Managing Director, Dan Roth, guest-starred on Healthcare Huddles most recent podcast: The Do’s and Dont’s of Selling Your Healthcare Business. See exerpt below or visit: Considering selling your healthcare business? – HealthCare Huddle (captivate.fm)
Articles – Category Posts from The Forbes M+A Group. Research via our Knowledge Base and get access to M&A articles, news, and other info.
Denver, Colorado (October 15, 2020): A couple months ago, The Forbes M+A Group celebrated the successful sale of Managed Chaos to Digital Media Solutions [(NYSE:DMS)], a leading provider of technology and digital performance marketing solutions. ManagedChaos represents the holding company for a one-of-a-kind performance and affiliate marketing platform, comprised of four synergistic companies: (i) SmarterChaos, a premier digital marketing and online performance management agency; (ii) She Is Media, a female-centric performance ad network; (iii)Dealtaker, an online marketplace and coupon site for consumers; and (iv) Elite Media Partners, an affiliate marketing agency.
Lead advisors, Dan Pellegrino (Managing Director/Partner) and Blake Shear (Director) walk us through the process of a deal, the obstacles they faced along the way, and the success they found with the right companies.
What was the role of The Forbes M+A Group within this deal?
Dan Pellegrino: “Forbes was selected as the exclusive Investment Banking Advisor to partner with Managed Chaos on the deal. That means we advised our clients on most aspects of the business terms and deal structure. We managed the process while also strategizing and negotiating on their behalf.”
Blake Shear: “We worked closely with management to craft a compelling story and operational model that could be presented to institutional investors. Key for investors to understand was exactly how all the “pieces” fit into the broader ecosystem and where each of the entities in the roll up would add value to an overall platform to generate the most value in the market.”
What is your role within the company and background within Investment Banking?
Dan Pellegrino: “I am a Partner and Managing Director with The Forbes M+A Group. I started my career in Management Consulting helping companies make strategic growth decisions, including acquisitions before I went off on my own to start three different companies. I sold two of those companies; an e-commerce business and a white label digital agency. Although my software company failed, I believe those experiences help me to better relate to my clients and ultimately add more value when working on these long complex transactions. I’ve been doing dedicated transactional work in my current role for about 13 years now.”
Blake Shear: “I am a Director at the firm. As a co-lead on the deal, I focus on helping our clients understand the M&A process, help conceive the story, communicate to the market, and lead the negotiation with the buyer. I’ve been in investment banking for over 15 years. Prior to Forbes, I worked in the middle market as an advisor on both healthy and distressed transactions as well as cross border and domestic deals.”
What are trends you are seeing within the Advertising/Marketing industry, specifically within M&A?
Dan Pellegrino: “One big, recent, driver in the industry is the ability to obtain and use clean and consensual deterministic data for marketing purposes. This will ultimately lead to consolidation because most smaller companies will realize they need to be part of a larger organization to survive the coming privacy changes.”
Blake Shear: “The ability to use technology and data to show attribution for marketing dollars to drive measurable results for clients is becoming more important than ever. Buyers are looking for companies who have the technology and/or expertise in a certain niche of marketing as targets for acquisitions.”
What was unique about this transaction?
Dan Pellegrino: “It’s pretty unique to do a deal that involves multiple companies coming together like this. We always say that 1+1 =3 in the M&A world and there is an arbitrage that can benefit the seller in a roll up like this However, it is difficult to get one deal across the finish line, let alone four.”
Blake Shear: “Our client was being acquired ahead of a large SPAC going public, which created a lot of challenging issues that we had to work through. For one, the timing of this deal was critical to the deal as it had to line up with the SPAC’s IPO plans. It also created negotiation challenges because the structure of SPAC limited its ability to consider certain options, so ultimately we had a lot to build consensus between the two parties to get everyone working together in a collaborative way to get the deal done in time and at a premium valuation.“
What is a SPAC? Are SPACs the new IPO?
Dan Pellegrino: “They used to be known as reverse mergers, and they seem to be gaining in popularity again. Essentially, a SPAC, or Special Purpose Acquisition Company, is formed to raise money through an IPO to make acquisitions. The money is held in a trust account until released to fund the business combination or used to redeem shares sold in the IPO. The benefit of a SPAC over a regular IPO is typicallybecause the SPAC transaction is a little simpler and less time consuming than its counterpart.”
Blake Shear: “A special purpose acquisition company, which in theory, a blank check to make for an entity to make acquisitions. Once an acquisition is completed, the SPAC will go public on an exchange. We are seeing SPACs growing in popularity and they are emerging as a new category of buyer.”
What is a roll up? What is the best way for companies to think of a roll up?
Dan Pellegrino: “The best way to do a roll up is to start with, what we call a platform company. Once you have a solid, well-managed platform, the next step is to find a target, ‘add-on’, companies that you believe add synergies to the combined entities. As a business gets larger and more operationalized, the risk perceptions get lower and the multiples will go up. This is the 1+1=3 scenario. Most Private Equity groups follow this recipe and it works well.”
Blake Shear: “It’s very hard to get a bunch of companies to agree at the same time to be acquired. We would recommend that one company serve as a platform and begin rolling up companies one at a time once integrated, go to look for additional targets.”
What kind of advertising/marketing companies are attractive to buyers?
Dan Pellegrino: “Old school, full service, agency model has become somewhat commoditized, so there needs to be a unique service offering such as a focus on a certain niche, a data play, or a technology-enabled service provider that is proven to drive value. High growth and large margins will be the “proof in the pudding” so to speak.”
Blake Shear: “Companies that leverage technology, have long term relationships in specific sectors, as well as a diversified group of customers. Customer concentration can dramatically change the valuation.”
Media Contact: Sara Cody | 303.558.1462 | firstname.lastname@example.org
Unity Software – IPO
Unity Software (NYSE:U) is a 3D game engine used to create, run, and monetize video games on mobile phones, tablets, PCs, and consoles. Unity is one of the most popular gaming engines and has been used to create 53% of the top 1,000 games on IOS and Android and 50% of all games regardless of the platform. It is the biggest competitor to Epic Games’ Unreal Engine that is currently in a heated legal battle with Apple. As Apple and Epic battle it out, Unity is poised to capitalize and take market share from Unreal. This market share growth is already being priced into the Unity shares within its first week of trading. Unity was offering 25 million shares at $52 with an enterprie value of $13.7 billion. The market was hungry for the Unity debut, especially given how well positioned they were in the face of Apple v. Epic, as its share price ballooned 44% to $75 per share in intraday trading and closed at $68 a share. As of September 24th, Unity now has an enterprise value of $22.2 billion and is trading around $83 per share.
Microsoft Acquires Zenimax (game publisher Bethesda)
Following on the heels of the highly successful Unity IPO, Microsoft announced they were acquiring Zenimax and its game publisher Bethesda Softworks for $7.5 billion in cash, one of the biggest gaming acquisitions in history. Zenimax, headquartered in Washington D.C. and with offices around the globe, is a creator and publisher of video games for PCs and consoles. One of Zenimax’s most successful studios is Bethesda. Bethesda is the creator of critically acclaimed games including The Elder Scrolls and Fallout and has a total of 8 studios, won publisher of the year in 2018, and has won “Game of the Year” five years in a row. With the acquisition, Microsoft will grow from 15 studios to 23 and will be adding the games to its fast-growing Xbox Game Pass subscription. Although transaction terms have not been made public, Microsoft is looking to close the transaction in fall 2021 and the transaction will have minimal impact on non-GAAP operating income in fiscal years 2021 and 2022.
The historic week in gaming continued on September 23rd when Corsair (CRSR) debuted its IPO for $17 per share and is looking to raise $238 million. Corsair is the manufacturer of gaming hardware and accessories marketed to PC gamers and streamers. Corsair was previously publicly listed but was acquired by EagleTree Capital, a private equity firm, in 2017 for $550 million. With more people at home, Corsair has seen a significant boost in its revenue and is on pace to make a profit for the first time since 2017. After its debut on the Nasdaq, the company’s stock declined 16% on its first day of trading and is currently trading at $15.58 per share. Before its IPO, the company had a valuation of $1.3 billion and is now sitting at $1.8 billion. While both Corsair and Unity are in gaming, they are materially different companies, with Corsair much more of a consumer products / hardware company and Unity serving as the engine that drives the future of gaming. This is reflected in their respective stock performance post-IPO.
Vice President & Head of Digital Gaming
As the current environment evolves and we all adjust to the new normal, the Forbes M+A Group is dedicated to keeping our team, clients, and friends of the firm up to date. Our team continues to remain very active, with as many transactions in the works as before the pandemic. Through these transactions, we are experiencing firsthand the effects of the virus on a variety of industries. We will continue to monitor market trends and share our experiences in order to grasp, internalize and ultimately, exceed, our clients’ goals.
The initial shock of the pandemic essentially put a pause on deal activity. Many buyers had to shift their focus from acquiring new companies to maintaining and providing support for their existing portfolio. Other buyers became more conservative with their funds out of fear of their ability to outlast the pandemic. These factors, combined with other concerns, resulted in deals going on hold or even dying out. However, now that the first half of 2020 is behind us, you may be wondering what to expect going forward.
Fortunately, the market appears to be showing signs of resumed deal activity. Private Equity is still sitting on upwards of one trillion dollars in funds. Sponsors will need to be more diligent in their investments but will not neglect M&A. Strategic acquisitions of industries that have been deemed “COVID19-resistant” will continue to be targets.
Additionally, as election season sits on the horizon, some sellers are pushing for end of the year close dates. With the possibility of a new party overtaking the White House come January, the looming specter of tax increases has caused sellers to recalibrate price expectations as they race to the finish line.
In this newsletter, we highlight how these trends in M&A are affecting some of our focus industries.
Food & Beverage Industry Insights and Post-COVID predictions
Food & Beverage M&A activity in the first quarter of 2020 was off to a strong start with recent activity being driven by companies looking to meet shifting consumer needs and preferences. While COVID-19 has caused major disruptions throughout the industry and slowed M&A activity, public comparables remain high with a median EV/EBITDA multiple of 12.7x.
Forbes M+A Awarded Colorado M&A Firm of the Year!
Forbes has been selected as the M&A Advisory Firm of the Year in Colorado – 2020 presented by Global Advisory Experts, for the second consecutive year. “Over the past 15 years, Forbes has made it a mission to really grasp, internalize and ultimately, exceed, our client’s goals, said Bob Forbes.
Please make note of our new address:
6400 S. Fiddlers Green Circle, Suite 850, Greenwood Village, Colorado 80111
Spring Digital Gaming Report
Digital gaming, despite the global pandemic, continued to surge forward with unprecedented growth across all channels; streaming platforms saw record viewership while consumer spending was at its highest since 2008.
About The Forbes M+A Group
Founded in 2004 with offices in Denver, CO and Salt Lake City, UT, The Forbes M+A Group is an award-winning investment bank with expertise in mergers and acquisitions, capital formation, and financial restructuring within the middle market. The group has over 15 years of experience delivering outstanding results for business owners, entrepreneurs, and investors. Advisors at The Forbes M+A Group have 250+ years of combined experience in international transactions across a wide variety of industries. The Forbes M+A Group has been recognized as a leader within the middle market as a regional M&A Firm of the Year for the past 5 years.
Denver, CO., (March 30, 2020) – All of us at The Forbes M+A Group are hoping you, your businesses, and families are maintaining your health and well-being during these trying times.
Over the past few weeks, The Forbes M+A Group has been closely monitoring the situation and wanted to pass along some trends we have been witnessing in M&A and the capital markets. As the environment continues to shift within the middle market, it is our goal to keep our clients and colleagues informed. It is important we find some level ground amongst the chaos.
With a variety of deals currently in market, we have been in the trenches for our clients discovering how best to navigate this difficult environment. We have been in constant communication with lenders, investors, private equity groups, and other strategic buyers to understand how they have been affected and get a sense of their expectations in real time.
The Mind of the Buyer
We understand there is some anxiety for sellers, and possible pull back from buyers in the early stages of transactions. Buyers, especially strategic ones, will be focusing on getting their own businesses in check before considering investing in outside companies. This will most likely slow down sell-side or capital raising processes, but not necessarily drive it to a dead stop. In some cases, sellers’ businesses may perform better in this market, which would create a very strong proposition for any buyer.
Future of Investments
Simultaneously, there are many driven investors who believe that in the long run, if the US responds to this situation in a similar way that China has, this crisis could be resolved in a few months. Those investors will continue to look for good opportunities and good companies. There is still a significant amount of committed capital held by investors and buyers with long-term investment theses. We are hearing from these groups on a regular basis with the message that they would still like to put money to work.
Banks and Lending
In the capital markets, some of the more traditional banks have been slowing down processes while they evaluate the market and manage new internal processes related to employees working remotely. We continue to speak with our network of non-bank direct lenders and are hearing that they are still active and ready to lend. It is likely that the threshold for lending has increased some but initial signs point to continued activity.
Overall, we believe we can expect a slowdown of processes over these next several weeks while the wounds are still fresh and the investing community continues to assess the market situation. But we believe forward-looking, smart, decisions on deals will continue given the amount of capital waiting to be deployed.
Please do not hesitate to contact our Special Situations team, as you and your constituents continue to navigate through unforeseen change. We are able to respond quickly, offer unbiased advice, and develop custom solutions designed to preserve flexibility and maximize value in the face of underperformance, distress, and/or insolvency. For a guide of key steps to consider when evaluating transaction solutions please click here.
Whatever the outcome, we hope to use our resources to support each other and help each other to overcome this.
The Forbes Team
When one sells their house, the best deal is usually the highest price. When one decides to sell their business, there may be other factors to consider. Many buyers are similar to the buyers described below, serious and qualified; and most sales of businesses are win-win transactions. However, there are a few exceptions, and sellers should consider them carefully, balancing their prerequisites to the goals of the buyer.
Selling to a Competitor
Many company owners think this is the best way to go. They read about the mega-mergers such as Bank of America and Merrill Lynch, or the deals such as LVMH and Tiffany & Co., and GE and Danahrer. Consolidation may play a major role in large public companies; this is not the case in middle market companies.
Many owners of middle market firms look at these mega-deals and think it might work for them. However, upon further consideration, they realize that by disclosing a lot of confidential information to a competitor, their business could suffer irreparable damage if the deal would fall apart – and many do.
Selling to a Strategic Acquirer
This may bring the highest price, but there are several reasons why this may not be in the company’s best interest. Many owners have worked with key employees for years and would not like to see them replaced. The strategic owner might not only replace members of management but might also move the company to another part of the country.
Selling to a Financial Buyer
This buyer may not be willing to pay the seller’s price and is usually buying a company with intentions of selling it at a profit in three to five years. This leaves the company and its employees in limbo waiting for a new owner to take over.
The employees may decide to buy the company (ESOP). However, this usually means a long-term payout for the owner. An individual buyer may come along such as a Warren Buffett, but what are the chances? A key member or members of management might decide to purchase the company, but generally they won’t pay the price. If a sale is not consummated, the key management member(s) will most likely leave. In addition, there are motivated individuals who are backed by investors or large amounts of capital who could be a potential buyer.
There Is No Magic Answer – Selling a company comes with no guarantees. When Badger Meter Company, a public company headquartered in Milwaukee, acquired Data Industrial Corporation based in Mattapoisett, Massachusetts, this appeared to be a marriage made in heaven. Their respective product lines fit like a glove, their corporate cultures seemed compatible, and sales expansion by cross-selling was evident.
This strategic acquisition would have been fine except for one change. The parent company moved Data Industrial’s operation to Kansas, and every employee’s job was terminated. However, one should not construe that all acquisitions by strategic or competitive acquirers end up in a similar fate. Furthermore, for price considerations, the seller can draft restrictions in the Purchase & Sale agreement to prevent the transfer of the business, at least for a specified time period.
Certainly, selling to the particular type buyer doesn’t guarantee all of the seller’s concerns, but knowing the interests of some of the various buyer types can help ensure that the goals of both buyer and seller are met. Sellers should determine their goals prior to attempting to sell their business. A consultation with a investment bank is a good start to this process.
Nearly a decade ago, we set out to answer a critical management question: What type of M&A strategy creates the most value for large corporations? We crunched the numbers, and the answer was clear: pursue many small deals that accrue to a meaningful amount of market capitalization over multiple years instead of relying on episodic, “big-bang” transactions.1 Between 1999 and 2010, companies following this programmatic approach to M&A generally outperformed peers.2
That pattern is even more pronounced in today’s fast-moving, increasingly uncertain business environment (see sidebar, “The staying power of programmatic acquisition”). A recent update of our research reflects the growing importance of placing multiple bets and being nimble with capital: between 2007 and 2017, the programmatic acquirers in our data set of 1,000 global companies (or Global 1,000) achieved higher excess total shareholder returns than did industry peers using other M&A strategies (large deals, selective acquisitions, or organic growth).3 What’s more, the alternative approaches seem to have under-delivered. Companies making selective acquisitions or relying on organic growth, on average, showed losses in excess total shareholder returns relative to peers (Exhibit 1).
The data also confirmed just how challenging it is for individual companies to make the transition to programmatic M&A from any of the other models we identified. For instance, none of the companies that followed an organic approach between 2004 and 2014 had shifted to a programmatic model by the time we performed our latest analysis. And by 2017, more than a quarter of those companies had dropped out of the Global 1,000 altogether because of takeovers and other factors. The story was similar among those companies we deemed selective acquirers (Exhibit 2).
When we looked even closer at the data, we saw some striking differences in what high-volume deal makers do relative to peers. For example, the programmatic acquirers were twice as likely as peers to estimate revenue and cost synergies at various stages of the deal-making process, and they were 1.4 times more likely than peers to have designated clear owners for each stage.4
These findings are consistent with our experience in the field, in which we see that programmatic acquirers have built up organizational infrastructures and established best practices across all stages of the M&A process—from strategy and sourcing to due diligence and integration planning to establishing the operating model. In this article, we will consider how programmatic acquirers typically manage each of these stages.
A programmatic approach won’t work if you don’t define the program and don’t treat M&A as an enduring capability rather than a project or occasional event.
The programmatic model may not be the right fit for every company, of course. Some businesses may contend with organizational limitations or industry-specific obstacles (consolidation trends and regulatory concerns, for instance). Regardless, it can be instructive for companies with any type of M&A program to understand how some companies are taking advantage of the programmatic approach.
Strategy and sourcing
Most of the programmatic acquirers we interviewed said they work hard to connect their strategies with their M&A priorities. The hard work starts with a return to first principles: the development of a blueprint for bringing strategic goals into deal-sourcing discussions. An effective M&A blueprint delineates the limitations of pursuing certain deals and provides a realistic snapshot of market trends—for instance, “Which market-shaping forces are the most promising within our sector, and how are our competitors likely to evolve?” Additionally, the M&A blueprint can help programmatic acquirers identify whether or not they may be the best owner in any deal or transfer of assets—for instance, “What are our sources of competitive advantage, and what capabilities are we trying to acquire?” Finally, the blueprint can help companies assess how realistic it may be to expect success from a deal—for instance, “Are assets readily available, or are they overpriced? Do we have the relationships required to carry out this transaction? Are regulatory constraints too much to overcome?”
These were the kinds of questions senior leaders at one consumer-products company asked themselves as part of a recent deal. The leadership team strongly believed the company needed to expand its presence in China and asked the M&A organization to identify potential acquisition targets. The debate over which regions to focus on went on for several weeks, until senior leaders and the M&A team realized they needed to revisit the base strategy. In a series of fact-finding meetings that took place over an eight-week period—and referring back to their M&A blueprint—the senior leaders and the M&A organization identified the amount of capital required to meet their goals, specific market trends and customer segments in China, and the potential advantages the company could confer to a target (primarily, its global distribution network). Once senior leaders at the consumer-products company had systematically explored such questions, they were able to gain quick agreement on a handful of potential targets in specific regions, several of which had not even been mentioned during the initial discussions.
Due diligence and integration planning
The programmatic acquirers we interviewed said they often tackle due diligence and integration planning simultaneously—holding discussions far ahead of closing about how to redefine roles, combine processes, or adopt new technologies. Having the right resources at the ready seems to be a key tenet for these companies. It was for one consumer-products company that, at the outset of its merger with a target, modeled the optimal sequence for migrating general and administrative tasks from both companies to a centralized shared-services group, thereby jump-starting the overall integration process.
Corporate culture and organizational health— both their own and that of the target companies—also seem to be important concerns for programmatic acquirers. Our research shows that programmatic acquirers are more likely than peers to pay close attention to cultural factors during both diligence and integration processes.5 For instance, the integration team at one technology company closely tracked the balance of employees who would be selected for the combined entity from across both the parent company and the target. If any area of the business was not achieving a balance that matched the relative scale of the merger, team leaders intervened. Additionally, employee selections could not be approved without ratification from the integration team. If two candidates were deemed equally suitable for a role, the team tilted its selection to the target-company candidate, recognizing that managers in the acquiring company likely already had a built-in unconscious bias in favor of the homegrown employee. If neither candidate was considered suitable, the team moved quickly to recruit externally.6
M&A operating model
A programmatic approach won’t work if you don’t define the program and don’t treat M&A as an enduring capability rather than a project or occasional event. Our research shows that, compared with peers, programmatic acquirers often focus on building end-to-end M&A operating models with clear performance measures, incentives, and governance processes. For these companies, the devil is in the details. Potential acquisitions are not evaluated ad hoc, for instance. Instead all the decision makers and the criteria they are using are clearly defined and made transparent to all stakeholders. “If it’s truly a program, then for each type of opportunity, you need to say, here are the targets that would constitute a doubling down, here are the targets or products we’d like to have, and here are the targets for the distribution we want,” one partner at a private-equity company explained to us. “It has to be systematic.”
To that end, one technology company treats M&A in much the same way it does customer acquisitions: it uses a customer-relationship-management-like tool to manage its M&A program. The tool is an online database of hundreds of companies that the technology company actively monitors as potential targets. Using a series of customizable dashboards, the corporate-development team updates the database and tracks statistics about acquired companies and which targets are in which phases of acquisition. (Business-unit leaders are also tasked with keeping this information up to date.) The corporate-development team generates reports, and the head of M&A analyzes the data and tracks progress on deals. The tool enables accountability across all phases of M&A; it is even invoked during executives’ performance reviews.
A clear takeaway from our research is that practice still makes perfect. By building a dedicated M&A function, codifying learnings from past deals, and taking an end-to-end perspective on transactions, businesses can emulate the success of programmatic acquirers—becoming as capable in M&A as they are in sales, R&D, and other disciplines that create outperformance relative to competitors.
For many business owners, a large portion of their net worth is tied up in a single asset: their company. This can be an unsettling situation, especially for those that may not have the time or inclination to ride out the next downturn before seeking a full sale. Increasingly, there are options available to business owners to diversify net worth or add growth without having to sell or give up control.
As frothy M&A markets drive ever higher exit multiples, investors continue to expand into additional segments of a company’s capital structure providing more financing alternatives and flexibility. Private equity funds continue to raise capital and the buyout market is sitting on a record $1.6 trillion of uninvested capital according to Pitchbook. We are experiencing one of the strongest seller’s markets in history. As a result, investors are looking for alternative methods for deploying capital. Traditional PE groups are raising minority equity and yield driven funds. A record $97.2 billion in debt funds were raised in 2017 compared to a low of $17.2 in 2009. Including the $69.6 billion raised in 2018 the estimated amount of alternative debt funding waiting to be invested now totals $208.9 billion according to Pitchbook.
There has always been a market for alternative lending (non-bank financing) but the focus had generally been on turnaround situations. More often we are seeing this source of capital being used to finance healthy, growing companies. General debt and direct lending funds have outpaced distress debt funds in amounts raised, accounting for more than half of total new debt funds. Lenders have expanded from traditional asset based and mezzanine lenders to include more unitranche, 2nd lien, and hybrid equity options. Mezzanine and 2nd lien lenders provide junior capital that is subordinated to traditional bank debt. The lenders work together through a negotiated intercreditor agreement. In some cases, a one-stop solution might make more sense. Unitranche facilities offer a similar ability to borrow more capital than a bank will typically provide with an interest rate that ranges somewhere between bank and subordinated debt, often designed to match the overall blended rate of the two separate facilities. Hybrid solutions include preferred equity securities with financial profiles very similar to alternative debt options.
Uses of Proceeds
Private equity firms are generally willing to have owners retain some ownership after a purchase but typically want majority ownership. While these majority recaps are becoming very common, they don’t help business owners that would like to diversify their holdings but aren’t ready to concede control. This is where the dividend recap comes into play. The company would borrow money from an alternative lender in an amount larger than a bank would provide and use the capital to make a distribution to the business owners. In this scenario, the business owner has achieved some level of diversification without ceding control of the business. This can also be a solution when there are multiple owners that
have different objectives. The active owner can borrow or use minority equity to buy out passive owners.
Alternative lenders are also interested in growth situations, whether through acquisitions or organic growth. In the case of acquisition, the lender will look to the combined earnings and capital structure of the companies post-acquisition to determine how much capital they can provide. We also see situations where a company has unique organic growth opportunities but, without the proper capital in place, won’t be able to take advantage. Alternative lenders have the ability to be more forward-looking than banks. While banks typically base loans on trailing twelve-month financial information, alternative lenders may be able to finance based on new contracts or qualified growth opportunities.
Terms and Structure
In general, alternative lenders are willing to take on more risk than a bank, often lending an additional 1x EBITDA. As a result, they will need to generate higher returns. This comes in the form of higher fees, interest rates, and in some cases equity kickers such as warrants or preferred equity. The trade-off for a borrower is additional flexibility. While the interest rate will be higher, the loan is often amortized over a much longer period and is sometimes interest only. This creates more cash flow to fund operations and growth. In some situations, lenders will offer payment in kind (PIK) options for interest. PIKs reduce the need for cash interest payments, further increasing cash flow.
Alternative lending options are not a fit for all companies. Early stage companies with no track record of earnings or collateral will not meet necessary criteria. As with private equity, the market for alternative lending options gets more efficient for middle market companies. The number of lenders providing capital in amounts less than $10 million is reduced significantly. That said, for companies that do qualify, alternative lending can be a great option for situations where additional capital is needed but owners prefer to minimize dilution and outside control.
Jon Wiley is a Managing Director at The Forbes M+A Group, where he leads the firm’s capital formation practice. He has advised companies in a variety of industries including medical devices, food and beverage, energy, aerospace & defense, and technology. He has also advised numerous specialty lenders in sourcing debt and equity investments including facilities ranging to hundreds of millions of dollars.
What You Need to Know About the Rise of Management Buyouts
A management buyout (MBO) is when a business’s management team purchases the company, usually by relying on both private and external finance. MBO offers a sound alternative to a trade sale. These buyouts have steadily risen over the past few years. Here’s what you need to know about this alluring M&A option.
Management Buyout Statistics
Management buyouts were most prevalent among tech companies last year, constituting 20% of deals. Eleven percent of industrial deals featured management buyouts, compared to 9% in manufacturing. This year’s highest-profile MBOs include Pizza Hut and Holiday Extras.
The Role of Political Uncertainty in Management Buyouts
Political instability undermines M&A activity, but it may have the opposite effect on management buyouts. In Britain, the General Election of 2017 prompted a surge of deal activity, as owners sought to counter risk in the wake of governmental uncertainty. In the U.S., disruption is also figuring prominently in the political landscape. Companies may feel more comfortable handing the reins over to managers, and would-be entrepreneurs may be more interested in buying companies they already know well rather than striking out on their own.
Ample Funding Availability
The availability of significant funding is also a major contributor to the surge in management buyouts. Equity and debt funds, as well as both traditional and challenger banks, are often willing to fund these buyouts. With more competition in the funding space, there’s been a major boost in the number of transactions.
Private equity firms have an abundance of cash on hand, leading to record-breaking funding at the end of 2018. With mounting pressure to put their capital for work, PE has an insatiable appetite for deals, and a tendency toward favorable valuations.
Management buyouts temporarily slowed in the wake of the financial crisis, as business owners delayed their exits in the hopes of bigger future values. Over the last few years, these increases in value have come to fruition. Though political uncertainty remains a factor, there is healthy growth in sales in the UK and the US. When there is more certainty about this process, companies can expect a bonanza in M&A activity, and especially in management buyouts.
An Eye to the Future
2018 was a banner year for management buyouts. Despite a slight downturn in activity this year, deals will likely continue at a healthy pace. As uncertainty remains an issue on both sides of the pond, the appetite for MBO remains healthy. Funding options and conditions will likely remain favorable. Of course, there’s no certainty in future predictions, and the best time to sell may be now.
When private companies are sold, the parties often sign a letter of intent to ensure that they agree to basic terms. Negotiating this document can save time and avoid wasted effort. Here’s what you need to know.
What is Included in a Letter of Intent?
A letter of intent (LOI) typically includes:
- Sale price
- Adjustments to the purchase price based on whether the deal will be cash, seller financed, etc.
- The structure of the transaction
- Timeline for due diligence and negotiations
- Escrow to secure the seller’s obligations and the length of time escrow will last
- A timeline for the period of exclusivity
- Details about access to key records so the buyer can undertake due diligence
- Scope of significant representations and warranties
- How third-party contracts and agreements with employees will be handled
- Each party’s confidentiality obligations
- How disputes will be handled
- Under what circumstances the agreement may be terminated
LOIs can be long or short-form. Longer form are more comprehensive and legally detailed. They hammer out key deal terms well in advance, but demand a lot of upfront effort. Short-form LOIs are easier to negotiate and set general deal terms, but offer less protection against a deal falling through because of a fundamental disagreement over key deal terms.
What Type of LOI is Best?
A long-form LOI is typically best for the seller. This is because once the letter is signed, leverage in negotiations transfers to the buyer. The more terms a seller can iron out ahead of time, the better. Buyers are more likely to offer concessions in a competitive bidding process—before the LOI is signed.
The buyer’s perspective is exactly the opposite. Buyers generally seek a short-form LOI with a long period of exclusivity. In most deals, the parties must ultimately balance these competing demands.
Binding or Non-Binding?
LOIs are not typically binding, or may be binding only for key provisions. In either scenario, the agreement must be clear about what is and is not binding. It’s common for terms such as confidentiality, deal exclusivity period, dispute resolution, and expenses to be binding.
An exclusivity period will be especially important to the buyer, since this gives the buyer time to undertake due diligence without fear that doing so might harm the deal.
Other Deal Terms
In addition to obvious factor like price, the LOI should also spell out other important terms, including:
- Whether stock is part of the deal
- The interest and principal payments associated with any promissory note
- Whether there will be a working capital adjustment
- Whether there will be an earnout, and what its terms will be
- Dates by which key deal steps should be completed
- The specific terms of any planned indemnification agreement
- A full and thorough disclosure schedule
- Conditions to closing
- Agreements about an escrow or closing agent