Sell the Seller

Sell the Seller

Years ago, I coined the phrase, “Buying is Selling.” It’s important to remember that an essential element of making an acquisition is to sell the seller when attempting to complete the purchase of a company. This is particularly true when dealing with a founder that is a majority shareholder.

A major mistake that buyer’s make when acquiring a company is that they do not sell the seller. More often than not, when a buyer approaches a target for the first time, they are turned down for one reason or another. The most common reason revolves around the buyer’s long-term motives for the company. If a seller does not have confidence that the buyer will uphold certain company philosophies, then the deal can easily fall through. Studies have shown that sellers are willing to accept a marginal reduction in price in exchange for certain reassurances. If the buyer is keen to acquire the company, it may be an essential step in the process to sell the seller. Therefore, as a buyer, the best way to increase the likelihood of a successful transaction is to be persistent and always sell the seller.

Sell the seller can manifest itself in many forms. At a superficial level, buyers should always take the time to develop a positive rapport with the target. This will allow the buyer to better understand the seller’s goals for a potential transaction. With this knowledge, the buyer will then be able to effectively tailor their pitch to fully resonate with the seller. Moreover, the buyer should convey, throughout the deal process, that they value the company’s stakeholders, i.e., customers, employees, suppliers, etc. Sellers want to know that their employees, customer relationships, brand image, etc. will not be sacrificed for synergy once the deal is completed. Buyers can help mitigate this concern by introducing the target to satisfied sellers from past deals. The successful application of “sell the seller” may be the defining factor in convincing the owner or seller to accept your bid.

Regardless of the technique, sell the seller requires creativity on behalf of the buyer. No one seller is the same. Every transaction needs to be approached in a new and unique way that specifically targets the seller’s motives. This often involves providing the seller certain assurances that the integrity of their company will not be exploited after closing. If accomplished correctly, this technique of selling the seller can act as a powerful differentiator in the competitive process of buying a company. An M&A firm with years of experience on both the buy and sell side will be able to guide you through this process adroitly and successfully.

M&A Deals - The Power of Multiple Buyers

M&A Deals - The Power of Multiple Buyers

In M&A deals - the power of multiple buyers should never be discounted. In fact, having multiple buyers is an essential ingredient to a successful transaction.

The proper way to sell a business is for the M&A advisor or investment banker to prepare a Confidential Information Memorandum (“CIM”) on the company to be sold. The CIM will give the potential buyer an in-depth look at the company. However, before the buyer sees that document, the investment banker will prepare a “teaser,” which will enable them to generate interest in the company without disclosing the company name, location, or other revealing details. The M&A advisor will prepare a list of potential buyers who will receive the teaser in order to maximize the power of multiple buyers.

When prospective buyers see the teaser, they decide if they’re interested. If they are, they execute a Non-Disclosure Agreement and receive the detailed CIM. Most buyers have questions after reading the CIM and the investment banker either answers them directly or sets up a conference call with the seller. In other cases, informational meetings are held where the seller gives a management presentation and the buyers ask questions.

In any case, if the prospective buyer is serious and very interested, they will submit a Letter of Intent (“LOI”). The LOI outlines the value and basic terms/conditions for the purchase. Unless stated to the contrary, LOI’s are non-binding. Usually, a buyer will make certain clauses binding to protect themselves. Similarly, the seller will want certain provisions to be binding.
Sometimes sellers become overly excited when they receive their first LOI, especially if the price/terms are favorable. Sellers should always consult with their investment banker as to the advisability of accepting the first offer. Committing to the first buyer eliminates the chance of negotiating a better deal with that one buyer and ruins the chance of developing the other buyers, just in case the original buyer fails to close. Most importantly, the whole objective of the sales process is to create an auction whereby all of the buyers would compete. Accepting the first offer circumvents this important step in creating a superior transaction. It violates the basis rule of M&A deals – the power of multiple buyers.

Versailles Group firmly believes that if a seller has one buyer, they have no choice. If the seller has two buyers, they have a dilemma. It’s only with three or more buyers does the seller have true choice. With only one buyer, the seller has no leverage, which means that the closing takes longer and the buyer will feel free to keep negotiating the deal or even just walk away. Thus, many investment bankers say “one buyer is no buyer.”

To summarize, an experienced M&A advisor will know how to conduct this process efficiently and effectively. That being said, many firms believe that the process is like a recipe or treat it like a “cookie cutter.” The basic process works, but it always works better if the investment banker has a flexible program that can accommodate the normal twists and turns that take place in today’s fast paced world. That’s really the only way to maximize the power of multiple buyers. Versailles Group has closed many transactions because of its unique ability to run these processes in a manner that maximized value and terms and met or exceeded the sellers other objectives. Thus, M&A deals – the power of multiple buyers should always be maximized.

M&A Bubble? - US Middle Market M&A Activity

M&A Bubble? - US Middle Market M&A Activity

Middle Market M&A activity in the United States is at its highest levels since 2009 when the Great Recession interrupted deal-making.

These two charts show the volume and value of U.S. Middle Market M&A activity for the last 10 years, which leads to the question, M&A bubble? - US middle market M&A activity?

US Middle Market M&A Volume Since 2005

US Middle Market M&A Transaction Value Since 2005

M&A advisers are beginning to question whether transaction activity will continue to expand or is it a bubble that might burst at some point in the near future. No one has the answer to that question; however, there is certainly plenty of evidence for both scenarios. We’re finding that those parties that remember the “pain” of watching the value of their business deteriorate in the Great Recession are taking advantage of the strong M&A markets now.

What’s your opinion on M&A bubble? - US middle market M&A activity? Please send us an e-mail dgrava [at] versaillesgroup dot com, if you'd like to express your opinion. Thank you.

Regulation D – Reg D

Regulation D – Reg D

Private placements refer the issuance of either debt or equity securities to investors in the private market. Private placements are an effective way for small companies who have limited access to the capital markets and/or bank lending to secure financing. Because private placements are non-public transactions, they are considered “exempt transactions” by the SEC which allows them to avoid the high costs and lengthy timetable associated with registering securities. One way an issuer can obtain a private placement exemption is through adhering to the rules set forth in Regulation D, or Reg D.

Briefly, Reg D lays out a basic set of rules for private placement transactions. First off, sufficient information must be provided to all potential investors and the SEC so that a potential investor can make an informed investment decision. Additionally, there can be no general solicitation or resale of the securities without registration. Since the securities being offered are not intended for resale, they are classified as “restricted.” Lastly, any securities sold within a specific time period are treated as one offering under Reg D. After these rules are satisfied, the issuing company must file a Form D with the SEC. The Form D prohibits any sort of public solicitation or advertising for the securities, such as television ads or seminars.

Reg D also contains specific rules depending on the size of a private placement. Rules 504, 505, and 506 refer to offerings of up to US$1 million, up to US$5 million, and over US$5 million, respectively. Rules 505 and 506 specify that only “accredited investors” and up to 35 non-accredited investors can purchase the securities. An accredited investor may be an institutional investor or a common retail investor, if the retail investor meets certain standards. Some of these standards include a net worth of at least $1 million (less net equity in their primary residence), an income exceeding $200,000 for the past two years, and so on. Moreover, rule 506 states that any investor who is not “accredited” must be “sophisticated.” Sophisticated investors are individuals who possess both experience in finance and the knowledge to properly evaluate the risks of a given investment. To clarify, rules 504 and 505 do not require all non-accredited investors to be sophisticated; this distinction only applies under rule 506.

Private placement financing’s primary benefit is that it provides the necessary financing to help growing companies. While there are many rules surrounding private placements in the form of Reg D, these rules play an important role in ensuring the suitability of an investment. Through controlling the solicitation, resale, and investor pool for private placements, legislation like Reg D serves to protect small investors from making inappropriate investments.

Any company that wants to perform a private placement should make sure that they are dealing with a registered broker-dealer. It is illegal for other types of firms to assist companies in these types of transactions. Versailles Group has and affiliated broker dealer, VGL Global LLC, which is a registered broker and capable of completing a private placement. VGL Global’s website is www.vglglobal.com.

Real Estate Investment Trusts

Real Estate Investment Trusts

A real estate investment trust or “REIT,” is an entity that owns and operates a portfolio of real estate properties or mortgages. REITs can be classified into three main categories; equity REITs, mortgage REITs, and hybrid REITs. Equity REITs have ownership of the properties in their portfolios and collect revenue via rent. Mortgage REITs will purchase mortgages, invest in mortgage backed securities, or issue mortgages to property buyers. All of these activities generate revenue via interest on the mortgage payments. Lastly, Hybrid REITs are a combination of equity and mortgage REITs that generate revenue using a combination of both strategies. REIT securities are commonly sold on public exchanges, offering investors access to a liquid means of making real estate investments. It should be noted that some REITs do not trade. In these cases, the REIT itself has certain rules around redemption. It’s very important for the investor to know what these rules are as redemptions outside of those rules is not allowed. Most importantly, the value is also dictated by these rules.

In order for a company to be classified as a REIT, certain rules must be followed. First, the REIT must invest at least 75% of its total assets in real estate. Additionally, the company must gross 75% or more of its revenue through these real estate investments. As aforementioned, these revenues are commonly in the form of the collection of rents or as interest on mortgages. Finally, the REIT must pay out at least 90% of its taxable income to shareholders, usually in the form of dividends. This generous dividend is another attractive feature of a REIT investment.

REITs are tax advantaged investments which avoid double taxation of income. Any dividends distributed by the company are considered tax deductible and vastly reduce the level of taxable income the REIT pays. For example, a REIT that distributes 90% of its net income in the form of dividends will be taxed on only 10% of its total net income as a result of the exemption.
If you are considering an investment in a REIT, it’s highly advisable to seek the advice and counsel of your broker or wealth advisor. REITs can be a very good investment, but probably aren’t for everyone and certainly, the investor should do their diligence.

Dutch Auction

Dutch Auction

In a Dutch auction, each individual bidder will end up paying the same price as their competitor. During an initial public offering (IPO), the prospective investors will place orders for the number of shares they want and the price they are willing to pay per share. The price that the shares will be sold at or the clearing price is determined by the price at which all of the shares in the offering will be purchased. Investors who bid higher than the clearing price will receive the number of shares they ordered at the clearing price which may actually be lower than the price they were willing to pay. Investors who bid lower than the clearing price will receive no shares.

Some people believe that Dutch auctions are better than traditional auctions because the quantity of shares an investor is willing to purchase will not determine whether or not they receive those shares. It is considered more democratic since the price is the only determining factor. For example, if a larger company placed an order for two million shares at a price that fell below the clearing price they would receive zero shares. On the other hand if a small investor placed an order for only two hundred shares but they bid at or above the clearing price, they would receive those shares at the clearing price.

In a typical IPO the price of the shares rises as bidders compete for shares. By contrast, in a Dutch auction, the price of the shares is lowered until the clearing price in which all of the shares will be sold is determined. Therefore, if an investor bids one hundred dollars per share but the clearing price was determined to be seventy dollars per share, then that investor would only have to pay seventy dollars per share as opposed to the one hundred they were willing to pay.

M&A Deals - Hockey Stick Projections

M&A Deals - Hockey Stick Projections

During the deal making process, there are a number of common mistakes that can cost sellers millions of dollars. Many of these mistakes can be avoided by simply hiring an experienced M&A team to guide the parties through the transaction. One common mistake committed by sellers in M&A deals is the use of “hockey stick” projections in sales growth.

A hockey stick projection, depicted above, is an unrealistic forecast for future sales growth. These projections portray a growth rate substantially higher than what the company has traditionally achieved, and often times make the seller appear not credible. Overly optimistic projections are a mistake that many sellers make in an attempt to fetch higher valuations for their companies; however, from a buyer’s perspective a hockey stick sales growth usually raises suspicions over the validity of the forecasts and other information.

The buyer’s due diligence process will examine all aspects of the target company and expose the unrealistic nature of the lofty projections. In many cases, a seller will attribute the growth rate to estimates made by the sales team or expected catalysts foreseen in the market. But, the buyer will want to check the forecasting methodologies of the sales team and validate the proposed market catalyst. The buyer’s due diligence team and M&A advisor will thoroughly evaluate the seller’s data, obtain expert opinions, and research the assumptions and economics behind the projections. Ultimately, if the seller’s forecasts cannot be substantiated, potential buyers will lose faith in both the future performance and management of the company. As a result, potential buyers will either walk away from the deal or make offers at many multiples below the industry average.

The stakes are high during an M&A transaction, with average deal values in the millions of dollars. Consequently, mistakes can prove to be very expensive. The mistake of making hockey stick projections is one that can shatter deals and put far less money in a seller’s pocket. Careful preparation of valid sales forecasts and the advice of experienced deal makers will eliminate this mistake from the process. In fact, when buyers find solid rationale and data behind forecasts, they are more likely to pay a higher price for the company.

To conclude, for M&A deals – hockey stock projections do not add value, they actually diminish the value.

M&A Deals - When Should I Sell my Business?

M&A Deals - When Should I Sell My Business

The question that every business owner asks themselves at some point is “when should I sell my business?” The answer to this question may not be as simple as it sounds as often times the owner of a business is not only looking to maximize the value of a sale but may also be looking to stay with the business in order to help it grow and reach its full potential.

Age/Health of the Majority Shareholder

There are several factors to consider when contemplating whether or not it is time to sell. The age and health of the controlling shareholder is one of the most important factors. Many owners wait too long, either age or health-wise. Are there existing health issues or familial/hereditary health issues that may restrict the owner from operating the business at its maximum potential? These are concerns that should be addressed when considering the potential sale of a business.

Time of Life Considerations

In other cases, owners may want to sell because they feel “burnt out.” Sometimes, owners may not be burnt out; however, they’d like to pursue a different line of business or other opportunities. Both of these reasons should motivate the potential seller to consider the sale of their company. Usually, a loss of interest is permanent and the business will suffer if the owner isn’t that interested.

Risk Profile / Capital Constraints

Sometimes, when a company is growing at a pace that is difficult to maintain, it maybe time to seek a partner to help manage and finance the growing business. This is also one of the best times to sell, i.e., when the business’ growth looks like it will last forever.

Business owners should also plan to exit a declining business before the financial difficulties become extreme. Usually, there is still good value to be had in the sale of a business that has had financial difficulty. However, if the situation reaches the point of bankruptcy, particularly for a smaller middle market company, it’s usually game over. In contrast, it may also be time to exit a declining business that is heading towards financial difficulties.

Owners considering a sale should consider technological changes happening in their marketplace and consider if their company is keeping up or can keep up with it. If not, a sale should be arranged. Similarly, increasing or decreasing product demand should be considered. Increasing demand is great if the company has the wherewithal to finance the growth. Otherwise, it could be dangerous if the company can’t scale appropriately. If there’s lots of demand, it will increase the value of the company in a sale, even if the company can’t meet that demand itself.

Market Conditions

Owners should always stay abreast of the market conditions. Obviously, everyone wants to sell at the “top;” however, many wait too long. It’s better to sell just before the absolute “top” than to risk missing it. Over the years, Versailles Group has seen far too many entrepreneurs miss the “window” because they waited too long. As the expression says, “better safe than sorry.”

Conclusion

The issues of when to sell are often intertwined so it’s highly recommended for the business owner to have some serious conversations with their M&A advisory. Every company and owner has unique circumstances and challenges. A trusted M&A advisor will be able to understand the owner’s desires and factor in the other things like market conditions in order to determine the timing of the sale of the company.

Further Information

For further information on this topic, please download our Ebook.

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M&A Deals - Q1 2015 Activity

Global M&A Activity - Q1 2015

Globally, M&A transaction value for Q1 2015 was approximately US$831.5 billion, which showed growth of approximately ten percent over Q1 2014. The following chart shows Q1 global M&A activity from 2012 through 2015.

Both the US/Canada and Asia/Pacific showed an approximate 22 percent growth in M&A transaction value from Q1 2014 to Q1 of 2015. As shown in the following charts, both markets (except for 2013 in Asia/Pacific) have had steady M&A growth over the last few years.

US/ Canada M&A Activity - Q1 2015

Asia/Pacific M&A Activity - Q1 2015

European M&A Activity - Q1 2015

European M&A deals have slowed from last year, but have not slipped below 2013’s slowdown.

Latin America M&A Activity - Q1 2015

M&A deals in Latin America/Caribbean have slowed from last year, but are still ahead of 2012 and 2013.

Africa/MEast M&A Activity - Q1 2015

M&A deals in Africa/Middle East have shown a steady decline from 2013’s high and, are, in fact, lower than even 2012.

While M&A activity is robust, sellers should move quickly. Over the years, Versailles Group has seen many sellers miss the "window." This was very apparent in the Great Recession as many buyers waited too long and found that not only did their businesses suffer during the recession, but that the value of their business declined tremendously.

M&A Deals - The Benefits of a Global Auction

M&A Deals - The Benefits of a Global Auction

With regard to M&A Deals – the benefits of a global auction should always be considered when selling your business. It is important to offer a sell side transaction as broadly as possible to achieve the best possible results.
A broad based approach will result in a global auction for the company, thus ensuring the highest possible value as bids are received from across the globe. A multitude of bids to examine will reveal the true value of the selling company. It will also provide the seller with unique insights as some of the bids will have different structures. This will give the seller a chance to “mix and match” structures to obtain not only the highest value, but also the best terms.

Versailles Group has conducted a number of these global auctions over the last 28 years. It should be stressed that all of these auctions are 100 percent confidential. It should also be noted that the results have been phenomenal, in terms of both value and terms. Versailles Group sold a company in Massachusetts to a company in South Africa. Another company headquartered in Houston was sold to a company in New Zealand. The firm has multiple success stories, all based on the international, highly confidential auction. In the case of the South African company, they paid two times the next closest bid, which demonstrates that this process works.

Entrepreneurs and corporate sellers should always be cognizant of the eventual sale of their business and should be preparing for a sale long before they think it’s time. Private equity investors and venture capital investors achieve success when selling businesses because they start preparing for a sale even before they invest.

Most business owners don’t think about selling their business, particularly when they’re starting out; however, it is something that should be considered annually. This should be done with a professional M&A advisor that can advise you about your company’s possible value, the market, possible timing, etc.

When it is time to sell, a broad based approach to the sale should be your first consideration. Frequently, the best buyer is a company on the other side of the world. That being said, as with all M&A deals, confidentiality is paramount. Only responsible M&A advisors know how to conduct themselves and the sale of your company in a secure and confidential manner.

M&A Deals - The Benefits of a Global Auction - Conclusion

An M&A advisor with decades of experience and a global reach will know how to create and facilitate a worldwide, confidential auction. That is the best way to achieve the maximum value and terms when selling a company. To summarize, for M&A deals – the benefits of a global auction should not be underestimated.

M&A Deals - Sell Side Considerations

M&A Deals - Sell Side Considerations

With regard to M&A deals, as an owner of a middle market private company, it is important that you seek the assistance of a boutique investment bank to help you sell your business. Having a team of advisors with decades of M&A experience will help you understand the value of your business, as well as help you attain the maximum value through a sale.

Considerations Before A Sale Is Launched
One of the most important considerations before selling your business is to determine the best time to pursue an M&A transaction. Your M&A advisors will assist you in this regard. Many entrepreneurs delay the process, most of the time to their detriment. Many entrepreneurs want to launch one or more new products or develop one more sales channel or do something that they think will make their business more attractive to buyers. However, while the entrepreneur is focused on projects like these, they miss a seller’s market or don’t realize that a dangerous competitor is in the process of taking their largest customer. It’s a shame when these things happen, particularly because the entrepreneur has spent years building a valuable business. And, then in the final moments, they lose a large percentage of the value.

In all M&A deals, the seller is concerned with confidentiality. The M&A advisor should have a strong Non-Disclosure Agreement to protect the seller’s business. In addition, the seller and the financial advisor need to determine whether or not a broad based approach of contacting a large number of buyers is right for the company. In most cases, contacting a large number of potential buyers will yield the best results. But, in particular cases, a seller may want to deploy a more limited process. The seller and the M&A advisor need to discuss the pros and cons of each approach and agree how the company should be marketed.

Considerations During A Sale
It is important for the seller to be prepared to address any issues that may arise during the transaction with regard to the company’s operations, technology, human resources, and financials. The due diligence that potential buyers will conduct undoubtedly will raise questions about the selling company. The buyer needs to fully understand the intricate details of the business being purchased. Sellers usually find this part of the process of selling their business to be daunting, which makes it invaluable to have an experienced team of advisors helping to answer questions and ease any concerns the buyers might have raised.

Considerations After The Sale
After an M&A deal is completed, the buyer is faced with integration and how to run the new business efficiently. Issues regarding employee retention, disparate compensation strategies, and more will need to be addressed. Most of the time, the buyer will address these issues directly; however, it’s important that the seller to help, particularly if it’s requested. A smooth transition will preserve the seller’s legacy, protect the entrepreneur’s former employees, and provide former customers with the best on-going customer service. A good M&A advisor can help guide the seller through this process and find the appropriate level of involvement for the departing entrepreneur.