Selling a Business – Category Posts from The Forbes M+A Group. Research via our Knowledge Base and get access to M&A articles, news, and other info.

Alternative Lending: Non-Dilutive Growth Capital

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 WileyJon Wiley

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.

Jon.Wiley@forbesma.com

The Sale of a Business May Actually Excite Employees

Many sellers worry that employees might “hit the panic button” when they learn that a business is up for sale.  Yet, in a recent article from mergers and acquisitions specialist Barbara Taylor entitled, “Selling Your Business?  3 Reasons Why Your Employees Will Be Thrilled,” Taylor brings up some thought-provoking points on why employees might actually be glad to hear this news.  Let’s take a closer look at the three reasons that Taylor believes employees might actually be pretty excited by the prospect of a sale.

Taylor is 100% correct in her assertion that employees may indeed get nervous when they hear that a business is up for sale.  She recounts her own experience selling a business in which she was concerned that her employees might “pack up their bags and leave once we (the owners) had permanently left the building.”  As it turns out, this wasn’t the case, as the employees did in fact stay on after the sale.

Interestingly, Taylor points to something of a paradox.  While employees may sometimes worry that a new owner will “come in and fire everyone” the opposite is usually the case.  Usually, the new owner is worried that everyone will quit and tries to ensure the opposite outcome.

Here Taylor brings up an excellent point for business owners to relay to their employees.  A new owner will likely mean enhanced job security, as the new owner is truly dependent on the expertise, know-how and experience that the current employees bring to the table.

A second reason that employees may be excited with the prospect of a new owner is their potential career advancement.  The size of your business will, to an extent, dictate the opportunities for advancement.  However, if a larger entity buys your business then it is suddenly possible for your employees to have a range of new career advancement opportunities.  As Taylor points out, if your business goes from a “mom and pop operation” to a mid-sized company overnight, then your employees will suddenly have new opportunities before them.

Finally, selling a business could mean “new growth, energy and ideas.”  Taylor discusses how she had worked with a 72-year-old business owner that was exhausted and simply didn’t have the energy to run the business.  This business owner felt that a new owner would bring new ideas and new energy and, as a result, the option for new growth.

There is no way around it, Taylor’s article definitely provides ample food for thought.  It underscores the fact that how information is presented is critical.  It is not prudent to assume that your employees may panic if you sell your business.  The simple fact is that if you provide them with the right information, your employees may see a wealth of opportunity in the sale of your business.

Copyright: Business Brokerage Press, Inc.

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Evaluating Your Company’s Weaknesses

The time you spend evaluating your company’s weaknesses is, as it turns out, one of the single best investments you can hope to make.  No one should understand your company better than you.  But to fully understand your company, it is essential that you invest the time to understand your company’s various strengths and weakness.

Your company, from the beginning, has been an investment.  It’s an investment in your time, your mental energy and, of course, your financial resources.  The time and effort you expend to locate, understand and then fix your businesses’ weaknesses is time very well spent.  Addressing and remedying your businesses’ weakness will not only pay dividends in the here and now, but will also help get your business ready to sell.  Let’s turn our attention to some of the key areas of weakness that can cause some buyers to look elsewhere.

An Industry in Decline

A declining market can serve as a major red flag for buyers.  You as a businessowner must be savvy enough to understand market situations and respond accordingly.

If you spot a troubling trend and realize that a major source of your revenue is declining or will decline, then you must branch out in new directions, offer new goods and/or services, find new customers and also find new ways to get your existing customers to buy more.  Taking these steps shows that your business is a vibrant and dynamic one.

You Face an Aging Workforce

It has been well publicized that young people, for example, are not entering the trades.  Many trades such as tool and die makers will be left with a substantial shortage of skilled workers as a result.  No doubt, technology will replace some, but not all, of these workers.

This is an example of how an aging workforce can impact the health and stability of a business.  If your business potentially relies upon an aging workforce then it is essential that you find a way to address this issue long before you put your business up for sale.

You Only Have, or Primarily Rely Upon a Single Product

Being a “one-trick pony” is never a good thing, even if that trick is exceptionally good.  Diversification increases the chances of stability and can even help you find new customers.  Additional goods and services allow you to weather unexpected storms such as a supply chain disruption while at the same time provide access to new customers and thus new revenue.

The Factor of Customer Concentration

Many buyers are concerned about customer concentration.  If your business has only one or two customers, then your business is highly vulnerable and almost every prospective buyer will realize this fact.  While it is an investment to find new customers, it is well worth the time and money.

A business broker can help you evaluate your company and, in the process, address its weaknesses.  Remedying your businesses weakness before you put your business up for sale and you will be rewarded.

Copyright: Business Brokerage Press, Inc.

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Successful Colorado Companies to Watch Alumni Event

Greenwood Village, CO, United States (May 22, 2018) – The Forbes M+A Group, a CCTW ambassador and sponsor, is pleased to announce another successful Colorado Companies to Watch event.

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Tactics for Maximizing Business Value Ahead of a Sale

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Axial’s recent article “Maximizing Your Business Value Before a Sale” gives insight into how to get the most out of a business sale. According to the article, the key to a successful sale comes in driving business value before selling the business. 

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Preparing Your Business for Sale? You Better Follow these Rules

The best way to generate the highest possible value for your business is to prepare for a sale long before the fact. BizJournal recently published “Top 5 rules on preparing your company for sale”, which encourages business owners to begin to plan for their sale beginning now. The article focuses on the following ‘rules’: 

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Winter 2017/2018: The Forbes M&A Group Newsletter

The Forbes M&A Group recently released its Winter newsletter for business owners looking to learn more about merger and acquisition transactions. This 8-page newsletter includes valuable information for executives wanting to learn more about selling a company, growing through acquisitions or buying a company. The original articles, written by our own team of experienced M&A executives and entrepreneurs, include:

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How to Improve the Value of Your Company

The first way is to have your accountant take a look at your accounting procedures and make recommendations on how to improve them.  He or she may also help in preparing financial projections for the coming year(s).  Getting your company’s financial house in order is very important in establishing the value of your firm.

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Q3 2017: The Forbes M&A Group Newsletter

The Forbes M&A Group recently developed its inaugural newsletter for business owners looking to learn more about merger and acquisition transactions. This 8-page newsletter includes valuable information for executives wanting to learn more about selling a company, growing through acquisitions or buying a company. The original articles written by our own team of experienced M&A executives and entrepreneurs include:

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Colorado Companies to Watch 2017

by The Forbes M+A Group

The Forbes M+A Group was proud to be a Platinum Sponsor for Colorado Companies to Watch 2017. As entrepreneurs ourselves, we understand the perseverance and creativity it takes to create and sustain a thriving, successful business. We sincerely congratulate all of this year’s winners. Read the full press release. 

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