Selling the family business: A Portland investment banker sees an uptick in M&A activity
Photo / Tim Greenway
Sam Adams, director at Corporate Finance Associates, in the Old Port in Portland.
The continued improvement of the economy is driving merger and acquisition activity both nationwide and in Maine, particularly among baby boomer owners who waited through the recession for the right conditions to sell their companies.
That's the sense of Sam Adams, a director at the Portland office of Corporate Finance Associates, an investment banking services firm specializing in ownership transfers, acquisitions and financing for growth and expansion. “There are more buyers out there who are willing to take the risk of acquiring a company in our marketplace in Maine and New England,” he says. “It's taken a long time for people to get to the place where they're willing to say 'I'm in a growth mode' or 'I'm willing to buy a business.' There's a sense of solidity in the economy now, a feeling that growth is possible and sustainable. That's incredibly important.”
CFA's niche is the “middle market,” which Wall Street defines as anything less than $1 billion, but which Adams says in a small, largely rural state such as Maine is typically below $50 million. By far, Adams says, the greatest number of companies for sale that he sees in Maine are in the “few million up to $50 million range.”
Adams bases his sense of Maine's mergers and acquisitions activity on CFA's Portland office being “significantly busier now than a year ago,” with half of the business being in financings and half being in mergers and acquisitions. “Our deal flow increased 15% between 2012 and 2013, and 30% between 2013 and 2014,” he says. “This trend continued in the first quarter and we expect 2015 to be a very robust year.”
Giving credence to his assessment is a bullish forecast for 2015 by PricewaterhouseCoopers, which reports 9,354 transactions in the United States through October 2014, representing $1.7 trillion in disclosed deal value. It was the highest M&A value recorded since 2007's record $1.8 trillion, PwC reports, adding that it expects that “momentum to continue in 2015.”
Other positive indicators include:
• The quarterly Duke University/CFO Magazine Global Business Outlook Survey, released in March, which reported that on a scale from 0 to 100, 1,000 U.S. CFOs rate the economic outlook at 65, the most optimistic expectation for the U.S. economy since 2007.
• Market Pulse, a quarterly survey complied by the International Business Brokers Association, M&A Source and the Pepperdine Private Capital Markets Project, reports deal volume increased in the last quarter of 2014 and that 89% of the 200 business brokers and advisers surveyed expect M&A activity to increase this year.
“It is possible that for the first time since early 2007, the market has some pull to it,” private equity analyst GF Data concludes in its February 2015 M&A report. “That is, more business owners are beginning to feel that the current mix of economic, industry and capital market conditions will not last forever, and that these conditions are becoming an impetus to sell.”
Time to sell?
Adams brings to his role as a CFA adviser a broad perspective, reflecting his diverse background as a business owner, investor, legal adviser and legislative advocate. What's significant about the recovery happening in Maine and elsewhere, he says, is the “meaningful confluence of better valuations for small- and medium-sized businesses [largely due to increasing sales revenues]; demographic factors [older owners who now are thinking about selling]; and a lower cost of capital for buyers who may need to borrow as part of an acquisition.”
Even so, he stops short of making sweeping generalizations that now is the best time for any would-be seller to pull the trigger and put his or her company on the market. There are other factors besides the generally favorable macro-economic conditions, he says, including the size of the business; its total enterprise value (or TEV, which factors in debt and is considered a better reflection of the market value of business than simply its net worth); and earnings before interest, taxes, depreciation and amortization (or EBITDA, a measurement of the business's free cash).
Typically, Adams says, the higher the EBITDA, the higher the sale price.
With smaller companies, the value indicators often tend to be of lower quality than they are for much-larger firms. That can signal to potential buyers that it might be harder to get a good return on their investment and may result in a lower sale price than the seller would have preferred. Adams says prospective sellers in the low-end of the middle-market businesses can often feel paralyzed by uncertainty over whether it's the right time to sell, and related questions such as: How do they know if they're pricing the business too low and leaving money on the table if they quickly sell it for that price? Is it priced too high, risking a long wait for a buyer and the possibility of holding onto the business too long?
In first meetings with potential clients, Adams encourages them to tell the story of their business: Its challenges and achievements. How they came into the business. Their reasons for selling. Their exit aspirations, and what their hopes might be for other family members and employees. His goal is to help the owner step back in a reflective way and get a sense of where they are and where they want to go. A picture emerges that invariably helps that owner know what they want to achieve.
“People want to tell you their story,” he says. “It's critical to understanding how you might help someone achieve their goals.” Since for most owners their business is the primary source of their wealth — “stored value” is how Adams refers to it — the decision to sell invariably is tied to the question “How much can I sell it for?”
Getting the right price
If an owner wants to sell and hires CFA to help with the process, Adams says the next steps typically involve defining the exit (e.g., deciding whether to sell to partners, strategic buyers, an investor, competitors, international buyers or transferring it to family, management or employees) and setting goals, such as the likely range of pricing, terms and deal structure in the current market, as well as tax strategies and legacy objectives. “We're prepared to help business owners sell their business based on whatever timetable they have, from 'I'm ready to sell now' to a much longer time-frame,” he says. “We're a very collaborative shop. We like to work collaboratively with the clients' other advisers to get the best result.”
In a recent white paper on “The Optimal Exit Strategy,” CFA Chairman and CEO Peter Heydenrych spells out business attributes that will facilitate a successful sale:
• Businesses which have scaled beyond a total dependence on the owner
• Proprietary products, services or processes
• Strong, remaining management
• Defensible, differentiated market position
• Stable, diverse customer base
• Recurring revenue business model
• Business growth (opportunities)
• Strong operating margins
• Manageable business risk.
Sometimes the owner's expectation of how much wealth will be transferred hits a speed bump after CFA estimates its market valuation, typically by analyzing the business's income, sales of comparable businesses and determining the market value of a company's assets. If the resulting price ends up being lower than the owner would like, Adams says, CFA's Portland team has the expertise to help the owner develop a longer-term exit strategy with the goal of improving the company's market value for a buyout down the line.
A first step often involves taking a closer look at the company's balance sheet and inventory. “Anything that detracts from value can be addressed to have a better outcome at the time of sale,” Adams says, citing out-of-date inventory still on the books as a common problem for older businesses. Taking a write-down on that inventory and getting those items off the books, he says, improves the company's value and its potential sale price.
Another step to improve the owner's prospects of getting the best price is to make changes that will drive growth in topline revenues — for example, expanding or diversifying the customer base or making process improvements that lower manufacturing costs.
“These businesses are the most important thing financially and emotionally for the business owner. You've got to take the long view. The starting point is one of listening and developing rapport and establishing a relationship,” he says.
Even when all the variables are optimum, selling a business takes time — with the median time to close being about eight months for lower middle market deals, according to Market Pulse's fourth quarter 2014 report. Once an owner hires CFA to sell his or her business and all the due diligence financial accounting is completed, Adams says, the goal is to schedule a limited private auction with multiple buyers who are willing and able to purchase the company.
In an ideal world, the seller ends up with three or more buyers who are willing to pay cash, allowing the seller to pick the best price.
But that's rarely the case, Adams says. Some buyers might seek to take out a note with the seller to cover some of the purchase price; others might want to negotiate a “hold back” clause, allowing them to retain some of the purchase price until the company reaches agreed-upon targets.
The seller's goals play a big role in deciding the merits of one prospective buyer over another, he says, especially if one of the prospective buyers might simply be planning to eliminate a competitor and close the plant, or buy the equipment and relocate workers to an out-of-state plant.
“If employees' well-being is a high priority, the motivations of the buyer are going to be very important,” he says.
With an improving economic climate and perhaps some pent-up desire among baby boomer owners to sell their companies, Adams says there are lots of opportunities, with broad social implications.
“There are a lot of great companies in Maine,” he says. “But we have a demographic problem we have to solve: We have an aging population with a lot of business owners who want to retire, and their kids are not necessarily interested in staying on to run the family business. Let's imagine businesses in towns across Maine that provide an opportunity for the owner to sell and retire, but also continue to provide jobs. If we can find ways to find people to buy these companies and keep these jobs, there's a social good that can work itself out in those mergers and acquisitions — if we do it the right way.”
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