Wednesday, February 4, 2009
Thursday, November 20, 2008
Capital Gains & Business Owners
Why is it a better time to sell now vs. the future?
Let’s assume you are a business owner and your company is generating $1M EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and has $300,000 in Depreciation. Today, your company could sell to a Private Equity Group (“PEG”) at a multiple of 5x EBITDA. This produces gross pre-tax proceeds for you of $5 million, or $4.25 million after taxes at today’s 15% long term capital gains tax rate.
For the PEG who typically likes 30%+ returns on their equity, this investment just barely makes their return hurdle. As a happy and healthy business owner with have a few good years left, maybe you think it might be a good idea to wait to sell his business?
(The math for your buyer, the PEG is as follows: They will borrow $4.3 million from their local bank and invest $0.7 million of equity capital. Given the $700,000 in Free Cash Flow produced by the your company and the $344,000 in interest that the bank collects, your buyer is left with $356,000 before taxes. Assuming this PEG pays taxes to the Federal and State governments at a combined rate of 34%, they are left with $235,000. Thus, a 30% required return on investment.)
Let us fast forward 3 years and assume you decided to wait to sell his business. The new Congress has raised the Long Term Capital Gains Tax Rate back to 28%. You’ve done a good running your company and through your hard work, your EBITDA has grown 10% per year. As the economy has recovered, interest rates have risen 2% for long term borrowings and even more for short term debt. Your EBITDA is approaching $1.35 million. You do the math at 5x EBITDA to see for how much you can sell your business for? The gross pre-tax proceeds come to $6.75 million while your net after-tax monies now exceed $4.86 million! Unfortunately, that money you’ll get is not higher after-taxes given the 30% growth in EBITDA, as you’ll still be left with 12.5% more in your bank account.
As now you’re getting near retirement age, you approach the same Intermediary to talk to the PEG’s about buying your business. Unfortunately, the PEG’s will tell you that they cannot pay you more than 3.75x your Company’s EBITDA for a total of $5.06 million for your Company.
You ask how this could be given the PEG’s interest in acquiring your company at 5x EBITDA just a few years earlier? The PEG will now explain to you how they must now pay 10% on their borrowings. In order to be left with the same $356,000 in pre-tax income on his $0.7 million investment, they cannot borrow more than $4.35 million. As the banks require acquirers to put in a minimum amount of equity into any purchase, if they pay more for the business, they will need to put in more equity.
Given your Company’s EBITDA, they will not earn his 30%+ returns if he pays more than $5 million for the business. On the other hand, you are now left with only $5 million in gross proceeds, not the $6.75 million you expected. On top of this, you now must pay taxes at a 28% tax rate on the sale of your company. This leaves you with only $3.6 million in net proceeds or 15% less than you could have had in your bank account by selling 3 years earlier. In fact, for you to receive the same net proceeds as three years earlier given the rise in taxes and in interest rates, your Company needs to grow its EBITDA by over 57% or at a 16.3% compound rate over this time period.
With family owned companies facing this math, you’re going to see more sales prior to the next Congress. You’ll also see CEOs that are close to retirement and possess large equity stakes in their businesses to making similar moves before the window of opportunity closes. In addition to this depressing math, you should note that in five years, there will be more businesses for sale than any time in the history of the United States. It is staggering to see how many business owners are baby-boomers in consideration to the correlation turning 65.
It might be better to sell your business now vs. in the future. What do you think?
Let’s assume you are a business owner and your company is generating $1M EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and has $300,000 in Depreciation. Today, your company could sell to a Private Equity Group (“PEG”) at a multiple of 5x EBITDA. This produces gross pre-tax proceeds for you of $5 million, or $4.25 million after taxes at today’s 15% long term capital gains tax rate.
For the PEG who typically likes 30%+ returns on their equity, this investment just barely makes their return hurdle. As a happy and healthy business owner with have a few good years left, maybe you think it might be a good idea to wait to sell his business?
(The math for your buyer, the PEG is as follows: They will borrow $4.3 million from their local bank and invest $0.7 million of equity capital. Given the $700,000 in Free Cash Flow produced by the your company and the $344,000 in interest that the bank collects, your buyer is left with $356,000 before taxes. Assuming this PEG pays taxes to the Federal and State governments at a combined rate of 34%, they are left with $235,000. Thus, a 30% required return on investment.)
Let us fast forward 3 years and assume you decided to wait to sell his business. The new Congress has raised the Long Term Capital Gains Tax Rate back to 28%. You’ve done a good running your company and through your hard work, your EBITDA has grown 10% per year. As the economy has recovered, interest rates have risen 2% for long term borrowings and even more for short term debt. Your EBITDA is approaching $1.35 million. You do the math at 5x EBITDA to see for how much you can sell your business for? The gross pre-tax proceeds come to $6.75 million while your net after-tax monies now exceed $4.86 million! Unfortunately, that money you’ll get is not higher after-taxes given the 30% growth in EBITDA, as you’ll still be left with 12.5% more in your bank account.
As now you’re getting near retirement age, you approach the same Intermediary to talk to the PEG’s about buying your business. Unfortunately, the PEG’s will tell you that they cannot pay you more than 3.75x your Company’s EBITDA for a total of $5.06 million for your Company.
You ask how this could be given the PEG’s interest in acquiring your company at 5x EBITDA just a few years earlier? The PEG will now explain to you how they must now pay 10% on their borrowings. In order to be left with the same $356,000 in pre-tax income on his $0.7 million investment, they cannot borrow more than $4.35 million. As the banks require acquirers to put in a minimum amount of equity into any purchase, if they pay more for the business, they will need to put in more equity.
Given your Company’s EBITDA, they will not earn his 30%+ returns if he pays more than $5 million for the business. On the other hand, you are now left with only $5 million in gross proceeds, not the $6.75 million you expected. On top of this, you now must pay taxes at a 28% tax rate on the sale of your company. This leaves you with only $3.6 million in net proceeds or 15% less than you could have had in your bank account by selling 3 years earlier. In fact, for you to receive the same net proceeds as three years earlier given the rise in taxes and in interest rates, your Company needs to grow its EBITDA by over 57% or at a 16.3% compound rate over this time period.
With family owned companies facing this math, you’re going to see more sales prior to the next Congress. You’ll also see CEOs that are close to retirement and possess large equity stakes in their businesses to making similar moves before the window of opportunity closes. In addition to this depressing math, you should note that in five years, there will be more businesses for sale than any time in the history of the United States. It is staggering to see how many business owners are baby-boomers in consideration to the correlation turning 65.
It might be better to sell your business now vs. in the future. What do you think?
Friday, September 26, 2008
Brandywine Mergers & Acquisitions, LLC.
Brandywine Mergers & Acquisitions, LLC is a leading intermediary firm providing transactional services for small to mid-sized privately held companies. Located in suburban Philadelphia, PA we represent clients throughout the entire region.
Brandywine Mergers & Acquisitions, LLC continually strives to bring exceptional levels of professionalism to business owners interested in planning and implementing effective succession plans. Through our proprietary assessment process, you receive the tools and information to make an informed decision about the future ownership of your company. We respect and understand this is the most important financial decision a business owner will ever make and we work hard to make sure you make the right one. All consultations and assessments are strictly confidential.
Services Include:
• Seller Representation & Advisory
• Succession Planning
• Recapitalization & Financing Advisory
• Transaction Consulting
Brandywine Mergers & Acquisitions, LLC.
645 Swedesford Road
Swedesford Corporate Center
Malvern, PA 19355
Phone: 610.408.0554
Fax: 610.408.8499
www.VRbrandywine.com
Brandywine Mergers & Acquisitions, LLC continually strives to bring exceptional levels of professionalism to business owners interested in planning and implementing effective succession plans. Through our proprietary assessment process, you receive the tools and information to make an informed decision about the future ownership of your company. We respect and understand this is the most important financial decision a business owner will ever make and we work hard to make sure you make the right one. All consultations and assessments are strictly confidential.
Services Include:
• Seller Representation & Advisory
• Succession Planning
• Recapitalization & Financing Advisory
• Transaction Consulting
Brandywine Mergers & Acquisitions, LLC.
645 Swedesford Road
Swedesford Corporate Center
Malvern, PA 19355
Phone: 610.408.0554
Fax: 610.408.8499
www.VRbrandywine.com
Tuesday, August 19, 2008
Comfort Systems USA® acquires Delcard Associates
Business Editors
HOUSTON--(BUSINESS WIRE)--August 18, 2008--Comfort Systems USA, Inc. (NYSE:FIX), a leading provider of commercial, industrial and institutional heating, ventilation and air conditioning (“HVAC”) services, today announced that it has acquired Delcard Associates, Inc. (“Delcard”), a full service commercial HVAC company based in Wilmington, Delaware. Delcard had 2007 revenues of approximately $45 million, and if Delcard had been part of Comfort Systems in 2007 we believe it would have contributed earnings before interest, taxes, depreciation and amortization of at least $3.2 million.
Bill Murdy, Comfort Systems USA's Chairman and CEO,noted, “We are very pleased to bring Delcard into the Comfort Systems USA family of companies. Delcard has an ideal geographic location for Comfort Systems, and given its construction and service reputation throughout Delaware, and especially given the strength of its excellent workforce, we believe Delcard will make a strong contribution to our continuing operations.”
Comfort Systems USA ® is a premier provider of business solutions addressing workplace comfort, with 74 locations in 59 cities around the nation. For more information, visit the Company’s website at www.comfortsystemsusa.com.
As the representative of Delcard Associates, Inc., Brandywine Mergers & Acquisitions is an advisory firm to privately held business owners. BMA is a leading provider of “sell-side” transactional services to the owners of profitable manufacturing, distribution, and service based companies in the Middle Atlantic Region. To learn more about BMA, visit the Company's website at www.vrbrandywine.com
HOUSTON--(BUSINESS WIRE)--August 18, 2008--Comfort Systems USA, Inc. (NYSE:FIX), a leading provider of commercial, industrial and institutional heating, ventilation and air conditioning (“HVAC”) services, today announced that it has acquired Delcard Associates, Inc. (“Delcard”), a full service commercial HVAC company based in Wilmington, Delaware. Delcard had 2007 revenues of approximately $45 million, and if Delcard had been part of Comfort Systems in 2007 we believe it would have contributed earnings before interest, taxes, depreciation and amortization of at least $3.2 million.
Bill Murdy, Comfort Systems USA's Chairman and CEO,noted, “We are very pleased to bring Delcard into the Comfort Systems USA family of companies. Delcard has an ideal geographic location for Comfort Systems, and given its construction and service reputation throughout Delaware, and especially given the strength of its excellent workforce, we believe Delcard will make a strong contribution to our continuing operations.”
Comfort Systems USA ® is a premier provider of business solutions addressing workplace comfort, with 74 locations in 59 cities around the nation. For more information, visit the Company’s website at www.comfortsystemsusa.com.
As the representative of Delcard Associates, Inc., Brandywine Mergers & Acquisitions is an advisory firm to privately held business owners. BMA is a leading provider of “sell-side” transactional services to the owners of profitable manufacturing, distribution, and service based companies in the Middle Atlantic Region. To learn more about BMA, visit the Company's website at www.vrbrandywine.com
Thursday, April 3, 2008
Liquor Licenses moving with Population by Sarah Larson
BUCKS COUNTY COURIER TIMES - THE INTELLIGENCER
It probably comes as no surprise that in a state where liquor licenses are tied to population, the most populated areas have the most bars and other liquor-serving establishments.
But an analysis of retail liquor licenses in Bucks and Eastern Montgomery counties also shows that the licenses are moving where the people move.
Seven years after a state law changed to allow the licenses to move freely within a county's borders, 12 licenses have been transferred across municipal lines in Eastern Montgomery County, with at least two moves pending approval. In Bucks County, 26 licenses have been transferred, with at least six moves pending.
In many cases, those licenses are moving out of boroughs and once-thriving townships where they had been for decades, and into once-rural townships with expanding populations.
The transfers also typically move a liquor establishment from neighborhoods to shopping centers, making for fewer conflicts between neighbors and bars and better quality of life for everyone, said state Sen. Chuck McIlhinney Jr., who wrote the 2001 law allowing for the transfers.
“So what was once a neighborhood bar is going to end up in a shopping center, and that was kind of the point — to separate bars and their noise and distraction from the residential areas,” said McIlhinney, R-10. “If those bars were proposed for those same neighborhoods today, they wouldn't be approved. And besides, most bar and restaurant owners would probably prefer to be in strip malls, where they'll get more foot traffic.”
On Monday, for example, Hilltown supervisors will consider a request from newly formed B&V 313 Enterprises to transfer a liquor license from Sellersville to a new restaurant proposed for 624 W. Route 313.
That license, in existence since 1948, most recently belonged to Emil's Diner, at 321 S. Main St., according to state data. The building is now home to the A&N Diner.
Until February 2001, that liquor license could have been transferred only elsewhere within Sellersville. Licenses could not be transferred across municipal borders.
McIlhinney, who then represented Doylestown in the state House, wrote a law that allowed for the cross-town transfers. But the main goal of the law was not really the transfers; it was to give local leaders more control over liquor-serving bars and restaurants that wanted to open within their borders.
At that time, Pennsylvania law regulating such establishments was something of a split personality.
State law ties liquor licenses to population; one retail license is allowed for every 3,000 people. Yet, in 1984, a “resort” designation was created to allow businesses to evade those restrictions. No limits were put on the number of alcohol establishments that could open in towns such as Doylestown that were designated “resorts.”
At the urging of Doylestown leaders, McIlhinney wrote a law eliminating the resort designation. As a sort of compromise, licenses were allowed to be transferred across municipalities as long as the move was approved by town leaders where the business wanted to open.
“My whole point in writing the law was turning it back and giving the municipality the say,” he said. “And we can see now that it's proceeding exactly as was intended. I think it's working well for the municipalities. It's something we have to continue to monitor, but the days of uncontrolled resort licenses — that's over.”
Today, Bucks County is home to 381 retail liquor licenses, according to data from the Pennsylvania Liquor Control Board, which licenses the bars and restaurants. Eastern Montgomery County has 70 such licenses.
The bulk of the establishments are in populated areas, with Bristol, Bensalem, Middletown and Falls leading the list in Bucks.
As many a would-be business owner quickly learns, buying a liquor license is a long, expensive legal process.
“I've seen transfers happen as quickly as three months,” said Chad Byers, of The Pennsylvania Liquor License Company, “but the last one I did in Malvern took just over a year.”
The licenses don't come cheap, said Byers, who started his company last year to help buyers and sellers of liquor licenses during the negotiations. (www.PennsylvaniaLiquorLicense.com)
If you want to open a bar in Montgomery County, the liquor license alone will set you back anywhere from $185,000 to $225,000, Byers said. In Bucks County, that figure is likely to be $125,000 to $225,000, he said.
Most buyers turn first to licenses the state holds in “safekeeping” for business owners who have temporarily stopped using them, said Joe Conti. The former Doylestown restaurateur and state senator is now head of the state's liquor control board.
“Anyone who's looking for a license goes to safekeeping first,” Conti said. “Many times, there are restaurants that haven't done well, so you could explore buying that license and the owners might be more willing to sell.”
Both Conti and McIlhinney agree that the quota system limiting the number of retail liquor licenses — as well as the philosophy that keeps beer, wine and liquor sales out of most supermarkets — is unlikely to change any time soon.
While the Philadelphia suburbs might lobby for privatization of state stores and a lifting of retail license limits, the rest of the state is against it, McIlhinney said.
“Over 40 percent of the townships in Pennsylvania are dry — no alcohol is allowed to be sold at all,” he said. “There are no bars, no state stores. So, politically, in Pennsylvania and in Harrisburg, there's no support for changing the law.”
But there may be more opportunity in a few years for businesses that want liquor licenses.
Because new licenses are granted according to the population-based quota, and because the population is set by the U.S. Census, 2011 — when the 2010 Census is likely to be approved — could well bring a rush of applications for new licenses, Conti said.
McIlhinney represents Falls, Lower Makefield, Morrisville, Tullytown, Newtown, Newtown Township, Upper Makefield, Yardley, 20 municipalities in Central and Upper Bucks and two Montgomery County communities. Sarah Larson can be reached at 215-345-3187 or slarson@phillyBurbs.com.
It probably comes as no surprise that in a state where liquor licenses are tied to population, the most populated areas have the most bars and other liquor-serving establishments.
But an analysis of retail liquor licenses in Bucks and Eastern Montgomery counties also shows that the licenses are moving where the people move.
Seven years after a state law changed to allow the licenses to move freely within a county's borders, 12 licenses have been transferred across municipal lines in Eastern Montgomery County, with at least two moves pending approval. In Bucks County, 26 licenses have been transferred, with at least six moves pending.
In many cases, those licenses are moving out of boroughs and once-thriving townships where they had been for decades, and into once-rural townships with expanding populations.
The transfers also typically move a liquor establishment from neighborhoods to shopping centers, making for fewer conflicts between neighbors and bars and better quality of life for everyone, said state Sen. Chuck McIlhinney Jr., who wrote the 2001 law allowing for the transfers.
“So what was once a neighborhood bar is going to end up in a shopping center, and that was kind of the point — to separate bars and their noise and distraction from the residential areas,” said McIlhinney, R-10. “If those bars were proposed for those same neighborhoods today, they wouldn't be approved. And besides, most bar and restaurant owners would probably prefer to be in strip malls, where they'll get more foot traffic.”
On Monday, for example, Hilltown supervisors will consider a request from newly formed B&V 313 Enterprises to transfer a liquor license from Sellersville to a new restaurant proposed for 624 W. Route 313.
That license, in existence since 1948, most recently belonged to Emil's Diner, at 321 S. Main St., according to state data. The building is now home to the A&N Diner.
Until February 2001, that liquor license could have been transferred only elsewhere within Sellersville. Licenses could not be transferred across municipal borders.
McIlhinney, who then represented Doylestown in the state House, wrote a law that allowed for the cross-town transfers. But the main goal of the law was not really the transfers; it was to give local leaders more control over liquor-serving bars and restaurants that wanted to open within their borders.
At that time, Pennsylvania law regulating such establishments was something of a split personality.
State law ties liquor licenses to population; one retail license is allowed for every 3,000 people. Yet, in 1984, a “resort” designation was created to allow businesses to evade those restrictions. No limits were put on the number of alcohol establishments that could open in towns such as Doylestown that were designated “resorts.”
At the urging of Doylestown leaders, McIlhinney wrote a law eliminating the resort designation. As a sort of compromise, licenses were allowed to be transferred across municipalities as long as the move was approved by town leaders where the business wanted to open.
“My whole point in writing the law was turning it back and giving the municipality the say,” he said. “And we can see now that it's proceeding exactly as was intended. I think it's working well for the municipalities. It's something we have to continue to monitor, but the days of uncontrolled resort licenses — that's over.”
Today, Bucks County is home to 381 retail liquor licenses, according to data from the Pennsylvania Liquor Control Board, which licenses the bars and restaurants. Eastern Montgomery County has 70 such licenses.
The bulk of the establishments are in populated areas, with Bristol, Bensalem, Middletown and Falls leading the list in Bucks.
As many a would-be business owner quickly learns, buying a liquor license is a long, expensive legal process.
“I've seen transfers happen as quickly as three months,” said Chad Byers, of The Pennsylvania Liquor License Company, “but the last one I did in Malvern took just over a year.”
The licenses don't come cheap, said Byers, who started his company last year to help buyers and sellers of liquor licenses during the negotiations. (www.PennsylvaniaLiquorLicense.com)
If you want to open a bar in Montgomery County, the liquor license alone will set you back anywhere from $185,000 to $225,000, Byers said. In Bucks County, that figure is likely to be $125,000 to $225,000, he said.
Most buyers turn first to licenses the state holds in “safekeeping” for business owners who have temporarily stopped using them, said Joe Conti. The former Doylestown restaurateur and state senator is now head of the state's liquor control board.
“Anyone who's looking for a license goes to safekeeping first,” Conti said. “Many times, there are restaurants that haven't done well, so you could explore buying that license and the owners might be more willing to sell.”
Both Conti and McIlhinney agree that the quota system limiting the number of retail liquor licenses — as well as the philosophy that keeps beer, wine and liquor sales out of most supermarkets — is unlikely to change any time soon.
While the Philadelphia suburbs might lobby for privatization of state stores and a lifting of retail license limits, the rest of the state is against it, McIlhinney said.
“Over 40 percent of the townships in Pennsylvania are dry — no alcohol is allowed to be sold at all,” he said. “There are no bars, no state stores. So, politically, in Pennsylvania and in Harrisburg, there's no support for changing the law.”
But there may be more opportunity in a few years for businesses that want liquor licenses.
Because new licenses are granted according to the population-based quota, and because the population is set by the U.S. Census, 2011 — when the 2010 Census is likely to be approved — could well bring a rush of applications for new licenses, Conti said.
McIlhinney represents Falls, Lower Makefield, Morrisville, Tullytown, Newtown, Newtown Township, Upper Makefield, Yardley, 20 municipalities in Central and Upper Bucks and two Montgomery County communities. Sarah Larson can be reached at 215-345-3187 or slarson@phillyBurbs.com.
Tuesday, March 25, 2008
Private-equity groups: Liquidity for family businesses
By Alan J. Smith, Bay Pacific Group
Reprinted courtesy of EntreWorld.org
The new moguls of capitalism are here — private-equity groups — and that's good news for privately held companies, particularly closely held family operations. Over the past 20 years, private-equity groups, commonly called PEGs, have moved from the outer fringes to the hierarchy of the capitalist system. Their flexibility as a liquidity source offers a lot of ways for entrepreneurs to take some cash off the table, recapitalize the company, or simply sell out.
For the family-owned privately held company, PEGs are ideal, and that has a lot to do with the peculiarities of family businesses. In my three years consulting and brokering liquidity events for private companies — I founded Bay Pacific Group in 2002 to get into that business — about 60% of my clients have been family-owned. In the larger universe of all so-called mid-market private companies — those with annual revenue between $10 million and $200 million — about 40% would likely fit the family category.
Family companies, revealed
In my experience, family businesses, while legally no different from closely held companies in general, tend to be worlds apart in the way they function. Whereas owners of most private companies usually make decisions on the basis of what is appropriate for shareholders, those tied to families often let emotions, nepotism, and politics muddy the water.
Throw out the one-share, one-vote rule when it comes to a family business! The differing emotions within the family circle will often allow members with lesser stakes to override any specific share ownership stipulations in the interest of keeping the peace. It's not unusual for a family business to have extended members of the family working in the business that are less than capable in their role but, nonetheless, secure in their positions. Ah, nepotism is alive and well! A recent sale I was brokering eventually fell through, for example, when the owner's wife insisted that her two sons whose competence was questionable continue in their jobs at the same six-figure salary after the company was sold.
Finally, generational changes affect family businesses more than other private businesses. When the founder of a family-owned business that has operated for 35 years decides to retire, the dynamics are generally much more challenging than in other privately held companies. That is because he or she must weigh emotions as well as skill sets when evaluating which, if any, of the children should take over and in what roles.
Fit for a family business
All of these converging factors have a significant impact on how founders and their heirs need to find the right balance to successfully accomplish individual goals. The solutions will depend as much upon politics as economics. The smart family founders will search for achieving a balance that keeps everybody smiling as much as possible. In that quest, turning to the private-equity community can be an excellent fit.
It is interesting to point out that while America's venture capitalists, which provide seed and start-up funding to fledglings, have become the envy of the world for developing such firms as Google and Intel into hugely successful companies, investments being made today by private-equity firms on various deals to acquire, recapitalize, or invest in established companies are substantially higher — as much as four times the amount of money.
It is estimated that there are now more than 2,700 private-equity groups in the United States, up from just a few hundred two decades ago, and the number continues to grow. The trick for a privately owned company is to have access to those particular groups that invest in their industries and that are within their acquisition criteria. Virtually all private-equity groups have established acquisition and investment guidelines that they are more than happy to share.
In fact, most private-equity firms in today's market are constantly scouting for deal opportunities. There is a tremendous amount of money on the sidelines waiting to find a home. Part of that buildup of available money is a result of a lack of suitable alternative investments. With low interest rates, fixed-income securities, such as corporate bonds and bank instruments, are not attractive investments. Add then public corporate mismanagement and criminality issues (World Com, Enron, HealthSouth, etc.) that have been going on, and the result is more money going out of stocks into private-equity groups where the perception is that the investment is safer. Indeed, if you examine all the major corporate scandals of the past 25 years, none occurred where a private-equity firm was involved.
Tailoring the right family fit
Where does all of this leave the family company? With options. Lots of them. Teaming with an experienced M&A advisor that has relationships with the private-equity community and understands their parameters can unlock that opportunity. Working with a PEG that compliments your goals is key. Perhaps a "late-stage" investment in the future of the company by a PEG solves some issues. It can allow a company to take some money off the table while building a base for a stronger company moving ahead. It's quite possible for the company to still maintain majority control, a particularly sensitive issue for many family businesses. An agreement can be made for the PEG to invest in the company in increments over a time span, slowly increasing ownership while family members cash out along the way.
PEGs can offer much in the way of resources besides cash. They can provide advice based on their core competencies; they can bring in additional management from their contacts; and they can give a lot of guidance to help move the company forward. Remember, it's entirely in their best interests for a company to succeed — it's a true win-win. In short, a lot of the idiosyncrasies of family-owned businesses can be addressed at the bargaining table where unique deals can be carved out.
Conversely, when an acquiring stand-alone firm is buying a family company, really the only other exit option for a closely held business, the flexibility is much less. It's not to say that these can't be great deals, but most private companies usually only attract a limited amount of stand-alone companies and generally with a much tighter range of opportunity — often a complete acquisition or nothing. You can find a private-equity group solution, on the other hand, where a complete acquisition, a recapitalization, an employee-led buyout, a growth company needing an investment, a turnaround situation, an add-on or a buy-and-build scenario, can all be accommodated.
Making the best of a good thing
With all these great liquidity tools available, a privately held family concern should carefully evaluate its individual and collective needs. I'm often asked by a private-equity group what range of options a particular company might want to explore to see what the possibilities might be for a deal to be struck. I'm continually impressed by the sophistication and flexibility most reputable private-equity firms bring to the table.
Part of the reason is that this is what they do for a living. Whereas for the family-company owner, this is usually a one-time shot, the typical private-equity firm has worked with dozens of companies, in one form or another, and knows how to successfully complete transactions that provide value for all the parties. This is a tremendous post-closing asset that a private-equity group brings to the table. You get all their experience as part of the deal. They can be great partners, both short-term and long-term. Speaking of time horizons, this is generally a topic where there will be some understood agreement on what the short, intermediate, and long-term plans are for an eventual exit for all the parties.
For family-business owners approaching PEGs, the following suggestions might help them make the best of a good thing:
• Target the PEG to fit your needs — look for those that work within your industry and offer what you want, such as acquisition or late-stage investment.
• Gather appropriate historical financial information — at least three years prior — and set financing projections for three years going forward.
• Know your family's hot buttons, and work with family members to resolve or at least mitigate them before approaching the PEG.
• Confide in PEG investors about likely family bottlenecks — don't worry about having to save face, they've heard it all before. Besides, if they thought your business was perfect, what need would there be for them to step in? There's a fine line between presenting your business as worthy of investment and acknowledging that such could make it better.
• Educate yourself and family members about the emotional stumbling blocks involved in letting go of some control and also that it can be a wise step.
There is that old saying that you can't have your cake and eat it, too. Well, with the versatility of the private-equity community to tailor a plan to your needs, family companies just might be able to have the best of both worlds. When your time comes to cash out in one form or another, make sure you explore the possibilities of a private-equity deal. You just might solve a lot of problems for a lot of people, particularly your loved ones, where some understanding, flexibility, and unique tweaking can be accomplished.
Reprinted courtesy of EntreWorld.org
The new moguls of capitalism are here — private-equity groups — and that's good news for privately held companies, particularly closely held family operations. Over the past 20 years, private-equity groups, commonly called PEGs, have moved from the outer fringes to the hierarchy of the capitalist system. Their flexibility as a liquidity source offers a lot of ways for entrepreneurs to take some cash off the table, recapitalize the company, or simply sell out.
For the family-owned privately held company, PEGs are ideal, and that has a lot to do with the peculiarities of family businesses. In my three years consulting and brokering liquidity events for private companies — I founded Bay Pacific Group in 2002 to get into that business — about 60% of my clients have been family-owned. In the larger universe of all so-called mid-market private companies — those with annual revenue between $10 million and $200 million — about 40% would likely fit the family category.
Family companies, revealed
In my experience, family businesses, while legally no different from closely held companies in general, tend to be worlds apart in the way they function. Whereas owners of most private companies usually make decisions on the basis of what is appropriate for shareholders, those tied to families often let emotions, nepotism, and politics muddy the water.
Throw out the one-share, one-vote rule when it comes to a family business! The differing emotions within the family circle will often allow members with lesser stakes to override any specific share ownership stipulations in the interest of keeping the peace. It's not unusual for a family business to have extended members of the family working in the business that are less than capable in their role but, nonetheless, secure in their positions. Ah, nepotism is alive and well! A recent sale I was brokering eventually fell through, for example, when the owner's wife insisted that her two sons whose competence was questionable continue in their jobs at the same six-figure salary after the company was sold.
Finally, generational changes affect family businesses more than other private businesses. When the founder of a family-owned business that has operated for 35 years decides to retire, the dynamics are generally much more challenging than in other privately held companies. That is because he or she must weigh emotions as well as skill sets when evaluating which, if any, of the children should take over and in what roles.
Fit for a family business
All of these converging factors have a significant impact on how founders and their heirs need to find the right balance to successfully accomplish individual goals. The solutions will depend as much upon politics as economics. The smart family founders will search for achieving a balance that keeps everybody smiling as much as possible. In that quest, turning to the private-equity community can be an excellent fit.
It is interesting to point out that while America's venture capitalists, which provide seed and start-up funding to fledglings, have become the envy of the world for developing such firms as Google and Intel into hugely successful companies, investments being made today by private-equity firms on various deals to acquire, recapitalize, or invest in established companies are substantially higher — as much as four times the amount of money.
It is estimated that there are now more than 2,700 private-equity groups in the United States, up from just a few hundred two decades ago, and the number continues to grow. The trick for a privately owned company is to have access to those particular groups that invest in their industries and that are within their acquisition criteria. Virtually all private-equity groups have established acquisition and investment guidelines that they are more than happy to share.
In fact, most private-equity firms in today's market are constantly scouting for deal opportunities. There is a tremendous amount of money on the sidelines waiting to find a home. Part of that buildup of available money is a result of a lack of suitable alternative investments. With low interest rates, fixed-income securities, such as corporate bonds and bank instruments, are not attractive investments. Add then public corporate mismanagement and criminality issues (World Com, Enron, HealthSouth, etc.) that have been going on, and the result is more money going out of stocks into private-equity groups where the perception is that the investment is safer. Indeed, if you examine all the major corporate scandals of the past 25 years, none occurred where a private-equity firm was involved.
Tailoring the right family fit
Where does all of this leave the family company? With options. Lots of them. Teaming with an experienced M&A advisor that has relationships with the private-equity community and understands their parameters can unlock that opportunity. Working with a PEG that compliments your goals is key. Perhaps a "late-stage" investment in the future of the company by a PEG solves some issues. It can allow a company to take some money off the table while building a base for a stronger company moving ahead. It's quite possible for the company to still maintain majority control, a particularly sensitive issue for many family businesses. An agreement can be made for the PEG to invest in the company in increments over a time span, slowly increasing ownership while family members cash out along the way.
PEGs can offer much in the way of resources besides cash. They can provide advice based on their core competencies; they can bring in additional management from their contacts; and they can give a lot of guidance to help move the company forward. Remember, it's entirely in their best interests for a company to succeed — it's a true win-win. In short, a lot of the idiosyncrasies of family-owned businesses can be addressed at the bargaining table where unique deals can be carved out.
Conversely, when an acquiring stand-alone firm is buying a family company, really the only other exit option for a closely held business, the flexibility is much less. It's not to say that these can't be great deals, but most private companies usually only attract a limited amount of stand-alone companies and generally with a much tighter range of opportunity — often a complete acquisition or nothing. You can find a private-equity group solution, on the other hand, where a complete acquisition, a recapitalization, an employee-led buyout, a growth company needing an investment, a turnaround situation, an add-on or a buy-and-build scenario, can all be accommodated.
Making the best of a good thing
With all these great liquidity tools available, a privately held family concern should carefully evaluate its individual and collective needs. I'm often asked by a private-equity group what range of options a particular company might want to explore to see what the possibilities might be for a deal to be struck. I'm continually impressed by the sophistication and flexibility most reputable private-equity firms bring to the table.
Part of the reason is that this is what they do for a living. Whereas for the family-company owner, this is usually a one-time shot, the typical private-equity firm has worked with dozens of companies, in one form or another, and knows how to successfully complete transactions that provide value for all the parties. This is a tremendous post-closing asset that a private-equity group brings to the table. You get all their experience as part of the deal. They can be great partners, both short-term and long-term. Speaking of time horizons, this is generally a topic where there will be some understood agreement on what the short, intermediate, and long-term plans are for an eventual exit for all the parties.
For family-business owners approaching PEGs, the following suggestions might help them make the best of a good thing:
• Target the PEG to fit your needs — look for those that work within your industry and offer what you want, such as acquisition or late-stage investment.
• Gather appropriate historical financial information — at least three years prior — and set financing projections for three years going forward.
• Know your family's hot buttons, and work with family members to resolve or at least mitigate them before approaching the PEG.
• Confide in PEG investors about likely family bottlenecks — don't worry about having to save face, they've heard it all before. Besides, if they thought your business was perfect, what need would there be for them to step in? There's a fine line between presenting your business as worthy of investment and acknowledging that such could make it better.
• Educate yourself and family members about the emotional stumbling blocks involved in letting go of some control and also that it can be a wise step.
There is that old saying that you can't have your cake and eat it, too. Well, with the versatility of the private-equity community to tailor a plan to your needs, family companies just might be able to have the best of both worlds. When your time comes to cash out in one form or another, make sure you explore the possibilities of a private-equity deal. You just might solve a lot of problems for a lot of people, particularly your loved ones, where some understanding, flexibility, and unique tweaking can be accomplished.
Monday, February 4, 2008
Want to Buy a Business? Your Timing is Right
A large-scale baby boomer exit will make for a buyer's market for businesses over the next several years.
THE KIPLINGER LETTER
Expect a glut of firms to go up for sale as thousands of baby boomers retire. With about 8,000 Americans turning 60 every day, more and more business owners are thinking about retiring. By 2009, an estimated 750,000 companies owned by boomers -- one in every six -- will be looking for buyers, up fifteen-fold from 2001.
Most firms will sell to strangers. Children today feel less pressure to run the family business, and even those that want to often find it tough to come up with the cash to pay off parents or other relatives who hold shares in the firm. Family in-fighting and prolonged legal spats also make family handoffs that much harder. Studies show that less than 15% of family businesses successfully make it down the third generation.
Owners without an exit strategy will likely sell at a discount, warns John Brown, founder of Business Enterprise Institute. With roughly 20 million more people in the boomer generation than the X Generation, there will be fewer potential buyers, so a good price will be harder to find. That's what makes advance thinking so important. "Gigantic amounts of wealth are not going to be realized because of a lack of planning," says John Hrastar, president of InterSource, a consulting firm.
Expert advice is a must. Owners need to consult a battery of advisers, from attorneys to accountants to appraisers, at least a year or so ahead of any expected sale. Potential buyers, including rival businesses, private equity firms and venture capitalists, all have sophisticated experts on their side and owners will need to be able to keep up. An exit planning team will do everything from entertaining bids from potential suitors to making sure the sale is tax-advantageous to spotting and correcting hidden liabilities that could torpedo a sale.
One option that's growing more popular is selling to employees -- either a management buyout or employee stock ownership plan (ESOP). Both take time to set up but give owners the fulfillment that they're passing on their legacy. In management buyouts, owners must weed out ill-suited managers and groom and train the best personnel so the firm will succeed without them. In these cases, management will often buy into the business over a number of years.
An ESOP tends to be a good route for firms with stable earnings and revenue. But the plan gets way too costly for small firms -- those under $1 million in yearly pre-tax profit -- due to associated upkeep costs like annual appraisals.
By Matthew Mogul, Associate Editor, The Kiplinger Letter
THE KIPLINGER LETTER
Expect a glut of firms to go up for sale as thousands of baby boomers retire. With about 8,000 Americans turning 60 every day, more and more business owners are thinking about retiring. By 2009, an estimated 750,000 companies owned by boomers -- one in every six -- will be looking for buyers, up fifteen-fold from 2001.
Most firms will sell to strangers. Children today feel less pressure to run the family business, and even those that want to often find it tough to come up with the cash to pay off parents or other relatives who hold shares in the firm. Family in-fighting and prolonged legal spats also make family handoffs that much harder. Studies show that less than 15% of family businesses successfully make it down the third generation.
Owners without an exit strategy will likely sell at a discount, warns John Brown, founder of Business Enterprise Institute. With roughly 20 million more people in the boomer generation than the X Generation, there will be fewer potential buyers, so a good price will be harder to find. That's what makes advance thinking so important. "Gigantic amounts of wealth are not going to be realized because of a lack of planning," says John Hrastar, president of InterSource, a consulting firm.
Expert advice is a must. Owners need to consult a battery of advisers, from attorneys to accountants to appraisers, at least a year or so ahead of any expected sale. Potential buyers, including rival businesses, private equity firms and venture capitalists, all have sophisticated experts on their side and owners will need to be able to keep up. An exit planning team will do everything from entertaining bids from potential suitors to making sure the sale is tax-advantageous to spotting and correcting hidden liabilities that could torpedo a sale.
One option that's growing more popular is selling to employees -- either a management buyout or employee stock ownership plan (ESOP). Both take time to set up but give owners the fulfillment that they're passing on their legacy. In management buyouts, owners must weed out ill-suited managers and groom and train the best personnel so the firm will succeed without them. In these cases, management will often buy into the business over a number of years.
An ESOP tends to be a good route for firms with stable earnings and revenue. But the plan gets way too costly for small firms -- those under $1 million in yearly pre-tax profit -- due to associated upkeep costs like annual appraisals.
By Matthew Mogul, Associate Editor, The Kiplinger Letter
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