Here are some of the basic strategies:
- Partner: Seek a strategic partnership to propel growth with expanded resources and/or capabilities.
- Secure Growth Capital: There are a number of sources of growth capital available. Selecting the right one for your business depends on your situation. Three of the most popular methods are: bank debt via a commercial loan at favorable market rates and terms; mezzanine financing through an unsecured loan that typically commands higher interest rates than a bank loan, but has no principle amortization, providing better liquidity; and equity investment, in which an individual or firm exchanges cash for ownership in your company with the anticipation of sharing in the income and growth.
- Acquisition: You should only choose to acquire another company that will be accretive to the value of your business. You can start by developing a checklist of criteria that the acquisition should provide. Some key areas for consideration are adding product lines, distribution channels, capacity, capabilities or geography. Always consider the impact of additional customers.
- Organic Growth: Create new ways to increase revenue by using your existing resources more effectively.
Do I Take Money Off the Table?
There are several options that exist to take money off the table. You can do a recapitalization or “recap” of the business that will reorganize the balance sheet and allow the owner to get money out of the business while maintaining control.
You can also sell all or part of the business. There are several types of buyers who have different advantages and attributes that can be considered:
- Strategic Buyer: A strategic buyer often pays the highest price and has significant synergistic reasons for executing on a transaction. Your company’s capabilities could increase the strategic buyer’s scope in ways you may never imagine, substantially increasing their own value and paying you a lucrative multiple. In today’s market, foreign strategic buyers are paying above market prices as a way to get into the US Market.
- Private Equity: There are also a large number of private equity firms who are active in middle market industries. If your transaction is structured correctly, these firms will purchase a portion of your company (some majority, some minority), allow you to take money off the table, stay involved and share in the growth. This is an appropriate hedging strategy for those who aren’t quite ready to exit, and want to hedge their bets.
What is My Business Worth?
In any of the above scenarios, your investment banker should be able to help you understand the value of your business. Be very careful about the industry rule of thumb: The specifics of your business really impact its value.
It’s important for you to understand the value that an investor sees in your company. If the purchaser is strategic, then you need to know how your business will impact the value of their business to obtain the highest valuation.
Don’t assume that an industry average multiple is the right valuation metric for your business. This is particularly poignant for commercial integrators. The marketplace places different value on cash flows associated with project-oriented businesses than those that result from recurring revenue streams (such as managed services). Integrators whose business isa hybrid should take that into account particularly when allocating investment dollars to their business.
Fred D’Alessandro, CEO of New Jersey-based technology integrator Diversified, has been focused on growing the business for many years.
“You can never get comfortable in business” says Fred, “when it comes to creating, building, and maintaining corporate value, it’s essential to keep your eye on the evolving needs of your customer; ensure that you have the skills and expertise to meet and exceed those needs; and maintain focus on delivering outstanding customer service.”
In 2016, Diversified implemented an M&A strategy raising capital to meet customer demands. They subsequently acquired two commercial integrators, Atlanta-based Technical Innovation and New Jersey-based The Systems Group that complemented Diversified’s geography and portfolio of services.
Fred continued saying, “It’s critically important to know who you are and where you can become better so our recent acquisitions of TI and TSG not only makes our business stronger but adds value for our customers and employees alike. Having access to capital brings opportunity and offers many options for us now and in the future.”
All in all, acquisitions and divestitures represent great opportunities for middle market businesses to take advantage of the changing market. With sound advice, good planning and a strategic approach, you can review a number of options to determine which is best for your business.
Selling your own company—or buying someone else’s—is not a task you want to take on without the assistance of experts that understand the steps, can navigate the process and bring value to whichever side of the table you end up on.
Therefore, we recommend consulting with experienced professionals, including investment bankers, attorneys and accountants who can help guide you through the process.
Ari Fuchs is a director with The DAK Group, an investment banking firm specializing in the middle-market. With over a decade of experience as a corporate finance professional, Ari has been involved in dozens of sales, divestitures, private placements and recapitalization transactions for mid-market and founder-owned businesses. Ari is part of the DAK team of professionals that has originated and executed more than 600 transactions. More information and downloadable business tools are available at www.dakgroup.com.
