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What really happens at the Dealmaking Table?

P3220394-CroppedKnowing what to expect helps owner/entrepreneurs produce better dealmaking results and avoid getting boxed into bad situations. Savvy buy-siders try to keep owners focused on the glory (and gloss over what could be gory) while reeling them in. Not until the hook is set and backing out would be painful do their technicians hammer on the issues that become costly adjustments.

Whether the deal is for the sale of a business, the purchase of another, raising debt or equity, buying out a partner or striking a strategic alliance, the process always becomes more complicated than originally envisioned. While there is no shortage of capital for independent private companies and family owned businesses, actually completing fair deals and keeping everybody happy is the hard part. Here are some insights on what to expect and how to protect your interests.

Timing is rarely convenient for owners who haven’t been actively planning for a deal. The trigger for action is often an incoming call which is either flattering or frightening. A respected industry leader wants to talk about doing something together or a major revenue source begins to stumble. A new product line takes off and draws attention or a partner wants out when cash flow can’t support more borrowing or the hit to equity.

The discipline of tidying-up before a turn at the dealmaking table will minimize surprises, reduce anxiety and may be the only way to be able to close the deal. If you can’t do that, at least recognize it and begin to deal with issues on your own terms so that you don’t hand control of them to someone else unless you want that to happen.

In many instances, the historical financial results and some measure of management’s plans have been shared under a confidentiality agreement before the principals sit down together. In an auction sale process, the buy-side will have been required to provide a valuation range in order to be invited to talk. For an investment or credit facility, review of background information is common for determining level of interest in meeting with management.

Financial fundamentals always matter. Since the earnings proxy so commonly has adjustments or a story attached, the focus of conversation about earnings should be on their make-up and quality so that approached to valuation can be validated. While relative value is a multiple of EBITDA, price is a dollar value and structure determines how price translates into after tax proceeds. The difference between 6.0x and 8.0x and 10.0x is a function of market position and quality of management within a framework of opportunity size and deal competition. Size of company is a major factor in valuation.

The buy-side will determine what they will pay for an acquisition (price amount, not multiple) or how to backstop an investment (liquidation preference to cover downside and supercharge upside). Lenders will focus on the measure of availability and cap with the protection of fixed charges coverage and selective veto power.

This all gets a little trickier if the recent fundamentals (most importantly earnings) don’t support the sell-side or issuer valuation expectations or the credit request. If these problems can be overcome, they may require compromise and creative structuring.

Most published accounts of deals are biased because people like to talk about their successes rather than the tough issues that kept other deals from getting to the finish line. Taking an objective view to anticipate and resolve the trapdoor issues before or at the outset of negotiations pays great dividends before the power-leverage shifts away from the business owner. Signing a general letter of intent or term sheet and hoping for the best inevitably leads to disappointment. Avoid getting backed into a corner by clarifying dealbreakers early.

Tell-tale signs of an owner’s mindset often limit value or discourage interest without their even knowing it. This is generally less damaging in a change of control deal, but can sink an equity investment or strategic alliance when the other party recognizes the danger of reliance on an entrepreneur who isn’t ready or capable of the psychological adjustment to serve the best interests of all the owners. More deals die because the money loses faith in the owner than for any other reason.

Chances are that the other party is a more frequent participant in the type of transaction on the table. If they are a public company or private equity firm or bank, they usually have less flexibility in what they can live with than independent business owners can readily appreciate. The rigidity is evidenced more by terms than by pricing. Entrepreneurs are cocktail-napkin-May-blog2more comfortable living with risk than investors and lenders governed by an independent board or approval committee with fiduciary responsibility.

A corporate financial advisor with a track record of success in helping business owners address all of these concerns can be worth their weight in gold. When you decide to go to the dealmaking table, give us a chance to help you make it as rewarding as possible.

Open Season for Corporate Hunger Games

Graphic for blog April 2012 JPEG croppedCorporate buyers committed to growth through acquisition are stepping up their game to win the favor of owners of successful middle market companies. Although business owners strive to be meaningful players on the competitive scorecard, they often don’t actively prepare for the time when bigger players approach them. Most acquisition deals for entrepreneurs and family businesses are ignited by an incoming call from a senior executive at a larger company you know and respect. You may not be actively planning to sell, but you might consider the option when the buy-side is most eager to make an offer you may not want to refuse.

If you own a good business, you are not impressed by the idea that your company is an attractive target for a strategic buyer or a private equity fund with an agenda that you fit nicely into. What you may not know is exactly how real the alternatives are for grabbing the brass ring and having a shot at sweetening the profit in a deal. That is where MidMarket can add value for you to maximize those opportunities.

A common mistake by owners is assuming that the buy-side interest will be there whenever they decide to go to market. The fact is that a variety of factors outside of your control have an impact on the attractiveness of your company. You should be cautious about assuming that the market will be interested whenever it suits you. We suggest striking while the iron is hot.

What the majority of entrepreneurs and family businesses so often fail to appreciate is that people who own businesses for a living (corporate buyers and private equity firms) are fundamentally different from people who happen to own and work at the business they own. Professional ownership is motivated by the opportunities to grow and monetize the business, so different standards for measuring success apply. Unless you have actually participated in an ownership group involving a corporate owner or private equity owner, you most likely don’t really know their game. We can provide that input for your benefit so that you manage the interaction with prospective buyers or investors.

What is not surprising it that your competitors are plotting to succeed at your expense. They may not be as nimble as you or as capable, but they are very real and you must be ready to anticipate and respond to their actions. Strategic deals often trigger further activity and can also limit options. All the more reason to be out in front of your competitors on these matters.BeReady-blog

MidMarket can help you to take advantage of this surge in corporate acquisitions and ownership transactions. Just call us if you are interested in how we can be helpful. Contact us for a no-strings attached assessment of your situation.

Three years on and we are nearly 100% better…

chart-final-webThree years ago today the public equity market bottomed after a harrowing fall that slammed the broader financial markets. The first few months of 2009 tested the mettle of nearly all of us who rely on the smooth functioning of markets to provide capital for business owners. Stability has been restored and the private market is both flush and eager to invest. Professional owners of middle market companies are already in full swing taking advantage of opportunities to recapitalize at record prices. Fundamental improvement in several industry sectors has opened the market on a broad basis.

What are professional owners? They are asset managers who invest in private companies for the purpose of building and trading them for profit. They differ from most other private company owners because they have a laser focus on planning and executing to increase value that can be monetized. They concentrate on organizational muscle to strengthen management teams and systems, and then meticulously monitor progress toward the goal of sustainable growth at maximum margins. They come in all shapes and sizes and seek both minority investments as well as control positions. Even the control investors love for sellers to have a piece of the upside.

How about the rest of us? Most businesses under entrepreneurial or family control are at least a little less disciplined for a variety of reasons. The main reason is they don’t expect to be in the market in the near term and they mistakenly think that investors or strategic buyers will overlook their being out of shape. Then some market development or personal priority change motivates the discretionary participant to want their business to be judged as worthy as those of the professional owners. They don’t say it that way; they just expect a premium valuation that is as good as a similar company that has been groomed for maximum value. That is when it is most apparent that the biggest rewards go to those who run their businesses like professional owners.

Why does any of that matter? The stability and maturity that has been achieved in the market for investment in private companies combined with the predictability that is finally in place has opened more alternatives than ever for business owners to raise capital and monetize some or all of their illiquid value. Manageable volatility will continue and of course there are continuing economic and political risks. Nevertheless, conditions are positive and on the uptick; very real opportunities are there if you want to pursue them.

cocktail-napkin-blogLet’s appreciate that we have survived and have emerged smarter and tougher than most of us were three years ago. Ask yourself whether you have an interest in knowing just what growth financing and liquidity options are available for your business. MidMarket is here to help you take advantage of opportunities you might not even know are waiting for you. In the meantime, today’s anniversary is one that we can all celebrate!

Is the Year of the Dragon your time to slay China problems

02-2012-blogTelu Tsai and Jian Zhang from MidMarket enjoyed the New Year festivities along with their families here and in China. This week begins a particularly important year in China as people anticipate the once a decade leadership change as the second year of the 12th Five-Year Plan takes shape.

Is your business invested in China through a joint venture or wholly-owned foreign enterprise? Is it performing as reasonably expected? Chances are you have concerns about how it really going and whether it could be improved. If you are invested in China then you undoubtedly faced some dragons in your path to success. We have encountered a few with our own joint venture experience.

If you are thinking about investing in China this year, you will benefit from the insight of those that have gone before you. Whether it be a JV, WOFE, greenfield operation, acquisition or strategic alliance, you can avoid missteps, anticipate issues and strengthen your strategic position with guidance from those who have relevant experience.

Imagine the impact of dramatically improving the performance of your China operations or savings from launching the investment based on the strongest footing. We can help with both of those situations because we have the talent and the passion to serve our clients’ best interest. We have the experience in China to help you be more successful there.

MidMarket is a valuable resource to North American /European companies and investor groups with interests in China. Those investments range from joint ventures/subsidiaries to potential investments such as equity stakes or acquisitions. MidMarket offers financial professionals experienced in Western corporate transactions/markets who are natural born Mandarin speakers comfortable traveling in China with clients interested in in-depth interaction with Chinese executives and government officials that are not fluent in English.

Telu Tsai is a partner at MidMarket mainly based in Philadelphia and frequently travels to China on behalf of the firm and our clients. Jian Zhang is a director at MidMarket and will be based in Beijing for the next few months supporting a Chinese client raise growth there. They are supported by Patrick Hurley in Philadelphia and Song Hong in Tianjin. MidMarket serves clients in Beijing, Shanghai, Harbin, Guangdong and Tianjin as well as various other major markets and secondary markets throughout China.

  1. MidMarket provides these services for Western clients already invested in China.
    1. Improving the quality, reliability and usefulness of financial planning and reporting.
    2. Pinpointing and defining operational problems in order to take action to improve performance.
    3. Working with Chinese and Western managers on strategic business planning and accountability.
    4. Assistance in obtaining bank debt and equity financing in China and optimizing inbound financing.
    5. Planning and implementing divestiture exit strategies and investor liquidity programs.
  2. MidMarket provides these services for Western clients considering investing in China.
    1. Identification of strategic corporate partners/ co-investors/acquisition candidates.
    2. Due diligence investigation/confirmation in China and assistance in negotiations for prospective investments and acquisitions in China.
    3. Clarifying necessary local, provincial and central governmental approvals (and/or regulatory and tax), timing and process considerations.
    4. Establishing and maintaining relations between Western corporate/investor with key Chinese influencers relevant to the company’s success.
  3. MidMarket provides these services for Chinese clients.
    1. Assistance in corporate financial dealings with Western corporations and investors.
    2. Identification of prospective Western investments, acquisitions and corporate relationships.
    3. Assistance to Chinese government in developing and maintaining strategic relationships (i.e. ACG)
    4. Educational programs (in the U.S. and China) for senior management and customized internships for exceptional mid-level managers.

So whether your business is already invested in China or consider it to be a near term priority, MidMarket can help you to make the most of the Year of the Dragon. Call us to talk about how we can help.

CallTelu-box3MidMarket’s value proposition is to bring our knowledge and insight to conduct a thoughtful analysis that you can use to accomplish your goals. We deliver relevant market data and valuable information along with sound independent advice aimed only at your best interests. We do that on a timely and cost effective basis that in no way limits your flexibility or ties you to a commitment to us. Let us show you what we have done for so many business owners for over 30 years and how we can make that valuable resource work for your advantage.

Strategic Financial Options for Closely-Held Businesses

profile5The calls come mostly from intermediaries on behalf of a strategic investor who has identified your company as an attractive match. Others come from a supplier or customer who wants you to be aware of a potential opportunity to buy or invest in a struggling producer. Some private equity firms have even made direct approaches to talk about your taking some money off the table and continuing to control the business. Is it just stirring the pot or is there something that might be of real interest?

You’re pretty well informed about how businesses like yours are valued and what strings are attached to raising capital. There is plenty of loose talk about multiples of normalized EBITDA for a debt-free balance sheet with a net asset adjustment for net assets or working capital at closing. You know that non-control investors want some form of downside protection and a put at fair value in five years to get their return if there is no sale.

Even with a keen awareness of activity in your industry, there is quite a lot that is not obvious. What did they really get and what did it really cost? What were the stumbling blocks and the types of issues that they wish they had addressed earlier? There are always factors which can and do have a material impact on deal structures and whether the transaction can even be completed.

Making the most of your situation begins with knowing your strategic financial options and having reliable information specifically relevant to what you might want to do. We work with business owners to answer these questions.

  • Can I improve the financing arrangements that I already have?
  • How attractive is our company to a strategic or private equity investor?
  • What is a realistic valuation for raising equity or selling the company?
  • What would the structure/cost be for subordinated debt to relieve bank pressure?
  • Which investors/lenders/buyers would be most interested and most valuable?
  • How should we finance an acquisition or our expansion plans?
  • How could we recapitalize for partial cash-out or to buy-out a partner?
  • What other alternatives should we be aware of?

StrategicFinancial5MidMarket’s value proposition is to bring our knowledge and insight to conduct a thoughtful analysis that you can use to accomplish your goals. We deliver relevant market data and valuable information along with sound independent advice aimed only at your best interests. We do that on a timely and cost effective basis that in no way limits your flexibility or ties you to a commitment to us. Let us show you what we have done for so many business owners for over 30 years and how we can make that valuable resource work for your advantage.