Life is full of second chances, but when it comes to mergers and acquisitions, the maxim “you have only one chance to make a first impression” usually is true. The first time prospective sellers sit down with prospective buyers is a critical moment — one that may determine whether the deal will go forward and prosper, or get stopped in its tracks. If you’re selling a business, you naturally want to
impress your buyers at this initial meeting. Your success — or failure — will come down to preparation and attention to details, including the attendees, location and agenda. Choosing your reps One of the first decisions you’ll need to make is
who will attend the meeting. Do you want to keep it small and confidential, including only your owner or CEO and your M&A advisors? Or do you wish to invite senior managers representing your company’s various departments? Each configuration offers certain pros and cons. A meeting limited to owners and CEOs will likely
move faster and be more candid. But its success will rely on the impression made by only one or two individuals. Involving a team of managers, on the other hand, enables you to provide more information and expertise. But it also increases the
chance that the meeting will get bogged down with too many — or even mixed — messages. You’ll also want to consider whether your prospective buyer is sending an army of officials or only a few key decision-makers. Your M&A advisor can help you decide what’s appropriate under the circumstances.
Mapping a location Although it may seem like a minor detail, your meeting’s location can have major repercussions. A third-party site such as a hotel conference room is
ideal because it eliminates the “home field advantage” for either party and helps both concentrate on the issues without distraction. However, it’s likely that your potential buyers will want to meet at your office so they can look around and get a feel for your operations and business culture. If this is the case, be sure your facilities are clean and organized and that employees are on notice to dress and act appropriately. If you’re concerned about fueling the employee rumor mill, consider holding your meeting after-hours.
Click "HERE" for entire article.
Monday, September 20, 2010
Wednesday, September 15, 2010
Crush Financing Roadblocks with a Mezzanine Loan
When business buyers don’t have the cash to make an acquisition, they traditionally turn to banks for help. But the credit crunch of the past few years means that these types of loans are extremely hard to come by. If you’ve struck out with primary lenders (or they’re willing to give you only a portion of the amount you need) and your target has already rejected the idea of seller financing, it’s time to consider mezzanine debt. This type of financing gives companies the opportunity to obtain the capital they need and avoid some of the drawbacks associated with traditional debt or equity financing. Layered loans Mezzanine financing works by layering a junior loan atop a senior (or primary) loan. It combines aspects of senior secured debt from a bank and equity obtained from direct investors. Sources of mezzanine financing can include private equity groups, insurance companies and buyout firms.
Unlike bank loans, mezzanine debt typically is unsecured, so the cost of obtaining financing is higher than that of a senior loan. The cost, however, generally is lower than what’s required for an equity investment, which, to compensate investors for increased risk, must offer the potential for higher gains. Structurally speaking
The primary advantage of mezzanine financing is that it can provide capital when you can’t obtain it elsewhere. That doesn’t mean mezzanine debt is an option of last resort, though. Many companies prefer it because it offers flexible structures. If, for example, you’re uncomfortable giving up any equity interest (and partial control of your company), you can choose to pay a higher interest rate instead. Although structures vary, most mezzanine instruments share the following characteristics:Term of between five and 10 years. During the loan’s term, you repay only interest. Repayment of principal typically is deferred, based on your financing needs and cash flow projections. High interest rate. Rates generally range between 10% and 15%.
Investor participation. Most mezzanine instruments allow the lender to participate in your company’s success — or failure. Generally, the lower your interest rate, the more equity you have to offer. Lender participation usually takes the form of warrants with put options, which enables the lender to purchase a certain amount of ownership at a relatively low price. At the end of the loan term, you may be required to repurchase the lender’s stock. Mezzanine financing has some disadvantages, however. Primary among them is the higher expense. And although some lenders are relatively hands-off, they retain the right to a significant say in
company operations. What’s more, mezzanine financing can make an M&A deal more complicated because it introduces an extra interested party to the negotiation table.
Exploring your options Mezzanine loans aren’t for every company contemplating an acquisition, but high-growth companies with strong earnings potential and
proven management typically make the best candidates. If you’re having trouble getting bank financing and prefer not to dilute your equity, talk to your M&A advisor about this option.
Unlike bank loans, mezzanine debt typically is unsecured, so the cost of obtaining financing is higher than that of a senior loan. The cost, however, generally is lower than what’s required for an equity investment, which, to compensate investors for increased risk, must offer the potential for higher gains. Structurally speaking
The primary advantage of mezzanine financing is that it can provide capital when you can’t obtain it elsewhere. That doesn’t mean mezzanine debt is an option of last resort, though. Many companies prefer it because it offers flexible structures. If, for example, you’re uncomfortable giving up any equity interest (and partial control of your company), you can choose to pay a higher interest rate instead. Although structures vary, most mezzanine instruments share the following characteristics:Term of between five and 10 years. During the loan’s term, you repay only interest. Repayment of principal typically is deferred, based on your financing needs and cash flow projections. High interest rate. Rates generally range between 10% and 15%.
Investor participation. Most mezzanine instruments allow the lender to participate in your company’s success — or failure. Generally, the lower your interest rate, the more equity you have to offer. Lender participation usually takes the form of warrants with put options, which enables the lender to purchase a certain amount of ownership at a relatively low price. At the end of the loan term, you may be required to repurchase the lender’s stock. Mezzanine financing has some disadvantages, however. Primary among them is the higher expense. And although some lenders are relatively hands-off, they retain the right to a significant say in
company operations. What’s more, mezzanine financing can make an M&A deal more complicated because it introduces an extra interested party to the negotiation table.
Exploring your options Mezzanine loans aren’t for every company contemplating an acquisition, but high-growth companies with strong earnings potential and
proven management typically make the best candidates. If you’re having trouble getting bank financing and prefer not to dilute your equity, talk to your M&A advisor about this option.
Monday, September 13, 2010
SUNBELT INDIANA BUSINESS BROKERS RECEIVE CMSBB DESIGNATION
INDIANAPOLIS, IN August 19, 2010 – Dave Gorman, Gary Stehle and Tim Koger, Business Intermediaries at Sunbelt Indiana Business Resource in Indianapolis, IN, have earned the prestigious Certified Mainstreet Business Broker (CMSBB) designation. Dave, Gary and Tim successfully passed the CMSBB exam administered by the national Sunbelt Network of business brokers. Business brokers are the intermediaries for owners who want to sell their business.
Business broker transactions – mainly geared to brokering sales of mid-sized and small businesses – are valued at more than $1.5 billion per year and affect the economic well-being of thousands of communities in the United States and around the world.
Gorman, Stehle and Koger were awarded the CMSBB designation after demonstrating a superior knowledge about the functions and applications of business broker services, participating in a rigorous 10 week curriculum of courses, and passing a comprehensive examination. They are to be awarded a plaque certifying the designation by the Sunbelt Network this month and will undoubtedly be lauded by their peers for their significant professional accomplishment. This designation identifies them among America’s highly qualified and credentialed business intermediaries, and sets them apart in their profession.
As the world’s largest business brokerage firm, Sunbelt has over 250 licensed locations in the US with over 1400 brokers handling over 3000 business sales transactions annually. Sunbelt sponsors national education programs for its brokers and are members in good standing of the International Business Brokers Association (IBBA). Sunbelt awards the designation “Certified Mainstreet Business Broker (CMSBB)” to members who demonstrate professional excellence through their broker experience and education, and pass a comprehensive examination.
Additional information is available from Dave Gorman by telephoning 317-218-8626, Gary Stehle at 317-218-8620, and Tim Koger at 317-218-8628. They are available to the news media on a continuing basis as a source of information and comment about the transfer of business ownership, strategic exit planning, business valuation, or current economic trends and how they affect the local business community.
Business broker transactions – mainly geared to brokering sales of mid-sized and small businesses – are valued at more than $1.5 billion per year and affect the economic well-being of thousands of communities in the United States and around the world.
Gorman, Stehle and Koger were awarded the CMSBB designation after demonstrating a superior knowledge about the functions and applications of business broker services, participating in a rigorous 10 week curriculum of courses, and passing a comprehensive examination. They are to be awarded a plaque certifying the designation by the Sunbelt Network this month and will undoubtedly be lauded by their peers for their significant professional accomplishment. This designation identifies them among America’s highly qualified and credentialed business intermediaries, and sets them apart in their profession.
As the world’s largest business brokerage firm, Sunbelt has over 250 licensed locations in the US with over 1400 brokers handling over 3000 business sales transactions annually. Sunbelt sponsors national education programs for its brokers and are members in good standing of the International Business Brokers Association (IBBA). Sunbelt awards the designation “Certified Mainstreet Business Broker (CMSBB)” to members who demonstrate professional excellence through their broker experience and education, and pass a comprehensive examination.
Additional information is available from Dave Gorman by telephoning 317-218-8626, Gary Stehle at 317-218-8620, and Tim Koger at 317-218-8628. They are available to the news media on a continuing basis as a source of information and comment about the transfer of business ownership, strategic exit planning, business valuation, or current economic trends and how they affect the local business community.
Friday, September 10, 2010
Are you sure you’re ready to sell?
You may have decided it’s time to sell, but
before you begin the M&A process, you need to
take a good, hard look at what you plan to put
on the block. Just because you’re ready doesn’t
mean buyers will be interested — particularly if
this is the first time you’ve thought about
preparing your business for sale. Prospective
buyers won’t just scrutinize your business, but
they’ll also compare it to other opportunities in
the marketplace.
Asking tough questions
With the help of your M&A advisors, go over your
company with a fine-tooth comb,
just as a buyer will during the due
diligence stage. Evaluate
everything from debt levels to
personnel to customer
relationships and address any
issues that are likely to give
potential buyers pause, such as
too much business concentration
in only a few customers.
As an owner, you probably value
your business and its sale
prospects highly. But to understand its actual
market value, you need to think like a buyer and
ask the kinds of questions buyers will. These
include:
Is it financially sound? Is your balance sheet
strong relative to those of your competitors,
particularly when it comes to debt? Do you have
good growth prospects or has your company’s
growth plateaued? If buyers sense financial
distress or little growth opportunity, they’ll
undervalue your business or, more likely, move on.
Is it unique? Identify what gives you a leg up on
the competition. Do you make a niche product
essential to the business of other manufacturers?
Do you own a valuable patent, trademark or brand?
Do you have an exclusive client or customer list?
Such assets can increase your company’s value in
the eyes of the right buyer.
Is it an easy fit? Buyers look for businesses with
strong leaders, similar corporate cultures and the
prospect of smooth integration. Do you have an
experienced management team capable of easing
the company through a merger transition? Have
you provided incentives for good employees to
stay?
Click "HERE" for entire article.
before you begin the M&A process, you need to
take a good, hard look at what you plan to put
on the block. Just because you’re ready doesn’t
mean buyers will be interested — particularly if
this is the first time you’ve thought about
preparing your business for sale. Prospective
buyers won’t just scrutinize your business, but
they’ll also compare it to other opportunities in
the marketplace.
Asking tough questions
With the help of your M&A advisors, go over your
company with a fine-tooth comb,
just as a buyer will during the due
diligence stage. Evaluate
everything from debt levels to
personnel to customer
relationships and address any
issues that are likely to give
potential buyers pause, such as
too much business concentration
in only a few customers.
As an owner, you probably value
your business and its sale
prospects highly. But to understand its actual
market value, you need to think like a buyer and
ask the kinds of questions buyers will. These
include:
Is it financially sound? Is your balance sheet
strong relative to those of your competitors,
particularly when it comes to debt? Do you have
good growth prospects or has your company’s
growth plateaued? If buyers sense financial
distress or little growth opportunity, they’ll
undervalue your business or, more likely, move on.
Is it unique? Identify what gives you a leg up on
the competition. Do you make a niche product
essential to the business of other manufacturers?
Do you own a valuable patent, trademark or brand?
Do you have an exclusive client or customer list?
Such assets can increase your company’s value in
the eyes of the right buyer.
Is it an easy fit? Buyers look for businesses with
strong leaders, similar corporate cultures and the
prospect of smooth integration. Do you have an
experienced management team capable of easing
the company through a merger transition? Have
you provided incentives for good employees to
stay?
Click "HERE" for entire article.
Tuesday, September 7, 2010
Tax Advantage - Section 338(h)(10) can help S corp buyers and sellers
If you’re planning to sell a business arranged as
a subchapter S corporation, a provision of the
federal tax code can make you a more
appealing target for buyers. Even better, it
could boost your sale price.
Why buyers like the code
S corporations don’t pay income taxes. Instead, the
company’s income or losses are
distributed through its
shareholders, who in turn report
income or losses on their
individual income tax returns. This
fact can potentially complicate the
sale of an S corporation.
Internal Revenue Code Section
338(h)(10), however, enables a
stock sale of an S corporation to
be taxed as if the transaction were
an asset sale. Asset sales offer
several advantages. For one, the buyer can take a
“stepped-up” tax basis, which means it can
significantly raise the stated value of the seller’s
assets. Greater asset value, in turn, enables a
buyer to claim more depreciation on its to-beacquired
assets and, therefore, take a larger,
current tax deduction.
What’s in it for sellers
This advantageous tax situation puts selling S
corporations in an excellent negotiating position.
Buyers must obtain the approval of the selling
company’s shareholders to structure a deal that
includes a 338(h)(10) election. And buyers typically
are willing to agree to a higher purchase price in
exchange for shareholder cooperation.
In a 2005 study analyzing S corporations, Merle
Erickson, an accounting professor at the University
of Chicago’s Booth School of Business, and Shiingwu
Wang, a professor at the University of Southern California’s Marshall School of Business, estimated
that the tax benefits of S corporation acquisitions
total, on average, approximately 12% to 17% of the
deal’s value.
For example, when Coca-Cola Enterprises
acquired the S corporation Herb Coca-Cola Inc. in
2001, it paid Herb’s shareholders an extra $100
million to approve the 338(h)(10) election.
Coca Cola reportedly valued the tax
benefits of the election at $145 million,
thus paying Herb shareholders 70% of
the total tax benefits.
Despite these kinds of benefits, many S
corporation sellers are unaware of or illinformed
about the tax code provision.
Unfortunately, sometimes buyers use
seller ignorance to take the deduction
without offering a higher acquisition price
in return.
Know your advantage
Realizing the tax advantages of Section 338(h)(10)
is a complex process. So it’s essential to work with
experienced advisors who are knowledgeable
about tax issues. They can help you determine if
your business is eligible and ensure you get an
equitable share of any tax benefits a buyer derives
from the acquisition.
a subchapter S corporation, a provision of the
federal tax code can make you a more
appealing target for buyers. Even better, it
could boost your sale price.
Why buyers like the code
S corporations don’t pay income taxes. Instead, the
company’s income or losses are
distributed through its
shareholders, who in turn report
income or losses on their
individual income tax returns. This
fact can potentially complicate the
sale of an S corporation.
Internal Revenue Code Section
338(h)(10), however, enables a
stock sale of an S corporation to
be taxed as if the transaction were
an asset sale. Asset sales offer
several advantages. For one, the buyer can take a
“stepped-up” tax basis, which means it can
significantly raise the stated value of the seller’s
assets. Greater asset value, in turn, enables a
buyer to claim more depreciation on its to-beacquired
assets and, therefore, take a larger,
current tax deduction.
What’s in it for sellers
This advantageous tax situation puts selling S
corporations in an excellent negotiating position.
Buyers must obtain the approval of the selling
company’s shareholders to structure a deal that
includes a 338(h)(10) election. And buyers typically
are willing to agree to a higher purchase price in
exchange for shareholder cooperation.
In a 2005 study analyzing S corporations, Merle
Erickson, an accounting professor at the University
of Chicago’s Booth School of Business, and Shiingwu
Wang, a professor at the University of Southern California’s Marshall School of Business, estimated
that the tax benefits of S corporation acquisitions
total, on average, approximately 12% to 17% of the
deal’s value.
For example, when Coca-Cola Enterprises
acquired the S corporation Herb Coca-Cola Inc. in
2001, it paid Herb’s shareholders an extra $100
million to approve the 338(h)(10) election.
Coca Cola reportedly valued the tax
benefits of the election at $145 million,
thus paying Herb shareholders 70% of
the total tax benefits.
Despite these kinds of benefits, many S
corporation sellers are unaware of or illinformed
about the tax code provision.
Unfortunately, sometimes buyers use
seller ignorance to take the deduction
without offering a higher acquisition price
in return.
Know your advantage
Realizing the tax advantages of Section 338(h)(10)
is a complex process. So it’s essential to work with
experienced advisors who are knowledgeable
about tax issues. They can help you determine if
your business is eligible and ensure you get an
equitable share of any tax benefits a buyer derives
from the acquisition.
Friday, September 3, 2010
Turning to Earnouts - A potential solution for negotiation stalemates
Sometimes merger and acquisition negotiations reach
an impasse — even when both parties are committed
to making the deal succeed. When buyers and sellers
are at loggerheads over pricing, all of the transaction’s
benefits can fall to the wayside.
There may, however, be an alternative: an earnout.
With an earnout agreement, the seller might remain
with the company to operate it after it has been sold.
The buyer agrees to make periodic payments to the
seller if the company meets specific performance goals.
Incentives for everyone
An earnout can be a particularly effective way to bridge
the gap when the buyer and seller disagree about the
value of the company. The promise of future payments
can assuage seller concerns that they’re settling for a
price that undervalues their business. And, assuming
the seller remains in control of operations after the
sale, earnouts help reassure the buyer that the seller
will work hard to maintain the company’s performance.
Keep in mind that earnouts are far more effective for
sellers when, postmerger, the selling company
continues to operate as a stand-alone subsidiary or the
seller continues to manage it as a division of the
acquiring company. If a target is intended to be
immediately absorbed by the buyer, earnouts may not
make sense. Sellers will have little control over the newly
merged company’s performance. Negotiating the details
Although earnouts often provide a solution to difficult
price negotiations, the process of agreeing on an earnout
structure can prove challenging as well. The parties need to
discuss the form that seller payments will take as early
as possible, because this decision can have other ramifications. If, for example, a seller wants to be paid
in stock, the parties must decide whether the stock will
be valued as of the deal closing date, at some other
date or by another measure.
The parties also must agree on the objectives that must
be reached to trigger earnout payments and an
acceptable accounting method (typically, Generally
Accepted Accounting Principles) by which to measure
achievement of these objectives.
Earnout objectives could include:
Sales. Often, sellers prefer that performance be
measured by gross sales, because they provide a clear
goal that management can directly influence.
EBITDA. If performance is measured by EBITDA
(earnings before interest, taxes, depreciation and
amortization), the seller will need to show that it’s
achieving a certain level of pretax cash flow. Earnout
payments typically are a percentage or multiple of the
amount by which the seller division’s results exceed a
set EBITDA figure.
Annual performance. The parties may agree to set an
annual performance threshold based on revenues.
Click "HERE" for entire article.
an impasse — even when both parties are committed
to making the deal succeed. When buyers and sellers
are at loggerheads over pricing, all of the transaction’s
benefits can fall to the wayside.
There may, however, be an alternative: an earnout.
With an earnout agreement, the seller might remain
with the company to operate it after it has been sold.
The buyer agrees to make periodic payments to the
seller if the company meets specific performance goals.
Incentives for everyone
An earnout can be a particularly effective way to bridge
the gap when the buyer and seller disagree about the
value of the company. The promise of future payments
can assuage seller concerns that they’re settling for a
price that undervalues their business. And, assuming
the seller remains in control of operations after the
sale, earnouts help reassure the buyer that the seller
will work hard to maintain the company’s performance.
Keep in mind that earnouts are far more effective for
sellers when, postmerger, the selling company
continues to operate as a stand-alone subsidiary or the
seller continues to manage it as a division of the
acquiring company. If a target is intended to be
immediately absorbed by the buyer, earnouts may not
make sense. Sellers will have little control over the newly
merged company’s performance. Negotiating the details
Although earnouts often provide a solution to difficult
price negotiations, the process of agreeing on an earnout
structure can prove challenging as well. The parties need to
discuss the form that seller payments will take as early
as possible, because this decision can have other ramifications. If, for example, a seller wants to be paid
in stock, the parties must decide whether the stock will
be valued as of the deal closing date, at some other
date or by another measure.
The parties also must agree on the objectives that must
be reached to trigger earnout payments and an
acceptable accounting method (typically, Generally
Accepted Accounting Principles) by which to measure
achievement of these objectives.
Earnout objectives could include:
Sales. Often, sellers prefer that performance be
measured by gross sales, because they provide a clear
goal that management can directly influence.
EBITDA. If performance is measured by EBITDA
(earnings before interest, taxes, depreciation and
amortization), the seller will need to show that it’s
achieving a certain level of pretax cash flow. Earnout
payments typically are a percentage or multiple of the
amount by which the seller division’s results exceed a
set EBITDA figure.
Annual performance. The parties may agree to set an
annual performance threshold based on revenues.
Click "HERE" for entire article.
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