Congress & President Obama: It’s NOT About the ACA or the Debit Ceiling!

9 Oct

By Huxley Nixon

Washington has been dancing around the elephant in the room for the past six years and it is NOT the Affordable Care Act!  It’s much BIGGER – a loss of confidence in our SYSTEM and the elected representatives and leadership that are supposed to do what is best for the WE (as in the people) versus the ME (as in my re-election). We are a nation whose uniqueness was founded by immigrants who came with little and created the “American Dream”.

Post WWII US Economy

We are a consumer driven economy (70% in 2012) and we depend on a large and strong middle class that is able and willing to consume these products and services. A key indicator of the health of the economy is the Real GDP (total of all goods & services produced in a year adjusted for inflation).  This indicator shifted from a Product (manufacturing) driven economy to a Service driven one in the 1970’s with much of US manufacturing being sent offshore. Economists feel a healthy GDP growth rate is between 2% and 4%. Below 2% cannot sustain a strong employed labor force and above 4% for multiple quarters lead to inflation, thus reducing buying power and creating unsustainable bubbles in the economy.

What Affects Good Economic Health?

1.      Demographics – growing labor pool

2.      Regulatory and Tax environment – minimal restrictive regulations on business and tax structure to promote growth

3.      Uncertainty – bad for growth, job creation and stable economy

4.      Poverty rate – High rate negatively effects growth and stability

5.      Participation Rate of Labor Force – Higher the better, measures the percentage of working age individuals in the labor force.

Demographics

Economic Growth has been the engine that has allowed us to mask many sins of the past. The Baby Boomer generation (1946-1961) created a population surge (approximately 80 million) that was a huge contributor to strong sustained economic growth between 1970 and early 2000’s. Unfortunately, approximately 12,000 boomers are turning 65 every day since January 2011 and will continue to do so until 2030.  The US total population in 2012 was 313.9 million and its Growth Rate is declining (.7 of 1% in 2012, US Census Bureau).

In addition to becoming an aging population, we have been reproducing at a Sub-Replacement Fertility Rate for the past four decades. It takes 2.1 births for each female (replacement fertility rate) to sustain a population in industrialized countries. Except for 2007 (2.12 rate) and 2010 (2.1 rate) the US has NOT reached this replacement rate since 1971 and we would not have had any increase in our population over the past four decades were it not for immigration (legal and illegal). Europe and Japan’s fertility rate (two of our largest trading partners) is currently approximately 1.6 and they have not been above 2.1 since WWII.

Regulatory

We have created failed social programs to help those in need with well-intentioned safety nets but instead of helping these individuals get back on their feet and become self-supporting citizens, our system has encouraged them to live off of expanding government programs where many no longer have any incentive to get a job. The family unit is in tatters (current percentage of population married was 51% in 2010) and the percentage of children born out-of-wedlock was 40.7% in 2011.  Key results by race: Non-Hispanic white – 29.1%, Non-Hispanic Black – 72.3%, American Indian/Alaska Native 66.2%, Asian – 17.2% and Hispanic – 53.3% (National Vital Statistics Reports, Vol 61, No. 5, Oct 3, 2012).

Poverty & Labor Force

As of 2012 there were approximately 154 million citizens of working age (18 yrs – 64 yrs) with 13.7% below the poverty line, thus not paying taxes. Citizens below the poverty line were 25 million in 1975 and 46.2 million in 2011 increasing a drag on GDP.

Exacerbating this is the rapidly dropping Labor Participation Rate (those of working age dropping out of the labor force). 63.2% of Americans had a job or were actively seeking work in 2011 (lowest rate since 1978), down approximately 11.4 million since 2000 (The US Bureau of Labor Statistics: “TBLS”). When these individuals are added to the unemployment number – ACTUAL UNEMPLOYMENT is 14.4% versus the 7.3% reported by the TBLS in August 2013.

The rapidly expanding cost of funding entitlement programs for the aging and under-employed population can be seen in the graph below and what it will do to the growth rate of our national debt as a percentage of GDP if left unchecked. We only have to look to our largest trading partner – Europe and the PIGS (Portugal, Italy, Greece and Spain) to see where we are heading. Between the end of WWII and 2008 our debt as a percent of GDP has been around 35% – as of October 2, 2013 it was 100.46%! (Federal Reserve Bank of St Louis)

Uncertainty

The U.S. is experiencing a double whammy – the increased cost of funding entitlement programs for the rapidly aging population at a time when the labor pool is shrinking and fewer citizens are paying taxes and contributing to GDP growth.

The facts mentioned above leaves me to believe the US is at crossroads and rapidly approaching a point where we cannot reverse the irreparable harm of an ever-increasing DEBT as a percent of our GDP, especially when our future economic growth will be lower than in the past. Here is a summary of where the author feels we are today:

1.      Demographics – declining labor pool. The US has not had positive “Fertility Growth Rate” but two times since 1971. Immigration Policy and Regulatory reform uncertain.

2.      Regulatory and Tax environment – dramatic increase in business compliance regulations, tax increases (Affordable Care Act, Dodd Frank, and largest tax increase as a percent of GDP in 2013).

3.      Uncertainty – Rapid acceleration of US Debt (100+% of GDP) while US economic growth slowing!  The declining buying power of US middle class will continue.

4.      Poverty rate – number below poverty level has increased 85% to 46.2 million since 1975 and Medicaid recipients have doubled since starting the implementation of the Affordable Care Act.

5.      Participation Rate of Labor Force – 2011 it was 62.3% (lowest since 1978).

The DEBT CEILING is not the problem – the DEBT is!

US Debt Trajectory Chart 

US DEBT as % of GDP thru Q3 2013

US Aging Trend

Solution?

After the near meltdown of our economy in the fall of 2008, Congress, the President, US Treasury and Federal Reserve moved quickly to avert disaster.  In fact, President Obama in 2010 established an 18 member, blue ribbon bi-partisan committee (Simpson-Bowles) to address measures to pay down the huge increase in the US DEBT as a result of the economic Stimulus Bill and looming demands facing the treasury to fund “entitlements” for our aging population and the expanding social programs targeting the under-employed and poor.  They came up with a proposal that addressed the debt and “entitlement issue” through a combination of simplifying the tax code (lowering rates and eliminating many popular deductions) and a gradual increase in the eligibility age for Social Security.  It would stabilize the National debt by the end of 2014 and reduce it by 60% by 2023 with debt elimination reached in 2035. Unfortunately, it did not receive the support of the necessary super majority of 14 of the 18 members (it received 11 – 60%) to send it to Congress for approval.

Some in Congress are suggesting this model be used to address the current crises. We CANNOT allow our country to default on its debt or other existing promises risking another (even worse) recession. Individuals, companies and state and local governments cannot print money so they MUST not spend more than they receive or they eventually will go out of business. The President and Congress should temporarily fund the Government for 60 days to buy time to pass true reform legislation reducing the Debt to reinstall confidence lost by the American people and this should be the No.1 priority for all!  Maybe a good start is to “dust off” the Simpson-Bowles Outlinetruly a Bi-Partisan solution that no one will be completely happy with – BUT it puts our financial house in order and places critical social programs on sound footing for future generations.

Since 1960 the US has ONLY taken in more that it spent in 4 of these 53 years (1997-2001) and our debt as of September 30, 2013 was $16.96 TRILLION! Since Congress established a statutory limit on the US Debt in 1917, it took 80 years for the debt to reach $6 Trillion in 2001.  WOW!

Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary.  He is founder of the M&A MARKETPLACE by CHC (www.mamarketplace.com) where the buyer pays all success fees and the process is only 120 days.  For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

DISCLAIMER:  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship.  For those desiring additional information please visit our website www.mamarketplace.com.

Private Equity M&A Deal Activity DROPS Dramatically in Q2 2013

18 Jul

 When Should I SELL?

When Should I SELL?

By:  Huxley Nixon

PitchBook just released its report on Middle Market M&A activity by Private Equity for the First Half of 2013 – it was a BIG surprise to many.  Most market watchers were expecting a pickup in deal activity in Q2 after a drop off in Q1 from the spike in tax motivated transactions in late 2012. Investors were sitting on unprecedented amounts of dry powder that started expiring in 2013, large numbers of portfolio companies were still held after five+ years, easy access to debt at very low rates was available, all pointed to a pickup in deal activity.   This did NOT happen – Q2 was the slowest since Q2 2009!  Click here to see full report.

The US stock markets are at all time HIGH’s, unemployment is below 8%, interest rates are at historical lows and consumer confidence is at 57%, the highest since 2007. Even the housing market is coming back with new construction activity up for the first time since the great recession.  This fragile recovery is being buoyed by the Fed’s policy of Quantitative Easing pumping $85 BN monthly into the US economy.  Everyone knows the stimulus will come to an end and we have already seen the impact of Chairman Bernanke’s June 20th comment about the Fed “taking its foot off the accelerator” in late 2013 or the first half of 2014 if unemployment declines to 7% – the Dow lost over 550 points in two trading sessions.  Last week he made another announcement that he will keep the pedal to the metal for as long as it takes – the markets are at NEW all time HIGH’s.

“Uncertainty” kills markets and consumer confidence (consumer spending drives our GDP) and the author feels this is the reason for this BIG surprise in deal activity slowing down.  Volatility in the markets will be the norm going forward as long as clouds of uncertainty remain on the horizon.  Our largest trading partner, Europe, is in recession, US 1st Half 2013 GDP forecasts have been revised down to below 1%, Geo-political Risk is spreading across the Middle East with Syria in a civil war and Egypt potentially headed in this direction, the first successful terrorist attack on US soil since 911 occurred in Boston, an exploding national debt with Washington unable to address the tough choices ahead, and more government regulations imposed on US businesses (the Affordable Health Care Act takes full effect in 2014) do not make for a high degree of confidence in strong GDP growth in the future.

The author does not know what will happen going forward but business owners considering a sale of part or all of their company in the next five years may want to act sooner than later.  At least an owner should consider hedging their bet by taking some of their chips off the table today.  In five years there will be less money available for acquisitions by financial buyers (fewer buyers), the number of “boomer” business owners selling will add potentially hundreds of thousands of new deals to the market when interest rates are rising, and inflation possibly once again is a concern.  This is not what I would call a “Sellers Market”.

DISCLAIMER:  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship.  For those desiring additional information please visit our website www.mamarketplace.com.

Where can I Invest my Proceeds from a SALE?

12 Jun

Image

What are MY Options?

DILEMMA

The market for Mergers and Acquisitions for quality private companies below $500 million in enterprise value is very strong and should continue through 2012.  Supply (availability of capital) and demand (quality companies ready to sell part or all of their equity) is out of balance today with much more supply than demand.  For many industries, valuations are back to pre-recession levels for strong companies with a solid management team and good growth story.  However, the window of opportunity to invest for the $330 BN of private equity funds closed on in 2007 begins to shut in 2013.  Click here to read more…

Owners frequently say they are receptive to taking some chips off the table but indicate their reluctance because of this question:

 “Where can I invest my sale proceeds that can give me a higher return than investing in my business?”

This is a very fair question BUT it is not the right question.

What Motivates YOU to SELL?

For a “founder”, the underlying issue may be giving up “control” which is an emotional issue not a financial one.  An attorney friend recently shared with me a story about a client in the Building Supply industry who was pursued by multiple buyers to sell in 2006.  He was offered $350 million for his company but elected not to sell because he was confident others would offer more. Today he is still around but just struggling to survive digging into his pockets to honor his personal guarantees securing his company debt.

Many would immediately respond that the reason the owner “walked” was “Greed”.  I disagree.  A recent study (Noam Wasserman and Timothy Butler – The Motivation Matrix) of 2,000 business founders were given 13 motivational traits to rank in order from the most to least important.  The TOP two motivations driving founders are AUTONOMY (cannot work for others – control) and POWER & INFLUENCE (likes to be the Boss).  Unfortunately, these founders rarely build large companies because they refuse to hire top-level employees where the owner must relinquish his power and control over their pet areas.  By contrast, according to Wasserman, those entrepreneurs that place FINANCIAL GAIN near the top of the list ended up with an equity stake 52% more valuable on average than those who ranked AUTONOMY/POWER & INFLUENCE first (“Rich vs King Dilemma”).

INVESTING in your Business

This may be the BEST option but you must analyze it objectively. What is the real return of investing in your business versus the risk associated with it?  To evaluate this let’s look at five market influencers –

  1. Interest Rates
  2. Inflation
  3. Globalization
  4. Technology
  5. Demographics

Interest Rates:  The Federal Reserve Chairman did NOT announce last week the third round of “Quantitative Easing” (another term for printing money) to keep interest rates low to create a positive environment to support the economic recovery but he did not rule out the possibility in the future if the EURO Zone deteriorates further.  It previously announced that it intends to end this policy by 2014 allowing rates to be determined by market forces versus government intervention.  WHAT happens then? (Hint: It is hard for rates to go below zero)

If rates do rise, how will it affect your value?

  1. Borrowing costs for your company, customers and potential acquirers will go up.  This reduces your cash flow and makes it more difficult for buyers to pay as much and meet their return expectations (this frequently results in a lower valuation).
  2. It has a negative impact on GDP since more resources will go to service debt versus being invested in growth.  It also will increase the need of Government to collect more revenues (pressure to raise taxes) and it can put a damper on economic growth. This tends to make business owners hesitant to hire additional employees and expand in uncertain economic times. (i.e. current woes in the EURO Zone)

Inflation:  Currently it is not a factor, global economies are struggling on how to prevent a double dip recession (many believe Europe is already in a recession) and reverse the effects of “deflation”.  However, the sovereign debt crises of the US will have to be addressed.  It is estimated to reach approximately $16 Trillion in 2012.  This debt burden coupled with the coming huge expenditures to support the aging US population will definitely put upward pressure on inflation in 2014 and beyond (SEE Chart below).

Globalization: You use to compete with the firm across town.  Today you compete with firms from Asia, India, South Africa, and all over the globe.  You cannot ignore international opportunities and threats in the future and be prepared to act.  Is the health of the U.S.’s key trading partners important to you? YES!  Collectively the EURO Zone is our largest partner and if they are in a severe recession they cannot (or will not) buy as many products and services from U.S. companies.

Technology:  It has changed every industry and the way we live our lives.  It is facilitating change at a speed never seen before.  Ten years ago did you foresee corporate names like Eastman Kodak, Blockbuster, and Borders Books disappearing?  We had not heard of household names like: “Nook” or “Kindle”, iPad, and “Cloud Computing”.  If you are not familiar with “Moore’s Law” then follow the link.  As a business owner you must keep pace with technology advances because your competitors will.

Demographics: The chart below says it all.  The U.S. like most of the industrialized countries in the world have a Sub-Replacement Fertility Rate (less than 2.1 births for every female in the population) and this has been occurring every year but 2 years since 1976.  On  January 1, 2011, Baby Boomers began turning 65 at the rate of 12,000+ per day and will continue to so through 2030.  This will double the percent of the population reaching retirement age and receiving entitlement benefits such Medicare, Social Security, etc. while the percentage of those between 25 and 65 of age (wage earning years) are declining by approximately the same percentage.  There is no reserve fund set aside to pay for this so the government will have to borrow to meet these obligations.

US Aging Trend

Effect on Your Company:  What will higher interest rates, inflation, globalization and technology have on the value of your business and Middle Market M&A activity?  For starters the first two will increase the cost of borrowing for your company and acquirers desiring to buy your company.  How will the more stringent lending practices and higher rates affect consumers and their ability and willingness to borrow to buy your products or services?  If these cause a slowdown in your company’s growth and the confidence of buyers about where your business will be in the future, it can translate into a lower value.

If you are convinced that your business is recession resilient AND you still have the fire in your gut – then use this opportunity to expand by creating additional products/services, distribution channels and/or acquisition of competitors or other synergistic targets to strengthen your position for when the economy recovers. 

The facts are:

  1. Only approximately one-third of family owned businesses will successfully pass to the second generation, 12% to the third and 3% to the fourth according to the Small Business Administration statistics.
  2. Some experts’ estimate as high as 70% of those failing to transfer will liquidate because of insolvency or the owner ceases operations and sells the assets!
  3. The remaining businesses are sold to third parties.

Regardless of what you decide to do, explore other options that can protect your family and employees to provide for an orderly succession but will not necessarily maximize your purchase price because it is a non-competitive process.  None of us mortals can beat father time but we can plan for an orderly transition of the business.

Non-market (non-competitive process) types of exits are:

  1. ESOP (Employee Stock Ownership Plan)
  2. Transition to Family
  3. Management Buyout
  4. Liquidation (most likely)

Is  FINANCIAL GAIN a key Motivation for YOU?

For those owners where wealth creation is a high priority and you would like to:

  1. De-risk your personal financial picture (i.e. remove yourself from personal guarantees of company debt)
  2. Not have to invest in new facilities and technology to keep up with global competitors
  3. Hedge your bets or retire by capturing some or all of the value you have created
  4. Maximize your purchase price in this “seller’s market” window

If you answered YES to the above desires and are psychologicaly prepared to separate from your company, you should take the following steps ASAP:

  1. HIRE the best professionals possible who are expert in succession planning to assist in creating an EXIT PLAN (this will be more than one person but you should have a team leader coordinating the efforts).
  2. Develop a plan to prepare for a sale of part or all of your company as soon as practicable (2012 if possible)

Your planning will need to include both YOUR personal objectives and those to prepare and execute a Sale of the business. Your planning will include multiple disciplines;

  • Succession Planning
  • Accounting & Legal
  • Wealth Management and Planning
  • Strategic Planning
  • M&A Market knowledge
  • Transaction Execution Expertise (MUST create competitive tension)

The lead adviser (coordinator) should have a complete picture and be experienced in the planning and process. The M&A MARKETPLACE by CHC can assist with referrals if desired.

WHAT Should I to DO WITH MY SALE Proceeds?

We finally get to the Title subject! Hopefully you have followed the above advice and have selected an expert in wealth management to help in creating your plan. Most good money managers will tell you, their job is not to match the growth in value (or take the RISK) you did in building your company, their objective is to preserve what you worked so hard to build.  Your decision is:

“Do you want the responsibility of managing your sale proceeds OR do you HIRE a professional to do it for you?”

Robert Balentine, CEO of Balentine, LLC a respected wealth management firm,  recently gave an excellent presentation to a group of Vistage CEO’s outlining in a simple chart the reasons business owners, who are use to controlling their world,  have a hard time turning what they worked a career building over to a third party.

Wealth Creation Stages

There is huge “Uncertainty” about the global economy, especially the EURO zone (the U.S.’s largest trading partner) and the possibility of its woes putting the U.S. back into recession. The options for investing are limitless and confusing with huge pitfalls for the inexperienced.  No longer can you Buy and Hold (“on”) in the age of 24/7 trading hours and computer trades where trading algorithms can cause a 700 point drop in the DOW in minutes when certain triggers are hit.

Potential OPTIONS for INVESTING the PROCEEDS

 

Remember, the goal of a professional wealth manager is NOT to make you a fortune, it is to preserve the one YOU made!  Warren Buffet did not become the most successful investor on the globe by taking wild risks – he did it by avoiding them!

Buffet Secret

Note:  Buffet’s gains in positive periods were slightly below the S&P 500 (93.9%) BUT outperformed them in down periods by limiting his loss to only 37.8% of the S&P 500.  The result were annualized returns of 15.9%, 2.24 X the 7.1% return for the index!

Below are the raw returns compiled by the U.S. Treasury Department  since 1928 through 2011 for Stocks, T-Bills (3 month maturity) and T-Bonds (10 year maturity) the average annual compound return for each category was 9.35%, 3.66% and 5.20% respectively. Below is a summary of the returns for the periods following the two worst depression/recessions in U.S. history.

U.S. Stock, T-Bill & T-Bond Market Performance

  5 Years 10 Years 20 Years Average Compound Annual Return (1929-2011)
Post Great Depression (1932)        
    Stocks 12.43% 7.92% 11.28% 9.35%
    T-Bills 0.38% 0.25% 0.05% 3.66%
    T-Bonds 4.04% 3.39% 2.79% 5.20%
         
Post Arab Oil Embargo (1974)        
    Stocks 13.86% 13.72% 13.59% 9.35%
    T-Bills 6.39% 8.39% 6.98% 3.66%
    T-Bonds 3.91% 6.90% 8.35% 5.20%

Stocks outperformed their historic average return after both of these down periods.  It is interesting to note that after a prolonged period of “deflation” (Great Depression) stocks performed roughly the same as the “inflationary” period following the Arab Oil Embargo (except for 10 year period post 1932).

Alternative Investment Options:

The Investment Management field is one of the fastest growing business areas and investing today is more complicated than ever. In an attempt to show how professionals in this arena can make a difference, the author has selected a portfolio strategy that he found during his research that was created in the early 1980’s to provide the investor long term market returns without the volatility. Please see the disclaimer at the end of the blog about the opinions and statistics of others. The following approach was useful to see how one manager has attempted to create the perfect “Permanent Portfolio”.  Though allocation among four asset classes this strategy attempts to provide protection as the economy shifts between cycles of prosperity, inflation, deflation and recession. The four classes are:

  1. 1.      25% Stocks – Total Stock Market Index Fund (TSM)
  2. 2.      25% Cash – Treasury Short Term Bonds (1 – 2 years)
  3. 3.      25% Treasury Long Term Bonds (20+ years)
  4. 4.      25% Gold Bullion

Going back 40 years (1972) using this methodology the creators (Harry Browne, deceased, Terry Coxon and John Chandler) claim an average return over that period of 9.7%.  This is roughly the same performance of “stocks” compiled by the US Treasury over the same period BUT what stands out is the “Permanent Portfolio” only shows losses in two years and greatly reduced year to year fluctuations.  Two of the creator’s of the above “Permanent Portfolio” strategy started a mutual fund called The Permanent Portfolio Fund (Ticker: PRPFX) in 1981 that demonstrate the fund’s success at limiting the magnitude of losses in down markets. (Example: in 2008 the fund claims a positive 1.9% return when stocks lost approximately 40% of their value)

Please forgive this long-winded explanation to try and address what may not be your real concern – giving up control, of your company and investment decisions.  If wealth creation is a key motivator then hopefully some of this is helpful.

Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary.  He is founder of the M&A MARKETPLACE by CHC (www.mamarketplace.com) where the buyer pays all success fees and the process is only 120 days.  For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

DISCLAIMER:  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship.  For those desiring additional information please visit our website www.mamarketplace.com.

Link

WHO Pays the highest Purchase PRICE – Strategic or Financial Buyer?

2 Jun

By Huxley Nixon

Conventional wisdom has always been the Strategic buyer could pay more because of the potential to “rationalize” the less efficient or duplicate functions of the target company.   Frequently this meant firing most of the employees and selling or closing most of the target’s facilities.  A strategic buyer usually desires 80% to 100% of the equity and it is definitely not interested in less than a control equity position unless it is to acquire access to intellectual property or expansion into additional markets.  It virtually never is interested in the personal wealth creation of the Seller other than appreciation of any stock of the acquirer they may have taken as part of the purchase price.

On the-other-hand, Financial buyers such as private equity groups (“PEG”) usually are seeking strong “platform” companies to buy and grow and exit in three to five years.  They desire and need….Read More…

WHAT destroys your EXIT Value but you CANNOT control it?

23 May

When Should I SELL?


By:  Huxley Nixon

 

                                                                                                                                                                                                

“It” universally affects a buyer’s willingness to invest, a lender’s willingness to lend and a seller’s to sell. Unfortunately, NONE of these constituencies have the power to change its momentum! It is a cancer no form of government or geographic region is immune from and it paralyses our financial markets.  WHAT IS IT?

Hint:  It is related to RISK.

BUYERS:

If you are a successful company but not sure customers will continue to buy your product or service it keeps you from investing in new inventory, plant or equipment and frequently prompts management to lay off employees.  It affects your decision to acquire others that in normal times would be logical actions and accretive to your bottom line.

LENDERS:

This group makes loans to others based on the expectation they will be repaid their principal and interest based on the Five C’s of Credit –

Capacity/Collateral/Capital/Conditions/Character

How did the near collapse of the financial system in late 2008 affect the ability of new borrowers to get a loan today?  Lenders have more availability of FUNDS to lend but few loans are being made and borrowers are hesitant to borrow.  WHY?

SELLERS:

Business Owners remember the heady valuations being offered prior to the Great Recession but few pulled the trigger and sold.  Family business owners were hit especially hard because selling is also an EMOTIONAL decision, NOT just a financial one.  Many founders ask themselves – “What will I do after I sell? Unfortunately, in many instances their company has become their identity and they cannot envision not being part of it.  Financial Gain is NOT the key motivation driving them in most cases so they elect to do nothing and do not plan well for this eventuality.  We all know someone whose business was flying high in 2007 but if they were in the building supply arena Chapter 7 liquidation was the outcome for many when ALL construction came to an abrupt halt in 2009.  Not a GOOD outcome.

Fast forward three and half years and the majority of owners who survived the worst, have stabilized their companies and are growing again but may not have reached their pre-recession high water mark.  The almost universal response when asked about selling part or all of their company today is:

Why not wait five years until things settle down and valuations return to normal?

WHAT THREE FACTORS DETERMINE VALUE?  

1)      INTERNAL:         (You control creating these value drivers)

  • Strong Management TEAM and Company Culture
  • Excellent Financial/Management controls and Operating systems
  • Diversified Customer Base
  • Investing in new technology advances and capital improvements
  • Strong Sales and Cash Flow
  • Recurring Revenue business model
  • Three Year rolling Strategic Plan positioning Company for GROWTH – reviewed annually

 

2)      EXTERNAL:   Unfortunately, you do NOT control these.  

·         MARKET Influence

  • Supply & Demand
  • Governmental Regulation and Policy
  • Tax Rates and Rules 
  • US and Global Economy
  •  Money Supply
  • Inflation and Interest Rates
  • Access to Capital
  • Investor Confidence about the future
  • Political INSTABILITY, UNREST & WAR
  • Terrorism
  • Natural Disasters

·         DEMOGRAPHICS

·         GLOBALIZATION

·         TECHNOLOGY ADVANCES

 

3)      SALES PROCESS:          (You can control this)

  • Hire the BEST professionals possible who are expert in dealing with Succession/EXIT Planning issues and develop a PLAN
  • Execute the PLAN
  • When ready, select a Transaction process that creates a COMPETITIVE TENSION!

CARDINAL RULE

NEVER DO A NEGOTIATED DEAL WITH ONLY ONE BUYER!

In my 35+ year business career, two things usually happen when there is NO competitive tension created:

  • LOWER Sale PRICE – 20% to 30+%
  • TERMS more favorable to the Buyer (they typically have greater resources and are more experienced in the Mergers and Acquisition process – an Owner sells only ONCE)

Lastly, the single MOST IMPORTANT thing affecting the THREE Factors mentioned above is –

UNCERTAINTY

We can deal with BAD News and GOOD News but UNCERTAINTY paralyses us and the Market!

All of the above factors have an influence on YOUR value.  In upcoming blogs, the author will examine in detail the IMPACT in 2012 and 2013 & beyond, of four KEY EXTERNAL forces potentiality creating dramatic UNCERTAINTY and lower exit value.  They are:

1.      Supply and Demand (Access to Capital & Demographics)

2.      Tax Environment

3.      Globalization

4.      Technology Advances

Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary.  He is founder of the M&A MARKETPLACE by CHC (www.mamarketplace.com) where the buyer pays all success fees and the process is only 120 days.  For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

DISCLAIMER:  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship.  For those desiring additional information please visit our website www.mamarketplace.com

Why did you start your company?

2 Mar

By Huxley Nixon

Is it in your DNA?

Leigh Buchanan’s article in the March 2012 issue of INC. magazine, The Motivation Matrix, summarizes the findings of a fascinating study by two Harvard Business School faculty members who surveyed 2,000 founders and approximately the same number of non entrepreneurs about their motivations.  In an effort to better understand the motivations driving founders to start businesses, identify what they want out of life and how these change over time, respondents were asked to rank 13 motivations from the Most to Least influential.

Entrepreneurs are from Mars and Non Entrepreneurs are from Venus!

The study by Noam Wasserman and Timothy Butler revealed one of the key attributes about entrepreneurs is that they predominately make decisions with both their head and their heart.  The study looked at gender and those in the following age groups, 20’s, 30’s and 40’s plus.  With the exception of the over 40 age group for women, both men and women entrepreneurs of all age groups ranked AUTONOMY first and POWER & INFLUENCE  second.  By contrast, non-entrepreneurs ranked SECURITY and a CONGENIAL WORK ENVIRONMENT as their top two motivations.

Mergers and Acquisitions will experience huge growth over the next decade with the Boomer demographic turning 65 at the rate of 14,000 per day.  It is estimated that approximately 6 to 8 million Boomers own businesses and only about one-third will transition to family, employees, or third parties.   Businesses not sustainable after the founder’s departure will close their doors.  Others estimate in total there are approximately 10 million private businesses in the U.S. that represent approximately 60% of U.S. Gross Domestic Product and Labor Force, $8.75 Trillion and 92.6 million respectfully.   To understand how best to approach this difficult to reach segment of business owners to help them prepare for their inevitable exit, understanding what motivates them is critical.

The top seven Motivations selected by entrepreneurs (ranked from Most to Least Important) are:

  1. AUTONOMY
  2. POWER & INFLUENCE
  3. MANAGING PEOPLE
  4. FINANCIAL GAIN
  5. ALTRUISM
  6. VARIETY
  7. INTELLECTUAL CHALLENGE

Rich versus King Dilemma

Knowing these drivers helps identify an owner who is more likely to be a candidate willing to sell part or all of their company.  I frequently ask an owner which is more important to them: Wealth Creation or Control?  If it is control, they usually are not a good candidate to enter into a transaction where they have to give up control, regardless of the potential financial gain. Unfortunately, these companies rarely grow to be large companies because the owner refuses to hire top-level employees where the owner must relinquish his power and control over his pet areas.  By contrast, according to Wasserman, those entrepreneurs that place FINANCIAL GAIN near the top of the list ended up with an equity stake 52% more valuable on average than those who ranked AUTONOMY/POWER & INFLUENCE first (“Rich vs King Dilemma”).  See Inc. magazine article by Leigh Buchanan….

Two Iconic Entrepreneurs of Our Time

The best way to understand this Dilemma is to look at what were the driving motivations of two iconic Technology Entrepreneurs of the last forty years – STEVE JOBS and BILL GATES.  Both were motivated by AUTONOMY and POWER but also pragmatic in that they knew they had to bring in outside investors to launch their dreams.  Bill Gates was also motivated by FINANCIAL GAIN and was willing to license his Windows operating software to others manufacturing the computer hardware where Apple (JOBS) refused to do so.  Apple created a fully integrated solution for the user requiring them to buy all hardware and software from Apple.  More importantly this closed architecture meant other popular software applications in the 1980’s (i.e. Lotus spreadsheet) that businesses wanted could not be used on the Apple and Mac computers.  Yes, Steve Jobs was an unbelievable visionary who reinvented Apple upon his return in 1997 after being forced out ten years earlier and created the most valuable company on the planet (and died with an estate estimated to be $8+ Billion) but Bill Gates won the computer war and became the RICHEST person in the world (estimated net worth $56 BN).

Both Icons wanted to “Change the World”.  Gates used his gifts to build a massive fortune (“RICH”) and through his Charitable Foundation he is dedicated to bringing innovations in health, development, and learning to the global community.  Jobs (“KING”) was not motivated by money but is hailed for his genius and true achievement: his ability to blend product design and business market innovation by integrating consumer-oriented software, microelectronic components, industrial design and new business strategies in a way that has not been matched.  Click here to see the lost video of Jobs introducing “MACINTOSH” in 1984 – he was not introducing a computer, rather a way for us to “Think Different”! Oh WOW, Oh WOW, Oh WOW! (Steve Jobs last words)

Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary.  He is founder of the M&A MARKETPLACE by CHC (www.mamarketplace.com) where the buyer pays all success fees and the process is only 120 days.  For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

DISCLAIMER:  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship.  For those desiring additional information please visit our website www.mamarketplace.com.

M&A TRENDS for Lower Middle Market Q3 2011

5 Dec

By Huxley Nixon

According to sources such as Merger Stat Review, Flashwire Monthly, GF Data, Capital IQ and others, transactions with an enterprise value between $25M and $250M, deal activity and valuations are UP slightly but uncertainty continues to hang over the market due to Euro Debt crisis and the paralysis in Washington to deal with the huge US deficit and the jobless recovery.

FACTS (as of SEP 30, 2011)

  1. ACTIVITY:   UP 2.25% (TTM  1,083 transaction vs 1,059 prior TTM)
  2. CAVEAT:  Deals between $10M to $25M are DOWN 17%  BUT those between $250M to $500M are UP 45%
  3. EBITDA Multiple:   6.4X – UP (deals with TEV to TTM EBITDA between $10M and $250M, source GF Data)
  4. Size PREMIUM gap greatest in years!
  5. HOT Sectors: Industrials 26.8%, Consumer (discretionary) 19.2% and Information Technology 22.6%.(closed Q3 deals)
  6. Huge CASH reserves by strategic buyers and Private Equity Groups that are eager to invest in and acquire quality companies.
  7. IMPROVING borrowing climate for larger transactions.

What does this mean for business owners considering a sale of part or all of their company but are scared this is a BAD time because they have NOT returned to their previous high water mark of pre recession days? 

Buyers willing to PAY UP for Companies with LOWER RISK profile!

  • Forget what you did four years ago, what did your company do the past 12 months?
  • Is there a CREDIBLE Growth story for foreseeable future?
  • Strong Management Team
  • Strong Financial controls and Operations systems.
  • Have a diversified customer base with stable revenues and EBITDA margins.

If revenues and EBITDA are up from the same 12 month period a year ago, your financial house is in order, and revenues are growing, you should be well positioned to take advantage of growth opportunities when the recovery occurs and attract MULTIPLE suitors.Companies that reach a certain scale usually have developed a strong middle management, have better financial systems and operational controls – thus in the eyes of a buyer and lender have LESS RISK! 

Would you like to take some Chips off the table but are NOT ready to RETIRE?

If your company is less than $100M in revenues a Leveraged Equity ReCap may be something you should consider.  See this link describing how this powerful structure might work for you.

 How READY is your Company for a Transaction?   

Are you positioned to attract multiple BUYERS in today’s market?  Click here to see how your company stacks up. 

Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary.  He is founder of the M&A MARKETPLACE by CHC (www.mamarketplace.com) where the buyer pays all success fees and the process is only 120 days.  For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

DISCLAIMER:  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be a solicitation regarding any securities transaction and or investment relationship. For those desiring additional information please visit our website www.mamarketplace.com.