If your company is sold in part or whole, there will be change. It is inevitable and generally sought. It is hard, particularly if the company was yours.
If the new investor is a strategic one, the change will be easier to predict. Typically strategic buyers, particularly the large ones, have well-developed systems and processes that they will implement in the newly added company.
These include reporting chains, standardized employment and compensation structures, and other authority systems. It generally is difficult for entrepreneurs and family business owners to adjust to these regimes — they typically don’t last long. As such, success in these situations comes from recognizing this from the beginning, and structuring the transaction and transition accordingly.
“Partnering” investments, however, have a much different dynamic. In these investments, the investor often is betting on one or more of the existing managers to lead the company going forward, even if they are selling some or most of their ownership. The investor views its role as partnering with these leaders to assist them in realizing their strategic vision and the company’s potential. Partnering is how our firm invests.
If you are contemplating a partnering transaction, the following are some thoughts regarding how to maximize your success in working with your new investor/partner:
Openness in the process
The clearer your post-transaction aspirations, the better your ability to communicate these to your future partner. If these are communicated, your future partner has the ability to accept them, or not, and then structure accordingly.
The future partner has a similar imperative of openness regarding objectives and timing. This fosters the most critical component of a successful partnering — alignment.
For us, the strategic plan is the cornerstone of communication. It sets forth the vision, goals, path, responsibilities and budget of the organization. It sets expectations. You will be highly successful with an investor/partner if you present acceptable plans for growth and improvement, and then consistently meet or exceed them.
If choosing between a high-growth plan with high risk, or an acceptable plan with very low risk and potential to exceed it, I suggest the latter.
Willingness to let go
Change can be uncomfortable. This is particularly true for most successful business owners. This includes the very difficult, but necessary, process of letting go of employees and managers — no matter their tenure or relationship — who can’t keep pace or aren’t embracing the company’s new direction.
This also includes letting go of the notion that it is right merely because it is “how it’s always been done.”
Accountability can be difficult for those who aren’t accustomed to it (i.e., most entrepreneurs — which usually is why they are entrepreneurs). As such, success with a future partner will depend in part on how, and how often, the leader and team agree they will communicate.
Ideally, this communication and accountability can be accomplished without creating new tools (and more work) for the team. The goal is to keep the partner apprised of key issues and challenges. In doing so, the partner is able to bring assistance and potential solutions. In not doing so, you and the company are deprived of that opportunity for support.
It takes considerable effort to bring on an investor/partner. If done well, however, the benefits greatly outweigh the costs. You gain a skilled sounding board, a provider of resources and capital, a vastly greater network, asset diversification and a risk sharer.
Your ability to execute in the four areas described above can greatly impact your success. The onus is on you.
Dan Lubeck is founder and managing director of Solis Capital Partners, a private equity firm headquartered in Newport Beach, Calif. Solis focuses on investment in lower-middle market companies, typically located in the Western U.S. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world. For more information about the company, visit www.soliscapital.com.
As investors in lower middle-market companies, valuation is a fundamental question we grapple with in every transaction. The short answer to the valuation questions is “what the market will bear.”
Then the next question is, “Which market?”
Company valuations typically are discussed in terms of multiples of trailing 12-month EBITDA. The higher the “multiple,” the more the company is worth. While there are exceptions to using trailing EBITDA multiples — for instance, software company valuations often are discussed in terms of multiples of revenue, and companies with predictable contracts going forward may be valued on projected EBITDA — the valuation of the majority of companies will be discussed in terms of multiples of trailing EBITDA.
Cash and debt
Strategic buyers often pay the highest multiples. As they generally are in the same or related businesses as the acquired companies, these buyers often can identify significant synergies that will effectively grow the acquired company’s post-acquisition EBITDA and thereby lower the effective multiple. Another factor currently pushing up valuations paid by strategic buyers is the amount of cash many companies have on their balance sheets.
To the extent that companies are able to deploy this cash in an acquisition with a higher return on their invested dollars, the acquisition then can be considered “accretive” even if the multiple paid for the acquired company is higher than the multiple at which the acquiring company is valued.
However, often outbidding strategic buyers these days are financial buyers — typically the larger private equity funds.
While these buyers will look at many of the same intrinsic aspects of a target company as strategic buyers (except for synergies), there are other external factors that can move their valuations up or down. The most important of these is the availability of debt.
If lenders are aggressively lending, then the financial buyers will use that leverage to justify and pay higher multiples.
Another factor is the life cycle of fund buyers. Often, fund managers are anxious to deploy their capital before their investment periods expire, and thus, they will pay higher multiples to win transactions.
Your company’s multiple
So, the final question then is what is the multiple for your company? Multiples vary greatly based on company size, industry and specific company characteristics. As for size, there are rough EBITDA breakpoints where companies will be valued at higher multiples merely because of their size. These are at $5 million, $10 million and $20 million.
As for industries, multiples vary greatly. For example, a $5 million EBITDA software company may be valued at an eight multiple, and a nonvalue-added distributor may be valued at a four multiple.
Underlying these multiple variances, however, really is recognition of the predictability and scalability of a company’s EBITDA. A company that produces commodities and is vulnerable to competition and market fluctuations will be valued at the low end of the multiple range.
Conversely, a company that is solving a unique problem, with little or no competition, that is not cyclical and that has a very steep growth trajectory in a very large potential market will be valued at the high end of the multiple range.
Other than these EBITDA considerations, another important factor in the quality of a company is its leaders. Is the company well organized with good processes? Is there a great leadership team that will come with the company? Is there a clear strategic vision? If the answer to those questions is “yes,” the company will be awarded a higher multiple than other companies of the same size in its industry.
Dan Lubeck is founder and managing director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, Calif. Solis partners to build great business in the lower middle market. Lubeck was previously a transactional attorney, and has lectured at prominent universities and business schools around the world.
The sale of a private company typically is a life-changing event for the stakeholders. Its impact transcends multiple aspects of the sellers’ lives — finances, time and balance to name a few.
For investors in privately held companies, recognition and incorporation of these factors is fundamental to success. It enables the investor to structure transactions that meet the needs of the sellers and that have realistic post-closing expectations.
As important as this is to the investor, we believe it is equally important for the selling stakeholders. Sale transactions have a much higher likelihood of closure and success when the sellers have a clear vision of their personal goals in the transaction. We want sellers to describe the lives they desire at the close and after — their true aspirations. A successful sale structure will address those aspirations, while also meeting the needs of the investors and debt providers.
Developing the vision
Ironically, it is common for sellers not to have a clear or complete vision for their desired post-sale lives. If so, developing this vision becomes an important part of the early discussions. We often suggest a simple but powerful exercise where sellers describe their current lives, the lives they desire and how the transaction will advance or deliver them there.
While valuation and terms are key considerations, there are others that frequently are relevant.
Time and balance
Sellers must honestly assess if and how much they want to work after the close. If they want to continue to work, how do they want to spend their work time? Where do they most and least enjoy spending their work time? Where is their work time the most valuable? For sellers of companies they tightly control, are they truly ready to partially or completely let go? Old habits — particularly ones that have been effective and created a lot of wealth — die hard. Driving these questions are nonwork interests, relations and passions to which the sellers would like to give more time. Hopefully, for the sellers and for the transaction, they have many of these.
It is better to sell your company while you have the time and capacity to enjoy it.
This is a frequent aspiration for sellers we transact with. It is common that a seller’s largest asset is his ownership stake in the company, most often created over a long time period. It may make sense for those sellers to take some chips off the table, even if their company is poised for ongoing success. One of my wisest friends, who is a manager of significant wealth, once said, “All of my rich friends sold early.”
A very common aspiration for sellers we transact with, and one we greatly appreciate, is the desire to partner to facilitate growth and improvement. In these transactions, sellers accomplish partial realization, address other aspirations and continue to lead the company — but now with the added support of a new, interest-aligned partner.
Another common feature of partnering structures is provision of working capital. These transactions typically are driven by growth, and meeting the sellers’ aspirations of adequate working capital is essential.
Sellers often aspire to reward and protect key employees. This can be accommodated in many ways.
If you are contemplating selling part or all of your business, these steps can help create a clear vision of your future and how to make that vision a reality with a successful transaction.
Dan Lubeck is founder and managing director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, Calif. Solis focuses on disciplined investment in lower-middle-market companies. Lubeck was a transactional attorney, and has lectured at prominent universities and business schools around the world. Reach him at firstname.lastname@example.org.
When we look at potential investments, particularly in service, business service and niche manufacturing companies, the most important valuation attribute is the likelihood of sustainable revenue and profit growth that can be enhanced. As such, consistent, strong, multiyear historical growth at the rate of 15 to 25 percent annually generally will create more value than a very significant single year jump — even if that jump is as much as 50 or 100 percent. Technically, that valuation difference is because a buyer will want to average the earnings over a several year period, because the “big jump” year is so unusual.
Philosophically, that valuation difference is because buyers generally believe that consistent historical growth is a far better predictor for consistent future growth. So, unless there are circumstances that support the continuation of a hyper-growth year, a company for sale that has consistent historical growth will be credited with more future earnings and a higher valuation multiple. The tortoises usually win that race.
In our experience, if a company wants to generate solid, sustainable growth, there are a few areas where executives should pay particularly close attention. One is the urgency with which they run their organizations, the second is investment in their sales and marketing, and the third is taking the time to think strategically.
Have the right amount of urgency
A great rule of thumb is to run your company as if you are going to sell it in five years, even if you have no intention of selling. By simply putting this five-year mentality in place, the right amount of urgency and focus is created throughout the organization, from CEO to the shop floor. This urgency will help with tough personnel decisions. It also often will motivate innovation in product offerings, cost savings and other areas of the business. However, this rule of thumb may not apply to significant long-term capital investments that won’t increase short or medium term earnings, but are nonetheless necessary.
Evolve your sales effort
Growth requires investment. The most successful, consistently growing companies typically have a focus on sales talent, process and discipline, while creatively looking for new products and markets.
It takes a focused effort to find quality sales talent. One of the operating partners that we work with is truly an expert at this. He has a couple of practices that we believe are part of his consistent success. When he recruits new talent, he typically does not limit his search to individuals that have expertise in the company’s industry. For example, even for a software company we invested in, he recruited a highly successful salesman that had no technical expertise and had never sold software. However, he had a track record of success selling to the same type of customer. The other thing he does is review sales performance on a regular basis and replaces nonperforming members of the sales team.
While sales talent is paramount, it also is important to have process and infrastructure to organize, monitor and support the team. Tighter accountability standards and consistent discipline on meeting realistic goals often are areas of opportunity for improvement and more consistent growth.
In our experience, the most successful and valuable companies take the time to look beyond the day-to-day and current-year budget to develop a strategic vision for the company’s future — say three to five years — and how it’s going to get there. This is not a budget. It is a detailed picture and a path. The process of developing the strategic plan will bring the company together, and give leaders at all levels of the organization a better basis for making decisions. If consistent growth is part of the strategic vision, it is much more likely to occur than if there is no plan.
Successful focus on these three areas will facilitate consistent growth, improvement and valuation creation.
Dan Lubeck is founder and managing director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, Calif. Solis focuses on disciplined investment in lower-middle market companies. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world.
Until a few years ago, when I met with prospective partners, I would joke that before I was a private equity principal I was a lawyer, “but please don’t hold that against me.” That line has stopped getting laughs.
In fact, I’m hearing business owners respond that they would much rather deal with a lawyer than a private equity guy. Ouch!
So, what happened? When and why did private equity get a bad name?
Private equity had noble beginnings. Modern U.S. private equity took root after World War II to help fund new businesses for returning servicemen and foster technological advances to compete against the Soviet Union. The industry grew tremendously. By 1980, approximately $5 billion was invested in private equity. Today, that number is estimated to exceed $500 billion. Many great companies and iconic brands were founded with private equity investment and partnering including: Apple, Genentech, Electronic Arts, Federal Express and Minute Maid. Many private equity individuals and firms have generated very large and highly publicized returns on their investments.
The visible, monetary success of private equity was met with some general concern, skepticism and, perhaps, envy from the business community and seeded the pervasive negativity of today. These attitudes were then heightened by the sometimes-questionable and widely publicized practices of well-known private equity professionals like Michael Milken of Drexel Burnham Lambert, who drove tremendous merger and acquisition activity with junk bonds, T. Boone Pickens generating fortunes with greenmail, and Carl Icahn’s ruthless corporate slashing.
At this point, the term “private equity” was firmly embedded in business and the public’s dialogue, and the connotation was not good.
The public’s concern about private equity was cemented during the golden age of private equity, from 2003 to 2007. These years saw unprecedented levels of investment activity, investor commitments, debt deployment and the formation and growth of thousands of private firms and companies that support their investing. During that period, 13 of the 15 largest buyouts in history occurred, and three of the largest private equity firms went public, creating tremendous wealth for their general partners.
During the golden age, many owners of small- and middle-market companies, and much of the public, started considering private equity investors to be greedy abusers of debt, willing to do whatever is necessary to generate a quick return, even to a company’s detriment. Unfortunately, that perception was not unfounded. Fortunately, there are many great private equity firms that do not operate that way.
Private equity is like many industries (and political parties) where a highly visible portion sets the public’s perception of the whole. There are, in fact, many private equity firms that don’t fit the stereotype, and they can be great partners to business owners and management teams.
Reputable private equity firms focus on creating returns though growth and improvement of the companies they invest in. They develop transaction structures that align their needs with those of the selling parties, as well as the company and its employees. They use appropriate leverage. They develop well thought out incentive plans for company leadership and employees. They support management in developing and executing a strategic plan that will satisfy stakeholder expectations and realize the company’s full potential. They bring resources to bear that the ownership and management wouldn’t otherwise have access to. Finally, they are valuable sounding boards and guides. They add value.
Don’t assume all private equity firms — or lawyers for that matter — are the same. If you are considering a transaction, talk to a few firms, interview them and find a great partner. They definitely exist.
Dan Lubeck is founder and managing director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, Calif. Solis focuses on disciplined investment in lower-middle market companies. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world.
When we invest in a company, our return on investment always is premised on value creation from growth. While we look to other factors to enhance and accelerate value creation (like enterprise improvement and leadership development), growth is the key.
The most coveted and valuable companies (that is typical companies — not social media, Internet or other uniquely valued enterprises) are those with significant, sustainable, profitable organic growth. Since not all companies can accomplish that type of growth, an alternative or supplement to organic growth is growth from add-on acquisitions. While acquisition growth likely won’t be rewarded as highly as sustainable organic growth, great value can be created.
An ideal add-on acquisition will be in the same or complementary business and will add profitable, retainable revenue and will add employee talent. It will have costs eliminated upon integration and can be purchased at an attractive valuation. As companies typically are valued on the basis of a multiple of earnings (most commonly EBITDA), an attractive valuation multiple for an add-on acquisition is any multiple equal to or less than the multiple that would be used to value the acquiring company times the earnings of the acquired company pre-integration.
In other words, if the acquiring company is valued at five times earnings, and it can pay four times earnings for an add-on acquisition, and then save another one times earnings in costs upon integration, you’ve created a value equal to two times earnings on day one. Plus, there’s the harder-to-calculate value of broader product lines, more talent and other potential benefits from the add-on acquisition.
If this piques your interest, the following summarizes the five steps for completing an add-on acquisition.
Noncompetition/nondisclosure agreements. Sign mutual confidentiality and noncompetition/nondisclosure agreements (NDA). As the buyer, you will want to learn everything about the potential add-on without disclosing much information about your company. The NDA must give the seller comfort that the disclosed information will not be used against his or her company if the transaction doesn’t close. Typically, customer names and similar highly sensitive information is not disclosed until just prior to closing.
Initial information delivery. Once NDAs are signed, the acquirer should deliver an information request list to the seller. This list should be everything that is needed to understand the company well enough to propose a structure and terms but not a full diligence request list.
Proposal and agreement. Once the initial information has been reviewed, if there is interest in moving forward, the acquirer delivers a structure and terms proposal. A good acquirer will have listened carefully to the seller and incorporated not only fair economic terms but also terms that meet the non-economic needs of the seller. For the transaction to proceed, a final agreement must then be negotiated. It is then documented with a letter of intent.
Full due diligence and document preparation. At this point, the acquirer delivers a comprehensive due diligence request list to the seller and its representatives. The acquirer also retains CPA and other experts to conduct financial and specialized due diligence initiatives. Assuming due diligence is proceeding well, the acquirer has counsel begin preparation of the documents. This step should take 90 to 120 days.
Close. If the due diligence is satisfactory, the documents have been negotiated and there are no funding issues, there should be a final delivery of sensitive information. The closing should take place shortly thereafter.
I wish you great success in creating value through add-on acquisition.
Dan Lubeck is founder and managing director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, Calif. Solis focuses on disciplined investment in lower-middle market companies. Lubeck was a transactional attorney, and has lectured at prominent universities and business schools around the world.
As investors, our focus is on companies in the lower middle market. This typically means companies with annual revenue between $15 million and $75 million. As such, our strategy for value creation is different from investors who focus on larger companies. Those investors, typically, include financial engineering as a significant part of their value creation strategy.
We, by contrast, base our value-creation strategy on three elements: leadership development, enterprise improvement and growth. If we accomplish the first two, growth usually results. Even if it doesn’t, such as during the recent recession, significant value can still be created.
Good leaders make good companies. It is not required that our leaders have a long track record of success. We can support them in accomplishing that. What is required is that the leaders possess the personality traits and capabilities that are required to realize the vision of the company. For example, if the success of a company hinges on continually developing creative, new products, then the leader of that company must possess a personality and leadership style that fosters ideation and creativity. By contrast, such a leader likely would not be effective if they needed to streamline manufacturing processes. Good leadership is paramount.
Be sure you have the right team in place. Do a critical and honest analysis of your senior leadership relative to the company’s needs, and adjust accordingly. If you are the owner and at the center of most activities, this may mean firing yourself.
One of the elements we look for in an investment is the ability to evolve the enterprise. If accomplished, this also will create value without the need for growth. However, when coupled with growth, the value creation is multiplied. Enterprise evolution, typically, is accomplished by harvesting one or more of the following:
Strategic planning. For us, the strategic plan is the cornerstone of enterprise improvement. It is not a just a budget. It sets the management team’s vision.
Sales and marketing. This is an area that often can be improved. In our experience, a majority of lower middle-market companies have not invested sufficiently in this area.
Systems. Often there is an opportunity to evolve an enterprise by improving or replacing systems, including accounting, ERP, oversight, reporting and accountability.
Asset utilization and balance sheet. In lower middle-market companies, there almost always is the ability to improve and create value through better asset utilization and balance sheet focus. This may include using a return on investment framework for capital budgeting, as well as basic items such as improving accounts receivable, accounts payable and inventory turns through focus and technology.
Professional support and other external resources. Most business owners and senior leaders build a relationship of trust with their service providers. When making an investment, we appreciate and respect those relationships. We often find a level of complacency. Often, the mere introduction of a competitive scenario will yield better service at the same or even reduced cost. This is most often true with auditors, senior lenders and insurance and benefit providers. Providing services should not be an evergreen annuity for the service provider.
If you are able to accomplish some or all of the leadership development and enterprise improvement initiatives described in this article, you will create value irrespective of business cycles. Even better, you are likely to also create growth.
Dan Lubeck is founder and managing director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, Calif. Solis focuses on disciplined investment in lower-middle market companies. Lubeck was a transactional attorney, and has lectured at prominent universities and business schools around the world. Reach him at email@example.com.
Shortly after the movie “Saving Private Ryan” was released, I spoke with a World War II veteran who was one of the first soldiers to jump out of a landing craft to storm the beaches of Normandy. He said the movie was the most accurate depiction of that glorious and horrific event that he had ever seen. He was one of the lucky ones.
The beaches of Normandy are a good analogy to today’s post-recession landscape of buyout investors and operating companies: Many are dead, many more are severely injured, and a few are strong and thriving. What factors make the difference? The first and most important of these is debt. When used appropriately, debt can be a very cost-effective source of capital for growth. When used excessively, debt can put a company at risk of loss and cause a tremendous shift of resources and time away from your main focus — value creation.
The problem with debt is that lenders cycle greatly in their willingness to lend. At times like today, underwriting is very strict, and except for the most ideal borrowers, debt is very hard to get. Typical leverage today is around 2 to 2.5 times earnings before interest, taxes, depreciation and amortization (EBITDA). By contrast, at times like those from 2003 through 2007, debt is abundant and aggressive. Typical leverage during that period was around 3.5 to 4 times EBITDA, and often got as high as 6 or 7 times.
Lesson 1 from the recession: Don’t overlever
Even if lenders are willing to lend, only borrow to the extent the company can cover under conservative projections. If debt alone cannot meet the company’s capital needs, then look at bringing in equity. We often say, “It’s better to own half a watermelon than a whole grape.”
Lesson 2 from the recession: Run your company during boom times as if times were lean.
We have heard many leaders bemoaning that their companies would be far more successful if they had run them during the boom period as they are running them now. Without question, success can bring complacency. However, the best leaders we know resist this tendency. Their companies’ cultures foster continuous improvement and cost-reduction regardless of great performance.
Similarly, the advice we often give entrepreneurial and family business owners is, “Run your company as if you are preparing to sell it in three years.” This means eliminating underperforming employees (which can be difficult, even when done with great care and consideration, but is critical), and building cost-cutting and improvement initiatives. These efforts will grow EBITDA and result in a more successful, resilient and valuable company.
Lesson 3 from the recession: If you follow lessons 1 and 2, recessions can create great opportunities for growth and value creation.
Recessions eliminate the weak and reward the survivors. The weak generally are overlevered and are spending their time and significant dollars appeasing their debt holders. The strong, by contrast, are appropriately capitalized and well run. They are poised to bring in more work and to acquire other companies.
There are many companies, including our portfolio companies, which have thrived during the recession. These companies are growing revenue and EBITDA and are taking market share. They are accomplishing this both organically, often picking up business from failing competitors, as well as through acquisition. Those acquisitions often are of struggling competitors at very advantageous valuations.
Follow these lessons, and your company will be positioned to thrive through down cycles, and to dominate once the market turns positive.
Dan Lubeck is founder and managing director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, Calif. Solis focuses on disciplined investment in lower-middle-market companies. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world. Reach him at firstname.lastname@example.org.
Have investment questions? Of course you do.
Now, you have answers. Dan Lubeck, founder and managing director of Solis Capital Partners and contributing columnist for "Investor's Perspective" in Smart Business Los Angeles and Smart Business Orange County, has found his way to our blog. Last week, he debuted "Ask the Investor" by responding to some common investment questions that come up when buying and selling a company.
E-mail your investor questions to Dan@SolisCapital.com and his responses will be featured in future blog posts.
Q: Why is there so much focus on EBITDA by potential purchasers of my company?
The Investor says: At the end of the day, the most important aspect of value is how much cash a company will generate over time. EBITDA, or earnings before interest, taxes, depreciation and amortization, is an easy way for investors and purchasers to understand historical cash generation for most types of companies (except for those that require significant, recurring capital expenditures). The historical EBITDA often is a good indicator of what the future EBITDA will be.
Other critical factors include quality of leadership, ability to defend the niche, market dynamics, proprietary technologies or processes, contacted business and any other items that help assure future EBITDA. The investor or purchaser will value a company based on a multiple of EBITDA. Companies with the highest certainty of the fastest EBITDA growth typically will receive the highest multiple valuations. In addition to expected growth, companies with higher historical EBITDAs often will receive higher multiple valuations merely because of size. For example, a company with over $10 million of trailing 12-month EBITDA generally will fetch one times EBITDA more than a company with $5 million or less of trailing 12-month EBITDA.
Q: Should I hire a broker or investment banker to help me sell my company?
The Investor says: The answer to this question is “maybe.” The fees charged by intermediaries are significant. However, there are scenarios when qualified intermediaries can add value in excess of their fees. For example, if your company has performed well for the past two to three years, you want to sell most or all of it, there are a large number of potential buyers and/or you have no idea who the right buyer will be, a sale process run by an intermediary potentially can generate a much higher value. Another scenario is where the intermediary has particular expertise and experience in your industry, and there is “story” required as part of your sale presentation.
There are many scenarios where an intermediary will not add value. For example, if you know the one or two likely best buyers, then you should be able to maximize value with the assistance of an experienced transactional lawyer (which you need regardless). Another example is where there is significant risk to your business if the word leaks that you are selling. In this scenario, you are likely better off working with your experienced transactional lawyer.
We use intermediaries about half the time when selling our portfolio companies. Often it’s a good idea to seek the advice of your CPA when making this decision. If you decide that you need an intermediary, please do not base your decision on the firm name. Be sure that the individuals that will be representing your company (often not the senior partner that comes in for the dog and pony show) have the talent, experience, time and drive to get your deal done.
Q: Can I sell my company even if I have not made any profit the last couple of years?
The Investor says: You can always sell your company. The question is: Will you receive a value sufficient to satisfy your personal objectives? Although your historical EBITDA certainly is a factor, the value will depend largely on what EBITDA you can prove for the future. If, for example, you have landed large new contracts, you likely will be able to get value for most of the EBITDA that those contracts will generate. I suppose the tougher question here is: Why are you selling your company now? If you have no choice, then you should prepare the best you can, potentially hire a broker to help you tell the story, and get the best value possible. If you don’t have to sell now and you think the future looks better, you likely will get more value if you wait.
Dan Lubeck is Founder and Managing Director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, CA. Solis focuses on disciplined investment in lower-middle market companies. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world.
It is a big decision to bring equity into a company. Typically, equity is brought in when debt alone is not appropriate or sufficient to satisfy the company’s needs. Equity can be minority or majority, and it can be structured in infinite ways. Regardless of the type or structure, this step also means that you are adding one or more partners. So, if you have the good fortune of being able to choose among two or more equity suitors, do your homework. The following are some things to consider:
Beware of the false minority (i.e., the devil is in the details). Minority equity often is viewed as more attractive because of the perception that “control” is retained. While this certainly can be the case, great attention must be paid to the terms of the investment, particularly to the rights of the investor in the event things don’t go as planned.
Frequently, minority capital will have performance hurdles or other identified events (like defaults under loan agreements), the failure or occurrence of which will give the minority investor greater rights and authority — sometimes control of the company. When bringing in minority capital, engage a qualified, experienced attorney and understand the rights you are giving away.
The power of the majority (i.e., it’s better to own half a watermelon than a whole grape). The remainder of this discussion will focus on investors who purchase 50 percent or more of the company. Your decision to accept equal or majority investment must also come with the acceptance that you now have a partner or partners and that there will be changes — ideally, for the better. A good equity partner can help create tremendous value. A bad equity partner can make your world miserable. At a minimum, look for these qualities in a potential partner:
Track record. Be sure that whatever you are hoping to gain from the partnership (other than capital) your potential equity partner has successfully done before. Whether it’s building a sales team, developing new products, cutting costs, developing infrastructure, going public, acquiring add-ons, franchising, etc., verify they have done it well. Study their track record, and ask the hard questions. If they are what they represent, they will respect your diligence. If they aren’t, you will, hopefully, avoid a mess.
Expectations. A good potential equity partner will spend considerable time with you and your team understanding your vision and making sure it aligns with theirs. When disputes arise between investors and their operating partners, it most often is the result of misaligned expectations. On the other hand, if done properly, the equity structure should be based upon your and the investor’s collective vision of the future.
Hands-on, hands-off. Prior to closing the investment, it is imperative that you and the potential investor agree regarding how you will work together. Some investors are only comfortable if they are deeply involved in operations. Others expect only to attend quarterly board meetings unless things go badly. We are in the middle. We like to spend significant time supporting development of the strategic plan, and then seek to support our operating partners any way we can in executing the plan.
Chemistry. Although hard to quantify, you should feel good chemistry with and trust for your potential partner. As you may be together a long time and face great challenges with your partner, this consideration should not be compromised.
A good equity partner can accelerate your growth and success and help you create and realize a vision far grander than you might otherwise have. A bad equity partner can be disastrous. Be disciplined, and choose wisely.
Dan Lubeck is founder and managing director of Solis Capital Partners, a private equity firm headquartered in Newport Beach, Calif. Solis focuses on disciplined investment in lower-middle market companies. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world. Reach him at email@example.com or visit www.soliscapital.com.