A CapitalValue Quarterly E-newsletter designed to provide mid-sized businesses and their advisors with insight into the nuances of valuations and the intricacies of structuring a successful business transition.
Q1_2007
Off and running!
Already we have finished up the first quarter of 2007 and − to me − it seems like it happened at record pace! Much like the markets, business is busy and it seems like our lives, both personal and professional, are moving at the speed of light. At CapitalValue we understand that in today's facepaced environment, it's not easy to stay abreast of all the business trends and economic indicators that can help guide us. That's why each quarter we will strive to provide a quick read for our busy network of advisor colleagues and their clients in an effort to help make all of our business relationships even stronger. To advisors, we will continue to share information and insight about valuation techniques, market trends and the economic climate that have an impact in our areas of practice. Throughout the year, we will also prepare and deliver information independent of the Capital Connection − shorter, one-page pieces designed to quickly share pertinent information about our company and how we can better serve you. Last month, we delivered a piece on Core Values and how strong values can help drive a strong business. At CapitalValue, we continue to provide exceptional valuation services and to fill the gap in the professional world of representation services for businesses between $3M and $70M in value with our combination of experienced valuation skills and extensive merger and acquisition experts. If we can ever answer any questions for you or your clients regarding valuation or mergers and acquisitions, please call us. We'd be happy to assist! − David Tolson, President, CapitalValue
I
The Takeaway
In this issue of the Capital Connection, the advisors of CapitalValue take a look at what is important to private equity investors, showcase a successful sale, highlight the CapitalValue approach, provide economic trends associated with housing markets, look at the lifecycle of selling a privately held business, and describe 12 steps to selling a privately held business. It is our goal to make sure each issue provides our colleagues and their clients with information and tools to help create effective dialogue and result in a more productive advisory relationship. Please let us know how we are doing by emailing us at info@capitalvalue.net.
What is important to private equity investors?
Management Markets Advisors
In the last issue of the Capital Connection, we highlighted "What buyers expect from sellers," with the article focusing primarily on the financial expectations.
I
Tolson believes that when a company has a solid management team in place and is participating in a strong market, the other pieces of the deal usually fall into place with synchronicity. "If a business is considering the services of a private equity company, our advice is to be proactive and remove any obstacles in the way of portraying a strong management team," said Tolson. Achieving a good return Private equity investors look for companies with solid management in growth markets because this scenario makes them more confident they will generate a return on their invested capital − especially when the acquired company's management team is capable, can accept a new vision, and can execute on a plan developed by the private equity firm to increase revenues, reduce costs or both.
"We are not looking to run the companies we buy," says Federico Peña, a partner at Vestar Capital Partners. "Instead, we look for opportunities where we can partner with the existing management team and add value to their ability to execute the company's growth strategy by leveraging the expertise we have gained from our past investments and experience." In a merger situation, a poorly executed integration strategy can have a negative impact on the firm's productivity if the processes and people adversely react to the changed environment. According to Chris Younger, Principal of CapitalValue, "Private equity investors become adept at leveraging potential profitability gains and the risks associated with the post-closing integration strategy.If there is not a good balance, the result could be extremely detrimental to both parties."
"While potential buyers/private equity investors have many expectations of the seller, they rely heavily on the overall financial condition of the company," said David Tolson, CEO and Founder of CapitalValue. "The financials are critical to the buyer for obvious reasons, but also help the investor with the valuation of the enterprise and gain a sense of management's capability." The other factors that private equity investors typically consider during an acquisition or merger opportunity relate to management and markets. Like many of his contemporaries,
What investors want, continued on page 2
720.733.0400 info@capitalvalue.net
2
Capital Connection
OUR APPROACH
What investors want
The CapitalValue Approach
A thorough and systematic approach to representation
Continued from page 1
The principals of CapitalValue believe there is so much more to selling a business than what is portrayed on the financial statements. To help prove this, the team uses a four-phased, CapitalValuetrademarked approach which includes: OwnerAnalyticsTM ValueDriversTM MarketProfilerTM ValueMaximizerTM
The attraction of growth industries Private equity investors prefer enterprises that are strong competitors participating in steady or growth industries. Industry-wide demand for the types of products or services produced by the company creates a business environment that is conducive to success. However, steady or growing demand in the marketplace will also undoubtedly attract new competitors looking to take advantage of the favorable business environment. Corporations that have differentiated themselves by developing proprietary technology, brand awareness or unique know-how are best positioned in a competitive marketplace and as a result, are more attractive to private equity investors and receive higher valuations by investment banking advisors. Using an advisory firm Business valuation and mergers/acquisition advisory services firms like CapitalValue are often the final and sometimes overlooked piece to the acquisition puzzle. Jeff Ross, president of Ross Aviation, a Colorado-based private equity firm that specializes in the aviation industry, says that trained experts play a central role in preparing the business owner for the difficult task of selling the company. "I would much rather be dealing with capable and sophisticated advisers, because the seller is better prepared and informed," Ross says. "You usually end up negotiating a deal that is more toward industry standards, which is good for both parties." "Demonstrating that a business has a strong management team and showing its value in the market is critical to attracting the right investment advisors," concludes Tolson. "Equally important is recognizing the value in consulting and retaining a competent and honest advisory firm."
− Excerpts from Colorado Biz Magazine, September 2006, Paul Washington
Read more about this unique approach by going to www.capitalvalue.net/services.htm.
U.S. economy continues to perform well despite dramatic housing contraction
G
Growth of U.S. economic output (real Gross Domestic Product) has slowed from the above-trend rates recorded earlier in the expansion, although overall GDP growth has held up reasonably well in recent quarters even as the housing production component (residential fixed investment) has contracted substantially. Furthermore, the contraction in housing market activity and the slowdown in house price appreciation have not generated serious "spillover" effects in other sectors of the economy (including personal consumption expenditures), and strengthening activity in some sectors (including nonresidential construction) has helped offset the negatives from housing production. As a result, the economy did not skate close to recession in 2006 and the probability of an
economic downturn is not high during the 2007-2008 period. Economic resilience also is evident in the labor market. The housing downswing caused job losses in residential construction during most of 2006 and into January of this year, and further losses in construction are inevitable during coming months. However,overall job growth was reasonably well maintained in 2006 and a solid performance in 2007 is expected as well. The unemployment rate ticked up in January to 4.6% and is likely to gravitate upward somewhat further. However, it is not expected that the unemployment rate to rise above 5% during the 2007-2008 period.
MORE TRENDS
M&A surge to continue in 2007
The high levels of mergers and acquisition activity that characterized 2006 will likely continue, and even grow, through the first half of 2007, according to the Association for Corporate Growth. And the main drivers of the deals − private equity firms − will continue to be big players, the member association predicts. At a combined total value of $1.6 trillion, 2006 M&A action in the United States came close to topping the $1.7 trillion record for values of U.S. transactions set in 2000. And globally, worldwide M&A value in 2006 − worth $3.8 trillion − beat the 2000 numbers and was 38 percent higher than the 2005 total. - Thomson Financial Dealmakers Survey
720.733.0400 info@capitalvalue.net
− Source: National Association of Homebuilders
Q1_2007
3
Capital Connection
and not the deal. If we don't really understand and connect with our clients, there really is no way to ensure that we can adequately market what they are selling." The results fit the objectives In the end, after ferreting out the most qualified buyers through the soft auction process, CapitalValue and Sunny Side accepted a letter of intent from Talent Tree.
More than a temporary fix
CapitalValue helps Sunny Side, Inc. find the perfect buyer to continue its legacy of first-rate temporary staffing services
"The CapitalValue team listened to our needs, understood our direction, and guided the entire sales process in a way that made us feel incredibly comfortable," said Padilla. Working with CapitalValue
T
CapitalValue worked with Sunny Side as if they were partners. According to Ann Padilla, Owner and Founder of Sunny Side, "David Tolson, CapitalValue's CEO and his team, understood our direction, helped us focus on the final outcome and were completely inclusive throughout the entire process." Time to move on After 31 years growing her Denver-based legacy, the owner of Sunny Side was ready to start a new chapter in her life. The time had come for her to sell her prized temp agency. Finding the perfect buyer started with finding the perfect business partner to help Padilla and her husband − who is also the Vice President of Finance and Administration − Bob Grabowski, navigate the selling process. "After consulting with our attorneys, it was suggested that we contact CapitalValue for guidance," said Grabowski. "Once we did, we never looked back."
“
highest levels of service in the industry. The team understands that its clients have spent years building and operating their business successfully and that when it comes time to sell, it can be one of the most emotionallycharged, and anxiety-filled times in their lives. "Having competent advice and representation from the time these business owners decide to sell until the transaction closes helps clients make good choices and increase the chances for a successful transition," said David Tolson. Tolson and his team work on the philosophy that it's imperative to build great client relationships in order to facilitate a business transaction that is mutually-ideal for all parties. "We are as selective of our clients as they are of us," said Tolson "To us, it's about the people
"I am convinced that the closing went so smoothly because all the parties working for Sunny Side communicated so well," said Tolson. "I am very satisfied with the final outcome of the deal in terms of buyer fit and return on investment," said Padilla. "Thanks to David and his team, everything worked out ideally. They listened when we talked, they knew what was important to us, and they found a buyer who would help continue our legacy of quality service and community commitment." **** Read the full story in The Denver Post at http://www.denverpost.com/business/ci_48 22232 or view the full case study at http://www.capitalvalue.net/resources.htm
What’s the “Book”
More than just a two-page business profile, the "Book" on your business is the confidential memorandum or information memorandum. It offers a substantial presentation of your products and services, operations, management and senior staff, major
Also known as the confidential memorandum or information memorandum
accomplishments, significant risks, financial history, and future outlook. It is the single most important document because it sets expectations for the buyer. By the time the "Book" is presented, the negotiations have begun. It is important to make sure that you put your best foot forward and create a positive impression to maximize value.
Q1_2007
720.733.0400
“
The recent sale of Sunny Side, Inc./Temp Side to Talent Tree demonstrates the power that a mutually-respectful and future-focused relationship can produce. Together, Sunny Side and CapitalValue, a business valuation and mergers/acquisition advisory services firm, completed a major sale that was successful because of the strategic fit, valuation and shared corporate values.
"I was looking to find a buyer that could take my company and continue its legacy," said Padilla, "Talent Tree proved that its CapitalValue represents only a few select corporate values mirrored ours in terms of businesses for representation services each caring for its employees and having the same year in order to provide its clients with the high level of respect for its clients." "Thanks to David and his team, everything worked out ideally. Within four weeks of They listened when we talked, they knew what was important to receiving the letter of intent from Talent us, and they found a buyer who would help continue our legacy of Tree, the deal was quality service and community commitment." finalized.
info@capitalvalue.net
4
Capital Connection
The lifecycle of selling a small business
T
12 Steps
1. Hire a world class team to represent you 2. Have a professional business valuation performed 3. Have all records ready before you go to market 4. Keep a folder of all info/contacts, including prospective buyers 5. Make sure your M&A advisor writes a comprehensive and professional summary "Book" of the business 6. Confidentiality agreements are extremely important
Critical
This article examines the basics of the lifecycle of selling a small business − covering everything from going to market, increasing value, valuing a small business, letters of intent, understanding earnouts, and the due diligence and closing process. Getting Started There are a number of things that business owners can do long before the point of deciding to sell that can enhance the value of their business, reduce the risk of the deal falling through,and otherwise make the process easier. The very first step is to learn about the mergers and acquisitions process and understand the fundamentals of how businesses are valued. It's also important to clean up your books and records to ensure that an advisor will be able to provide an accurate valuation. Finally, stability is important so it's wise not to make any drastic business changes right before selling. Setting the Terms After the initial housekeeping items are cared for, most businesses then hire an M&A advisor, in addition to a CPA and an attorney. An effective M&A advisor will help locate a buyer, value the business, develop a thorough presentation on the business, help negotiate the price and terms, and manage due diligence and the closing. Going to Market When you're ready to go to market, make sure your advisor markets your business confidentially, but effectively. They should have access to no less than ten market venues where buyers look, and should work closely with your entire team of advisors. Don't be fooled by the "lure" of a substantial book of buyers; rather, make sure that your M&A advisor creates a specific and targeted list of buyers for your business. Not doing so, will ensure that your business won't get represented to those strategic buyers who surface periodically to make strategic acquisitions. It is also important to create a soft auction on your business to keep all buyers honest. Once
a buyer understands that they are in a competitive situation, multiples start to increase and the terms of the deal get better. Due Diligence Once an offer to purchase your business is signed, the due diligence process begins. In this stage of the sales process, the buyer will often examine financial information, contracts, employee-related issues, legal and regulatory issues, and other details. During due diligence, definitive agreements will be negotiated and drafted. These are the contracts that will be signed as part of the closing, and often include an asset or stock purchase agreement, noncompete agreements, indemnifications, representations and warranties, employment or consulting agreements, promissory notes and earnout agreements, and other ancillary agreements and exhibits. Sometimes, if the business is organized and efficient, the process can take as short as two weeks, but in some cases, due diligence can take longer than 90 days.For smaller businesses,about 45-60 days or so is typical.At this stage, be sure to disclose everything, while giving the buyer everything they ask for as quickly as possible.This will reduce the risk of the deal falling through, protect you legally, and get you to closing faster. In addition, having your due diligence material gathered prior to the signing of the letter of intent ensures that the time from signing the letter of intent to close is as short as possible. Remember, time kills deals! Closing the Deal The closing process can be an event, often referred to as a sign-n-close, or a process whereby a series of steps are taken leading to a final "close" in which, ultimately, funds are transferred to the seller. Once you've closed, it's time to celebrate and reflect on your significant accomplishments! For more details on the lifecycle of selling a business, visit www.capitalvalue.net/services.htm.
Selling a privately held business
Selling a business is often a matter of good timing and great planning. If you follow the steps and tips below, however, you can make the process go even smoother.
7. Get controlled maximum Exposure on the sale of the business; create a soft auction with multiple buyers 8. Qualify buyers − a good M&A firm will have a process for this 9. Keep the negotiating & communications moving forward 10. Due Diligence should be a defined period of time 11.The business isn't sold until you have the check in hand 12. Keep a positive attitude and be patient. It will happen
− Excerpts: Inc.com, column by John Burley
About CapitalValue
Working together, David Tolson, Chris Younger and Mark Luecke, the principals with CapitalValue, have conducted valuations on hundreds of businesses. The trio has been involved in over 50 transactions involving companies with revenues from $2 million to over $1 billion, with aggregate purchase consideration of over $500 million. For more information on our services, experience and background, please visit us at www.capitalvalue.net or email us at info@capitalvalue.net. Please feel free to forward this newsletter to anyone you think will appreciate the information.
Q1_2007
720.733.0400
info@capitalvalue.net