consistently on lists of desirable cities in the U.S. The study says: "Using the inclusion of a city on a 'best places' list as our initial proxy for desirability, we find that entrepreneurs pay an economically meaningful 16% premium for firms located in areas that have desirable features that are distinct from local characteristics that would affect firm cash flows or risks. This indicates that entrepreneurs' valuations of private firms are different from valuations of purely financial assets."

The white paper notes that transactions with enterprise values greater than about $20 million, when acquired by a public company or private equity group, do not have this premium. 

At Corporate Investment, our conversations with M & A advisors in other parts of the country confirm the results of this study. The velocity of buyers on engagements in Central Texas, versus a transaction in other areas, is also much greater. Buyers from many other areas of the country, specifically California and Illinois, exhibit significant interest in Texas businesses driven by to their desire to relocate to Texas.

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.