All posts by rickandrade121

The Fiscal Cliff: How will it affect your business?

As I have written before and in my recent article  Top 10 Middle Market Merger and Acquisition Drivers in 2012 (selected by Vistage International for its 15,000+ global CEO Newsletter). In it I break down the impact of the Fiscal Cliff (as it’s become best known), and its affects on CEOs in the Board Room.

The Fiscal Cliff,  is essentially a combination of expiring Bush tax cuts, Obama tax increases, and mandated congressional budget cuts known as Sequestration, from the Budget Control Act, all hitting the books roughly at the same time. A bad time for taxes to be going up on small businesses. And, given the nature of a too-close-to-call upcoming election, no one really knows if this impending fiscal train wreck will be avoided by a new act of Congress or not. One thing is certain, though, nothing will happen before election day, which makes the stakes even higher if something isn’t done. So what should you do next Monday Morning at 9:00am?

I suggest all CEOs call together all significant senior execs and/or Board members to a Special Emergency Planning meeting. In it you will define strategic what-if scenarios and plan for their outcomes just in case. This analysis may result in no action. Or, it could be a call to arms or one to build an economic moat around your business.  Counsel from Venable LLC attorneys says to remain or become “transactionally nimble.” Either way,  just remember not only are there winners and losers in troubled times, but also hunters and prey…

Link to Venable LLC Fiscal Cliff webinar white paper:

 
THE FISCAL CLIFF:

SEQUESTRATION AND TAXES

ANALYSIS BY VENABLE LLP OF THE IMPLEMENTATION OF THE THREATENED ACROSS THE BOARD REDUCTION IN FEDERAL SPENDING ON JANUARY 2, 2013 AND THE RELATED TAX POLICY OUTLOOK

 

Selling Your Business – How to Increase the Value of Your Business

Finally after what seemed like years overdue, NFIB published an excellent article about how best to prepare a business for sale, including lining up an investment banker among others in advance to help sell your business when the time comes.

Read the article and then get in touch with me if you have any questions.

What I like most about this article is how owners can increase the value of a business by adding BONUS valuation points incrementally. For instance:

Start with an Initial Valuation and add the following if you don’t already have:

1) Add 2% for creating an Owner’s Manual

2) Add 3% if the business has evolved beyond the owner’s reputation and daily activity

3) Add 4% for diverse revenue channels (more than one sector)

4) Add 6% for a diversified customer base (low levels of Customer Concentration)

5) Add 9% for a top-rated website

6) Add 10% for audited financial statements

In my years I have not seen such a breakdown of how to increase the value of your business incrementally but I agree in principle. I would caution that these figures are very subjective on a case by case basis. Still, as a national article this one helps me get the word out to middle market business owners.

Again, if you have any questions please call.

Rick

keywords: Mergers, acquisitions, selling my business, business broker, investment banker for my business

How Should Wealth Mgmt Professionals Advise Business Sellers in 2012?

It’s mid summer 2012, and you’re thinking about doing a private banking client portfolio review, when suddenly the phone rings. It’s a long time client, Ted Hillman, in business for over 25 years, very profitable, loves your advice. He’s frantic, and asks for your opinion if he should sell his business now, before the “Tax Cliff” everyone’s talking about in January kills him. How do you respond?

How about; “Okay Ted, but let’s first take a breath, maybe ratchet down the media hype and get more facts. Then we can act; at least before we start jumping off cliffs, sound good?” Ted agrees, and you decide to set up an appointment, and hang up. Now ask yourself as you read this. You’re a pro. How ready for that call were you? What if other business owners and clients call to ask if they should sell now or wait for better times? You won’t be caught flat-footed if you read this quick primer.

Let’s start with:

BACKGROUND

  • What is Ted really reacting to? Should he really sell his business before year end? I always ask for at least 3 reasons why a client may be considering a sale. Tax issues may be just one from a longer list, right? Be sure. Ask, who is on the advisory team? And how will sale proceeds be distributed and when?

REVIEW

  • What is the definition of the “Tax Cliff?” If you don’t know already, call your research team and find out. In short, the “tax cliff,” aka: “taxamaggedon,” or “fiscal cliff,” etc is not any one thing. Read my article at Vistage International: The Top 10 M&A Drivers for 2012, featured in their May 2012 global Newsletter. Needless to say, in Jan 2013, certain tax and spending measures (laws) will expire, and taxes on payroll, capital gains, dividends, and income will be going up, unless Congress makes a move. Some tax changes will directly increase Ted’s tax bite. For example if taxes on Investment & Capital Gains for long term assets increase from 15% to 24% on January 1st 2013, all other things being equal, Ted’s tax bite could increase $100,000 for every million in proceeds. Wow! I’m thinking he should probably know that one? In fact, this alone can cause a change in deal structure, and how and when proceeds should be distributed to minimize the tax hit. Still, it’s a good idea to get permission to call your client’s CPA or tax advisor directly and compare notes.

ANALYSIS

  • How will the current economic and tax environments actually impact Ted’s long term financial plans & goals after the business is sold? How should the portfolio mix change before and after the sale? Is it better to pull the trigger and structure a deal now?
  • Depending on how good you are in this arena, with the help of a tax advisor you can put together a specific proforma impact analysis. Think “scenario planning.” Lay out Best, Middle and Worse case scenarios such as; what if Ted can defer a portion of the sales proceeds over time, or what if the business doesn’t sell this year, then what? What’s plan B look like?

 GOALS & TIMELINE

  • Next calculate and add Ted’s expectations for a range of sale prices and compute them in financial terms. You may already know his dreams for family and friends. But how suitable will his investment choices be post sale? In other words, what would the new right balance of risk vs safety look like after the sale? It’s amazing how easy it is to get caught off guard by this one, preferring to wait until a deal closes before planning. A huge mistake. Rather, it makes more sense to guide the advance needs for income now, especially when dealing with more complex Estate Planning, and Charitable Giving issues for private banking clients who own businesses.

 TAKE ACTION

  • Finally, as one of my favorite business school professors used to say: “Great strategy Rick, but what should each of us be doing next Monday morning at 9:00am?” This means you should define and align your step by step process with Ted’s expectations asap. He will likely appreciate this pro-active strategy.
  •  If it makes sense to move ahead with a 2012 sale, the first step should be to call Ted’s investment banker and gather some high level input. Discuss potential sale-price ranges, current market trends, and maybe learn what’s up with Private Equity transactions these days as a few examples.  
  • Then reach out to Ted’s business transaction attorney and CPA. Together with these 4 key specialists; you, his CPA, his attorney, and investment banker you can all help formulate and execute a plan that anticipates the many broader issues clients like Ted face when selling their business. So much so, that after the business is sold, the team gets even more client referrals calling for help.

So before you meet with Ted again, get prepared. Whether the impending Tax Cliff coming January 2013 should translate into a sale this year or not, no advisor should be caught flat-footed with a “let me get back to you” answer. You agree? I say better to be prepared in advance, so you won’t have to guess how best to talk Ted off the ledge of a big tax increase abyss he can still avoid before year end. And if you need more, I’m happy to help anytime

Is your Board of Directors Obsolete?

So much media coverage these days about CEOs and BoDs in the hot seat, it makes sense to share a little insight from hundreds of other CEOs at a recent CEO Governance Conference in Los Angeles.  Let’s then quickly compare public vs private Boards, who should be on your Board, and whether you should dump yours and start over…

 http://blog.vistage.com/business-strategy-and-management/is-your-board-of-directors-obsolete/

CEO’s Getting Mixed M&A signals in 2012

Check out my recent CEO Vistage blog post.

In this article I outline the opposing sides that CEOs considering an M&A deal are faced with in this dynamic macro economic market. I call it a Tug of War Room in the corner office. So what should a CEO thinking about doing a deal this year be thinking? Take a look, and send me your views…

http://blog.vistage.com/business-strategy-and-management/top-10-ma-drivers-for-2012-are-ceos-in-a-tug-of-war-room/

The Future of M&A in 2012

 

According to Merrill Datasite’s recent “Monthly M&A Insider, April 2012” report, M&A “activity [inNorth America] declined in Q1 2012 with 873 deals valued at $149B, a 9.9% decrease in volume and 26% decrease in value when compared to the same time last year.”

What they don’t say is that Q4 to Q1 figures can typically trend down as the rush to close a deal by year-end falls off in Q1, and builds up again during the year. And if you delve deeper into the report you will find activity is flat -to-down in nearly every first quarter since 2006, so I discount Q1 2012 in the same way.

But this does not mean CEOs should sit back and wait around until things pick up this year. Strategic deals are the cats meow in 2012 with over $3 Trillion in excess cash on corporate balance sheets looking for M&A deals. Add to that on the Sponsorship side another $400Bil from Private Equity Funds looking to deploy that cash and I view the pump as altogether well primed to go. So what are we waiting for?

What I keep hearing from corporate execs is “uncertainty” is paralyzing the Board against taking only the most obviously easy to swallow deals, like the announcement of Kelloggs buying Pringles for $2.7Bil from P&G after Diamond Foods backed out. Not a real head turner decision for a strategic thinking Board to make.

The future of M&A now lies in 2 Worlds, the one in which CEOs can see and calculate a confident deal road ahead, and the other, which blinds CEOs, freezes them in their tracks, and paralyzes their muscles, like a deer in headlights. Ever wonder what that deer must be thinking just then?

I characterize this paralysis as a Tug of War game in the CEO suite going on right now between two opposing sides of advisors to the Board and the CEO. One side sees more clearly in their world the ‘what and how’ to measure a deal-launch sequence, while the other side sees chaos, and firmly pulls back hoping to paralyze the Board and Chief exec. This paralyzing intersection of indecision can stretch apart or destroy an important chance at a longer term value proposition a CEO may need down the line. Make sesnse?Just remember; “Fear is the mind killer” [Dune 1984].

In my next article, to be published in May, I drill down specifically on the Top 10 M&A Deal Drivers in this 2012 Tug of War room from a CEO vs Advisor perspective, and then ask you, which side of the rope should you be on?  Stay tuned…

 Rick Andrade

Wow! Lowest New Business Start-ups On Record?

Dateline Feb 14, 2012 – Valentine’s Day!

And here we go again. As if M&A isn’t tough enough these days convincing people to pull the trigger on a new deal opportunity a recent report from Challenger Gray & Christmas reported the number of new start-up businesses from formerly employed people dropped off quite a bit in 2011 to its lowest rate on record (3.2%). http://www.challengergray.com/press/PressRelease.aspx?PressUid=213.

But honestly — what does this mean?

A look behind the headline begs a look at what drives these figures in the first place. For instance, the report also cites that as employers start hiring again and business confidence climbs back, less formerly employed people start new businesses. Now that makes sense. Why risk uncertainly and your own money in a risky entrepreneurial venture when your prospects for getting a new job are increasing faster than the economy demands you start a new business, right?

At the same time I have not seen a precipitous drop in buying existing businesses for sale, so possibly the newly unemployed may not be starting new businesses, rather buying one already in business. According to Bizben the number of exiting business purchases from 2010 to 2011 increased 4.6% http://www.bizben.com/stats/stats-total.php. Nothing dramatic about that but not drop either. Another interesting distinction is the skill gap inAmerica today as many formerly employed workers don’t have the new skills to start a new business putting them on the sidelines perhaps like no time in history before. Another reason former workers may not be starting new businesses.

So there is a gap and perhaps a flaw in headlining a historical drop in new business start-ups from one source (former employees) and making hay of it. To me the market dynamics behind the scenes are far more complex in a shifting global economy than meets the eye. I believe in simple supply and demand. And as a SBA/SCORE counselor to new start-ups and exiting businesses I see what I expect to see, and that is people who need to work don’t just start a new business because they need to, rather when they have to use their own money they are far more certain to check the demand curve to measure their chances of success before jumping in. The lesson here is in order to get the whole story it’s always best to look behind the headlines.

Rick Andrade

The State of Capital Markets in 2012

 As a member of ACG (Association for Corporate Growth) here inLos Angeles, we get a chance each New Year to gather and hear from a panel of experts on the cost and accessibility of money in 2012.

The event on January 4th was appropriately headlined too, The State of Capital Markets in 2012, and well attended with 3 panelists I really wanted to hear from. Jason Horstman Sr VP at Union Bank talked about Senior lending, Jeri Harman, a partner at Avante Mezzanine Partners focused on the state of Mezz, and Steve Wiesner Sr VP from Evergreen Pacific Partners brought the state of Private Equity into focus for us.

Most of the panel agreed that while 2011 was a tough year for getting deals done, all agreed the pipeline heading into 2012 looks real promising. A big lesson from last year to roll forward from what I heard was re-learning the definition of “early disclosure” (being transparent) from start to finish. In other words, as a business Seller or borrower much more scrutiny was placed on getting your dirty laundry out in the open up front, not somewhere in the process when due diligence auditors uncover the ugly stuff that can kill a deal. Likewise, bankers and buyers were expected to sharpen their pencils and perform their own enhanced levels of pre-qualification and preliminary due diligence before engaging a borrower.

This upfront accountability is not completely new, but there is a lot more emphasis on not passing the buck when new clients enter the process. This is why I always advise owners to never hide any issues and hope they get overlooked. Because they seldom do — and perhaps something that could have been resolved in the early going, looks worse when it’s uncovered by others later. Good way to kill your deal and your credibility.

Most interesting to me from the panel was the discussion on current and expected interest rates for the type of money being borrowed or invested and the panel agreed, Sr lending rates are still low, but mostly for profitable businesses and owners who know how to manage through tough times. These rates according to Jason Horstman are still in the 3%-5% range for well qualified buyers, so to speak. The bank is eager to lend and expecting a busy year as conditions improve according to Horstman.

On the Mezzanine level where rates for unsecured debts are generally higher, the numbers to borrow came in as expected, in the low to mid teens, with leverage multiples (debt/ebitda) between 3x and 4x, not bad, especially if you need acquisition funding for a few years out. Jeri also noted an increase in ‘Unitranche’ deals. A Unitranche funding combines or rather blends a Sr lender’s (lower/secured rates) with a Mezzanine lender’s (higher/unsecured rates) all into a single lower rate, hence ‘uni’ trance rate. So let’s say you get a 5% Sr secured loan but need more. Adding a Mezzanine layer at 18% could be blended down to 10%. This is good news for many of you who may need both lending facilities to execute your 2012 strategy. The other interesting thing Jeri mentioned was an increasing level of respect and confidence lenders are showing to those business leaders who navigated the down turn. As conditions improve lenders are giving more credence to management teams that have proven they can manage the company in tough times, which is exactly what lenders feared most. This insight should give all surviving business owners more confidence this year to crawl out from their holes and borrow.

Lastly Steve Wiesner gave us the latest on the state of Private Equity backed funds going into 2012. As a buyer of business enterprises, Steve says buyers are paying higher EBITDA multiples for new acquisitions. This is in line with GF Data and other sources reporting EBITDA transaction multiples are back to pre-recession levels for firms over $50 mil in Enterprise Value, and not far behind pre-recession levels are multiples for firms under $50 mil EV. Steve’s bigger point may have been that we should expect to see less PE funds available overall in 2012 as 3-yr term vintage 2009 funds look to return un-deployed capital if the funds don’t find acceptable investment criteria targets soon. That’s the nature of the beast. But maybe less is better these days, you tell me. 

In conclusion, the ACG event was a welcoming outlook to a growing optimism for the business funding environment this year. Whether you are making an acquisition, selling a business, or looking to raise capital, ‘advance preparation’ may be the new buzz words in 2012, or better could make the difference in closing your deal, on your terms.

Rick Andrade