John Bintz

Thursday, 24 February 2005 06:41

Why valuation matters

Many entrepreneurs wonder about value of the enterprise they have so carefully built. The most important thing to remember is that when a liquidity event occurs, it is the market that will decide your valuation.

The publicly traded capital markets buy and sell stock at a certain price. If your business is a publicly traded entity, then a market capitalization is determined by the number of outstanding shares multiplied by the market price.

But what about privately or closely held enterprises?

Business valuations are done all the time and for different reasons, such as estate planning, raising growth equity capital or preparing for a merger or acquisition. Determining the enterprise value can be done by using various methodologies, including comparing companies within the industry to see how they are trading, as well as the traditional valuing-of-assets approach. You could also combine different methods to reach an estimated range of value.

EBITDA (Earnings Before Interest Taxes Depreciation & Amortization) multiples are crucial in the analysis. An EBITDA multiple determines the trading level of enterprise values. A similar measure with publicly traded companies is the PE (price-to-earnings) ratio.

If you own a privately held company and are seeking growth equity capital from the investment community -- either by angels or institutional investors -- here are some important terms to keep mind.

Pre-money valuation is the valuation determined prior to an investment.

Post-money valuation is the valuation after an investment has been made.

Valuation fraction is as follows:

* The investment amount = the numerator

* The investment amount + Pre-Money Valuation = the denominator

The more investors you have looking at the transaction, the higher likelihood of a competitive and favorable valuation determination. Refer to your Economics 101 textbook regarding supply and demand principals.

Company valuation example

XYZ Corp. is an early stage company with top line revenue of $5 million and EBITDA of $500,000. XYZ is looking for $2 million of growth equity capital in order to complete purchase orders and increase staffing, round out the management team, and for general working capital purposes.

After aggressive marketing efforts that utilize a top-notch investment banker, there are four interested parties. Each has a different valuation proposal for the target company.

* Investor A -- A $3 million pre-money valuation and a $2 million investment. The investor would own 40 percent of XYZ Corp.

* Investor B -- A $2 million pre-money valuation and a $2 million investment. The investor would own 50 percent of XYZ Corp.

* Investor C -- A $1 million pre-money valuation and a $2 million investment. The investor would own 67 percent of XYZ Corp.

* Investor D -- A, $8 million pre-money valuation and a $2 million investment. The investor would own 20 percent of XYZ Corp.

All other things being equal, the management team would reject Investors A, B and C and accept the proposal from Investor D because this is the most favorable valuation presented to the company.

So why the difference in valuations? Everyone has a different view of the world. It could be a strategic partner, who loves leveraging synergies; it could be economies of scale; or it could be something else entirely. The important thing is that the process is competitive and no stone is left unturned. The more investors that look and express interest, the better for the entrepreneur.

Using an investment banker in this process puts the entrepreneur in an auction environment and generates competition for the deal, hoping to attract the best investor at the best possible terms.

John Bintz is founder and president of Apple Tree Investments Inc., an investment bank dedicated to middle-market transactions. The firm raises growth equity capital, sells middle-market businesses and assists entities with strategic business planning. Reach Bintz at (312) 243-9694 or

Monday, 24 January 2005 08:47

Engaging times

Many entrepreneurs and management teams are faced with the decision of whether to engage an investment banking (financial advisory) firm when trying to raise capital or sell their entity.

Many of the same goals can be accomplished without an investment bank, but a dedicated, disciplined approach should never be sacrificed. These delicate processes require sincere commitment. Either one could be the most important action a business owner or manager takes.

Here are six things to consider and what you should expect.

* Managing the process. Raising capital and/or selling a business takes time. Both should be approached with a well-thought-out strategic plan. The process should include preparing a complete business plan, including narrative and financials, and preparing all collateral materials, including marketing brochures, sales pipeline information and management team bios.

* Confidentiality. Always be aware of the decision-making process and the accessibility of important information. Consider the effect that confidentiality policies may have on management, employees, customers and vendors. This sensitive area should always be carefully reviewed, and a plan must be in place before embarking on the process.

* Confidentiality and nondisclosure agreements. When working with potential buyers/investors, be aware that many institutional private equity firms do not sign confidentiality and nondisclosure agreements. If they did, they would be signing hundreds (sometimes thousands) each year, and could not possibly keep track all of the information.

Private equity firms are not in the business of stealing ideas from entrepreneurs and starting their own companies to compete with yours. They are in the business of investing and buying companies. If, however, discussions progress with a potential buyer or investor and sensitive information is going to be divulged, then it may be appropriate to broach the subject.

* Marketing the transaction. Communicating efficiently and effectively and tracking the communication flow is very important. Transactions take on a life of their own, and you should be well-prepared for managing the process.

The tracking, managing and coordinating of interested and noninterested buyers/investors is critical to a transaction, and one central body is essential. Third-party financial advisers are excellent in providing the necessary process. Quite often, investors/buyers welcome and encourage a third party to be a communication buffer.

* Assisting and supporting the financing process. Qualifying interested investors/buyers is an important step in the process. No one wants to waste time and resources with unqualified "tire kickers." Third-party advisers assist in screening and expedite the process.

Assuming sufficient investor/buyer interest, an investment bank will assist in coordinating activities including the inflow of term sheets and investment/purchase terms, Letters of intent (LOI), due diligence activities, coordinating and setting up a "data room," negotiating, structuring and closing a mutually beneficial transaction.

* Providing ongoing services. As part of a long-term commitment and relationship, an investment bank should be able to assist with ongoing financial services. Because of the nature of the process, the investment bank will learn a great deal about your business and its activities, opening the door to nurturing and maintaining a solid sounding board relationship.

Of great importance, regardless of whom you choose to market your transaction (internally or externally), remain the essential factors to a qualified buyer/investor. These factors include the quality of the management team and their business and strategic decisions, past financial and operational performance, the product and/or service, defensible market positions and executing the strategic plan going forward.

John Bintz is founder and president of Apple Tree Investments Inc., an investment bank dedicated to middle-market transactions. The firm raises growth equity capital, sells middle-market businesses and assists entities with strategic business planning. Reach him at (312) 243-9694 or

Tuesday, 21 December 2004 10:46

The right direction

A good business plan is crucial for two reasons. First, it is a management tool. Second, it is a means to obtain financing.

While the plan is an essential element in securing financing, it should also be an operating guide to the business, with the goals, objectives, milestones and strategies clearly defined and well-written. This is the best way to demonstrate the viability and growth potential of the business and to showcase the entrepreneur's knowledge and understanding of what is needed to meet the company's objectives.

The first reading of a plan is the investors' initial opportunity to evaluate the individuals who will manage the business and to measure the potential for return on this investment.

A quality business plan is an important first step in convincing investors that the management team has the experience to build a successful enterprise. It also provides measurable operating and financial objectives for management and potential investors to measure the target company's progress.

The plan should address the following business issues from the perspective of the investor.

* Is the management team capable of growing the business rapidly and successfully, and has it done it before?

* Is the product, service or technology fully developed?

* Is the product unique, and what value does it create so that buyers will want to purchase the product or service?

* Is the market potential large enough?

* Does the team understand how to penetrate the market?

* Do significant barriers to entry exist?

* How much money is required, and how will it be utilized?

* What exit strategies are possible?

* What are the financial projections?

* What is the valuation range?

* What are the market opportunities and risks?

* What is the capital raise/sale process?

The capital raising/sale process

Most often, the first step in dealing with investors is to forward them a copy of the executive summary. And because investors (venture capitalists, potential buyers and individual investors, a.k.a. angels) have to deal with so many proposals, the summary must immediately grab the reader's attention. The executive summary will either entice investors to read the entire proposal or convince them not to invest further time.

If the summary is of interest, a business plan will be requested. Then the entrepreneur will be contacted for the first of what will generally be several meetings, and the venture capitalist/individual investor may begin the due diligence process.

Since investors are in the business of making risk investments, a thorough analysis of the company's business prospects, management team, industry, and financial forecasts will precede any investment.

Where an entrepreneur can find capital

An entrepreneur can raise capital from a variety of sources -- bootstrapping, friends and family, angel investors, venture capital firms, SBA, vendors, strategic partners, etc. Typically, companies in the following stages their life cycle will seek funding from the following sources.

Start-up and early stage. Bootstrapping, savings, credit cards, friends and family

First and second stage. Friends and family, profits from operations, angel investors, SBA loans, early stage venture capital firms, vendors and strategic alliances

Third and fourth stage. Venture capital firms

Liquidity events. Public markets (IPO), buyout firms, strategic acquisition from competitor or firm in acquisition mode looking to add on to existing platform

John Bintz is founder and president of Apple Tree Investments Inc., an investment bank dedicated to middle market transactions. The firm raises growth equity capital, sells middle market businesses and assists entities with strategic business planning. Reach Bintz at (312) 243-9694 or

Wednesday, 23 March 2005 05:46

At the helm

Many private equity firms live by the axiom, "I would rather have a C product and an A management team than an A product and a C management team."

The quality of a management team is essential in both investment and buyout situations. In the former, the management team's experience and abilities are greatly scrutinized and can heavily influence an investment group's decision to invest or not.

The investment group will base its judgment on a number of factors, including management's ability to formulate and execute the company's strategic plan --establishing internal controls and financial functions, researching, developing products or services, maintaining margins and overseeing operations. The management team also has to be open to new ideas and working with an outside group that has influence and input into macro decisions and strategic direction.

Regarding a sale or buyout situation, the management team is important because the buyout group may want to keep key members of management or ownership with the company for a certain period. That period could be as little one year or as long as the person wants to stay. Sometimes these management agreements are referred to as golden handcuffs.

Some buyout funds are opportunistic and look for distressed situations in which a poorly managed company has an underlying strength. And there are private equity firms that build their business models around management team buyouts or investments. These firms have a stable of senior executives (or know where they can find them) on the sidelines that have specialties in certain industries. The private equity firm will seek out transaction opportunities that fit its management team's core specialty, then buy or invest in those targeted companies.

At young companies, many executive teams are creative and entrepreneurial but lack operational expertise. In this case, it is important to round out the team to become more attractive to an investor or buyer.

A good example can be found in the academic world. Many colleges and universities have research departments that are constantly creating new technologies and ideas in all fields. These new inventions and ideas are great, but these departments also need a team to commercialize the idea and capitalize on market opportunities.

This area in universities is called technology transfer. Some of America's finest institutions, including Stanford, MIT, Harvard and Michigan State, have sophisticated practices in place that allow investors the opportunity to identify and capitalize on such opportunities. Once opportunities are identified and seeded, the management team becomes critical. It is important to not just have creative people who formulate and create ideas but also to have executives who can carry out and execute a plan.

For early stage companies, the management team must be able to multitask and have the ability to do many jobs. Due to budget constraints, new management team members may not be added until capital is raised or cash flow becomes positive. Angel investors or internal funding may be needed before a company is positioned to be attractive to an outside institutional investor. Often, the institutional investor will have human capital (besides equity capital) to offer, as well.

The management team is one of the most important factors that determines whether or not a company receives investment capital. If you're having trouble finding investors, take a look at your management team and see if it needs improvement.

John Bintz is founder and president of Apple Tree Investments Inc., an investment bank dedicated to middle market transactions. The firm raises growth equity capital, sells middle market businesses and assists entities with strategic business planning. Reach him at (312) 243-9694 or