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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.


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.


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)


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


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 ( 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


Where can I Invest my Proceeds from a SALE?

12 Jun


What are MY Options?


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.



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 ( 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

WHO is the best buyer for MY Company?

7 Nov

By:  Huxley Nixon

Unfortunately, there is NO right answer for all situations.  It depends on many factors, but this discussion is limited to two types of third-party buyers: Strategic and Financial.  This blog does not address the issue of the buyer insisting the seller receive a portion of their purchase price in the form of an “earn-out” because both types of buyers employ them.

We focus on these third-party buyers because they are most likely to pay the highest price for your company.


Who are they?

A strategic buyer is a company in your industry or with the desire to enter your industry to accelerate their growth by expanding their product offering and/or geographic reach.  They can be public or private, foreign or domestic and are seeking targets that will be accretive to their stock value immediately.  By efficiently and quickly adding new customers, revenues and intellectual property (if any) they can leverage their existing personnel and infrastructure by “rationalizing” (a nice word for eliminating) unneeded people and infrastructure of the acquired target while accelerating growth.

Strategic buyers can pay a higher price because they do not require many of your existing personnel and facilities (administrative, sales & marketing, and production staff; outdated plant and equipment; etc.).

What happens after the sale?

  • Strategic buyers will “rationalize” the acquired target by terminating the excess personnel and closing inefficient facilities to maximize their profit and accretive benefit to their stock value.
  • Your company “culture” will most surely disappear, but the employees who make the transition will have new opportunities for growth and career advancement in a larger organization.
  • As the seller, you will be expected to remain for an orderly transition period. However, strategic buyers are not interested in your future “wealth creation” other than that agreed upon in the purchase contract.

What do I need to know about strategic buyers in the current market?

Because of the cost savings associated with the termination of personnel and closing of facilities, your company is worth more to a strategic buyer than to one who will need your people, plant and equipment.

Strategic buyers still have approximately $1.2 trillion of dry powder on their balance sheets for acquisitions and they have been the most active buyer segment since 2008 (approximately 85% to 90%).

They are NOT interested in buying less than 100% of the selling company and are NOT interested in backing Management Buyouts or an equity recapitalization.  

Public strategic buyers are not interested in smaller transactions and in general the “Size Premium” applies as it does for the Financial Buyer (see below).

PitchBook expects strategic buyers to be less active in 2012, but all US middle market merger and acquisition activity has slowed dramatically since July 2011, so this may change.


Who are they?

Financial buyers are primarily private equity groups (“PEG’s”), but there are a growing number of alternative financial buyers, such as family offices, or public acquisition corporations.

Financial buyers bring access to financial resources and top industry talent to help the platform achieve its growth objectives, which could not have been achieved by the founder alone.

The days of the “buy and flip” financial buyer are gone!  Today’s buyer adds real value and does not rely on financial engineering to create a quick return as the Buyout firms of the 1980’s and 90’s did. Many of these transactions were over-leveraged, ending up in bankruptcy court if the company hit a bump. Today a financial buyer invests an average of 40%-50% in equity to close a transaction.

What happens after the sale?

  • Financial buyers make a profit by acquiring well-run companies with excellent growth potential that they can use as a “platform” to build upon to maximize the arbitrage available to larger companies upon a sale (see “Size Premium” study results by GF Data below).
  • Unlike a strategic buyer, they align management’s interests with theirs (through performance-based stock options and other equity incentives) and are eager to back quality management teams in Management Buyouts, Leveraged Buyouts and to support CEO/Owners that desire to remain and execute a growth plan and have a second bite of the apple.
  • Financial buyers grow “platform” businesses through acquisitions and/or organic sales growth and then exit through an Initial Public Offering (“IPO”), sale to a third-party (frequently to another PEG) or to management.
  • The average time to acquire, grow and exit a platform investment has grown from 3 to 5.2 years since 2008.

Financial buyers are great at consolidating niche industries and they frequently grow their platform companies through acquiring smaller “bolt-on” companies to broaden the product offering or geographic reach and profitably grow sales, to take advantage of the valuation arbitrage created by the “Size Premium” discussed below.

What do I need to know about financial buyers in the current market?

PEG’s raised over $1 tillion in the last boom cycle (2005-2008) and very little has been spent due to the recession and uncertainty of the economic bottom being reached.

Most PEG’s are limited liability partnerships with a 10-year life and the average midpoint of these funds is the end of 2012.  There are an increasing number of PEG’s and other financial buyers such as public investment corporations that are taking a longer-term view.  These PEG’s can have up to a 25-year life cycle and continue to invest through year 15.  Public Investment Companies have owned portfolio companies for more than four decades.

Since the average hold time for the majority of PEG’s has grown from 3 years to 5.2 years, the 10 year PEG’s must deploy their huge un-invested cash reserve prior to 2013 or risk having to return much of it to the limited partners.  This has created huge pressure to put this cash to work NOW!

“Size Premium” Value GAP has never been WIDER – Andy Greenberg, CEO of GF Data recently commented on pricing trends of US middle market deals:

“I noted that the “size premium” in private equity-sponsored middle market deals had never been wider than in the first quarter of 2011. Within the $10-250 million total enterprise value (TEV) range we cover, valuations averaged 5.4x at $10-50 million of TEV, 7.2x at $50-100 million and 8.5x at $100-250 million….”

SUMMARY & CONCLUSION: Who is the best buyer?

Strategic buyers can pay a high price for your company because they will rationalize the purchase by eliminating excess personnel, property, and facilities. As the owner, you may be asked to participate in an orderly transition period with no additional financial incentive.

Strategic buyers have $1.2 trillion available for acquisitions. However, PitchBook expects strategic buyer acquisitions to decrease in 2012.

Financial buyers/partners derive value by growing ‘platform’ companies with management into bigger companies to take advantage of the “SIZE PREMIUM” upon exit. Company culture is more likely to be kept and a financial buyer is eager to back excellent management teams that want to take some chips off the table today and have a second bite at the apple.

Financial buyers have extensive cash reserves, which will need to be invested in the near-term to meet the necessary investment horizons.

In today’s VERY uncertain economic times an owner considering an exit in the next decade should consider an equity recapitalization with a financial buyer (some will do non-control transactions) and take some chips of the table now while growing the company to a larger critical mass and take a Second Bite in five years.  Click here to see an example of how this scenario unfolded for Bob and his decision to do an equity recapitalization of his $25 million revenue value-add Distribution Company.

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 ( 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

November 7, 2011

Is an EQUITY RECAP right for MY Company?

4 Nov

By:  Huxley Nixon

You frequently hear that Strategic Buyers always pay MORE than Financial Buyers but this is NOT the case if an Equity Recap is right for you and your company.  For business owners considering a sale of part or all of their company in the next decade but are not ready to retire or give up operational control today you will want to read further.  This structure allows owners to ease into their eventual exit by doing it in two steps over five to seven years. It also allows them to sleep better now by knowing they have converted a significant amount of their illiquid stock into cash, potentially eliminate their personal liability by transferring it to their new equity partner and have an opportunity for a second bite of the apple in the future.

What is an  Equity Recapitalization?

Also known as a Leveraged Equity Recapitalization.  It is a financial transaction where existing shareholders exchange 30% to 80% of their equity for cash with an outside financial investor like a Private Equity Group (“PEG”) that “re-capitalize” the balance sheet by infusing new equity and debt.  This structure allows the business owner to convert some their “illiquid” stock into cash today while maintaining a meaningful equity and operational interest in the company and participate in a second sale in five to seven years.


  • Liquidity – allows owner (and equity stakeholders) to diversify personal assets while maintaining a meaningful ownership position.
  • Management Continuity – Usually, new financial partner wants to leverage off of existing management and loyal employees to run the business.
  • Elimination of Personal Liability – When selling a majority equity position to a strong private equity partner it allows the business owner to shift the debt liability to the new equity partner, thus removing any requirement for personal guarantees.
  • Aids in Succession Planning –  helps provide a fair way for accommodating the disparate needs of family shareholders allowing the owner and the new controlling shareholder the opportunity to select the best candidate(s) to remain to lead the future growth.
  • Second Bite – Business owner(s) typically retain a significant equity position in the re-capitalized company and stands to generate a second liquidity event when the company is re-sold.  Depending on performance, this second payday can be larger than the initial transaction.
  • Experienced Growth-Oriented Financial Partner – brings access to financial resources and industry experts not available to owner.


Bob, 65 years old and the owner of Zenith Distributors (“Zenith”), has spent his career building his value-add Distribution Company to $50 million in sales and EBITDA of $5 million.  Virtually all of his net worth is tied up in Zenith and the additional liability of his personal guarantee securing the company debt of $5 million has made Bob more risk averse.  He knows Zenith has great growth prospects in the next several years but when faced with an additional investment to capture these growth opportunities he is uncomfortable in increasing his personal risk profile.

Alex, CEO of BIG Guy Distributors, a subsidiary of a large public company that distributes products complementary to Zenith’s product line in a different geographic market wants to meet to discuss synergies between their companies.

Succession Issues

Bob meets with Alex and learns that they are interested in acquiring Zenith to increase their geographic reach.  Bob is NOT prepared for this conversation and says Zenith is “Not-For-Sale”.   However, this serendipitous overture forces Bob to think about his inevitable transition out of the business.  There are many important issues regarding a transition – for Bob, family shareholders and employees.

Bob has two children, Kevin and Sally, and both work in the business.  Bob owns 75% of the equity with each of the children owning 12.5%.  Kevin is the oldest but in Bob’s eyes is not capable to run the company. Sally is smart, aggressive, a natural leader and has earned the respect of employees, vendors and customers.  Sally wants to invest more into the business to expand their product line and geographic reach but Bob does not want to take on more risk at this stage in his career.

Bob retains a professional valuation firm to determine what his company is worth before continuing the dialogue with Alex.  This analysis determines his company’s total enterprise value (TEV) is $27.5 million.

Bob’s Dilemma

Bob re-engages with Alex and BIG Guy offers $30 million for Zenith.  It will become part of BIG Guy and post closing the services of Bob, Kevin and Sally will no longer be needed.   Zenith has become Bob’s identity and he does not have any outside interest or hobbies.  Alex’s offer price is $2.5 million higher than expected but Bob has NO idea of what he will do with his time post closing.   Bob decides he must seek advice from someone who has faced these issues so he calls John, a trusted mentor who sold his company five years earlier.

Having Your Cake and Eating It

After hearing Bob’s story and fears, John suggested Zenith is an excellent candidate for a Leveraged Equity Recap.  He suggested several respected private equity firms that target family owned business where the owner is not ready to retire but want to De-Risk their personal financial picture by converting a significant portion of their illiquid stock into cash while retaining operational control and having an opportunity for a second bite-of-the-apple in the future.

Bob put his discussions with Alex on hold and takes John’s advice and contacted several private equity firms he recommended.  Bob “clicked” with the partners and management philosophy at ABC Equity Partners.  They also were very impressed with Sally and want her to remain in top management with Bob post closing.

Bob’s Options


Accept Alex’s seemingly generous offer and sell 100% of Zenith to BIG Guy and retire.  This would provide Bob and his children the following economic benefits but none of the family would be involved with the company post closing and Zenith would be absorbed into BIG Guy’s.

Sale to BIG Guy’s Distributors, Inc.

Pre-TAX (000′s)

SALES PRICE –                      $30,000  (6 X EBITDA)

Less Debt –                              $5,000__

NET Proceeds –                     $25,000

(Cash Split: Bob – $18.75 MM, Kevin & Sally $3.125 MM each)


ABC Equity Partners offers to partner with Bob and Sally to recapitalize Zenith and arrive at a valuation of $27.5 million (5.5 X EBITDA). They want Bob and Sally to continue to lead the company post closing but do not feel Kevin is a fit to help grow the company.  It is determined that the company can comfortably support $17.5 million of debt (3.5 x EBITDA) leaving an Equity requirement of $10 millionABC invests $6 million in equity for 60% of the Re-capitalized Zenith (“NEWCO”) and Bob and Sally invest collectively $4 million for a 40% equity interest and will remain to execute the growth plan created by ABC and Bob’s management team.  Kevin elects to sell 100% of his shares and pursue other interests.

ABC Leverage Equity Recap of Zenith Distributors, Inc.

Pre-TAX (000′s)

Zenith Value –                                $27,500          100%

Less DEBT –                                      $5,000_

Pre-NEWCO Proceeds –              $22,500

(Cash Split: Bob – $16.875 MM, Kevin & Sally – $2.8125 MM each)

NEWCO Capital Structure

New DEBT                                        $17,500           63%


ABC  (60%)        $6,000

Bob    (30%)       $3,000

Sally  (10%)       $1,000             _________

TOTAL EQUITY                          $10,000          37%

TOTAL CAPITAL                        $27,500          100%

(Post NEWCO Cash Split: Bob – $13.875 MM, Kevin – $2.8125 MM, Sally – $1.8125 MM)

Assuming Zenith is SOLD in 5 years and Sales and EBITDA have grown 10% annually at the end of year 5 they will be approximately $82.3 million and $8.2 million respectfully.  A debt balance of approximately $5.4 million remains.  After speaking with multiple interested buyers, Zenith is sold to BIG Guy Distributors for $59 million (7.2 X EBITDA).

Sale of NEWCO 

Pre-TAX (000′s)

SALES PRICE                                   $59,000  (7.2 X EBITDA)

Less Outstanding DEBT                 $5,400__

NET EQUITY                                    $53,640          100%

ABC    (60%)        $32,184

Bob     (30%)        $16,092

Sally    (10%)        $5,364                  ______

TOTAL EQUITY                               $53,640          100%


OPTION A                   OPTION B                                DIFFERENCE______

$25,000       vs          $39,956                      $17,956 (increase of 60%)

(Net PROCEEDS  (000′s) to Family shareholders, pre-tax & before any transaction fees due)

OPTION B – WINNER in a Landslide!

  • At the initial Recap Bob was able to take $13.875 million ($16.875 M – $3 M invested in NEWCO) off the table to do some estate planning and diversify his portfolio + no personal guarantee was required on the company debt + he owned a 30% equity interest in NEWCO resulting in an additional equity payment of $16.09 million upon its sale + he continued to run his company for five more years (which allowed him the time to emotionally prepare for the inevitable separation from it and the employees who were like family).
  • Bob was able to create a fair solution to SUCCESSION issues created by having one child who was not well suited for the business and the other who had proven their leadership and ability to perform.
  • NEWCO benefits from a valuation bump due to the “Size Premium” – NEWCO’s TEV has grown from $27.5 million to $59 million at sale date.  Click here to read more.
  • LASTLY, Bob and his Family received a total pre-tax (and pre transaction fees) payment for their Equity of $39,956,000!  Almost 60% more by NOT selling out at the higher price offered initially by a Strategic Buyer!

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 ( 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:  The example above is a fictitious transaction and is intended only to illustrate how an equity recap works and demonstrate its potential benefits based on the facts assumed in the analysis.  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


2 Aug

By Huxley Nixon

Like many of you I was fixed to the Bloomberg business channel today to see if I would need to start searching for new career – maybe farming.  I am sick of listening to “Talking Heads” but Paul O’Neill (ex – Secretary of the Treasury) seemed to me the most credible of all the pundits taking air time.  Anyone watching our financial markets were made aware of the fact our economy is in real danger of dipping into recession again.  Some the reasons:

  • Jobs Growth – UP on average 179,000/month for first four months of 2011, DRAMATICALLY DOWN since May.
  • Consumer Spending – DOWN for the 1st time since July 2009
  • Manufacturing – DOWN for the 1st time since July 2009
  • Unemployment – UP since May 2011
  • Personal Income – DOWN
  • Stock Markets – DOWN seven straight trading days (this has NOT occurred since August 2008), DOWN down 276 points today (lost additional 150 pts after Obama signed bill)
  • GOLD – Reached $1,660, it’s all time high today (August 2, 2011) and this was the eighth time in the past fifteen days.
  • GDP – DOWN (anticipated to be approximately 1-2% for 2011 vs the previous estimate of 3-4%)
  • Housing numbers – DOWN and will not improve until excess inventory is moved through the economy.

The solution is NOT trying to make our existing inefficient government bigger.  Mr. O’Neill believes we need to streamline government and put programs in place that will provide business owners and investment firms such as private equity firms (my comment) an environment that encourages them to deploy some of the over $2+ trillion sitting on the sidelines waiting for clarity on where the economy is heading.  Did you know that the Internal Revenue System’s (“IRS”) annual budget for 2011 is $12.9 BN and that it fails to collect another $400 BN in taxes due?  According to Mr. O’Neill this is due to the impossibly complex tax code (excess of 37,000 pages according some sources) that allows for loopholes for special interests and makes it impossible to effectively manage and collect all taxes due.  But most importantly Mr. O’Neill believes high taxes are a huge negative influence on business owners to take the risk of starting new companies and expanding existing ones and for individuals to invest and save.

The only time in our history have we owed such a high percentage  of debt as compared to our Gross Domestic Product “GDP”) was after WWII.  What allowed the US to become the strongest economy in the world since then was innovation and long term growth in GDP of 3%+.  It permitted us to pay off the war debt and move away from a culture of “Investing and Saving” to one of “Borrowing and Consumption” in the late 1960’s (remember President Johnson‘s “Guns and Butter” speech justifying dramatically expanding government with social entitlement legislation while fighting the Vietnam War).   Thus we have been borrowing against our future earnings potential (GDP) for over 40 years and getting away with it because of our growth.

Unfortunately this chapter has closed.  Approximately 14,000 Americans are turning 65 every day since January 1st and will continue to do so for the next fifteen years.  Current estimates are government is spending approximately $2 Trillion more than we collect in Taxes annually and according to one of the “talking heads” on Bloomberg’s Margaret Breman’s show, after 2020 approximately 76% of our annual budget will be spent on “Entitlement” programs (Medicare, Medicaid, Welfare Programs and Social Security) and the interest on the national debt.

How do we prevent this pending train wreck?

We need to change the culture of Washington, D.C. and Mr. O’Neill believes it will take a strong “Architectural” President in the White House to accomplish this.   I also feel it is imperative to set term limits for members of congress (my comment) to reduce the fiefdoms in congress and promote what is best for the country.  Hopefully, then we can address the TWO critical areas O’Neill feels MUST be addressed  to put our financial house on sound footing:

  1. Reform ENTITLEMENT programs and
  2. Repeal ALL current Federal tax laws and move to a Value Add Tax (“VAT”) that is based on consumption versus income.
    • FAIR – Applies to all that consume goods and services (would provide relief for those below a certain threshold)
    • SIMPLE – Easy to enforce and collect tax
    • IMPROVES EFFICIENCY – REDUCES SIZE of Government – No IRS, etc.
    • PRO JOBS – provides a much more business friendly environment that does NOT penalize the business owner to take market risks than expand the job market

I am not so idealistic to think this will be easy but I feel very confident that if we do NOT change the way Washington operates then according to Alan Beaulieu of ITR Economics by 2030 we will experience the worst DEPRESSION in our history.

My favorite quote of the day was Mr. O’Neill’s comment:

“Washington is the only place that when the CIRCUS leaves the CLOWNS stay in town.”

At least the clowns succeeded in kicking the can down the road today and hopefully we will figure a way to prevent the train wreck – maybe with some new clowns.  I feel more strongly than ever that NOW is the time to act if you are considering a sale of part or all of your company in the next decade.

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 ( 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

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WHEN is the BEST time to SELL?

27 Jul

When is the BEST Time to SELL?

BY: Huxley Nixon

I am frequently asked this question by owners of private companies, especially the boomer generation owner, of which approximately 14,000 are turning 65 daily since January 1, 2011 and this will continue for the next fifteen years.  When asked if they are ready today, many respond -”WHY would I sell into the worst recession in my lifetime?”  They want to wait for the return of the good times.  My response is this may be the BEST of times for the next decade!


Let’s use my fictitious owner, Bob, majority owner of ABC Builder Distributors, LLC (“ABC”) from my previous blog about the importance of “competition” when selling your company.  Bob wants to buy out two sibling shareholders that would like to retire, invest most of his equity back into NEWCO, and continue to grow the company and exit in five years.  ABC is still the largest privately owned company in their industry segment but Bob wants to find a financial partner to provide his siblings liquidity and to contribute the additional equity that would allow him to acquire his largest competitor without over leveraging the company.  However, since ABC’s valuation has dropped from the $130 million he was offered in 2007 he feels he should wait several years.

Below is a summary of ABC’s financial performance since 2007.  Bob’s industry has been hammered by the recession and ABC’s sales dipped to $150 million and EBITDA to $8 million in 2009 but because the company only carried modest debt on its balance sheet and Bob had placed excellent management and financial controls in place, he was in an a position to remain profitable and take advantage of weaker competitors when the market began to turn.

Historical Facts about ABC:                          ($millions)

2007                2008                2009                2010       TTM-Jun 2011

Revenues                 $220                $200                $150                $160                $175

EBITDA                        $20                  $14                  $8                     $10                    $14

(% of Rev)                   9.1                   7.0                   5.3                      6.2                     8.0

While ABC’s Trailing Twelve Month (“TTM”) revenues and EBITDA are off 20% and 30% respectively from the high-water mark in 2007, buyers are more interested in knowing that you have successfully managed through the bottom of the recession (March 2009) and they are concentrating on performance over the past twelve months and where you are headed versus where you have been.   When looked at in this light, ABC looks like the star it is (especially when compared to its peers).  Its TTM growth of 9.4% and 40% in revenues and EBITDA clearly shows a strong platform to build upon –an ideal equity recap candidate for PEG’s.  ABC may not be at their pre-recession value of $130 million BUT neither is its peer group!  ABC is still the largest private company in their industry segment and NOW is an excellent time to acquire some of its less fortunate competitors.

The Mergers and Acquisitions market (“M&A” Market) for “quality” lower middle market private companies like ABC has rebounded from its trough in Q1 2009.  According to Flashwire and Merger Stat the number of deals and pricing are at or above Q1 2008 levels for transactions below $250 million in enterprise value.  Assuming our politicians will avoid economic suicide over the debt ceiling issue the M&A Market for lower middle market companies should be strong through 2012.

Why should Bob do something NOW?

Value is driven by TWO Factors:

  1. EXTERNAL – Which we DO NOT CONTROL! (Government Regulation & Taxes, demographics, global economic and political risks, WAR in the Middle East, etc.)
  2. INTERNAL – Which we do have control over (strong Management Team, good financial and management controls/systems, competitive barriers to entry, strong margins and revenue growth, etc).

There are several compelling reasons when looking at EXTERNAL RISKS that would suggest between NOW and the end of 2012 will be the best time in the next decade to sell part or all of your company.


FACT:              There is MORE un-invested cash sitting in Private Equity Funds (PEG’s) earning virtually zero percent interest, than any time in our history – approximately $500 Billion.

FACT:              Most PEG’s have a 10 yr lifespan and need 3 to 5 years to acquire, grow and exit companies they buy.  Most of these funds will have their 5th anniversary by Dec 31, 2012!

FACT:              With Washington seeking ways to increase revenue to help reduce the $14+ Trillion deficit, hedge fund managers and PEG’s are likely targets after the 2012 election.  They make their money when they sell their portfolio companies for an amount over their costs basis and currently these profits, known as their “carried interest”, are taxed at long term capital gain rates (15%).  Many on Capitol Hill want to tax these profits as “Ordinary Income” (39.6% after 2012).


FACT:              Approximately 14,000 boomers are turning 65 every day since January 1, 2011 and will continue to do so through 2025.  It is estimated that 6 million of these boomer’s own private companies that will not pass to family members. By the end of 2012 only 800,000 potentially could come to market – thus, before the wave crests!

FACT:              By the end of 2015 – 2 million of these owners will have turned 65.

FACT:              Bush-era tax cuts EXPIRE at the end of 2012 – LT Capital Gains rate increases to 20% from 15% (33.3% INCREASE).  In simplistic terms a seller must receive a premium over today’s value to remain the same after 2012.

FACT:              Estate & Gift Tax rules will change dramatically post 2012 restricting the gifting and tax planning options for owners unless Congress acts to reverse the sunset extension date of December 31, 2011.


2011 & 2012 –

  1. Lots of buyers Eager to deploy largest cash overhang in US History – seeking quality opportunities – good valuations.
  2. Boomers WAVE just beginning – fewer deals in the market.
  3. Owners should NOT wait for the “Good old Days” to return – Now may well be the best they will see for the next decade.
  4. FAVORABLE tax environment compared to 2013 and beyond.

2013 & Beyond –

  1. DECREASING Buyer Pool (Investment window closing for Private Equity funds started 2006-2007).
  2. Boomer wave begins to crest (2 million sellers at end of 2015 and 4 million by 2020) versus declining number of buyers!
  3. LT Capital Gains rate 33.3% higher after 2012 and pressure to increase taxes to reduce deficits going forward.
  4. Probability increases for higher interest rates.
  5. UNCERTAINTY regarding US and Global economy – Inflation, Negative Demographics (declining birth rates to support exploding aging populations) in most industrialized/westernized countries, Destabilization of Middle East and Central America, etc.

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 ( 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

How Valuable Is A Competitive Process?

18 Jul

By Huxley Nixon

When buying a new car do you pay the “Suggested Retail Price” of the dealer?  If so, you NEED to read the actual case study for my new business – the M&A MARKETPLACE by CHC℠ or you may pay 10 to 30 percent more than you should.  I assume most of us would shop several online and/or offline sources before making a major capital decision in an effort to achieve the peace-of-mind that we received a fair deal.  Then WHY do so many business owners of private companies end up selling to a “friendly competitor” or a financial buyer in a “negotiated” transaction?  

When selling what is usually the MOST valuable asset of the owner’s net worth, their company, it is ESSENTIAL to create a COMPETITIVE tension to keep the buyer honest and validate to the seller that they have a fair deal.  Otherwise many of these owners just walk away because they do not understand the current market metrics and do not recognize a fair deal when it is presented to them.

Below is a synopsis of an actual transaction I was involved in where the owner had refused to retain our or any other investment banking firm to represent them in selling their very successful business. For reasons of confidentiality, certain facts and names have been changed.   


Bob and several siblings had taken over their father’s $10 million revenue family aggregate business twenty years earlier.  It was Bob’s vision to diversify out of the low margin, geographically restricted family business by establishing a new department to provide a more economical and dependable source of basic power tools and consumable items needed by residential and commercial contractors.   This quickly became the most profitable and fastest growing segment of the business.    

Bob was an excellent CEO who had assembled a solid management team with strong management and financial controls that allowed him to monitor daily how each of his 80+ locations were performing.  This along with a ten-year period of constant growth in revenue and earnings before interest, tax, depreciation and amortization (“EBITDA”) made this $220 million revenue company the largest privately owned value add distributor in their industry.

His siblings desired to sell some or all of their equity and Bob wanted to bring in an outside partner that shared his dream, provide liquidity for his siblings and allow him to remain as CEO and grow the company.  Bob desired to roll most of his sale proceeds into the new acquisition entity established on the same basis and terms as the new partner.  Bob had been pursued by several national and regional investment banking firms but he did not understand the value they added and what he perceived as excessive fees.  It was difficult for Bob to “trust” an intermediary that was not investing any of their money and were asking for fees that represented more money than he had taken out in salary for the past ten years.

Bob elected to manage this project internally with his existing outside legal and accounting advisers who did not specialize in mergers and acquisitions.  After signing a Letter of Intent (“LOI”) with a strategic buyer to sell for $100 million he quickly realized he was not going to be a partner but an employee and the company culture would change dramatically.  He walked away and several months later he was offered a term sheet from a private equity firm (“PEG”) for $115 million.  They needed his people and facilities and were eager to partner with him to acquire the largest competitor on the West Coast.  Bob’s goal was to grow the company to $500 million and then exit, allowing him a second bite of the apple.  Unfortunately, this well established PEG was not able to close on their latest fund and could not perform on their offer.  Thus, in the space of 6 months and many disruptions to his people and business operations, Bob had failed to find a buyer to partner with. 

After this very frustrating experience Bob contacted a partner of mine at the time agreeing to provide us a VERY limited opportunity to match or exceed the offer withdrawn by the PEG.  Bob’s conditions were: 1) he refused to retain our firm or pay our fee should we be successful, 2) we were given a 40 day exclusivity period to approach a limited number of potential buyers and obtain a LOI from a Buyer meeting his essential requirements and  3) the deal must close within 90 days of signing the LOI or he was free to walk without any financial penalty.  My first reaction to this risky and seemingly unreasonable request was to pass on the opportunity but after reflecting on the quality of Bob’s company, and the strong appetite of financial buyers hungry for quality opportunities like this, we accepted his terms.

The Transaction:

A one page “Teaser” was sent to ten financial buyers since a strategic buyer could not possibly meet the compressed time line to generate a LOI.  This was a perfect equity recapitalization opportunity for a PEG to acquire a strong platform to build upon and exit in five years.  The company profile was:

  • Strong CEO and management team
  • Excellent management/financial systems
  • Very little debt
  • Great growth story
  • Audited financials
  • Largest private company in their industry

Due to Bob’s two previous failed attempts, he had major deal fatigue but these experiences had crystallized his focus on what he needed to conclude a transaction (or so he thought).  He identified three essential requirements in the Teaser.  The buyer must meet or exceed the following three criteria:

  1. A Price of $115 million,
  2. The new Acquisition Entity (“NEWCO”) could NOT have more than 1:1 leverage post closing,
  3. BOB would remain CEO and continue to run the day-to-day operations with the understanding the goal was to grow the company and to exit in three to five years.  Bob also must be permitted to invest $30 million of his sales proceeds in NEWCO on the same basis and terms and conditions as the new partner.

In order to meet this very compressed timeline a single-bid, limited auction of ten PEG’s was conducted, six signed the Confidentiality Agreement and our Fee Agreement and FIVE submitted LOI’s within the 40 day exclusivity period.  This process resulted in TWO bidders presenting identical offers of $130 million.  A winner was selected based on cultural fit and key document terms of the buyer.  Diligence and document negotiations were completed within the 90 day requirement.


Six months earlier, Bob agreed to sell his company to a strategic buyer for $100 million in a negotiated transaction.  Had Bob taken the first offer he would never have received the offer for $130 million – a $30 million and 30% price difference!

Competition provides a seller with market validation and the peace-of-mind they have received a fair deal.  It also benefits the buyer since the seller managing the process internally is less likely to back out of the deal if he has third-party validation. This is NOT an option in NEGOTIATED transactions which usually always result in TWO things for the seller:

1.  A LOWER Price and

2.  LESS favorable Terms

Bob’s rules provided the foundation for the Maxi-AUCTION℠ process created by the M&A MARKETPLACE by CHC℠ to help level the playing field for the seller.
Upcoming TOPICS:
1.  When is the BEST time to SELL my Company?
2.  What is my Company worth?
3.  Is my Company READY to SELL? (ask for the Maxi-QUIZ for owners)
4.  Who is the BEST buyer for my Company?
5.  When do I tell my Employees, Vendors and Customers of my SALE plans?

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 ( 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