Most investors are aware of the intricacies of equity and building value when it comes to publicly-traded companies, however few can offer advice for private companies. When developing a plan for your private company, you should consider how your plan could help your company grow to reach your long-term financial goals. Here are a few tips that can help build value in a private company:
1. Consider your Target Net Proceeds
If selling your company is important in the future, be sure to focus on EBITDA. Although revenue is important, if you are looking to sell, buyers often focus on your earnings. Streamlining your business, improving your margins and increasing earnings is always more important than growing your sales without the corresponding profitability.
2. Diversify
In any company, risks can threaten the success and valuation of a business. One of the most common risks a private company faces is becoming dependent and reliant on one customer, vendor, or product type. In order to avoid this risk, companies must diversify.
By diversifying your business, it reduces risk and sets your company up in the long run. If one vendor goes out of business, your company can continue to operate without having a major impact on your success. Similarly, diversifying can provide your business with additional bargaining power.
To still receive a premium valuation when selling a company, top customers should be less than 15-20% of total revenues.
3. Understand the Quality of Earnings
When looking at a company’s revenue and cash flow, it is important to have some consistency in your business. Creating a source of recurring revenue is a good way to ensure a high quality of earnings and helps you to evaluate your cash flow and potential earnings.
Similarly, buyers analyze predictability of revenues and profits in order to assess the value of a company.
Whether you are looking to sell your business today or decades down the road, building your business to sell will help you create value and ultimately, wealth.
Symmetrical works with privately held, mid-market companies, representing both buyers and sellers. Acting as a trusted advisor, we often help business owners and executives implement strategic changes that add value to their company. For more information on how your business could build value, please contact us at info@sym-inv.com.
When examining what makes high-growth companies so successful, we frequently refer to one of the largest and most rigorous performance benchmarking studies ever prepared on the middle market, “The Market That Moves America” performed by The National Center for the Middle Market, Ohio State University in March 2011, which measured 2,048 US businesses.
Taking this a step further, The National Center for the Middle Market released its Blueprint for Growth: Middle Market Growth Champions Reveal a Framework for Success, produced in collaboration with Fisher College of Business and GE Capital, in 2012.
Blueprint for Growth explored: which forces enable one company to succeed and surpass another? And how are these forces managed? These questions can be particularly hard to answer for Middle Market firms that are facing special issues, such as a lower number of resources compared to larger companies.
Rather than company size, industry type, ownership structure or location being the pivotal factor, Blueprint for Growth clearly identifies six qualities that growth firms tend to strongly reflect:
1. A formal growth strategy process. These exceptional companies will set strategic goals on an annual basis, communicate these goals internally, and then carefully track their progress.
2. Focus on innovation. Growth companies seek out and invest in products and services that help them succeed.
3. Exceptional talent management. Not only do growth companies have the recruiting power to attract top talent, they reward their employees as well.
4. Sharper customer focus. Growth companies are more successful in attracting new customers, and retaining and strengthening the ones they have in place.
5. Strong management culture. Operating efficiently and withstanding external challenges are well within the operating team’s capabilities.
6. A broader geographic vision. Rather than focusing locally and regionally, growth companies look globally.
The Six Qualities for Growth are not only for the high-growth firms; marginal growers can also adopt these qualities and rise incrementally. CEOs and senior executives across various industries can reflect upon their firm’s capabilities in each of the six growth areas:
1. How well do you set growth targets, and also communicate these internally and then track progress?
2. Do you allocate and protect funding for innovation? How could you improve innovation and new ideas at your company?
3. How can you better position your company against competitors to gain top talent?
4. How can your company increase its ability to bring on new clients?
5. How do the leadership skills of your management team meet today’s global challenges?
6. Do you look at markets outside your region for opportunity?
Focusing on the Six Qualities for Growth is a good place to start, when it comes to growing your company. Even incremental steps in a few of the growth areas can pay off and make a substantial difference.
For more information on the study, please visit the National Center for the Middle Market.
Every year billions of dollars in mergers and acquisitions take place. 2015 was the biggest year ever for mergers and acquisitions to date and 2016 has already seen seven “megadeals”, or deals greater than $1 billion. While most deals are fractions of this size, they can reveal insights about the mid-market level.
The number of megadeals is on the rise – the first quarter of 2016 alone saw some of the largest M&A deals in the past few years. This is telling of the mid-market sector too, as deals in this space continue to grow in number. At the mid-market level, dealmakers also expect to increase their number of acquisitions in 2016, which we saw happening late last year as market volume picked up in the final months of 2015.
For large deals, healthcare and technology vied for the No. 1 sector, which jives with the mid-market, as these two industries as especially active when it comes to consolidation and M&A activity.
Deals both mega and mid-size happened when the company for sale was positioned properly. Using strategic advisors was critical in ensuring the deal’s terms were agreeable to both parties. The use of accountants, lawyers, financial advisors, M&A consultants, and other experts was consistent for deals both large and small.
Without further ado, here is a roundup of the top megadeals so far in 2016:
1. $32 Billion Shire plc mergers with Baxalta Incorporated
In early January, the board of directors from Shire plc and Baxalta Incorporated agreed to merge the two companies. This merge marks the creation of the global leader in rare diseases and projects that the company will earn over $20 billion in annual revenues by 2020.
2. $15 Billion Apollo acquisition of ADT Corp
After much negotiation, ADT has agreed to sell to Apollo. With the acquisition, Apollo plans to then merge ADT with Protection 1 and ASG Security to create a company with annual revenue greater than $4.2 billion.
3. $10.2 Billion TransCanada acquisition of Columbia Pipeline Group
In March, TransCanada announced a natural gas acquisition of Columbia Pipeline Group for $13 billion. The all cash deal makes the Canadian company one of the largest distributors of natural gas in the northeastern United States.
4. $11.3 Billion Fortis acquisition of ITC Holdings
In February, Canada’s Fortis announced the acquisition of ITC Holdings, a U.S. based electricity-transmission company, for $11.3 billion. In the deal Fortis plans to retain all ITC employees and Fortis will continue to operate as a stand-alone company.
5. $6 Billion Virginia’s Dominion acquisition of Questar
In February, Virginia-based Dominion Resources acquired Questar Corp. to make one utility giant. The combined entity will serve 2.5 million electric customers and 2.3 million gas customers from Virginia to Utah.
6. $3.8 Billion Comcast acquires DreamWorks Animation
In April, Philadelphia-based Comcast proposed to acquire DreamWorks Animation studio. Comcast plans to make DreamWorks part of the Universal Filmed Entertainment Group and sees this acquisition as an opportunity to expand the company.
While you may not be working on the next megadeal, Symmetrical provides a full range of services to middle market companies, and is here to advise you whether you are thinking about selling your company, buying another, or simply need to see more opportunities for your fund or family office.
Transaction Structuring
When contemplating any kind of merger or acquisition, it is important to consider what type of transaction you will move forward with. In order for a deal to be considered successful, it must be mutually beneficial for both the Buyer and the Seller.
In today’s market, there are three common structures used in the sale of these sale businesses – asset purchases, stock purchases, and mergers.
1. Asset Purchase
An Asset Purchase is a structure in which a Buyer purchases assets of a business from a Seller. This deal is structured around an Asset Purchase Agreement, and consists of the Buyer and Seller agreeing upon what each party will gain.
This type of structure is a preferred method, as the Buyer does not have to assume all liability from the Seller. Rather, the Buyer has the ability to choose what aspects of the company it wants.
Some of the disadvantages to this structure are in the amount of contracts and agreements. Because both parties will end up with an aspect of the whole, there are a number of supplemental agreements that must be executed in order to transfer to the customer and/or vendor contracts.
2. Stock Purchase
A Stock Purchase is a structure in which a Buyer purchases all of the equity in a company. In this type of transaction, once the deal is complete the Seller is no longer involved in the company. Although the name of the company, the employees, and basic business principles remain the same, the ownership is in different hands.
This type of structure has both advantages and disadvantages to the Buyer and Seller. This type of structure is often praised for how quickly and easily it can be completed. By having the Buyer purchase the Stock it avoids having to transfer titles and contracts and keeps a third party consent out of the deal.
Although this structure has its advantages, there are drawbacks for the Buyer. In this type of structure the Buyer is assuming all liabilities from the Seller, both current and past liabilities since the formation of the entity. The Buyer is also not able to negotiate specific assets of the business it does not want nor does it gain the ability to begin with a new depreciation schedule.
3. Merger
The last type of transaction structure is a merger. A merger is when two companies combine to form one entity. This deal structure works when one company agrees to buy another companies shares or assets and then the two combine to form a “new” company.
This merger is often regarded as the smoothest for both the Buyer and Seller. All contracts and liabilities are passed to the new entity without much negotiation.
The disadvantages to a Merger, however, are that both companies can put the sale at risk depending upon shareholder disapproval. In some instances, the shareholders for a large enough block and vote against the merger.
Selecting the best transaction structure for and effective Merger and Acquisition transaction is critical to a company’s success. When choosing between an Asset Purchase, Stock Purchase or Merger, both parties must consider the legal, tax, and business factors will be advantageous to achieving their goals.
To learn more about these transaction structures and keep up with our latest news, follow Symmetrical Investments on Facebook and LinkedIn.
In the simplest terms, working capital can be defined as current assets less current liabilities but ultimately it is the amount of operating liquidity or cash available to a business at a given point in time. Working capital is an essential part of the day to day operations of a business and is just as important as employees and physical assets.
When selling a business the buyer will often require a normalized level of working capital so that the business can continue operating seamlessly and fulfill obligations to customers and creditors post-acquisition.
In a merger or acquisition, one of the most difficult parts of the transaction is often negotiating the amount of working capital that remains with the original business. Naturally this can be an emotional topic for the seller, and should be taken care of as early as possible. In nearly all transactions there will be some form of working capital adjustment as part of the purchase price agreement. A mergers and acquisitions advisor is instrumental in getting both parties to agree on the way working capital will be calculated, making for a much smoother transaction.
What is considered in a working capital adjustment?
Advisors will begin by looking at the selling company’s current assets over current liabilities on a monthly basis. Typically this process will start with the current month and go backwards over the most recent twelve trailing months but could go back as far as the past thirty-six months. It will be critical to understand the accounts receivables and how quickly the company collects revenue (and if all of this A/R will actually come in). It is also imperative to understand the current liabilities and the relationships associated with these debts. Advisors will keep in mind the type of business, industry, demand, market changes, competition, seasonality, and more.
How does this affect the sale price?
We can best illustrate this using a hypothetical example. For instance, a transaction may have a purchase price of $25M based on the seller including $4M of working capital at closing. The purchase price would depend upon the final amount of working capital provided by the seller. If the seller delivers only $3M of working capital, instead of the original $4M, the purchase price would be adjusted down to $24M. Similarly, if there was $5M of working capital at closing, the transaction would increase to $26M or the seller would be allowed to remove $1M of assets from the business and retain the $25M transaction value. Note: sometimes buyers and sellers will agree to a range or band and if the working capital falls within this range, there is no adjustment. Using the same example above, if the Working Capital came in within $1M of the $4M Working Capital Target (in either direction), there would be no adjustment.
Working capital is involved in every merger or acquisition transaction. It is vital to have a trustworthy advisor working on your behalf. Armed with decades of knowledge and your best interest at heart, the right advisory can ensure you walk away satisfied with your deal.