Calling all business owners who need an exit strategy

    If you are even vaguely thinking about buying or selling a company in the next five years, you owe it to yourself to attend the “BizTimes M&A Forum: Buy? Sell? Hold?” at the Pfister Hotel, 424 E. Wisconsin Ave., Milwaukee, on Wednesday, May 19.

    The seminar will be held from 7:30 to 11 a.m. For additional information, visit

    The Great Recession took a significant toll on the mergers and acquisitions market. Many businesses that could have been sold for a significant gain during the frenzied M&A market of 2005 through early 2008 have since seen significant losses and decreased profits. Many private equity firms that had gone on shopping sprees earlier this decade saw their portfolio companies taking losses, making it difficult to re-sell them at a profit. And commercial banks, which helped fuel the buyout boom, significantly clamped down or even stopped new lending in light of their own losses and increased government scrutiny.

    However, the marketplace has improved greatly since the beginning of the year.

    The M&A Forum will include breakout sessions featuring experts from Reinhart Boerner Van Deuren Attorneys at Law and Northern Trust Bank.

    The sessions will include:
    Part 1 – Long-range planning from an estate planning perspective. The questions answered in this session will include: Defining goals for business succession and transferring wealth effectively – what will your legacy be? How to minimize estate taxes, safeguard your lifestyle and control your business for as long as necessary to achieve your goals. What are the planning strategies business owners can use to reduce income taxes on the business sale? What strategies can owners use to transfer their business to heirs?
    Part 2 – Long-range planning – How to position the company for greater value. The topics covered will include: How is a business valued? What are the strategies business owners use to increase value? Management retention strategies. Building the management team. Intellectual property.
    Part 3 – The deal itself. Topics covered will include: What is the role of the investment banker and how to engage one? What does it cost? What’s an auction and is there more than on type?  What are the advantages and disadvantages of an auction? How do financial vs. strategic vs. synergistic buyers differ in approach? Should I sell to management? What are the current trends?   What do the other professionals do? Accountants; lawyers; other consultants. What if you’re approached by a buyer, what do you do? The role of due diligence – how to enhance and retain value. Telling the business story – making the buyer eager to buy. What is a recapitalization?  Selling only part of the business.

    The keynote speaker of the BizTimes M&A Forum will be Mark Herndon, president of Dallas-based Parkwood Advisors LLC, a financial services firm specializing in mergers and acquisitions, investment banking and private equity financing. I recently interviewed Herndon about the new M&A marketplace. The following are excerpts from that conversation.

    BizTimes Milwaukee: Has the window re-opened for business owners that want to begin the sale process who may feel they missed out with the height of the market in 2007 and 2008?
    Herndon: “Within the last 60 days, the general business conversation that I am hearing from business owners as well as intermediaries and service providers is that they have all experienced a noticeable uptick in both activity, interest in transactions and confidence. That is heavily qualified by the fact that the deal recovery and the ability to get the desirable valuations and the desirable deal structures will act somewhat like a jobless recovery. No one expects a fast bounce back in employment. And likewise, none of the deal market advisors expect a fast bounce back in terms of valuation or the widespread availability of credit like there was pre-crash. But there are very encouraging signs of progress.”

    BizTimes: What is the first step that these business owners should take when they are beginning to craft an exit strategy?
    Herndon: “A business owner that I met in September of 2008 told me that he had been contemplating the sale of the business but had not really crafted a viable exit strategy. As we watched the capital markets crater and the financial markets crater, the business owner said, ‘When I started thinking about selling my business, it was already too late.’ That’s a perspective I hear a lot. Owners who are serious about reaping the rewards of their lifetime of hard work need to start now. It’s never too soon to start planning an exit strategy. As we come out of this and get into the next 12 to 36 months, I think we’re going to see a lot of deal activity because of pent up demand and people anticipating the ability to make a transaction. You don’t want to miss out on those opportunities to find the ideal partner, so starting early is the key.”

    BizTimes: What about valuation and pricing? How has the recession changed what business owners can expect to receive for their companies?
    Herndon: “By and large, valuations have declined. (A valuation) number is a moving target that changes quarter to quarter and annualized and industry to industry, but at a big picture level, count on 1.5 to 2 times less in terms of your EBITDA multiple as of the end of 2009 from prior.”

    BizTimes: Are deals being put together differently today than they were previously?
    Herndon: “Not only are the valuations going down, but the structures of the deals have changed.
    Buyers will need to be prepared to put more equity in deals and rely less on commercially available credit of any kind. Almost all small market and lower mid market, Main Street type businesses, have some type of seller financing included. It’s typically interest bearing debt, but it is typically subordinated to a variety of things – maybe even the performance of the business and not just other debt in the deal. Earn outs have been used for a long time and are fairly common in the lower end of the middle market. It basically says, ‘We know we’re not able to do a deal for the ultimate value of the enterprise based on the circumstances right now. But if you’ll stay in the saddle and help to grow the business, there will some additional earnings opportunities for you over a one to three year time frame.'”

    BizTimes: In terms of financing, are banks willing to back buyouts in the same manner that they were in 2007 and 2008?
    Herndon: “I would say that banks have acted just like private equity buyers and in some cases strategic buyers, in that there is a major flight to quality. At the Main Street level, at the lower mid market and particularly anywhere there is distress in a company or unstable earnings or a challenging balance sheet, I would say that the credit availability is still not there, except perhaps with regard to some of the alternative financing sources. Private equity buyers have stepped in to do more debt deals, mezzanine lending is back – so you’re going to end up paying a much higher rate probably with some warrants but using your sub debt or mezzanine level for a substitute for your senior lending and just relying on equity and your sub debt or mezzanine along with whatever seller’s note and earn-out will be involved in the structure. We’re still not at a position where I can confidently say that debt capital is widely available in the lower end of the market, yet.”


    Eric Decker is a reporter at BizTimes Milwaukee.

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