CohnReznick’s Fifth Annual Liquidity and Capital Raising Forum recently brought business executives and investors together to hear observations and insights focused on many of the most relevant topics, issues, challenges and opportunities impacting mergers and acquisitions activity, liquidity, capital raising, and financing. Whether your a small or large scale business check out this blog about small business loan.
A summary of the event’s panel discussions, and insights from our first Middle Market Business and Investor Survey, are provided below and may serve as valuable tools as we start 2016.
What is Your Business Worth?
How Prospective Buyers Establish a Price for Your Business
We are in the midst of a sellers’ market and this should remain status quo for the foreseeable future. There is a considerable amount of cash on hand that is waiting to be put to work.
- Private equity and strategic investors are competing for the same acquisitions.
- Valuations continue to be considered “high.” Some private equity investors are exiting the auction process when valuations spiral up and the investment no longer fits their financial model.
- Strategic investors are often being forced to pay premiums for quality investments.
- The gap between buyers’ and sellers’ expectations is a major stumbling block in closing deals.
- The “golf club problem” leads to unrealistic expectations on the part of the seller. Each seller enters a transaction process with specific value drivers and risk factors. Identifying and then maximizing value drivers and minimizing risk factors before starting negotiations is critical.
- Sell-side due diligence will increase the certainty of close.
Middle Market Business and Investor Survey
Middle market companies and investors are ready to pull the trigger on capital raising transactions aimed at growing their businesses and creating jobs in 2016. More than 75% of those surveyed were confident or very confident in the strength of the business environment of the United States, indicating a strong forecast for growth heading into 2016.
- 70% of survey respondents believe that a strategic investor (competitor, corporate) would offer the greatest price for their business versus 30% believing the best deal would come from a financial investor (private equity, venture capital, family office).
- For those looking to raise capital, 26% would choose a private equity firm while 21% would opt for a commercial bank. Just 2% would pick a public offering/IPO.
- Nearly 73% believe their business would participate in a capital raising transaction in 2016 and 43% believe their business would participate in a merger or acquisition in 2016.
- 40% of respondents felt that an increase in the Federal Reserve rate would have a negative impact on their business. 47% were neutral.
- Taking current market and economic conditions into consideration, 96% of respondents believe that now is a good time for middle market companies to raise debt capital.
- 28% of survey respondents believe that the biggest concern when selling a controlling interest in their company would be negotiating a favorable transaction. 24% said that selecting “the right buyer with the right fit” is the biggest concern.
- While more than 75% of those surveyed were confident or very confident in the strength of the business environment of the United States, only 33% were confident about the strength of the global business environment, perhaps an indication of the current conditions overseas.
Growth continues to be the mantra of middle market companies and investors. Organic growth has been difficult to achieve and the survey indicates that there is clearly emphasis on growth through mergers and acquisitions. Barring unexpected market or economic events, we should anticipate a healthy pace in transaction activity in 2016.
Today’s Most Common Deal Breakers
During the transaction process, some items can be negotiated while others are flat out deal breakers. Given this, anything that either the buyer or seller sees as a potential deal breaker should be discussed early in the transaction process.
- A large gap between the buyer’s and seller’s expectations will prevent a deal from closing.
- A lack of transparency will increase the risk of the deal not closing and will bring into question the amount of transparency that will exist post-close. No buyer wants to do a deal with a seller who is anything but truthful and honest. It is best for a seller to disclose challenges and risks and provide financial and operational data that is accurate.
- A clash of cultures between buyer and seller can be a deal breaker. If either party can’t envision a productive partnership, can’t appreciate the values the other is introducing to the relationship, or can’t see themselves communicating with the other party on a regular basis, it may make sense to halt negotiations.
- Letters of intent that are vague, or that don’t specifically communicate expectations moving forward, can break a deal. Engaging advisors (lawyers and accountants) that do not specialize in transactions, and do not have appreciation clear understanding of f the transaction process, may prevent a deal from closing. Even worse, this can result in a bad deal with unanticipated and undesired consequences.
Executive Perspectives on Private Equity Transactions
Panelist Matt Matros, currently CEO of FarmedHere and past CEO of The Protein Bar, “dated” 30 private equity firms before selecting one as his “bride,” reflecting the importance of selecting the right private equity partner. Panelists Tom Dillon, CEO of Rosa Mexicano, and Philip Moyles, CEO of Vanbridge, agreed on the importance of finding a private equity firm that is a fit for the business.
- The money doesn’t always matter most when striking a deal with a private equity investor. Instead, a shared vision for the future of the business may be more important.
- The right private equity investor should have industry specific and/or situation specific experience in the business being acquired. They need to understand the specific opportunities and challenges to help the business grow.
- For a successful relationship post-transaction, sellers should be totally transparent during the negotiation process. Buyers and sellers who develop a strong relationship pre-transaction are most likely to benefit from a long and rewarding partnership
Trends in Capital Formation
Market factors, economic conditions, and the capital needs of a business based on its strategic plan will all combine to impact capital raising decisions. Private and public forms of equity capital each introduce a unique set of challenges and opportunities.
- A continuing sellers’ market with plenty of capital on the sidelines and access to affordable financing options has increased valuations and the competition for quality investments. A heightened level of transaction activity is likely to continue until valuations reach a point where buyers are unwilling to pay the high prices, or affordable financing options dissipate.
- Strategic buyers have been willing to reward sellers with higher valuations than have financial investors. For some private equity firms, their portfolios have been shrinking as they have been selling investments, but have been unable to originate and close new acquisitions.
Compared to 2014, IPO activity in 2015 has decreased. Fewer companies are going public as a result of high valuations in the private sector and the associated regulatory and reporting requirements of becoming, and operating as, a public company.
Strategies and Opportunities for Building the Capital Stack
A company’s capital structure needs to fit its overall business strategy and its business profile. The operational and financial risk of a business will influence its capital structure as will an owner’s future intentions relative to the business.
- Business executives may select different forms of capital based on their eventual exit strategies—for some, the business may be a long-term hold, while others may have a greater interest in a more immediate exit via IPO or sale to a private investor.
- There is no “one size fits all” capital stack that works for every company. Today’s market is filled with a number of debt and equity options. Each form of capital comes with a unique personality of money, and business executives must decide on the personality that works best for them and their business.
- As opposed to “covenant light,” today’s market can best be described as “covenant loose.” Each deal usually comes down to three major components—the right price, the right terms and the right partner.
Executive Perspectives on Public Company Transactions
Public companies like Men’s Wearhouse and Sequential Brands have a different set of challenges than private companies. What they do share in common is the importance of planning and orchestrating a successful integration process for new acquisitions.
- Buyers must develop a thorough understanding of and appreciation for the sellers’ wants, needs, and desires and then communicate how they plan to support them post-acquisition.
- Buyers and sellers can often take months, even years, learning about one another before consummating a deal.
- Often, in the retail and consumer products sector in particular, buyers are acquiring much more than a business. They are acquiring a brand. The brand is near and dear to the hearts of many sellers so they need to be confident that the buyer has given careful thought and consideration to the plans for expanding the brand.
- While the financial considerations and terms and conditions for each transaction are important, it is a positive relationship between buyer and seller that will increase the certainty of close as well as a smooth integration process and successful moving forward.
Our Panelists & Presenters
The following panelists and presenters contributed to the valuable insight provided at our Fifth Annual Liquidity and Capital Raising Forum:
Joseph Abboud, Men’s Wearhouse; John Bautista, CohnReznick; Anthony DeLuise, Raymond James & Associates, Inc.; Tom Dillon, Rosa Mexicano; Matt Douglass, Prudential Capital Group; Matthew Eby, Tengram Capital Partners; David Edwab, Vice Chairman of the Board of Directors, Men’s Wearhouse and Former President & Exec. Vice Chairman Men’s Wearhouse; Pimm Fox, Bloomberg; Ken Grider, Raymond James & Associates, Inc.; Daniel Gross, Pegasus Capital Advisors; Ezra Lightman, Raymond James & Associates, Inc.; Frank Longobardi, CohnReznick; David Lorry, Versa Capital Management LLC; Carol Massar, Bloomberg; Matt Matros, Founder & Board Director: The Protein Bar; CEO: FarmedHere; Jeff Maxwell, Raymond James & Associates, Inc.; Zubin Mehta, Nourish Snacks; Philip Moyles, Vanbridge Holdings LLC; Carolyn Saacke, NYSE; Jeff Saut, Raymond James & Associates, Inc.; David Schnadig, Cortec Group; Corey Sclar, Brookside Mezzanine Partners; Yehuda Shmidman, Sequential Brands Group, Inc.; and Jeremy Swan, CohnReznick.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance has multiple offices in the Carolinas including Charlotte, Raleigh/Durham, Greensboro, and Wilmington with a team of more than 45 professionals serving more than 120 companies throughout the region.