What do buyers think about that concept? Honestly, they may be interested in the potential, since who wants to invest in a business that has no upside, but if they have to invest more of their money to realize that potential it’s like 2 transactions: one to buy the business as it sits today and another growth capital investment to make the business worth more money in the future. Buyers want to buy based on the company’s proven performance. If they have to invest more of their money to increase the value, then they tend to think that all of that increase in value due to the money they invested should belong to them. They have a good point.

But there is a middle ground. The middle ground is often seen in the typical private equity deal structure where the seller and the buyer partner to create that future value…turning potential into reality. These are schizophrenic deals for the owner since the owner becomes both a seller of some of his equity interest in the business and an investor in the company going forward. That investment by the owner can be in the form of what’s called “rollover” equity or “retained” equity, even if the investment is made at the level of the special purpose acquisition entity. Another form of the investment by the owner can be “earn-outs” which are contractual ways that an owner can participate in future growth of revenue or earnings. Earn-outs are typically more short term payoffs for future growth in the next 1-5 years, and not viewed as true partnering, since only the seller gets the reward specified in the earn-out terms. Still, private equity deals may include both earn-outs to reward the seller for future earnings growth already baked in the pie at the closing date, plus rollover equity to allow the seller to participate in growth that the owner and the private equity partners create together.

One of my private equity friends says “If the owners don’t think this is a good enough company to invest in themselves, then we don’t see any reason why we should invest in it either.” In other words, no partnering = no deal.

The bottom line is that if you want to get paid for potential, you need to be willing to go along for the ride and accept a partnering role alongside the buyers of your business. Why wouldn’t you want to do that? After all, the business has so much potential.

Real Multiples From Real Deals

We recently completed the Alliance of Merger & Acquisition Advisors’ Deal Stats report for the second half of 2012. Jason Boldt of Columbia Financial Advisors has been doing the heavy lifting on the last few reports and I’ve taken an editorial role. The deals reported came from M&A Brokers, Investment Bankers, M&A Advisors of various kinds, as well as business buyers who are members of AM&AA. The key results seem to indicate that we are still in a good market for business sales with reasonable multiples. The results are summarized below.

Median multiple for all deals of all sizes in all industries was flat at 5.25, but the average was down slightly in the second half dropping from 5.35 in the first half to 5.06. Because the data are not normally distributed we think the median is a better measure of what’s happening in the marketplace. If you look at the graph and squint a little it may be that some of the volatility we had seen during and immediately after the Great Recession has now quieted down so that we have more stable pricing for businesses.

One of the ways I like to look at things is to look at the frequency of occurrence of different multiples. If you look at the graph below you can in essence judge the probability that a deal will fall within a certain multiple range.

The chances that any random company will sell for less than 5.5 x or 6.5 x EBITDA are pretty high, but the chances that that company will sell for greater than 7.5 x EBITDA are pretty low (less than 10%). We’ve done this analysis quite a few times and it’s never exactly the same, although the big picture conclusions tend to be pretty stable. The chance of getting a deal with over 10x EBITDA is almost always less than 10%, and the chance of a deal ending up in the range of 3 to 6.5 x is pretty high. We tend to think about a 4 to 6 x EBITDA “box” where about half of all deals end up. In the latter half of 2012, 45% of all deals were in the 4 to 6x box. Seventy percent of all deals were in the larger 3 to 7x box.

These results tend to apply to companies that are mostly valued at less than $50 million, with the great majority in the $1 million to $25 million range, as illustrated in the graph below.

Once again we demonstrated that larger deals (generally for larger companies) carry higher multiples. The relationship from the last 4 surveys seems pretty clear. “Consideration” as used here is essentially the debt free enterprise value of the companies involved.

What does all this mean to a business owner? It means that deals are being done, and that there are reasonable prices being paid (or else those deals wouldn’t get done). The market for small and mid-sized business sales may be a little less frothy than it has been, as multiples seem to be stabilizing. There is always better pricing for larger enterprises, and for those with special situations, but the special situations tend to be rare in the marketplace. A seller going to market today with a quality company for sale can expect to receive a fair price, but the variability in pricing between deals confirms the same kind of variability we see among buyers when we take a company to market. It’s not uncommon for one buyer to pay 20% or 50% more than another will pay for the same company, and I’ve seen over 100% difference between 2 buyers bidding to acquire the same company. Hence, the way to maximize value is to market the company broadly using a proven confidential ”auction” or “limited auction” process in which buyers must submit competing bids. You can use the average and median multiples as guidance on what you might expect, but the true value is only delivered by a competitive process with multiple buyers involved. That’s the way I see it anyway.

Referrals

Thank you to all of the attorneys, accountants, financial planners, bankers, business owners and others who have referred clients to us. We greatly appreciate the trust and confidence you have placed in us. If you would like to refer a business owner to us for value consultation, business purchase, business sale, management buyout, management buy-in, or re-capitalization, please be assured that all of our services are totally confidential.

CITS seeks to acquire companies that provide Microsoft SharePoint consulting, pre-packaged SharePoint solutions, and/or related technologies. Also of interest are companies that provide business intelligence solutions (KPIs, digital dashboards, data warehouses), and Microsoft Gold Partners that provide Microsoft Dynamics AX-based accounting integration and solutions.

Companies of interest to CITS will have revenues between $1-5 million, with 35%+ gross margin on services and a minimum of five full-time, on staff developers. Microsoft partners and/or certifications are a plus.

“CITS sees an opportunity to deliver turn-key, private cloud solutions using Microsoft SharePoint as the base platform” says Todd Barton, Managing Director at Compass Capital. “CITS has developed a strategy to acquire a number of select service providers that, when integrated together, will enable CITS to deliver comprehensive business solutions to middle-market companies. Each of these service providers will possess a base of loyal customers and technical employees. Vertical market expertise and/or proprietary SharePoint solutions are a plus.”

About ACT Capital Advisors

ACT Capital Advisors is a seasoned boutique M&A advisory firm with offices in Seattle, Portland, Phoenix and New York.  Over the past 25 years ACT Capital has assisted in approximately 200 transactions valued in excess of a billion dollars.  ACT provides both buy-side and sell-side advisory services.  ACT’s sector experience includes industrial, technology, B2B services, construction, healthcare, aerospace, consumer and outsourced services among others.
SharePoint or MS Dynamics AX service providers interested in pursuing this opportunity should contact Diana Altchech at Diana@ACTCapitalAdvisors.com or call (206) 275-1070.

Preferential treatment for only “one buyer”.

A prospective buyer approaches a business owner with an offer seemingly too attractive to turn down. In almost all cases the prospective buyer knows the business owner. This “friendly” Buyer may be a competitor, supplier or an “old friend”. During lunch or dinner a verbal offer is made, subject of course to reviewing a few business details. Agreement reached and you shake hands.

So, now it’s settled! Or is it?

This lone Buyer, despite his familiarity and good cheer (and perhaps even honest and good intentions) is nevertheless putting you at an automatic disadvantage. All too often in “friendly single buyer” circumstances terms, price and timing are controlled by the lone Buyer – because the Seller, lacking experience in these matters, neither understands the proper sequence of events nor wants to rock the boat as he believes (or, rather, he wants to believe) it is a very attractive offer. Initially the Seller receives a short list of items (business details) to be reviewed by the lone Buyer. The list usually includes: three or four years of financial statements; AR and AP Aging and Payroll information. After responding to the initial request, additional requests continue to be made broadening scope and detail: privilege marketing and sales details, lease information, equipment valuation, costing information and on and on. This tedious, disruptive process often continues for months with no letup. Sound familiar?

What’s wrong with this picture?

Do not start Due Diligence without a signed Letter of Intent. Of course a Buyer may argue need for valuation material before presenting an offer. Fair enough and middle ground may be reached by providing only properly prepared valuation material beforehand. Negotiate a Letter of Intent. after providing valuation material. Remember you thought you shook hands on an offer. The Letter of Intent confirms that offer in writing.

Important Documents and Recommended Sequence:

1. Confidentiality Agreement. Prior to releasing any information to a prospective Buyer, (including the fact you are considering the sale of the Company), a signed Confidentiality Agreement must be in place. How important is this? Ask yourself: what are the possible damages if customers, vendors, employees or banks discovered that you may be selling your company? Therein is the need for a Confidentiality Agreement. If you are representing yourself ask your attorney to draw up the Confidentiality Agreement. Don’t rely on cut and paste or cheap advice from friends for this important document.

2. Letter of Intent. A Letter of Intent is a negotiated , signed document stating the intent of the Buyer and Seller to enter into an acquisition agreement (Purchase and Sale Agreement) subject to the terms and conditions described. Many important particulars of the proposed transaction are included: Asset or Stock Sale; Price; Terms; Contingencies; Due Diligence Period; Transition Period; Non-Compete; Closing Date; Closing Agent are some of the important items included in Letter of Intent.

Absent a Letter of Intent the Seller has nothing more than conversation. Verbal offers have no legal merit.

3. Due Diligence. Due Diligence. Due Diligence allows parties to comfortably check financial statements, business practices, contingent liabilities, property condition, equipment, inventory and a host of elements that make up an operating company. Buyers are also expected to check similar items. This sentence is worded to remind Sellers of their responsibility to perform Due Diligence on Buyers. Due Diligence need not be disruptive or unending. After acceptance of a LOI, provide a master list of items to be submitted for Due Diligence. And check off the items as you process the information. During Due Diligence it is not unusual to discover items that may impact value. Make a list of the items that impact value and handle them at the end of Due Diligence rather then one at a time as discovered.

During Due Diligence protect privilege information being released. Do not provide names of employees, clients or vendors. Assign proxies or numbers. For example:

Sales by Client for 2006

Accounts Payable Aging Report

Employees

In this way you are providing valuation information while protecting confidentiality of your clients, vendors and employees. And one final bit of advice, avoid identifying the Company within provided material. You just never know who may accidentally view the information.

Competing Offers often yields greater value

As children we learned that things gain value in direct relationship to interest. In other words, interest creates value. Increase interest and you increase value. A lone Buyer not competing with others often pays less than full market value for the business. Our experience over the years has demonstrated it is not unusual for competing offers to vary by 20% and sometimes reach 50%. If fact this occurs so often that we offer a 20% discount to our client if the lone Buyer they are dealing with at the time actually purchases the business. We have never paid the discount because the lone Buyer usually has no intention of competing with others for the business.

This dilemma facing every owner who ever sold a company. The Do-It-Yourselfer increases risk of being discovered by customers, vendors, employees and worst of all his competition. Be assured if your competition discovers that you are selling, your customers, vendors and key employees will be informed in short order and the consequences may be swift and quite damaging.

I remember well the financial damage done by a single phone call made by a family member to the competition. That phone call cost the company millions of dollars.

So you are back to square one with the lone Buyer who seldom pays full value. But that is okay. The Letter of Intent negotiated with the Buyer seems fair. Doesn’t it? And besides you do have a business to run. And therein is the rub. The time and attention required to sell a business is naturally disruptive and intensive — and no doubt more so when it is sold by the Do-It-Yourselfer.

Another Way

There is another way. Retain a professional, experienced, and long-respected merger and
acquisition firm that discreetly represent owners of privately held companies. Let’s get acquainted.
At the first meeting you will receive a non-disclosure agreement allowing you to comfortably
discuss your objectives and goals in confidence. The meeting may be at our offices or your
business. After reviewing four years’ financial statements and asking business-related questions,
we will discuss the reality and timetable of achieving your expectations during a second meeting.
Our fee structure will be explained and a contract will be provided for your review and approval.
Interested?

If you want to know more, contact us via our web form or give our ACT professionals a call at 866-744-5422.

• Bankers
• Accountants
• Attorneys
• Shareholders
• Family
• Board of Directors

I am reminded of a client that suffered when a family member, serving on the Board of Directors, mentioned to an outside party that the decision was made to sell the company. This news reached the ear of a local customer and all too quickly customers across the country learning of the decision panicked. Undue customer’s concern caused a major loss of sales revenue which decreased the company’s value. Readers are reminded to be cautious in discussing business plans with insiders and business associates.

Another incident involved a seller releasing information in unedited form in response to a buyers request for a list of customers and related sales. This type of request is not unusual.

Although expedient to print out a list of sales by customers, sellers are advised never to do so. Edit the list. Use numbers for customer’s name and location. Example:

This technique applies to employee and vendor lists. Substitute names with numbers or other codes. Prudence demands protection of proprietary information.

Confidentiality

Real Estate Brokers frequently tell the world that a given property is for sale. Signs are placed and existing real estate or business opportunities are noted in the MLS. They tend to rely on their network of brokers to generate market interest. Although this system works for real estate it is not recommended for mergers or acquisitions.

M&A professionals act in a very discreet manner maintaining confidentiality throughout the selling process. We appreciate the sensitivity of proprietary information and the value of non-disclosure agreements. ACT maintains relationships with many hundreds of qualified people and companies that have an interest in acquiring companies that fit their criteria. If you want to learn more, contact us via our web form or give our ACT professionals a call at 866-744-5422.

Our services include preparing important marketing documents, discreetly locating and approaching buyers, and provide guidance in developing and understanding salient, esoteric transaction terms. ACT brings years of experience to your side of the table in all aspects of a very complex M&A process.

The following summarizes a recent representation and provides an insight into ACT’s professional representation services:

ACT entered into a representation agreement with a local Exhibition Booth Company. They selected ACT after interviewing several competing merger and acquisition companies.

During the first two months, we performed all of the valuation work including recasting the financial statements and writing a complete Confidential Business Review, also referred to as an Offering Memorandum, a key document used for marketing the Company. ACT created the prospective buyer data base and went to market with a strong emphasis on confidentiality. During a five week window of time several buyers were introduced and an offer was negotiated that surpassed owners’ expectations. ACT then arranged a SBA/Bank loan for the buyer, at no additional cost to our client and the Buyer.

As is our custom, ACT marketed the company without specifying a selling price. It is preferable for competitive market forces to bargain price. Confidentiality is diligently maintained through out the process. As a result employees and vendors were not aware of the transaction until the Company elected to introduce the buyer and publish the event in the industry’s trade journals.

ACT takes great pride in the above referenced sequence of events, process and results that typifies all of our representations. ACT specializes in representing manufacturing, service and distribution companies with market values between one and fifty million dollars. What is the next step? It all starts with the first meeting to discuss your objectives and expectations and out methods and fee structure. To schedule a confidential visit, contact us via our web form or give our ACT professionals a call at 866-744-5422.. Remember “beginning is half done.”

Private Equity Deals

Why do I so often provide statistics and anecdotal information on private equity deals and compare them to strategic deals? For a couple of reasons: 1) private equity groups are always in the market looking for platform deals (a “platform” is a company that can serves as the platform for growth that they can build into a much larger enterprise) or add-on deals (an “add-on” or “bolt-on” is a company that can be acquired by one of the private equity group’s existing platforms), and 2) a strategic or industry buyer isn’t necessarily always a good choice to meet the goals of my client’s owners. Couple these considerations with the fact that strategic industry buyers are not always in the market, and are potentially dangerous buyers, and private equity groups often make the most sense to meet my clients’ needs.

Most of the time it works like this: If you simply want to sell out and get the highest price without regard to the future disposition of your company and your employees, a strategic buyer is often (but not always, as indicated above) the best bet. However, if you still want to see your name on the door after closing, you want the company to succeed and grow bigger and better, you want a future and opportunities for management and employees within the company, you want to keep an equity investment in the company, you want to keep a personal involvement in the management or direction of the company, you want to provide an opportunity for management to gain equity in the business, then a private equity deal will often make the most sense.

As I mentioned earlier, there about 3,000 of these private equity groups seeking deals, and making deals. They do this all day, every day, just like I do, so they are ready to deal and they know what they’re doing. The communications are quick and easy, and they don’t waste anyone’s time, unlike some strategic buyers.

What circumstances would cause me to pursue private equity groups for one of my clients?

1. Client wants to take a substantial amount of money off the table but continue to run the business. This is the classic “two bite at the apple” transaction with the owner seeking to take the first bite now, and another bite in about 5 years when the apple is bigger and brighter. This type of deal often yields more in the aggregate for an owner, than an outright sale.

2. Client needs more capital for an aggressive growth plan. This capital could be used for multiple acquisitions, or it could be used for another type of investment – a new production line, or something else to grow the company. The private equity group can fulfill this capital need via a “growth capital transaction”.

3. Client is founder of a family-owned business, wants to retire and needs cash to fund retirement, but the rest of the family members working in the business don’t have the money to buy out the founder. Once again, the private equity group can provide the capital that the other family members lack, and become a new partner in the family-owned enterprise. These transactions are often called “family re-capitalizations”.

4. Client is founder of a business who wants to retire and the management team would like to buy the business, unfortunately like many management teams they have little or no money to invest, certainly not enough to buy the company. The owner likes the managers and wants them to have a shot at getting as much equity as they can, but the bank will never put up enough money, and the owner doesn’t want to lend the money to his managers. That just wouldn’t be a prudent risk heading into retirement. Again, the creative private equity group brings cash that the managers don’t have and sponsors a management buy-out.

5. Client is a partner in a business with another owner, but they’ve decided they don’t get along and one partner wants to be bought out. The only problem is that the other partner doesn’t have enough money to buy out the first partner. The private equity group solves this problem by becoming the replacement partner for the departing partner.

6. Client wants to retire from a business but doesn’t have a second in command who can take over the business and handle all of the aspects of the business that need to be handled. A private equity group that sponsors managers (often former CEOs and CFOs) seeking to acquire businesses in this industry could fill the bill for my client in this case.

If you have goals like these, a private equity deal might be right for you. Just call me toll free at 800-240-4609 or send me an email to discuss.

Can Mezzanine Capital Increase Purchase Price?

The answer is yes, but what is this “mezzanine capital” anyway? In his recent “On the Left” newsletter, Randy Schwimmer of Churchill Capital described mezzanine capital as “equity dressed up as debt or vice versa”. It has some characteristics of each. First of all it is junior debt, second in position to the senior lender (often a bank). The buyer has only so much equity to put into the deal, and the bank will only lend so much based on the asset base and the cash flow. Add them together and the equity from the buyer plus the loan from the senior lender and the price isn’t high enough to get a deal done. What to do? Bring in mezzanine capital to add another 1 x EBITDA or more to the purchase price. The mezzanine lender is second in line behind the senior lender, so if things go really badly in the future the senior lender has the collateral of the company’s assets, but the mezzanine lender has little or nothing to fall back on. In that regard the mezzanine capital provider is similar to a preferred equity holder.

Mezzanine capital is like equity in one more way. Too boost their returns, mezzanine capital providers get something else besides an interesting paying note when they put their money into a deal. They get warrants (something like stock options) that they can exercise at some future date to obtain equity in the business. The amount of equity obtained by exercising warrants will vary depending on the interest rate that they receive and on the model of the purchased company’s future value when the warrants can be exercised. So if and when the mezzanine lender exercises those warrants, it becomes a true equity holder in the business. Sometimes mezzanine warrants can be purchased back at a pre-set price by the company or its shareholders.

Interestingly, senior lenders are often willing to lend more, and thereby provide a higher price to sellers, if a mezzanine lender is involved. The reason is that they consider mezzanine lenders as equity holders, hence the equity/debt ratio is higher and the deal seems less risky to the senior lender.

A mezzanine lender can therefore increase purchase price in several different ways. At the same time, a mezzanine lender can increase return on investment for a private equity group that’s bringing the equity to the deal. Sellers of growing companies who will keep skin in the game after a private equity deal, should not automatically reject the higher interest rates and warrants of a mezzanine financed deal. In fact, as co-investors with the private equity group, they would be well advised to learn how mezzanine lenders support the initial purchase price and increase their return on equity when they take their second bite at the apple.

The Economy in Mid 2011 – Up, Down or Sideways?

Yes. Next question. J

Seriously, we need to keep our eye on this ball to see which way it’s going to bounce. Recent performance of the U.S. economy (and the world economy) has not lived up to expectations, but it is still growing, albeit slowly. It may not feel like we’re in an economic expansion phase but we are, and the economy has been growing for 2 years, since June 2009. Mostly when we talk about the economy we say we’re in an economic expansion phase when the Gross Domestic Product is growing. When it grows we’re in an economic expansion but when it declines we’re in a recession. By this measure, the Great Recession began December 2007 and ended June 2009, since the economy has been growing ever since.

Prior to that time our economy was in an absolute free fall with the job market losing jobs at 500,000 to 800,000 jobs a month. Now private sector jobs are increasing modestly in most sectors of the economy (except for construction) with the service sector, particularly professional services recently playing a leading role. At the same time government jobs are now being cut back sharply so the overall unemployment rate actually ticked up lately. With this many people unemployed, and employed people spending less and saving more, the engine of our economy (American consumer spending) is still sputtering as it climbs out of the Great Recession. The Federal Reserve has lowered its expected growth rate for 2011 to a range of 2.7-2.9% from their previous forecast of 3.1-3.3%. The Fed still expects economic growth to increase in the second half of 2011, as they and many economists attribute much of the recent slowing in economic growth to disruptions caused by the Japanese Tsunami, and also to the spike in oil prices that we saw earlier this year. However, a study by the Fed Bank of Cleveland says that the 3 percent premium between yields for 3-month and 10-year Treasuries implies economic growth of only 1.1% in the next 12 months through June 2012. That would not be good news.

The recession may have ended 2 years ago and the economy may be growing, but the effects of this devastating recession still linger. Employment growth always lags economic growth since it takes a while for businesses to ramp up and re-hire to fill the needs of an economic expansion. Still, historically we get back to normal pretty quickly, with most recessions seeing a return to peak pre-recession levels of employment within about 14-24 months after decline in employment starts. The longest time for employment to recover was after the recession that began in 2001. It took 46 months during that so-called “jobless recovery”. In the jobless recovery it took 29 months to see any decrease in the unemployment rate. This time we started to see some reduction in the unemployment rate after 26 months but it’s clear that we will not return to the pre-recession peak level of unemployment within 46 months of the start of the recession in December 2007. Realistically, no-one is predicting that we’ll even get there within 5 years after the start of the recession. For one reason, this recession was much worse and we suffered job losses that were more than 3 times greater, so the hole we have to get ourselves out of is 3 times deeper. If one uses a ruler to extend the current rate of job growth into the future, it looks like it could take nearly 84 months (7 years!) to get back to where we were (that means the end of 2014). The Fed now projects unemployment to be at 8.6-8.9% by the end of 2011, 7.8-8.2% at the end of 2012, and 7.0-7.5% at the end of 2013, and in the “longer run” to end up at 5.2-5.6%. At the current rate of economic growth, it will still take several more years to get back to where we were when the recession started in December 2007. Whether you pay attention to my ruler on the graph or the Fed’s more sophisticated? approach, we’re looking at 2014-2015 before our economy will feel normal again. In the aggregate, this time we suffered one of the deepest and broadest recessions we’ve ever seen. This was clearly the worst one since World War II. You may recall that the big one before WWII was called the Great Depression.

Private sector employment began to grow again in March 2010, but the rate of growth has just not been strong enough to significantly reduce unemployment. What’s wrong? My opinion: We’re not seeing any growth in construction employment like we should coming out of a recession. We’re hardly building a thing in this country. We’re certainly not seeing anything close to the housing construction we need in a healthy economy, and we’re not building any Grand Coulee Dams either. The housing and home building industry continues to be in a 5 year deflationary Depression that started in 2006. Instead of new construction of single family houses we’re seeing the continuation of a foreclosure juggernaut that has put millions of existing homes on the market and driven down prices year after year destroying wealth for all homeowners in America, and making them much less likely to spend money. This slow motion train wreck in the housing market continues to this day. Until it’s over, I don’t foresee any significant strengthening in job growth. We need to get through all the foreclosures and sell the foreclosed homes, get them occupied, then start building demand for housing that will put 2 million unemployed construction workers back to work. In the meantime, maybe we’ll find some other things for them to build. One can only hope.

OK. Time to dust off the crystal ball. What’s ahead? I think I see continued modest growth in the U.S. economy through 2011 and 2012, despite the best efforts of Congress to reverse the trend. I see the Fed continuing to keep interest rates as low as they possibly can for at least another year, since those low rates are the only game in town that can provide much stimulus to economic activity. I think I see a continued slow reduction in the unemployment rate because the growth in the economy won’t reach the levels needed to knock the unemployment rate down by even 1 % in a year, and because all the state and local government budget cutting is now also contributing to increasing the unemployment rate – running against the private sector tide. I see an unemployment rate of about 8.0 to 8.5% a year from now (under 8% if we’re really lucky). I see the housing market hitting bottom with prices stabilizing and beginning to rebound a year from now. I see housing and construction employment strengthening slowly thereafter with full employment (that is about 5-6% unemployment rate) by 2014-2015. I see another recession sometime after that, although certain shocks to the economy could push us into another recession sooner. Greece and Italy are hot topics now, along with the wild idea that the U.S. might default on our obligations for the first time in our history, but there is no shortage of other opportunities for something else to go wrong…disruption to oil supply, terrorist attacks, financial chicanery, you name it. Another recession will come someday, for some reason, but my crystal ball says we’ll not see that happen for another 3-4 years, maybe longer. Did I mention that my crystal ball is painted black and has a number 8 printed on it?

The crystal ball and I offer no warranties on these prognostications . The expiration date for all predictions is tomorrow, and do not try this at home. In other words, the crystal ball and I can’t do any worse than a professional economist, so trust us at your peril.

To put this into some greater historical perspective, a big recession started in August 1929. The stock market crashed in October that year. Poor Herbert Hoover had to live through a devastating drop in the economy that continued for the remainder of his term. The free fall in the economy finally slowed in 1933, Roosevelt’s first year in office when unemployment peaked at 24.9 percent. By 1934, the recession ended and Gross National Product grew by 7.7 percent and unemployment fell to 21.7 percent as recovery began. The economic recovery continued through the final year of Roosevelt’s first term in 1936. In 1937 the government cut spending due to concern about balancing the budget and another recession started just at the time when the unemployment rate had dropped by nearly half to 14.3 percent. In 1938 the GNP fell by 4.5 percent and unemployment jumped up to 19 percent. In 1939 the government borrowed a billion dollars and began to prepare for war. Manufacturing shot up by 50% between 1939 and 1941. The global depression ended as the world went to war. The numbers were different then than now, but over this 10 year period between 1929 and 1939, an apparently strong recovery was underway that subsequently turned into a second recession. Our current recovery is actually not as strong as the one Roosevelt had going in his first term in office. Food for thought!

Since it’s easier to see where we’ve been than where we’re going I’ve provided a link to the chart gallery at Calculated Risk, a finance and economics site. Check out a few of these graphs that illustrate the trends. Here’s the link: http://cr4re.com/charts/charts.html . If those charts don’t convince you that this was no ordinary recession, nothing will.

Why is any of this important to a business owner considering sale of the business? I think it helps provide some general perspective on timing. An owner should want to sell when there is strong demand from buyers and when multiples are strong, a time like now for example. An owner would want to avoid selling when the economy is weakening, like in the second dip of a double dip recession. If you didn’t sell out in early 1929 and had wanted to sell your business in the 1930s, a good time to sell would have been 1936 before government spending was cut and a new recession started. But maybe you thought the economy hadn’t fully recovered (it hadn’t) and everything would surely get much better in 1937 or 1938 because the government was cutting spending and balancing the budget (it didn’t get better, it got worse). Maybe history doesn’t repeat itself but it has echoes. Will the economy really start cranking on all cylinders because state and local governments are cutting spending and the federal government is talking about doing the same (again)? I’m not convinced, and I think we’re still at risk of the dreaded double dip recession. Changes in the business sales climate operate over rather lengthy 5 to 10 year periods. 2011 is a good time to sell, but I can’t answer for 2012 and 2013. I think we’ll be OK then, but we could easily be pounded down by another recession. It has happened before. Another recession, and maybe another big one, will almost surely happen sometime this decade. In my opinion smart owners will sell well before the next recession. A word to the wise…..

Top and Bottom 10 Industries For Growth

IBIS World published a list of the top 10 fastest growing industries (2000-2011) last month, along with a list of the bottom 10 laggards (2000-2010), industries that were declining sharply or dying. I thought you might be interested.

The Top 10 – Rapidly Growing Industries

1. VOIP (voice over internet) Providers
2. Wind Power
3. E-Commerce & Online Auctions
4. Environmental Consulting
5. Biotechnology
6. Video Games
7. Solar Power
8. 3rd Party Administrators & Insurance Claim Adjusters
9. Correctional Facilities
10. Internet Publishing & Broadcasting

The Bottom 10 – Dying or Declining Industries

1. Manufactured home dealers
2. Record Stores
3. Photofinishing
4. Wired Telecommunications Carriers
5. Apparel Manufacturers
6. Newspaper Publishing
7. DVD, Game, Video Rental
8. Mills (textile, sock and hosiery, apparel knitting, rug and carpet)
9. Formal Wear & Costume Rental
10. Video Postproduction Services

Value is created and destroyed in our economy daily, but let’s not break out the buggy whip manufacturer analogy. The Westfield Whip Manufacturing Company has been in existence since 1884, and has a flashy web site at http://westfieldwhip.com/ . Giddy-up, you slow movers!

Referrals

Thank you to all of the attorneys, accountants, financial planners, bankers, business owners and others who have referred clients to us. We greatly appreciate the trust and confidence you have placed in us. If you would like to refer a business owner to us for value consultation, business purchase, business sale, management buyout, management buy-in, or re-capitalization, please be assured that all of our services are totally confidential. Call me today at 800-240-4609.

Dr. Campbell, Principal and Managing Director of the Portland-Vancouver office of ACT Capital Advisors, has over 30 years of business experience. He chairs the AM&AA Market Research Committee, and is principal author of AM&AA’s semi-annual “Deal Stats” survey. AM&AA selected Perry as its 2009 Member of the Year in recognition of his contribution to the profession

Best Regards,

K. Perry Campbell, Ph.D., CM&AA
Chair, AM&AA Market Research Committee
Alliance of Merger & Acquisition Advisors 2009 Member of the Year
Principal & Managing Director

ACT Capital Advisors, Inc.
4400 NE 77th Ave, Suite 275
Vancouver, WA 98662
USA

Phone: (360) 696-9450
Toll Free: (800) 240-4609
Cell: 360-904-9048
Fx: (503) 296-2452

pcampbell@actcapitaladvisors.com
http://www.actcapitaladvisors.com

First of all, we’re not looking for A buyer we’re looking for Many buyers. The old saying in our profession, is “One buyer is no buyer”, since things can go wrong with any single buyer, and the deal you could almost taste goes up in smoke. Multiple buyers create competitive pressure to give you your highest price and/or best deal, and they also give you backup buyers in case your chosen partner tries to “re-trade” the deal or simply walks away. Multiple buyers give you choices and recourse.

OK, but where do those buyers come from? It works like this:

Financial buyers: private equity groups, small business investment companies, business development companies, family offices, etc. We don’t really need to look very hard. They are constantly reaching out to us via mailings, emails, deal announcements, phone calls, personal visits, private meetings at conferences, lunch meetings, coffee meetings, beverages, gifts and promotions, just so they get a chance to invest in our clients’ companies. That helps us keep them top of mind, and our familiarity with their deals as well as what they like and don’t like helps us hit the mark more closely with those who take all the time and trouble to keep us informed. Nevertheless, we don’t let any of that influence us when we’re working for a seller client to whom we owe our loyalty. We actually take the time and effort to research the 3,000 or so entities that might be buyers and we line up your company’s characteristics with 1) their stated investment criteria, 2) their current portfolio holdings, 3) their past portfolio holdings, and 4) the relevant experience of their principals in your industry. I employ an almost full-time research associate to tell me everything I need to know about these prospective investors, and I pay for the industry-specific data bases and on-line research tools that allow her to find everything I need to know. Her name’s Jenny and she’s the best.

Strategic buyers: privately held and publicly traded companies in your industry or an associated industry. This is a harder lift, even in an industry where I have a lot of experience. Strategic buyers live in their offices at corporate headquarters. These buyers typically don’t have anywhere near the outreach and networking programs that financial buyers have. Financial buyers know they have to hustle to get deal opportunities, but the CEO of Big Behemoth Widget Company has other things on his mind and he figures the deals will find him because after all, doesn’t everybody want to sell to Big Behemoth? Additionally, strategic buyers don’t do a lot of advertising about internal re-organizations that may put someone new in charge of acquisitions this year. This is where research really pays off. We pay for the research tools that allow us to identify strategic buyers of any minimum or maximum size range, within any industry, and also to identify the key executives and get their contact information. Jenny uses those data bases and subscriptions to industry publications to get us an initial list of strategic buyers. For some industries we keep an ongoing tracking list of who’s bought whom, and we subscribe to various publications that tell us what deals got done this week. But how do we assure ourselves of a good fit for any buyer target with our client’s company? Once again, Jenny does the heavy lifting and researches outside data bases as well as each company’s web site to determine whether it really looks like a fit. When the process is done, we’ve got a pretty good target list for client review. The final list will incorporate any changes our client requests for any reason.

Individual buyers: individual buyers are sometimes the best buyers for smaller companies. If that’s the case for your small business we’ll make that recommendation. Those buyers come from two sources: 1) individual buyers who have reached out to us to indicate their interest in buying a certain type or size of business, and 2) advertising. Individual buyers live online. Advertising via online business buying and selling web sites, and places like the Wall Street Journal online provide most individual buyers. Honestly, although individual buyers are best for some clients, they are not my favorites. They often are long on dreams but short on capital, so it takes a lot of work to sort through them just to find out if they’re qualified. Additionally, since they may be using much of their net worth to buy a business, they often are very emotional and may not be totally rational actors. There is a great deal of hand holding involved when selling to individual buyers, and Jenny says I don’t pay her enough to do that job! Still, there are many well qualified and rational individual business buyers who know what they are doing, and those are the ones we really want for our clients. We just have to take a pragmatic approach and quickly sort out the dreamers who want some of our time from the real buyers who deserve to have most of our time.

That’s the long and short of it. We don’t let our always imperfect ‘knowledge’ get in the way of the solid research we should always use when representing a seller. The old information we had about industry players last year can be completely out of date this year, so up to date research is key. We work hard to get a good set of current, qualified buyers so that our clients will have options on who to choose and recourse if the chosen buyer fails in any way. This is fundamental blocking and tackling for us. If you’d like us to be on your business sale team, contact us via our web form or give our ACT professionals a call at 866-744-5422.

http://www.worldteanews.com/page.cfm/action=Archive/ContentID=184/EntryID=154

We love to help our clients structure private equity deals, whether they are growth capital deals, management buyouts, 100% sales, partner buyouts, family re-capitalizations to fund retirement of the founders, or “two-bite-at-the-apple” transactions so the owners can take some money off the table now and some later. If you want to learn how it’s done, contact us via our web form or give our ACT professionals a call at 866-744-5422.

http://www.worldteanews.com/page.cfm/action=Archive/ArchiveID=12/EntryID=136

We love the branded food and beverage industries – tea, coffee, wine, beer, cookies, cakes, and all sorts of snacks and other specialty foods. There’s no other sector where you can really get a taste for what the business is all about. If your company is brewing, mixing, fermenting, baking, or otherwise concocting something new and tasty we’re interested.

If you want to know more, contact us via our web form or give our ACT professionals a call at 866-744-5422.

The overall expectations for deal-making are bullish, with 90% predicting an increase. In North America, 95% predicted an increase. The sectors with the most deal-making potential in North America are expected to be TMT (Technology, Media and Telecommunications), Energy/Utilities, and Healthcare/Pharmaceuticals.

Across regions nearly 80% expected economic conditions will improve at least moderately. In North America, 74% expected moderate improvement, but less than 1% expected significant improvement. European and Asia-Pacific respondents were more bullish on the global economy, with 8% and 10%, respectively, expecting significant improvement.

The valuation climate (the gap between seller and buyer perceptions of value) remains a concern, but 75% of North American respondents expect that gap to narrow. Overall, the respondents were split on whether this is a buyer’s or a seller’s market. (This corresponds to my view that we’re in a normal range of valuations right now – not too hot, and not too cold.)

Availability of financing is linked to valuation, and survey respondents thought it was still an obstacle that could stop or stall closings of M&A transactions. They expect financing will be easier to obtain, but they do not expect a return to pre-credit crisis levels. (In general, that means that valuations will not get over-heated, as long as lenders’ memories of their losses remain.) While acquisition debt will be easier to obtain, buyers should expect more covenants, and deals will not be over-leveraged.

What does all this mean to you if you’re a business seller? It means that there will be a considerable appetite among buyers for buying businesses in the coming 12-24 months – perhaps that means businesses like yours. It means the buyers will be paying reasonable prices, but not wild and crazy prices. It also means that the acquired company will not be over-leveraged, and will therefore have a better chance to survive any future downturn in the economy. If you want to know what the latest market trends mean specifically for you and your company, contact us via our web form or give our ACT professionals a call at 866-744-5422.