exploring options in m&a

1 CEO REPORT: EXPLORING OPTIONS

BENCHMARK INTERNATIONAL - CEO REPORT

Exploring Options


ABOUT THIS REPORT

This report was created by Benchmark International and is one of a three part series.

To see other reports in this CEO series, please visit:

ABOUT BENCHMARK INTERNATIONAL

Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions

for growing and exiting their businesses. In 2015, Benchmark International transacted on over $1B in deal value across 50 industries worldwide. With

decades of global M&A experience, Benchmark International’s deal teams have assisted hundreds of owners to achieve their personal objectives and

ensure the continued growth of their businesses.

THEBENCHMARKVAULT.COM/CEO

BENCHMARKCORPORATE.COM

http://www.thebenchmarkvault.com/ceo/

http://www.benchmarkcorporate.com


EXPLORING OPTIONS

Everyday business owners draft plans for marketing, budgeting, and growth every day, but they rarely set aside time to plan an exit strategy. Many owners

simply don’t know where or when to start. All too often, owners make the irreparable mistake of holding on too long. A few key indicators that should alert

an owner that now is the time to begin preparing an exit strategy are:

1. I have been approached by a potential buyer or the market for the

company is ‘hot’.

2. My company involvement has steadily been decreasing - I may be

burned out.

3. My children are no longer interested in or capable of running the

business.

4. I would like to de-risk by ‘taking some chips off the table now ‘but still

keep a hand in the business.

5. I do not know the current value of my company in today’s market and

would like to know the values for my sector.

6. I am ready to pursue other interests.

7. I want to leave my business from a position of strength and on my terms.

8. I am more of an entrepreneur than a manager – I now take care of HR

and finance not business development.

9. There has been a health scare and it’s time to take a look at what’s

important.

10. There are relationship issues within the partnership or my family that

make the business emotionally draining.


DECLINE

DECAY

SUSTAINING

GROWTH

START-UP

GROWTHSLOWDOWN

NEWOWNERSHIP

CYCLE

COMPANY OWNERSHIP LIFECYCLE


When revenues begin to plateau, it is time to start strategizing and pursuing an exit. Despite these

facts, business owners tread on, and often past, their desireable exit date.

A common misconception about the sale of a business is that you need to fully exit. For those

who are not ready to walk away, lies the option of bringing on a strategic partner. A strategic

partner can bring innovative ideas, access to key relationships, and additional capital. With a

vested interest in the company, you can rest assured that your partner has the same objectives.

One of the deal structures offered for taking on a strategic partner is an elevator deal. In

exchange for capital, a business owner sells equity to an investor or buyer. Elevator deals are

right for sellers who would like to de-risk and cash in on some chips now, but still keep their

hand in the game. The seller leverages the influx of cash and continues to grow the business,

later exiting entirely at a potentially higher price. In addition, the business owner has less money

tied up in the business, and is able to diversify his/her investment holdings into other sectors or

business ventures. Another potential benefit of a partnership is having more time to focus on

personal interests.

If a business owner is ready for a complete exit, a Cash in Full deal can be achieved. Acquirers

gain immediate ownership and sellers have minimal financial risk. Once you’ve decided to sell,

you need to prepare for the valuation of your business.

Accurate and consistent financial statements should be gathered from the past 3 to 5 years of

operations. Financial statements speak to the health of the company, allowing investors to easily

recognize a company’s most profitable and unprofitable revenue streams. Investors and buyers

will use them to identify opportunities for improvement and factor that into their valuation. Bankers

will use them to give the seller reasonable expectations for the valuation of the company. Once

financial statements are sorted, your company is ready to be valued.


COMPANY VALUATION

The basic industry accepted formula for assessing a business’s value is based on the formula below:

It is important to note that while the above formula will give you an indication of a base value, the motives of a purchaser and a tightly controlled competitive

buyer process can drive the value of your business upwards. Although accountants and academics state that there are many technical ways of valuing

businesses, the reality is that value is determined by how much someone else is prepared to pay for it. In company valuation, there are three key concepts

to understand.

EBITDA - Earnings Before Interest Taxes

Depreciation & Amortization can be found

by taking Net Profit and adding back Interest,

Taxes, Depreciation & Amortization

Sector Multiple - derived from sector/buyer

appetite, deal history and value drivers in your

business (e.g. contracts, work in progress,

strength brands, customer base etc).

Surplus Net Assets - cash in bank, property,

recently purchased assets and any other assets

that are in the company which are not required

to sustain the current revenue and profit.

EBITDA x (Sector Multiple) + SURPLUS NET ASSETS

FREECOMPANYVALUATION

CALL BENCHMARK INTERNATIONAL TODAY: 813-898-2350


DISCOUNTED CASH FLOW

The Discounted Cash Flow (DCF) valuation method is based on the idea that the value of a business is equal to the sum of all future cash flows that a business

will generate, discounted to today’s value. There are several assumptions that must be made to project how a business will perform in the future. Some of

these assumptions include cash flow, discount rates, control premiums and illiquidity discounts.

Since private companies are not subject to the stringent reporting regulations imposed by the Securities and Exchange Commission, investors and banks

are especially careful when making projections about a private company’s cash flow. Private companies’ financial statements could misrepresent the true

cost of running the business. For example, if a business owner is actively working the business but not taking a salary, a buyer will need to factor the cost

of replacing the owner with a salaried individual into their valuation. A few ways a business owner could improve cash flow when strategizing for an exit

include reducing overhead, reducing inventory, and pursuing growth strategies.

The next estimation is a fair Discount Rate. A discount rate is a rate of return required by an investor. The more risky the business, the higher the discount

rate, and vice versa. More often than not discount rates are higher for private firms due to several factors including their size, depth of management and

other operational and financial risks. Public companies are presumed to conduct business to maximize shareholder value, have an independent board of

directors and sufficient access to capital.

Two other key factors that should be accounted for in a DCF valuation of a private firm are control premiums & illiquidity discounts. A control premium exists

when an investor believes the business is not being operated optimally, and that he/she can improve the financial performance of the company. Control

premiums increase value (apply a premium) while illiquidity discounts decrease value (apply a discount).

The resources required to purchase shares of a public firm are minimal relative to the time and transaction costs required to purchase a private company of

similar size. Therefore, a 20% to 30% illiquidity discount is applied to the sale of private companies relative to a sale of a public company with comparable

financial performance.


TRADING COMPARABLES

Another way to value a private company is to use ratios from a comparable peer group of publicly traded companies. When using this method, it is

imperative to make sure the peer companies are the closest reflection to the company in terms of size, product offerings, scalability, etc. The banker will

gather up to 15 of your public peers, and consider their multiples, paying closest attention to the companies that are most akin to your business.

COMPARABLE TRANSACTIONS

The Comparable transactions method values a company based on past sales of similar firms. The main challenge of this method is that there is often a lack

of relevant sales transactions to consider. In addition, there is no way for the banker to know the rationale behind the previous deal (ie synergies, control

premiums) or if market conditions at the time of the transaction influenced the multiple attained. In contrast, this method can be helpful in identifying buyers

who are highly acquisitive in the seller’s sector and could potentially be a suitor in the event of a sale.


WHAT ARE THE PARAMETERS?

The following graph is an indication of multiples paid across the mid-market sector:


HIRING AN M&A CONSULTANT

Studies have shown that private companies who hire an M&A consultant to help facilitate the sale of a business receive significantly higher acquisition

premiums than those who do not. An M&A team can consult you on market timing, market value and can bring both strategic and financial buyers to the

table. Benchmark International’s M&A diversified team of professionals bring a fresh perspective to every deal having knowledge in several disciplines

including finance, accounting, marketing, information technology and law. Benchmark’s industry agnostic approach spans 95% of the M&A landscape

creating a competitive tension among sizeable amounts of buyers. We know there is no ‘one size fits all’ approach. We provide our clients with an entirely

tailored experience, developing plans that are as highly individual as you and your business.

CONTACT US TODAYFOR A FREE

COMPANY VALUATION813-898-2350


WHY NOW IS THE TIME TO SELL

There are many factors that determine the best time to sell a business. Most owners know

the basics such as strong growth or high profitability but many ignore the macroscopic

factors to consider when deciding when is the right time to pursue an exit. The largest

factor is most often the one that an owner can’t control, and that is the state of the M&A

market.

The last few years have been very strong in terms of both deal volume and deal value

in the M&A market with 2015 matching previous records set in 2007. While similar

results are expected in 2016, we anticipate it will mark the beginning of the softening

of the M&A cycle. There are a number of factors that indicate that the market will

begin to soften in 2017, which we will discuss in just a moment, but it is because of this

expectation that we are encouraging clients that are planning to exit within the next 3

years to do so now instead of waiting until it’s too late.

Deal scarcity continues to be one of the largest contributors to the seller’s market.

Consider that financial groups have access to approximately $400 billon in dry powder

in the US alone. Also consider that a large number of trade and strategic acquirers are

also flush with cash. Now put them in a competitive bidding environment where they

have a lot of motivation to put that money to work and very few opportunities to invest

in at the moment. The logic of high demand and low supply tells us that those quality

opportunities on the market are receiving some of the highest values seen in the last

decade.

Access to cheap capital is allowing acquirers to finance these record high multiples. The

small hike expected soon won’t affect these high valuations significantly, but it will mark

CEO REPORT: EXPLORING OPTIONS


the beginning of the softening of the market. The expected hike will be the first of a series, and as the financing

rates increase, acquirers will be less aggressive with the amount they are willing to bid on these deals. We

expect a series of hikes over the next 3 years and as they do, multiples will steadily decline from the current

“norm”.

The scales are further tipped to the seller’s advantage when we also throw in the fact that additional groups

have entered the lower middle-market buying market share because of the current lack of desire to perform

IPOs. Many acquirers that normally focus on buying larger companies and taking them public are now turning

to smaller businesses as targets. However, this mindset won’t last long thanks to the ‘Year of the Megamerger”.

2015 saw some of the largest mergers we’ve seen in a long time and many of these new partnerships will lead

to small spin-offs this year that will go through IPOs in 2017. This means that many businesses in the lower

middle market only have the next 12 – 18 months to take advantage of this extra buying group in the market.

We must also consider the current level of international activity. Cross-border deals

absolutely exploded in 2015, with many of them involving entities in the United

States. As the economy continues to improve many acquirers are making a concerted effort to invest in cross

border transactions in order to break into new markets. Given the still volatile global market, many acquirers

are seeking to hedge their bets by investing in international entities so their success is no longer dependent on

a single country’s economy. There are also a number of incentives, such as the EB-5 program that provides

further motivation for international acquirers to buy into the US market. Given the extra motivation many

international acquirers have, we commonly see them submit some of the largest bids on our deals.

The US Presidential election is definitely one of the key reasons we are advising clients to sell early in the year.

As the election approaches, and even shortly after it wraps up, the M&A market will slow significantly due to

political uncertainty. Most active acquirers will put their activity on pause until we find out who will be the new

President and what first actions will be taken. Clients that wish to sell within the next two years should make it

their first priority to start the process immediately. Given the time it takes to prepare a company for market, get



the competitive bidding process underway, and negotiate and close the deal we are

looking at a 6 – 8 month process from cradle to grave. Even days matter when seeking

to close a deal prior to October/November this year.

There are a number of factors to consider that will stem from the results of the election.

One of the most prominent topics is the fate of capital gains tax (CGT). At 23.8% (20%

+ 3.8% for Obama Care), it is still historically low (even after the increase from 15% in

2012). Unfortunately, one of the most prominent topics of discussion is the inevitable

increase of capital gains. Many candidates are proposing a hike in the ordinary income

tax bracket, which will increase long-term capital gains from 23.8% to 39.6% for most

lower middle market business owners. This is a 16.4% haircut on the net proceeds of the

sale for any owner that waits too long to sell and, unfortunately, there is no negotiating

with the government on that rate.

Baby Boomers continue to be a threat to consider. Consider the current state of the

market due to the lack of quality opportunities. Given the current rate of nearly 8,000

baby boomers nearing retirement on a daily basis the dynamic of low supply and high

demand will shift rapidly. Sadly, most of these baby boomers will seek to fund their

retirement through the sale of their business but will see valuations and multiples rapidly

decline as more opportunities become available and buyers have far more businesses

from which to select. This is another driving factor behind our advice to clients to beat

this rush and begin the exit process sooner rather than later.

We are expecting 2016 to mark the peak of the M&A cycle and it will be another 8 –

10 years before we see both deal values and deal activity at the level expected for this

year. If you are considering a sale of your most prized asset within the next few years,

we highly encourage you to contact an advisor immediately to discuss your strategy.


exploring options in m&a

Business