Archive for the ‘selling a business’ Category

Leveraged Recapitalization

Tuesday, April 21st, 2009

In a leveraged recapitalization a the company being sold takes a loan for the majority of the purchase price, the new owners put in some equity capital, and the existing owners retain an equity stake.  For example, a company valued at $10,000,000 might be recapitalized as follows:

Existing owners equity capital: 1,000,000

New owners’ equity capital:       1,500,000

Bank Loan:                                7,500,000

Total Capital:                           10,000,000

The existing owners retain 40% of the equity in the company but pocket 9,000,000 in cash (less transaction costs and taxes of course).  The owners then grow the business and exit by selling (usually in 3 to 5 years).

There are of course issues with this deal structure, such as the ability of the business to repay the loan from cash flow, maintaining adequate capital to grow the business, how well existing owners and new owners can work together, the skills that each party brings to the table, and how major decisions are made.  An owner who wants to take money off the table, however, can take a lot of money out of the business while maintaining significant upside potential and gaining a new partner that brings skill and capital to the table.

Selling Part of Closely Held Company

Sunday, April 12th, 2009

I just returned from a meeting where a company owner discussed selling 60% of his company to a Private Equity Group.  At first glance this seems like a bad strategy.  The owner gives up control, and 60% of the profits.  It is difficult to protect your interests as a minority partner in a closely held business.  The new owners can force changes in strategy, operations, etc. and yet the existing owner is still tied to the business.  So, why would any owner take an offer in which another entity acquires a controlling interest in a business?

There are a variety of advantages to the existing owner in this deal structure.  First, the Private Equity Group that is acquiring the controlling interest is interested in growing the business and exiting in three to five years.  They have a track record of successfully growing businesses by bringing additional financing and expertise.  If the existing owner retains 40% and sells in three years he can share in that growth.  The owner interests will be protected both by the purchase and sale agreement and by the fact that the PEG wants the owner to be motivated and grow the business.

This deal offers the owner, who has the majority of his net worth tied up in the business, the ability to take some chips off of the table and diversify to reduce his risks.  It does so, in a way that allows the money that comes out to be treated largely as a capital gain for tax purposes.  So, the potential upside may outweigh the dangers of being a minority shareholder in a closely held corporation

Three New Websites

Tuesday, March 18th, 2008

We have added three new websites to our growing family of mergers and acquisitions websites. The first stie, our Business Broker Locator which allows you to locate a business broker based on the location, size, industry and other specific characteristics of your company. The second site, Ownership Transitions showcases services available to either buy or sell a business, at either an affordable hourly rate or at a fixed fee. The third site, is a companion to our Guide To Selling a Business. This site, a Guide to Buying a Business is written from a buyer’s perspective and has a plethora of information on how to purchase a company.

New Book and WebSite

Thursday, February 21st, 2008

I was working on doing another post about comparables, but something got in the way…

Gary Schine and I have Written a new book “Guide to Selling a Business” and created a website, based on the book. The website can be found at GuideToSellingABusiness.com The book and site are meant to be a complete guide to selling a small to mid-sized company, whether you choose to do it yourself, or hire an intermediary. As always, any feedback is welcome.

When is the right time to sell?

Tuesday, February 5th, 2008

The short answer is never, unless it makes sense from a personal point of view.

There are brokerage firms that call people when business is booming and the economy is humming along and tell prospective sellers that now is the time to sell, while prices are high and business is good. You’ll get a higher multiple, they claim, and there is an element of truth to that. However, as we know the market environment can change in days or weeks and selling a business takes months or years. How do you know that your business will sell before the market turns down? Conversely, the good times may last years. If you are growing at 25% a year and sell today, who’s to say that you wouldn’t have been better off waiting three years and selling for double (25% compounded over three years is 95%).

When business is bad, companies consolidate and the same brokers who argued that you should sell during the good times now point to the industry consolidation and use that as a reason that now is the time to sell. They say that you should sell before the economy gets worse, before too many competitors merge and leave you as a smaller player.

Here’s a dose of the truth. It almost never makes sense to sell a healthy business based on a strictly financial analysis. If I can get you 3 times earnings today you’re better off waiting 3 years then selling (even if you can only sell for a penny). If I can get you 5 times earnings you’re better off waiting 5 years, 7 times earnings; wait 7 years and so on.

Yes, there are advantages to selling now. Selling frees up your time which is worth something. Selling allows you to diversify your financial holdings and reduce risk. However, the time to sell is when you begin to feel burned out, you’d like to travel, or spend more time with your family. In short, sell when it makes sense for personal reasons. Sell when selling makes you happy.

Bottom line: don’t try to time a process that takes months or years to hit a particular day or week. Maximizing the multiple is nice, but unless you know how long a transaction will take, what will happen with your particular business, what each prospective buyer’s finances will be like in the future, and when markets will peak with some degree of certainty, it’s not an achievable goal. If you can accurately predict markets performance months in advance play the stock market and get rich.