Six Critical Questions to Ask Would-be Buyers When prospective buyers call, it’s critical owners use the opportunity to capture valuable information about the market, who active buyers are, and what’s driving the value of their company. MidCap Advisors suggests six critical questions to discern what profit levels and growth rates a buyer is looking for and, most importantly, how a buyer approaches valuing companies.
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Ron Stacey considers Return on Invested Capital (ROIC) and growth using EBITDA as a proxy for cash flow. ROIC, Stacey writes, is a critical value driver that’s probably the single most important factor for a given cost of capital. But calculation is never simple: “People always want a formula, but it doesn’t work that way,” Warren Buffet once noted. “You have to estimate total cash generated from now to eternity, and discount it back to today.” Here’s a case study. Find out how ROIC works—and what drives it.
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Bankers Say M&A ‘Good for Good Companies’ Which Can Often be Sold for 9-10x Earnings Luisa Beltran at PE Hub wonders: “Is there an M&A slowdown?”
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Main Street Businesses: Smart Strategies for Exit Plan Main Street businesses are those with less than $3 million in annual sales and less than 20 employees. While Main Street businesses are the backbone of the U.S. economy, the U.S. Small Business Administration reports that four out of five of these businesses liquidate when the owner decides to retire rather than ending in a profitable sale to a new owner.
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Terri Eyden at AccountingWeb analyzes new research from the American Accounting Association and finds that M&A restatements are common. Excerpt:
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Who Are America’s Wealthiest People? Small- and medium-sized businesses are the engines that drive the American economy. An IRS study of everyone who died with a net worth of at least $600,000 (and thus was required to file an estate tax return) showed America’s wealthiest citizens all have one thing in common: they all held significant blocks of stock in closely held private companies. In a nutshell, the surest way to get rich in America is to own a business. Want to know the actual numbers? According to IRS reports, over six million businesses file tax returns each year: 80…
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Competitive Intelligence is Key to Smart Acquisitions Part of growth is acquisition. To do smart acquisitions, you need insight into a business owner’s thoughts—specifically, her concerns vis-à-vis selling the businesses. These are not questions with simple yes or no answers; it’s more critical to figure out what an owner thought was missing in previous acquisition overtures. What, aside from price, will it take an owner to sit down and discuss a sale? The McLean Groups’s Zane Markowitz offers a case study and blow-by-blow analysis.
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Myths about Middle Market Valuation Multiples Sometimes it seems as if the only requirements to be an investment banker are the ability to multiply two, usually single-digit numbers together and write your name. Hence, upon finishing the second grade, everyone is qualified. For example, take an EBITDA (earnings before interest, taxes, depreciation, and amortization) of $10MM and the median lower middle market valuation multiple of five, which incidentally has nothing to do with the number of fingers on your hand.
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PE firms have recently begun to negotiate smaller equity contributions as borrowings increase, reports Matthew Sheahan at Mergers & Acquisitions. LBO activity came to a screeching halt last summer; there were $19.7 billion issued via 34 deals to back buyouts for all of 2011, but so far this year, nine high-yield bond deals totaling $8.3 billion have been issued to back LBOs. Banks and other creditors are sticking more of their necks out when funding private-equity players’ leveraged buyouts. Equity contributions to leveraged buyouts have generally remained in the 30 percent to 40 percent area for a couple of…
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You can’t hold back the demographic tide. In the U.S., another baby boomer turns 60 every eight seconds. This translates into a leadership change in the near future at many CPA firms. In an important article in the Journal of Accountancy last year, John F. Raspante, CPA, and Joseph A. Tarasco, CPA explain: Thousands of partners are at or reaching retirement age now and in the next five years, putting a tremendous strain on even the best succession plans. But age isn’t the only factor affecting the profession. Factors such as increased globalization and turmoil in the general economy causing greater competition have been analyzed…
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From attempting to recast the public image of private equity to trying to forge a new investment firm, 10 individuals profiled in the June issue of Mergers & Acquisitions are making their marks on middle-market investing, Tamika Cody, Mary Kathleen Flynn and Danielle Fugazy report. From the intro: To highlight a few: Pam Hendrickson, chief operating officer of the Riverside Co. and a director of the global Association for Corporate Growth, has been spreading the word on Capitol Hill, and across the country, that private capital matters to the growth of the U.S. economy. Andrew Sheiner, a managing director…
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A relatively unexplored area of family business research is the role that an active, independent board of directors can play in perpetuating the family business from one generation to the next. David Thayne Liebell reports at Trusts & Estates that a recently published book, Building A Successful Family Business Board, seeks to close that research gap. In fact, according to the book’s authors, an active, independent board can serve as an objective steward, overseeing the creation and execution of a leadership succession plan that works for both the business and the family. Even in the healthiest of families, the leadership succession…
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Top Ten Deal Killers! It’s an too familiar story line in the deal business. After months of hard work and, in many cases, hundreds of thousands of dollars in legal fees and expenses, the deal blows up. Most of the time it’s solely the fault of the participants—usually the seller—but sometimes external factors can add to the risk of deal failure. The really unfortunate thing about these bad outcomes is that many can be avoided with careful planning, due diligence, preparation, and just plain common sense. This article addresses the Top Ten Deal Killers and offers some suggestions on how…
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Why PE and the Middle Market Tied the Knot Robert Teitelman at The Deal explains: . . . This is the first of six special issues The Deal magazine will dedicate to the middle market in 2012, with a particular emphasis on a participant that, over the past four decades, emerged from that vast and diverse pool of midmarket companies: private equity. The current political debate tends to overlook the fact that private equity was gestated within the middle market for a very good reason: Midmarket companies, unlike large-cap corporates, have long been relatively starved for capital. Family-owned companies wanted…
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Accounting for Nuts: Blame a misalignment of incentives for the scandal at Diamond Foods. The Wall Street Journal’s Holman Jenkins opines: “Business people talk about “alignment of incentives.” The lesson here may concern a peculiar misalignment of incentives.” He explains: Here’s the executive summary: Diamond was a cooperative owned by California walnut growers until it became a publicly traded company owned by shareholders in 2005. Lately reporters and a shortseller-connected analyst have been poking around a $60 million payment the company made to growers in September 2011, which some growers apparently understood to be a “topping up” payment because…
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The Bankruptcy Files: A Big Start to 2012 At AM Law Daily, Brian Baxter reports: Signs that the economy is improving notwithstanding, the number and size of large corporate bankruptcies could double in 2012, according to a new Fitch Ratings report covered by CNNMoney. Fitch predicts that corporate bond defaults will hit 3 percent this year—more than double last year’s 1.4 percent and 2010’s 1.3 percent. Middle market companies valued between $200 million and $1 billion are at particular risk because of the difficulty they face in trying to refinance and restructure outside of court, according to the ratings agency.
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M&A Will Likely Pick Up in New Year An Ernst & Young survey indicates longer term appetite for deals has increased, reports Anthony Noto at Mergers & Acquisitions. Private equity firms are more confident in the worldwide economy, suggesting an increase in M&A activity for the New Year, according to a report Ernst & Young released Wednesday. In the longer term, the appetite for M&A increases as companies are less likely to feel inhibited by the volatile economy and political unrest in Washington DC, the survey said, with 68 percent of larger cap respondents believing credit availability is either stable…
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Visualizing the Middle Market The Middle Market not only accounts for a third of private sector GDP and jobs, but over the last four years it’s been leading the way in terms of viability, resilience and growth, according to a new study from GE Capital. When it comes to economic development and employment growth, people tend to focus on either small local businesses or large multi-national corporations. But what about the gap in the middle? To learn more, GE Capital partnered with The Ohio State University Fisher College of Business to conduct the largest-ever study of American mid-market businesses. A new…
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Lessons from a Dying Business Redbox has built a successful DVD kiosk business, but its days are numbered. Here’s why that’s not such a bad thing, report Karl Stark and Bill Stewart at Inc.com. You’re probably familiar with Redbox, owner of those DVD-rental kiosks that you see parked outside of just about every neighborhood grocery store or pharmacy. Redbox is an excellent example of how to create growth from a business that will ultimately die. All growing companies can benefit from thinking more like Redbox. Redbox has grown over the past decade by offering the convenience of DVD rentals…
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A First: Law Firm Finds New Life, Not Death, in Bankruptcy The Wall Street Journal’s Law Blog Jacqueline Palank reports: A South Florida law firm recently used bankruptcy to do something no one in the legal industry has done before: sell itself to another firm. Companies across corporate America, from Blockbuster to General Motors, have sought court protection while they try to sell continuing businesses to potential white knights. But until last week, law firms usually used bankruptcy to shut down. So the $7.8 million cash-and-debt sale of midsize law firm Ruden McClosky out of bankruptcy to fellow South Florida law firm Greenspoon Marder made…