Mergermarket

SDR’s Jodi Burrows Featured in Article Examining Mars’ Acquisition of Pet Company VCA

In a recent Mergermarket article, author Jeff Sheban outlined the significance of Mars’ $8.8 billion acquisition of the veterinary and dog day-care company VCA Inc. (NASDAQ:WOOF). Sheban cited information from SDR Ventures’ VP Jodi Burrows, including the fact that Mars’ pet care lines are growing faster than its gum and candy business. Prior to this transaction, Brussels-based Mars Global Petcare already owned food brands Iams, Pedigree and Whiskas, and veterinary services Banfield Pet Hospital, BluePearl and Pet Partners. According to the article, VCA has nearly 800 animal hospitals in North America and 137 Camp Bow Wow day care locations in the U.S.

SDR’s Burrows expects VCA to remain acquisitive; she notes in the article that the company grew through numerous roll-ups from a single location in Los Angeles in 1986 to its current stronghold. Nevertheless, Mars and VCA face competition in the luxury daycare services segment, namely from Phoenix-based Dogtopia. In 2017, Dogtopia plans to add 40 franchised locations to its current set of 44 locations. Florida-based Pet Paradise and Day Spa received a recent investment and also may pose a competitive threat.

At the end of the day, the pet space is experiencing plenty of activity and investment, which Burrows attributes to the “humanization of pets” trend. As she states in the article, “People are treating their pets like children, spending money on them, and making sure their pets are happy.” Mars’ recent acquisition may have brought some high-profile exposure to the pet industry, but this space has been active for some time now, and should remain that way going forward.

Mergermarket is a subscription-based media company specializing in corporate financial news and analysis. Users with access can read Sheban’s full article, “Dealspeak: Mars’ dogged pursuit of VCA,” by clicking here.

To read SDR’s latest pet industry quarterly report, please click here.

Archive

Food Dive

Several Factors Point to 2017 Food and Beverage M&A Bounce-Back

In a recent Food Dive feature article, author Carolyn Heneghan sought perspective from SDR Ventures’ Food and Beverage Director Ben Rudman and Mergermarket’s Deputy Editor Anthony Valentino to help paint the landscape for future food and beverage M&A activity.

As SDR’s Ben Rudman pointed out in the article, “sometimes the factors that drive M&A are not necessarily the typical capital market factors that you might think about.” Heneghan outlined some primary factors that will likely drive more M&A activity in the space, including consumer demand and innovation, the supply of acquisition targets and the political climate.

One of the main drivers of food and beverage M&A has become, and will likely continue to be, the contrast between the established, and generally slower-to-evolve brands that populate the center of grocery stores and the newer, innovative brands that populate the perimeter of stores. As Valentino points out, the perimeter brands “have the brand loyalty, and they can grow quickly.” Consumer demand is fueling these companies, and Rudman cites plant-based ingredients as healthy alternatives that have been around for 20 years, but just now are catching on with consumers since they finally provide great taste in addition to health benefits.

At the end of the day, the center-of-store brands are left seeking the high growth and customer loyalty that many perimeter brands are attaining, but their options are limited: they either can invest in internal research and development (R&D) or try to acquire perimeter brands. Many are opting for the latter, and as Heneghan pointed out, “many larger manufacturers have launched dedicated venture capital arms to set aside funds and invest in potential acquisition targets.”

Although food and beverage innovation is accelerating and there is bevy of motivated large acquirers, innovative companies still need to be willing to sell their companies to major corporations, and many startup founders simply are not. But Rudman asserted that baby boomers, who own numerous food and beverage businesses, ultimately will factor into M&A activity as they get later in their retirement windows and seek exits from their businesses.

Finally, the political climate over the past year-plus was likely a deterrent on food and beverage M&A. Even though, as Valentino stated, “the effect (of the election) on food businesses is muted (compared to other industries),” many business owners seemed to be waiting out the uncertainty before heading to market. With the U.S. election now in the rear-view mirror, Rudman concluded, “2017 could bring a pretty robust Q1 and Q2” for food and beverage M&A.

To read Heneghan’s full article on Food Dive, please click here.

Stay up to date on the latest food and beverage trends and M&A activity with SDR’s quarterly food and beverage reports.

Food Dive

SDR’s Q3 Food & Beverage Report Featured in Food Dive Article

SDR Ventures’ Q3 2016 Food & Beverage Report, which outlines the industry’s latest M&A data and trend information, has been featured in Food Dive, an online food publication.

The article in Food Dive, by Carolyn Heneghan, titled “What M&A Trends say About the Future of Food and Beverage,” highlights some of the main insights from SDR’s Q3 report and reveals how and why the industry is evolving.

SDR’s Q3 report states that private equity will remain a major player in food and beverage M&A but that this group of investors likely will invest in more mature, consolidated segments where they may be more competitive against major manufacturers.

Q3 also showed more investment interest in categories such as sauces and seasonings, grains and baked foods and coffee. Categories to watch for in the future include energy drinks and food and agricultural inputs, which include natural flavors.

Heneghan states, “New product development and reformulations have played a role in boosting top-line performances, but more manufacturers recognize the potential that acquisitions and venture capital investments offer.” She goes on to state, “This has led to the rapid adoption of dedicated VC arms among a wide range of major manufacturers, which could lead to increased M&A activity in the future.”

To read the entire Food Dive article, please click here.
To read SDR’s Q3 2016 Food & Beverage Report, please click here.

CNBC.com

Start-Ups that Took the Slow Road to Making Millions

By Maggie Overfelt, special to CNBC.com

Article Excerpt

The market has come down from a venture capital-funding manic high. The year of the billion-dollar-plus valuation in 2015 has given way to the lowest VC funding in two years in the third quarter 2016, according to CM Insights and KPMG. Still, start-up founders are advised to pursue growth at any cost.

“Everyone has Andreessen Horowitz-itis – if you’re $5 million in revenue now, you have to be $25 million in the next three years and have to sell,” said Ben Rudman, director at M&A advisory firm SDR Ventures in Denver.

But some companies have spurned the “grow or die” mantra…

To read Overfelt’s full article on CNBC.com, please click here.

The Denver Post | Business

The Pros and Cons of Convertible Debt

Gary Miller - Sell your businessBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

In recent years, convertible debt has become a common financing vehicle used by entrepreneurs to fund early stage companies, particularly tech startups. Convertible debt wasn’t always this popular, and there are more pros and cons (and complexities) to convertible debt than most entrepreneurs know. While this column is insufficient to discuss the many details and nuances of convertible debt, here’s a quick overview of the upsides and downsides of convertible debt, and what other alternatives might exist for your company.

Convertible debt is a hybrid: part debt and part equity.  It functions as debt until some point in the future when it may convert to equity with some predefined terms.

Convertible debt generally has the following principal terms:

  • Interest and payments: A relatively low interest rate (generally 6 to 9 percent). Typically, interest accrues “in kind” (meaning that the interest grows the principal and is not paid in cash) until the maturity date or conversion into equity.
  • Term: Generally as short as six months or as long as two years maturity, but commonly in the 12-18 month range. For the entrepreneur, longer is better because financing always takes longer than you expect.
  • Conversion into equity: Generally it converts during  future equity financing.  The event that “triggers” this conversion typically is called a “Qualified Equity Financing”, and is specified in the convertible note documents.
  • Discount and cap: Since the holders of the convertible debt took an early bet on your company, typically they receive two principal benefits in relation to the investor who negotiates a later equity financing with you — the discount and the cap. The discount is the rate at which convertible debt converts into equity at a lower price per share than the equity investors who are purchasing shares. The cap is a promise that you won’t use the investor’s money to grow the valuation so amazingly high that the discount doesn’t adequately compensate him or her for their high risk, early bet on your company. The cap is negotiated at the highest valuation at which the loan may be converted.

Convertible debt has its upsides. It is widely known to investors and accepted by them. It is easy and quick to negotiate — the only major terms are the interest rate, discount and cap. A convertible debt transaction is quicker and less complicated than stock offerings. It also has lower transaction costs. An experienced transaction/securities lawyer that works with startups or early stage companies on financing transactions has standard convertible debt documents, so there’s a good chance the transaction will cost you less than $5,000 in legal fees. Compare that with attorney’s fees for a typical venture capital preferred-stock deal that could run $15,000-40,000 — or more.

And there are some cons. You can easily end up with many early investors, since you’re often receiving relatively small checks from angel investors. If this is the case, it can be administratively messy when you bring in an equity investor who sets the conversion terms for all of those early folks.

If it doesn’t convert, the company must pay the money back at maturity, just like any other loan.  And the maturity date may be uncomfortably short.

One early stage tech company (for which I provided consulting services) that has had success with convertible notes is TekDry International. In the competitive Front Range startup market, TekDry founder and CEO Adam Cookson said investors seemed to prefer the convertible note “after they determined we had priced it fairly, and that we were the right team to be successful.” TekDry now is engaged in a major expansion with Staples throughout the country.

What about other possible funding options?

  • A SAFE. This acronym stands for “Simple Agreement for Future Equity.” The investor buys the right to buy stock in an equity round when it occurs. It can have a valuation cap, or not, just like a convertible note.  But the investor is buying something that’s more like a warrant, so there’s no need to decide on an interest rate or fix a term.
  • Venture capital financing. Unless you’re Elon Musk, it’s virtually impossible to interest VCs in a Series A round before you can demonstrate significant commercial traction.  Even with such traction, be aware that VCs fund only a small percentage of startups or early stage companies.
  • Revenue-based financing. This can be an easy and cost-effective way to grow your business that enables the founders to retain their control and equity position. The key is that you must have revenue to qualify for such financing, since revenue-based lenders get repaid from a percentage your revenue stream — like a royalty.
  • Bank loan. Sadly, banks don’t like to lend to newer businesses that lack significant hard assets and profits.

Be aware of what you’re getting into when you plan out the funding path for your company. My advice to entrepreneurs is to always engage an experienced transaction/securities attorney and pay close attention to the terms and details.

Gary Miller is the Managing Director of SDR Ventures Inc.’s Consulting Division, where he helps middle-market private business owners prepare to raise capital, sell their businesses or buy companies, and helps them develop strategic business plans. He is a sought-after business consultant and speaker on M&A and capital market trends, what buyers are looking for in acquisitions and due diligence. He can be reached at 970-390-4441 or gmiller@sdrventures.com.

To see Gary’s full article via The Denver Post Business, click here.

The Denver Post | Business

When to Make the First Offer in Negotiations

Going First — Whether Buying or Selling — Helps Tip the Scale in Your Favor

Gary Miller - Sell your businessBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

I often receive inquiries from owners who are negotiating to buy or sell a business who wonder if they should make the first offer or wait to receive an offer. Conventional negotiating wisdom says that it’s better to wait.

But you may be better off making the first offer yourself.

By sitting back and receiving the opening offer, the argument goes, you’ll gain valuable information about your opponent’s bargaining position and clues about acceptable terms. This advice makes intuitive sense, but it fails to account for the powerful effect that first offers often have on the way people think about the negotiation process. Substantial psychological research suggests that, more often than not, negotiators who make first offers come out ahead.

The Dramatic Effect of Anchors

Research into human judgment has shown that how we perceive the value of an offer is influenced by each relevant number that enters the negotiation process. Because they pull judgments toward themselves, these numerical values are known as anchors. In situations of ambiguity and uncertainty, first offers can have a strong “anchoring effect” and can exert a strong pull throughout the rest of the negotiations. Even when people know logically that a particular anchor should not influence their judgments, often they are incapable of avoiding its influence.  But why?

The answer lies in the fact that every material item under negotiation in a business transaction has both positive and negative qualities — qualities that suggest a higher price and qualities that suggest a lower price. High anchors selectively direct our attention toward an item’s positive attributes while low anchors direct our attention to its flaws. Hence, a high market price directs a buyer’s attention to the company’s positive attributes (such as its strong earnings and profit) while pushing negative attributes (such as a high employee turnover) to the recesses of their minds.

Anchoring research suggests that making the first offer often results in a bargaining advantage. Specifically, when a seller makes the first offer, the final transaction price tends to be higher than when the buyer makes the first offer.

When Not to Make the First Offer

There is one situation in which making the first offer may not be to your advantage: when the other side has much more information than you do about the transaction to be negotiated. For example, recruiters and employers typically have more compensation-related information than job candidates do.  Likewise, buyers and sellers represented by investment bankers often are privy to more information than are unrepresented buyers and sellers.

This doesn’t mean that in all cases you should sit back and let the other side make the first offer. Rather, this is an opportunity to level the playing field by gathering more information about the business, the industry and your opponent’s alternatives. The well-prepared negotiator will feel confident about making the first offer, anchoring the negotiations in her favor.

Don’t be Afraid to be Aggressive

How extreme should your first offer be? Many negotiators fear that an aggressive first offer will scare or annoy the other side. However, research shows that this fear typically is exaggerated.An aggressive first offer allows you to offer concessions and still reach an agreement may be better than your alternatives.

In contrast, an unaggressive first offer leaves you with two unappealing options: make small concessions or stand by your demands.  By making an aggressive first offer and giving your opponent the opportunity to negotiate some concessions, you may get a better overall outcome and increase the other side’s satisfaction.

Of course, it is important that your opening offer is not absurdly aggressive. An absurd offer can lead the person on the other side of the table  to believe that there is no reasonable possibility , and as such, the appropriate response is to walk away.

Focus on Your Target Price

When constructing a first offer, generally there are two considerations on which you should focus: your alternatives to agreement and a specific target price, above or below which you will walk away rather than reach a deal, and your ideal outcome, including your target price and the agreements, terms and conditions that would fulfill your principal hopes and desires.

I have found that negotiators who focus properly on their target prices make more aggressive first offers and ultimately reach more profitable agreements than those who do not.

A Caveat

Negotiators who focus too rigidly on their target prices or ideal outcomes sometimes curse if doing so results in rejecting profitable agreements. Remember that you want to reach an agreement that meets your objectives and that also satisfies the other side. A satisfied counterparty will be more likely to live up to the terms of the agreement and less likely to seek future concessions or revenge.

Gary Miller is the Managing Director of SDR Ventures Inc.’s Consulting Division, where he helps middle-market private business owners prepare to raise capital, sell their businesses or buy companies, and helps them develop strategic business plans. He is a sought-after business consultant and speaker on M&A and capital market trends, what buyers are looking for in acquisitions and due diligence. He can be reached at 970-390-4441 or gmiller@sdrventures.com.

To see Gary’s full article via The Denver Post Business, click here.

Axial

How Does an ESOP Work?

Gary Miller By Gary Miller – Managing Director, Consulting Division, SDR Ventures

Many owners are now considering selling their businesses as they approach retirement age. When considering their exit strategies, they face difficult decisions for monetizing the enterprise value of their businesses. While a business owner wants to receive a desirable price for the business, he or she may not want to sell to a third party (e.g., a strategic buyer or a private equity firm). The owner may instead want to reward loyal employees who have made significant contributions to the business’s success. If the owner is willing to receive fair market value vs. strategic market value, an Employee Stock Ownership Plan (ESOP) may be a practical exit strategy. Fair market value, which is based on the historical performance of a company, is typically less than strategic market value, which also takes into account future synergies.

Recently, SDR Ventures advised a client in a sales transaction in which the owner chose to execute an ESOP transaction versus other exit options available to him. Of utmost concern to this owner was rewarding his employees and keeping his legacy in-house.

How does an ESOP work? Below is a brief synopsis of this type of exit plan.

What Is an ESOP?

It is a type of qualified retirement plan similar to a profit-sharing plan, but with one main difference. An ESOP is required by statute to invest primarily in shares of stock of the ESOP sponsor (i.e., the corporation selling the stock). Unlike other qualified retirement plans, ESOPs are specifically permitted to finance the purchase of employer stock by borrowing from the corporation, other lending sources, or from the shareholders selling their stock.

When Congress authorized ESOPs in 1957 and defined their rules in 1974, it had two primary goals:

1) provide tax incentives for owners of privately held companies to sell their companies; and

2) provide ownership opportunities and retirement assets for working-class Americans.

How Does an ESOP Work?

In a typical leveraged ESOP transaction, a corporation’s board of directors adopts an ESOP plan and trust and appoints an independent ESOP trustee. After obtaining an independent appraisal of the value of the corporation’s equity, the ESOP trustee negotiates the purchase of all or a portion of the corporation’s issued and outstanding stock from one or more selling shareholders. Often, the corporation sponsoring the ESOP will borrow a portion of the purchase price from an outside lender (the “outside loan”) and immediately loan the proceeds of the outside loan to the ESOP (the “inside Loan”) so that the ESOP can purchase the shares.

The two-phase loan process is used because lenders generally are unwilling to comply with restrictive ERISA loan requirements. If only a portion of the purchase price is funded with senior financing, the remaining portion of the purchase price generally will be funded through the issuance of subordinated promissory notes to the selling shareholders, whereby the sellers receive a rate of interest appropriate for subordinated debt.

leveraged - employee stock ownership planTo provide the ESOP the funds necessary to repay the “inside loan,” the corporation is required to make tax-deductible contributions to the ESOP each year, similar to contributions to a profit-sharing plan. Upon receipt of these annual contributions, the ESOP trustee uses the funds to make payments to the corporation on the “inside loan.” In addition to these contributions made to the ESOP by the corporation, the corporation can declare and issue tax-deductible dividends (C-corporation) or earnings distributions (S-corporation) on shares of the corporation’s stock held by the ESOP which, in addition to employer contribution, can be used by the ESOP trustee to pay down the “inside loan”. Shares purchased by the ESOP from selling shareholders (or the corporation) are held in a “suspense account” within the ESOP trust. As the ESOP trustee makes its annual principal and interest payment on the “inside loan,” shares of the corporation’s stock acquired by the ESOP from the selling shareholders (or corporation) are released from the suspense account and allocated to the separate ESOP accounts of employees participating in the ESOP.

View Part I of this article on Axial Forum >

Continued…

For those considering an ESOP as an exit option, here are a few advantages and disadvantages of this strategy.

Advantages of an ESOP

The tax benefits of an ESOP exit strategy can be significant. These benefits accrue to the selling shareholder(s) (the corporation), and to the employees who participate in the ESOP. The tax benefits to the selling shareholder and corporation vary depending on whether the corporation is taxed as an S-corporation or as a C-corporation.

Non-tax advantages of an ESOP exit strategy are many and also should be considered by the business owner depending on the owner’s goals. Some of these advantages are:

  • A ready-made market for the owner’s stock
  • A ready-made buyer for the owner’s business
  • A lower marketability discount (typically 5 to 10 percent) when valuing shares on a “fair market value basis” vs. a “strategic market value basis”, since the ESOP is the market for those shares
  • A business owner who can gradually transition the ownership over a period of time and thus remain actively involved in the business
  • A vehicle for the owner to receive the desired liquidity without selling to a competitor or other third parties
  • A retirement benefit for employees
  • An avoidance of integration plans and their associated costs to restructure operations, reorganize management or reduce staff because management and staff continue in place after the transaction closes
  • An avoidance of giving out confidential information to a competitor or other potential buyers
  • A long-term financial investor (the ESOP) that will not seek to sell the corporation in a relatively short time period

Disadvantages of an ESOP

There are also several disadvantages of ESOPs to consider. Like most business decisions, there are trade-offs with any exit strategy. An ESOP is no different.

It is important to remember that an ESOP is a qualified retirement plan governed not only by the Internal Revenue Code, but also by the fiduciary and disclosure rules of ERISA. High fiduciary duty standards must be met. This adds additional costs to the corporation including the cost of:

  • Retaining an independent trustee, an independent financial advisor and independent legal counsel to advise the ESOP trustee
  • Engaging qualified ESOP counsel experienced with ESOP stock purchase transactions in addition to corporate counsel
  • Ongoing administrative, fiduciary and legal expenses associated with an ESOP that might not be present in a sale to a third party
  • Maintaining the ESOP plan and trust documents, a record-keeper/third-party administrator, a trustee and annual valuations of the share value of the ESOP
  • Calculating the amounts of tax-deductible contributions made to the ESOP each year
  • Monitoring who can participate in the ESOP depending on the Code section 1042 election, even if they are employees of the corporation
  • Implementing the anti-abuse provision, Section 409(p), which restricts any one participant or family from receiving excessive share allocations in the ESOP or other synthetic equity issued by the corporation
  • Obligating the corporation to have a stock repurchase plan (this requirement must be monitored and funded on an ongoing basis for participants who are eligible to receive a distribution of their ESOP stock accounts as they retire or terminate employment. The corporation is then required to repurchase the stock at the current fair market value).

As can be seen from the discussion above, ESOPs are highly technical and complex. If a business owner is considering an ESOP as an exit strategy, careful planning and retention of experienced professional advisors, including a wealth management firm, a qualified ESOP tax advisor and a qualified ESOP transaction law firm, are musts.

View Part II of this article on Axial Forum >

Gary Miller is managing director of Denver-based SDR Ventures Inc.’s consulting division. SDR is an investment banking firm that advises privately held middle-market businesses. Miller specializes in helping companies prepare for sale, exit planning, company valuations, strategic business planning and M&A consulting. He can be reached at 720-221-9220 or gmiller@sdrventures.com. For more info about SDR Ventures’ consulting division, please click here.

M&A Source

5 Traps to Avoid When Negotiating

Gary Miller - Sell your businessBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Bill had been thinking about selling his company for a couple of years. He and his wife, Carol, wanted to spend more time with their grandchildren and travel together to make up for all those years when they couldn’t.

One day Bill received a call from George, a friend and business competitor, who wanted to discuss a deal.

George’s timing was perfect. Bill had built a distribution company generating $25 million of annual revenues and $4.8 million of earnings before interest, taxes, depreciation and amortization, or EBITDA.

It was a solid company with strong management, consistent growth and earnings and opportunities for expansion into new territories. Bill expected a high purchase price.

He had decided that he didn’t need professional advisers with strong transaction experience. He believed that his regular accounting firm and corporate law firm could handle any deal he negotiated. He had previously made one small acquisition on his own and felt he was perfectly capable of selling his own firm.

After several discussions, Bill and George finally came to an agreement. George had his deal team present Bill with a term sheet specifying several items yet to be negotiated. As Bill found out, the problem with negotiating the deal yourself is the same problem a lawyer has in representing himself: He has a fool for a client.

About 75 percent of business owners who go it alone emerge at the end of their sale like Bill, regretting the deals they made.

There are risks that a business owner negotiating his own deal can bring to the table. Industrial psychologists define them as cognitive biases and they can be mitigated by using professional advisers who maintain their objectivity through the transaction process.

Here are five major biases that can ensnare owners when they negotiate their own deals:

Framing bias: This is context in which the buyer’s presentation to the seller significantly impacts his or her impression of a deal. The deal is framed so positively that the seller’s impression is “this deal could really work.” It can make the seller more relaxed and risk-tolerant.

If the price looks good, the remaining items in the term sheet look like they’re easy to be worked out. Take care to react to the quality of the complete deal — not the quality of the presentation.

Anchoring bias: This is the tendency to rely on the first piece of information in the term sheet. Most people tend to use an initial piece of data as the strongest reference point, or the “anchor,” for the entire term sheet. It can be particularly impactful when negotiating valuations of your company. For example if you are told by an investment banker, accountant, or a valuation company that your firm is worth 6.5 to 7.5 times EBITDA, you likely will remain pegged to those numbers. If you fixate on the price, you might rationalize away the rest of the deal’s points.

Confirmation bias: This is the tendency to favor information that reinforces or confirms a person’s existing beliefs. It can become particularly problematic for buyers during the due-diligence process. The bias to purchase can cause the buyer to selectively remember information that supports the desire to close the deal. If the opportunity seems strong, the buyer will seek out evidence to support its strength. Professional advisers can help by conducting objective and complete due diligence.

Cognitive dissonance bias: This occurs when your initial hypothesis is challenged, perhaps by conflicting sets of information. In the deal process, the bias most often appears when a disappointing realization develops — such as discovering a risky skeleton in the closet of an otherwise seemingly perfect company. You can either satisfy the dissonance by believing that the risk is not that great, or by backing out of the investment. If you choose to stay in the deal, make certain you understand the full impact of the skeleton.

Groupthink bias: This is the tendency for an individual to adopt the mind-set of a larger group. The pressures of conformity and the desire to fit in often drive those with minority opposing opinions questioning the deal to silence their doubts. Fix it by conducting thorough due diligence and reporting the findings to senior managers. Give them the chance to express any concerns, doubts or reservations about the deal.

About the Author:

Gary Miller is managing director of Denver-based SDR Ventures’ consulting division. SDR is an investment banking firm that advises privately held middle-market businesses. Gary leads senior consultants on engagements including business consulting for strategic planning, preparing companies for sale or to raise capital, growth and expansion strategies, value creation, exit strategy planning and post-merger/acquisition integration.

Prior to joining SDR, Gary was Founder and CEO of GEM Strategy Management, Inc., a strategic planning advisory firm. Gary has over 30 years of business experience with middle market, Fortune 500 and Global 10 companies. gmiller@sdrventures.com or LinkedIn at Gary E. Miller.

To view the article on M&A Source, click here.

Albuquerque Journal

‘Alternative’ Investments Require Extra Diligence, Caution

Gary Miller - Sell your businessBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

It is no secret the U.S. economy is performing poorly.

First-quarter 2016 gross domestic product, the broadest measure of economic output, advanced at a dismal 0.5 percent seasonally adjusted annual rate, according to the Commerce Department. It is the worst performance in two years. Both top and bottom lines for major U.S. corporations are being pressured, according to the Wall Street Journal. Apple Inc., Norfolk Southern Corp, 3M Co., Pepsi Co., and Procter & Gamble Co. all took hits.

With interest rates currently near zero, CDs, bonds and banks aren’t providing attractive yields. This is problematic for individual investors. Therefore, many investors are increasingly looking at “alternative” investments in search of higher returns or yields.

I believe that diligent homework and extreme caution are required. Truly, “the devil is in the details.” Anyone considering “alternative” investments should obtain the advice of trusted accountant, investment, legal and other professional advisers before making any investment decision.

What are “alternative” investments? Opinions vary to an exact definition but, to me, they are potential uses of funds other than for “traditional” investments, such as publicly traded stocks, bonds, ETFs and mutual funds.

“Alternative” investments include, among others, private real estate funds, nontraded REITs, oil and gas programs, startup companies, private equity and venture capital funds. They are extremely complex. Some of these “alternative” investments are legally available only to “accredited investors” defined by the U.S. securities laws.

A “private placement” is one type of an “alternative” investment. Under federal and state securities laws, “private placements” can fall within an exemption from SEC and/or state securities registration as a sale of securities “by an issuer not involving any public offering.”

“Alternative” investments require detailed scrutiny. Three overarching considerations are: 1) Each “alternative” investment must be evaluated individually; 2) The documents, disclosures and agreements for each must be received, read carefully and completely, and understood fully before moving forward (this will be time consuming; don’t rely only on presentations and representations provided by management); and 3) If you are asked to invest or commit any money without being provided with proper and complete legal documentation, walk away. Investing your hard-earned money is not a “handshake” deal!

The documents and agreements for a typical private placement generally include: 1) A “private placement memorandum” or “offering document” that contains important details and disclosures about the company, its business, its prospects, the applicable risks (internal and external to the company), use of funds, and the costs and expenses of the transaction; 2) A “subscription agreement” that contains the terms and conditions of the securities sale and purchase; and 3) information regarding the accredited or nonaccredited status of the investor.

The “securities” being sold can bear many names, including stock, shares, membership interests, limited partnership interests, convertible debt, warrants and options.

Below are eight considerations you should incorporate when doing your “homework” – your own due diligence. Remember, as a passive investor, you will have little or no say in the management of the entity in which you invest.

First, examine the management team’s professional qualifications, experience and past track record of investment performance. Determine if management is putting its own funds in the transaction. Be wary if management has no skin in the game. Check to make sure that management has no criminal or other disciplinary history.
Second, examine the risk factors of the product/service. Is the product/service new to the marketplace or is it a modification of an existing product/service? Would the product/service involve new or significant change in sales practices?

Third, does the entity have enough funds to execute its strategy? If not, the venture could fail quickly. In some transactions, you may be contractually required to invest additional capital in the future if capital calls are made by management.

Fourth, examine the anticipated internal rate of return in the context of the entity’s investment strategy. Is it realistic or is it pie in the sky?

Fifth, understand the duration of the investment. Many investments do not have redemption or “put” rights and are illiquid. Your money could be tied up for years.

Sixth, examine all management fees, costs and other expenses paid to management and others. Review the “use of funds.” A company must describe how it will use the net proceeds raised from the offering and the approximate amount intended for each purpose. Beware of vague statements like “the proceeds will be used for general working capital purposes.”

Seventh, closely examine the securities being sold. Understand the rights, restrictions and class of securities being offered, and management’s ability to change the capitalization structure. Sometimes, the founder or existing shareholders retain(s) full voting control of an entity.

Finally, if you can afford to invest, determine if you can afford to lose all of your investment should the investment crater.

A quote attributed to Will Rogers applies: “Be not so much concerned with the return on capital as with the return of capital.”

Gary Miller is managing director of SDR Ventures Inc.’s Consulting Division, where he helps middle-market business private owners prepare to raise capital, sell their businesses or buy companies, and helps them develops strategic business plans. He can be reached at 720-221-9220 or gmiller@sdrventures.com.

To see the article via Albuquerque Journal, click here.

The Denver Post | Business

Three Accepted Methods for Taking the Guesswork Out of Business Valuations

Setting a Value Before a Sale is as Much Art as it is Science

Gary Miller - Sell your businessBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Many sellers of privately owned businesses overvalue their companies. This mistake is a major reason why businesses fail to sell. However, there are solid techniques and procedures that can be used to help both buyers and sellers calculate an appropriate value for any particular business. Above all, buyers and sellers should realize that valuation is art and science, which is one reason a seller’s valuation is often quite different from a buyer’s.
I recommend that my clients seek professional advice from an outside valuation firm or from M&A experts at an investment bank. The pros understand business-value drivers that are unique to sellers and buyers, the value of the business’ intellectual property and how investment decisions are made by venture capital and private equity firms, and strategic and financial investors.

There are three generally accepted methods that should help sellers and buyers formulate a reasonable valuation. They are asset-based, income-based and market-based. Each can produce different valuations, so they should be used to triangulate a range while still allowing for other factors that are unique to the business to boost or lower the final valuation.

Here’s how they differ:

Asset-based valuation methods estimate the value of a business as the sum total of the costs required to create another business of equal economic value. They are useful for calculating a business purchase price allocation, an important element of structuring a deal. The two central methods under the asset approach are asset-accumulation technique and excess-earnings technique.

The asset-accumulation technique is a framework for tabulating the market value of the business’s assets and liabilities. The difference is the business value. Note that this method differs from the typical cost-basis accounting on a balance sheet. Important off-balance-sheet assets include intellectual property, customer lists, customer contracts and licensing agreements. The liabilities side of the balance sheet accounts for such things as pending legal actions, judgments and the costs associated with regulatory compliance.

The excess-earnings technique is an established way to determine the value of business goodwill and total business value. It has been used by the U.S. Treasury Department since the 1920s. It is used for business purchase price allocation in legal disputes, IRS challenges and to prove that the business is worth more than its tangible asset base.

Income-based valuation methods determine the business value based on its income producing capacity and risk. The two main techniques that are used are capitalization of earnings and discounted cash flow income streams to calculate business risk. If a business has consistent earnings year over year (an uncommon situation), then both techniques are equivalent. You can use the current year’s business earnings and an earnings growth rate as your business valuation inputs. The capitalization rate is then simply the difference between the discount rate and the business earnings growth rate.

However, if the business earnings vary materially over time (the more common situation), use the capitalization multiple of earnings technique by discounting its cash flow. Because you can model reasonably accurate earnings projections only so far into the future, make your business earnings projections only out three to five years. Assume that at the end of this period, business earnings will continue growing at a constant rate. Discount your projected business earnings at this point. Capitalize the earnings beyond this point. This gives you the residual or terminal business value (that point in the future when the investors hope to cash out).

Market-based valuation methods help you estimate the business’ value by comparing recent selling prices of similar businesses to yours and comparing the multiples paid based on the earnings of the other similar businesses — usually earnings before interest, taxes, depreciation and amortization. Both types of methods compare the subject business to similar companies that sold recently. Valuation comparables from M&A transaction data for public companies are usually more reliable than comparable data from privately companies. However, in reality no two businesses are exactly alike. Therefore, each business’s unique characteristics should be factored carefully into these comparable transaction analyses.

A final point to remember: The art of any successful valuation is bringing together the subtle components and important intangible variables — such as the quality of management, the quality of earnings, a highly skilled labor force and other variables — along with the application of various valuation methodologies.

Gary Miller is the Managing Director of SDR Ventures Inc.’s Consulting Division, where he helps middle-market private business owners prepare to raise capital, sell their businesses or buy companies, and helps them develop strategic business plans. He is a sought-after business consultant and speaker on M&A and capital market trends, what buyers are looking for in acquisitions and due diligence. He can be reached at 970-390-4441 or gmiller@sdrventures.com.

To read Gary’s article in The Denver Post Business, click here.

Beverage World

Conscious Consumers Driving Beverage Industry M&A Activity

The latest issue of Beverage World magazine features commentary from SDR Director Ben Rudman on the state of the beverage industry as it experiences a growing “conscious-consumer movement.” In the article, Ben discusses the current trends that he believes will continue to play a role in future industry growth.

According to Ben, the growing “conscious-consumer movement” is expected to gain ground in 2016 as shifting consumer appetites go mainstream. These are consumers who desire local, fresh, healthy and responsibly sourced products and ingredients. The demand for organic and natural juices and sodas is continually increasing while consumers have also begun to seek out convenient ways to consume protein. Meanwhile, in the adult beverage world, the conscious-consumer movement manifests in the growing popularity of craft beer. Market research by Mintel highlighted the many ways that craft beer drinkers think their choice of beverage reflects their identity—and the big brewers are taking notice.

Some industry giants such as the Dr. Pepper Snapple Group, Coca-Cola and Budweiser have already began to pursue this trend with their acquisitions of specialty drink companies. Small companies have been able to capitalize on this trend due to their implementation of faster innovation cycles, enabling them to develop beverages that are on trend in a timelier manner than many larger companies. Companies with strong, loyal followings, that can also provide distribution synergies to larger companies, make for mouth-watering targets.

“Consumers of all demographics and income levels increasingly want to identify and connect with brands that exemplify ethics and values that mirror their own,” Ben explains. Beverage companies that are responsive to this increasing consumer consciousness figure to reap significant benefits.

To read the full article, check out the latest issue of Beverage World.

M&A Source

Go to Sale Alone, and You’ll Probably Leave Money on the Table

Gary Miller - Sell your businessBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Last summer, Paul called me to ask if I would help him sell his company. He had built a business from scratch, and after 30 years, his revenues were pushing $30 million, with earnings — before interest, taxes, depreciation and amortization — approaching $3 million.

During our conversation, I explained the need to prepare his company for sale before we take it to market and that he needed a “deal team” — a consultant team leader, an investment banking firm, mergers and acquisitions legal counsel, tax counsel and a wealth management adviser —to ensure he realizes the most value possible from the sale of his company.

Paul wondered if he really needed all of those advisers — particularly the investment banker and M&A lawyer.

In fact, there is high value in all of their counsel. The deal team allows an owner to “run the business” while they “run the process.” This is critical as it keeps owners focused on managing the business and not distracted, which can negatively impact performance.

The right advisers help a seller set goals and identify strategies for exiting the business, help polish the strategic business plan and help clean up operations. They also take a seller through a due-diligence process similar to what buyers will do and help identify skeletons in the financial records. They also will prepare marketing documents and a high-level executive summary known as the “teaser,” as well as a confidential comprehensive memo detailing transaction goals, financial and operational performance, industry and market position, management team, competitive advantages, intellectual property and other market differentiators.

Experienced advisers will build a buyer list, take you to market, narrow down the potential buyers, negotiate the transaction terms and help you close the deal.

However, up to 80 percent of all middle-market companies for sale never close their transactions.

One of the biggest mistakes business owners make is underestimating the value that a seasoned and qualified investment banking firm brings to a transaction. There is a misconception that investment banking firms charge exorbitant fees for very little work. Nothing could be further from the truth.

An investment banker typically has her fingers on the pulse of current market conditions and pricing multiples, and her team is set up to conduct an auction process and has a Rolodex of buyers at hand.

Paul also wondered if he could use his current outside counsel since he was a trusted adviser and had served him well as long as he could remember.

But selling a company is not business as usual. I explained that a lawyer who has provided excellent counsel for all manner of general business issues, contract negotiations and litigation management has, more often than not, little experience with anything but the smallest of merger/acquisition transactions — which could be very problematic.

The legal demands of a middle-market transaction vary depending on the size of the business and the complexity of the transaction. But as a rule of thumb, the team should, at the very least, include an experienced partner, a senior associate and an experienced paralegal, each with expertise in corporate and commercial transactions. The team also should have access to resources for subject matter such as tax issues and potential post-transaction liability.

I advised him that a bigger, more expensive firm may not be better. They have very specific expertise and lots of manpower at their disposal, but for most middle-market transactions, smaller to mid-size firms will be far less expensive and may be of higher quality.

The sector a company does business in usually has little impact on the legal requirements of the transaction. Experienced M&A counsel can adapt to the basic legal requirements of most industries, but hire the best team you can afford. They will be a business owner’s guide on the varied path from structuring the deal through post-closing matters.

The latest research indicates that a business owner who uses an expert deal team has a far greater chance of success in selling their business than those who don’t. Don’t be penny-wise and pound-foolish.

Often your deal team will be able to negotiate a higher multiple of your EBITDA with much better terms than a business owner who tries to sell his own business.

To see the article on M&A Source, click here.

EBN

Amazon’s Increased Logistics Presence Ups Industry Ante

Recently, SDR Vice President Jodi Burrows shared her thoughts on M&A activity and key trends within the logistics industry with the online global supply chain publication EBN. Specifically, Jodi discussed the effects of Amazon’s increased presence in the space.

“Amazon’s move to become a fiercer participant within the logistics space may force electronics competitors to enhance their product and service offerings, as well as potentially reduce their prices,” Jodi stated.

Amazon has been gearing up to significantly increase its logistics presence and leverage the robotics and analytics in its warehouses for its logistics network.

It has continued to make strategic investments aimed at increasing the capacity of its multi-faceted global distribution channels.

Jodi continued to say, “Stiffer competition is forcing logistics companies to respond by investing internally or defensively acquiring companies or technologies that would provide them the capabilities necessary to compete.”

More consolidation and maneuverings are likely to continue as a result of Amazon flexing its logistics muscle.

To read Jodi’s full article on ebnonline.com, please click here.

Financial Planning and On Wall Street

Getting Entrepreneurs to Discuss Their Businesses

Chris Bouck

By Chris Bouck – Principal, SDR Ventures

Advisers have a unique opportunity to help entrepreneurs who may not have considered developing an exit plan from their business. It starts with a conversation that doesn’t leave wealth managers looking like they are nosing around or foolish because they are asking about a client’s business.

Owning and running a business is a very personal endeavor, and wealth managers can get into trouble by asking the wrong questions.

Business owners preside over valuable assets that should be taken into consideration in a client’s holistic financial profile. I believe that with education and the right vernacular and questions to ask, advisers can learn more about their clients’ business assets and effectively integrate them into a financial plan.

A good starting point starts with these questions:

  • Why are you in business?
  • What do you want to accomplish through your business?
  • Do you want to create a pile of gold and if so, what’s your time frame?
  • Do you want to eventually turn your business over to your children?
  • Do you want to run this business until you die, or sell the business and then retire?
  • What’s the time horizon for selling your business?

By starting the conversation with on-point questions…

To read the full article on financial-planning.com, please click here. Or, to read it on onwallstreet.com, click here.

Silicon Valley Globe

8 Things That Would Stop You From Selling Your Business

Gary Miller

By Gary Miller – Managing Director, Consulting Division, SDR Ventures

Many business owners are jumping on the “band wagon” to sell their companies, trying to take advantage of the current “hot” market and “frothy” multiples being paid by buyers. With the Baby Boomer tsunami, more businesses are for sale today than at any other point in history. This trend creates a competitive environment among sellers and leads buyers to look more closely at the “quality” and “price value” relationship of any potential acquisition.

For some time now, due to strong earnings, low interest rates and favorable capital markets, many buyers want to grow their businesses more rapidly through acquisitions in addition to organic growth.

However, 80 percent of business owners who put their businesses up for sale never close the transaction. From years of observation, I have found that most deals “fall apart” (fail to close) for eight basic reasons.

First, too high value expectations.
The number one reason deals fail to close is a seller’s unrealistic valuation expectations. Many business owners read and hear about companies or competitors selling their companies for very high valuations. Therefore, they believe that their businesses are worth the same.

Second, unclear story elements.
Business owners need to think like buyers. Attracting a buyer is like preparing for a beauty contest. Companies that “show best” win “first.” Often, because of poor strategic planning, the business owner cannot articulate clearly the company’s competitive advantages, its growth opportunities, its revenue potential, and its ability to produce significant returns on invested capital.

Third, quality of earnings.
Audited financial statements confirm financial accuracy and help validate forecasted performance. Lack of clarity and visibility regarding key business drivers, sales pipeline backlogs, back office operations, and the consistency of growth and earnings inhibit a buyer’s enthusiasm.

Fourth, length of time.
Every deal has its own momentum and a life of its own. Recognizing the “ebb and flow” of the deal momentum is critical to deal success. Therefore, time is the enemy of all deals. As the deal process drags on, both buyers and sellers start to lose interest.

Fifth, material changes.
Material changes in the business’s operations can occur at any time. While these changes may be completely out of the seller’s control (e.g., recession, loss of a large client, loss of a key employee,) often these changes can stop a deal from closing. However, if a material change occurs, the seller must disclose it promptly and fully to the potential buyer. Nothing will destroy a buyer’s trust quicker than the seller failing to be “up front” about a material change in the business.

Sixth, renegotiating terms of the deal.
Renegotiating the terms, conditions, structure, representations and warranties of a “settled deal” can be a deal killer. At the very least, back-tracking deal components that have been previously agreed too kills deal momentum, adds time and causes “deal fatigue.” Further, it fosters distrust and can call into question all other components of the deal structure previously negotiated.

Seventh, reaching for the last dollar.
It is completely understandable that sellers who have put everything into their businesses want to get every dollar they can out of their businesses. Often, the owner traps himself/herself mentally by fixating on a specific price for the company. Multi-million dollar deals have been lost over a few thousand dollars. I recommend to clients that they should examine all components of the deal’s structure –not just the final offering price.

Eighth, inadequate advisors.
Selecting a quality “deal team” is critical to “deal success.” In my experience, business owners are very good at building successful businesses, but often stumble when seeking to monetize them in some form of exit strategy. Selling a business is a once-in-a-lifetime event for most business owners. Most owners have never sold a business and do not have the skills to complete a deal on their own.

Moreover, research indicates that owners who “go it alone” more often than not will “leave money on the table” and fail to obtain the best terms and conditions for the transaction.

In addition, I believe the five key members of a successful deal team are:

  • First, an experienced mergers and acquisitions consultant to lead the transaction team.
  • Second, a skilled wealth management firm to help owners preserve their proceeds and to minimize tax obligations from the sale of the company.
  • Third, a law firm that has significant transaction experience and expertise.
  • Fourth, an accounting firm familiar with the tax implications of various deal structures.
  • Fifth, a strong investment banking firm with deep industry experience, solid valuation expertise, and keen negotiating and closing skills to get the deal done.

Gary Miller is managing director of SDR Ventures Inc.’s consulting division, where he helps middle-market business owners prepare to raise capital, sell their businesses or buy companies, and develop strategic business plans. He can be reached at 720-221-9220 or gmiller@sdrventures.com.

View article on www.siliconvalleyglobe.com >

CEOWORLD Magazine

New Financing Opportunities for Owners Seeking ESOPs

Recently, Travis Conway, Managing Director of SDR Ventures explained in CEOWORLD Magazine how new financing options are making employee stock ownership a potentially attractive alternative for those looking to sell their business. In the article, Travis discusses the benefits to the owners and employees who choose to pursue an Employee Stock Ownership Plan (ESOP) instead of selling by means of a more traditional transaction.

Travis explains that creating an ESOP can be a viable option for owners who are reluctant to sell their business outright on the open market. Owners often worry what will happen to their companies and employees upon their departure; after all, they have put in the blood, sweat and tears to build the company.

A properly structured ESOP can offer a “win-win” scenario for both owners and employees, Travis states. If executed properly, an ESOP can provide the business owner with the financial liquidity they are seeking while also directly incentivizing employees by giving them a stake in the ownership of the company.

While in the past business owners have relied on banks and other traditional sources to provide financing for their ESOPs, new financing options from non-bank lenders, such as private equity firms, have begun to financially assist companies in executing ESOP transactions.

Before determining whether or not an ESOP is a viable option for a particular company, it is important to understand how they work. By its structure, an ESOP is a tax-advantaged management buyout vehicle that serves as an employee benefit retirement plan.

The process begins with owners electing to legally convert their C or S Corporation into an ESOP Trust. This is followed with the appointment of an independent third-party trustee. Next, the company contributes its own stock to the plan for the benefit of the company’s eligible employees, which includes the CEO and other executive officers. The trustee is tasked with presiding over the ESOP’s trust and carrying out the allocation and flow of ownership shares. Shares are allocated and distributed over a vesting period, typically based upon an employee’s total compensation, tenure at the company or a combination.

An example of one such ESOP regarding which SDR was able to assist, was for a family-owned produce company based in California whose CEO was nearing retirement. The CEO was hesitant to sell his multi-generational business to a strategic buyer, in fear of what could happen to the company’s loyal customers and employee base, as well as the company’s longtime trade secrets. In addition to protecting the company he had built, the CEO also wanted to reward the dedication of his employees, not just the current shareholders. With private equity financing, SDR was able to help the owner structure and close an ESOP transaction that met the owner’s objectives. This successful transaction provided the CEO with an immediate payout and an additional stream of income after retirement, while also rewarding his long-time and trusted employees with ownership shares in the business.

ESOPs can provide many benefits, and with non-traditional financing now available, ESOPs are becoming more feasible for business owners who otherwise wouldn’t have considered employee ownership. However, Travis explains there are negatives to consider as well, including potential ongoing advisory, legal and administrative costs, and legal risks if the ESOP is not structured properly. Top-grade advisory from experienced ESOP experts is therefore a must.

In short, for those owners who feel concerned about transferring of ownership to third parties, we encourage them to learn and gather as much information as they can to see if an ESOP is right for them, their business and their employees.

To read the full article on ceoworld.biz, please click here.

The Denver Post | Business

Sluggish Market Sends Investors Looking for Alternatives

With interest rates currently near zero, CDs, bonds and banks aren’t providing attractive yields.

Gary Miller By Gary Miller – Managing Director, Consulting Division, SDR Ventures

It is no secret the U.S. economy is performing poorly. First-quarter gross domestic product, the broadest measure of economic output, advanced at a dismal 0.5 percent seasonally adjusted annual rate according to the Commerce Department. It is the worst performance in two years. Both top and bottom lines for major U.S. corporations are being pressured, according to the Wall Street Journal. Apple Inc., Norfolk Southern Corp., 3M Co., Pepsi Co. and Procter & Gamble Co. all took hits.

With interest rates currently near zero, CDs, bonds and banks aren’t providing attractive yields. This is problematic for individual investors who increasingly are considering alternative investments as they search for higher returns or yields.

What are alternative investments? Opinions vary, but to me they include private real estate funds, non-traded REITs, oil and gas programs, startup companies, private equity and venture capital funds. They are extremely complex and some are available only to accredited investors defined by the U.S. securities laws.

Alternative investments require close scrutiny as each option is individually evaluated. There are documents, disclosures and agreements to be read carefully and fully understood. This will be time consuming — don’t rely only on presentations and representations provided by management. If you are asked to invest without being provided with proper and complete legal documentation, walk away. Investing your hard-earned money is not a handshake deal!

The documents and agreements for a typical private placement generally include:

  • An offering document or private placement memorandum known, as a PPM, that contains important details and disclosures about the company, its business, its prospects, the applicable risks (internal and external), use of funds and the costs and expenses of the transaction.
  • A subscription agreement that contains the terms and conditions of the securities sale and purchase.
  • Information regarding the accredited or nonaccredited status of the investor.

The securities being sold can bear many names — stock, shares, membership interests, limited partnership interests, convertible debt, warrants, options.

Below are eight considerations you should incorporate when doing your own due diligence. Remember, as a passive investor you will have little or no say in the management of the entity in which you invest.

First, examine the management team’s professional qualifications, experience and past track record of investment performance. Is management putting in its own funds? Be wary if management has no skin in the game. Check to make sure that management has no criminal or other disciplinary history.

Second, examine the risk factors of the product or service. Is it new to market or a modification of something that exists? Would it involve new or significant change in sales practices?

Third, does the entity have enough money to execute its strategy? If not, the venture could fail quickly. In some transactions, you may be contractually required to invest additional capital in the future if management makes capital calls.

Fourth, examine the anticipated internal rate of return in the context of the entity’s investment strategy. Is it realistic?

Fifth, understand the duration of the investment. Many investments do not have redemption rights. Your money could be tied up for years.

Sixth, examine all management fees and expenses paid to management and others. Review the use of funds. A company must describe how it will use the net proceeds raised from the offering and the approximate amount intended for each purpose. Beware of vague statements like “the proceeds will be used for general working capital purposes.”

Seventh, closely examine the securities being sold. Understand the rights, restrictions and class of securities being offered, and management’s ability to change the capitalization structure. Sometimes the founder or existing shareholders retain full voting control of an entity.

Finally, if you can afford to invest, determine if you can afford to lose all of your capital if the investment craters.

A quote attributed to Will Rogers, or perhaps Mark Twain, applies: “I am not so much concerned with the return on capital as I am with the return of capital.”

Gary Miller is managing director of SDR Ventures Inc.’s consulting division, where he helps middle-market business owners prepare to raise capital, sell their businesses or buy companies, and develop strategic business plans. He can be reached at 720-221-9220 or gmiller@sdrventures.com.

View article on denverpost.com >

Albuquerque Journal

Executive’s Desk: Four Major Mistakes Can Threaten Startup Capital

Gary Miller - Sell your businessBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

I am concerned. No, I am worried.

I am worried about how unprepared entrepreneurs of startups and early-stage companies are when attempting to raise capital – particularly over the next 12 to 18 months. After meeting with many entrepreneurs, I have found that most make four major mistakes in their attempts to raise funds.

It’s no secret that capital markets (debt and equity) are rapidly withdrawing from funding high-risk investments. For example, there were no IPOs in January 2016 – zero. According to Dow Jones VentureSource, 58 percent of IPOs issued last year traded below their issue price for all of 2015.

Why? Investors doubt the future performance of U.S. and global economies. Adding to these doubts are political uncertainty, tensions between businesses and government, and anxious investors. This is evidenced by the largest investment banks struggling to raise both equity and debt. Last month, Goldman Sachs tried to sell $2 billion in corporate bonds quickly. A few days into the sale, they had sold only half of the bonds and were paying an 11 percent premium – up from the expected 10 percent premium. The bond sale comes at a time when U.S. junk-bond issuances have dropped more than 70 percent from a year ago.

Recently, the Wall Street Journal reported that mutual funds are cutting the valuations of their startup investments at an accelerated pace and are making fewer new investments. This has shocked many venture capital firms and executives at startups.

The mutual-fund pullback threatens to deepen a wider downturn that has already led to falling valuations, shrinking ambitions and layoffs as the receding tide of capital forces startup companies, of all kinds, to focus on the bottom line rather than growth at any cost.

There is a lesson here. Lower deal volume, lower deal multiples and lower valuations are ominous signs for any young company and spell trouble for entrepreneurs seeking capital. So what can you do to increase your chances of a successful capital raise? Avoid these four major mistakes:

Mistake #1. Not thinking like investors. Understanding investors’ sentiments, their fears and concerns regarding investment risks is critical to raising funds successfully. Entrepreneurs are often too enamored with their concepts/products/services and believe that the market is just waiting for their “better mousetraps.” Therefore, they believe that all they need is money to overcome any market obstacles. While passion is important, it must be tempered with realities of the marketplace.

Mistake #2. Not having a well-thought-out, detailed business plan. Serious investors expect to see a business plan with the following: realistic pro formas; financial models; detailed use of funds; addressable target markets; audience segments; competitive threats; potential disruptive technologies; market research; first mover advantage; buyer resistance/acceptance; and exit strategies for the investors – to name a few. Without addressing these issues clearly, investors can become confused and come away without any compelling reasons to invest.

Mistake #3. Not raising enough capital during each round of capital formation. Most entrepreneurs have not developed a detailed “capital formation strategy.” Therefore, they do not know how much capital they really need and they do not know whether to raise debt or equity during the capital formation process.

Since they have never raised capital nor have a capital formation strategy, they tend to ask for too little from each investor, fearing they won’t get any capital at all. Also, they often seek investors who may only have $20 to $30 thousand to invest and haven’t the financial depth to invest more in subsequent capital formation rounds. As a result, entrepreneurs raise capital from “hand to mouth,” feeding the “burn rate” (the monthly rate the company spends money) just to stay alive.

I call this “the capital raise treadmill.” This treadmill is perpetual and pushes entrepreneurs to take any amount of money from anyone who will invest. Eventually, they run out of investors and their companies die on the vine.

Mistake #4. Not generating revenue streams and profits quickly enough. Investors want revenue-building early in the growth stage of commercialization and profits soon thereafter. In today’s financial environment, investors examine how fast revenues are being generated, how steep the revenue growth curve is and how soon profits can be generated. Most investors look closely at operating and net profit margins.

More often than not, entrepreneurs are on the capital raise treadmill, not minding the store. Unless they can prove their revenue models and scalability early in their growth stage – generating what all investors want, namely revenues and profits – they will fail to secure the capital they need.

Gary Miller is managing director of the Denver-based investing banking firm, SDR Ventures’ consulting division. Miller helps middle-market business owners prepare to: raise capital, sell their businesses, buy companies and develop strategic business plans. He can be reached at 720-221-9220 or gmiller@sdrventures.com.

View article on abqjournal.com >

The Colorado Springs Business Journal

An Effective Advisory Board Helps Businesses Succeed

Gary Miller By Gary Miller – Managing Director, Consulting Division, SDR Ventures

Rarely can business owners build great companies alone. Whether it’s a startup or an established business, having access to high-quality advice increases an organization’s odds of success. Owners seeking advice can obtain it from consultants, attorneys, or accountants. Increasingly, though, attention is being given to advisory boards.

The benefits of an advisory board include: setting aside time to think strategically; obtaining feedback and insights from outside the company; and gathering information and expertise from peers who have knowledge and experience in areas different than your own.

The advisory board can provide advice about marketing, product development, operations or manufacturing. It can help identify acquisitions or potential buyers for the company. Typically, business owners seek experts in technology, sales and marketing, operations and the financial services industry. Thinking carefully about an advisory board’s role and composition will maximize its contribution to the organization’s success.

An advisory board is an informal group. It is not a corporate board of directors. It is a group of mentors. The group has no financial interest in the firm. It is a group of outside advisers/experts who share their knowledge to help you be more competitive, help you think strategically and offer specific advice.

When forming an advisory board, first determine what skill sets you are seeking. Think about including people who can introduce you to potential investors. Choosing the right people is critical. I recommend that you do not accept any member to an advisory board who is unwilling to sign a nondisclosure agreement and noncompete agreements.

Normally, advisory boards have from four to seven members, meet quarterly and can serve either indefinitely or for a limited term.

Advisory boards provide safe harbors for executives to help refine ideas before taking them to the board of directors or potential investors. Also, advisory boards may be needed in certain deal or ownership structures.

For example, investors in limited partnerships may require a voice in business operations, but may not wish to lose the benefits of limited liability by participating in the management of the business directly. Advisory boards are used frequently to avoid that potential risk.

Advisory boards can help address fiduciary duties and other liability concerns. Corporate boards of directors potentially expose themselves to a variety of legislated liabilities (responsibility for unpaid wages, unpaid taxes, environmental damage, etc.) and are subject to fiduciary and other legal duties that can lead to civil liabilities.

It is unlikely that advisory board members could be subject to these potential exposures. While I have heard concerns expressed about potential liabilities of advisory board members, I am unaware of any situation in which that liability actually has come home to roost. The legislated duties and responsibilities only apply to corporate directors pursuant to applicable entity law.

Accordingly, qualified individuals who may not be prepared to assume board of director responsibilities might well be encouraged to assist business owners as advisory board members.

Choosing advisory board members should cover more than merely evaluating their resumes and accomplishments. Strong advisory board candidates are objective and honest. They have knowledge and expertise outside your skill sets and have a genuine interest in helping you and your business succeed.

They are good problem-solvers, communicators, have diverse skills and are well-respected in their respective fields. Strong advisory board candidates are well-connected with networks that might be leveraged to assist you.

I do not believe in “cosmetic” advisory boards. These are individuals you post on your website because their resumés are filled with many accomplishments or they have high personal brand recognition. More often than not, they do little to genuinely give their time or expertise necessary for you to be mentored by them.

I am often asked about advisory board compensation. Depending on the stage of the business (startup to mature), I believe the compensation can range from providing food for each meeting and covering expenses to providing stock options or making cash payments — or a combination of these. Advisory board compensation is a matter of agreement. Since advisory board members have fewer time commitments and no fiduciary responsibilities, they should be paid less than the board of directors.

Note, however, an advisory board member is expected to contribute substantively — and not just paid a fee for showing up or answering email/phone from time to time.

Gary Miller, managing director of the consulting division for SDR Ventures Inc., can be reached at gmiller@sdrventures.com.

View article on csbj.com >

The Denver Post | Business

Corporate Culture is Most Powerful Influence on Financial Performance

True servant leadership can lead to a good company culture and make the difference between success and failure

Gary Miller By Gary Miller – Managing Director, Consulting Division, SDR Ventures

If you accidentally try to order the same song twice from iTunes, you’ll be warned that you already own it — and not because it would be illegal for Apple to profit from your forgetfulness. There’s a clear business reason: Apple realizes that there’s no better way to build trust than being totally honest when the customer least expects it. It’s part of the company’s culture.

In the age of the Web, smartphones and social networks, every action that an organization takes can be exposed and critiqued in real time. The bar for trustworthiness is higher than ever and is continuing to rise.

During my career, I have met with many CEOs of small privately held companies and of publicly traded companies. The thoughtful CEOs have concerns, of one kind or another, about their own company’s culture and its impact on shareholders, employees, customers and other stakeholders.

From those discussions, I have concluded that corporate culture — as hard as it is to define — is the most important asset that a company has to drive financial performance and overall success.

That culture always flows from the top and there are visible signs of both good and bad cultural environments.

From my observations of management’s behavior, I have defined six major signs of a bad company culture.

  • If only the leaders have offices, it implies a rigid, top-down hierarchical structure. Other signs of this type of hierarchical leadership include planning conducted only by senior management, with little or no involvement from line or staff employees.
  • If senior management constantly hovers over each employee’s work, no matter how big or small the project is, that signals a lack of trust. Often, senior management finds fault with their employees’ work and corrects them on the spot in front of others — embarrassing all.
  • If management is arrogant, condescending and volatile, allowing confrontations to take place in front of others, employees “walk on eggs” around their bosses. They fear for their jobs and dread interaction with management.
  • If management focuses only on short-term financial performance, using only cost-benefit analysis as the decisionmaking paradigm, this often stifles creativity and critical thinking.
  • If employee turnover is high, it affects morale negatively, increases workloads, results in loss of skill sets, piles on additional recruiting costs and slows job performance.
  • If companies attempt to create the illusion of positive culture, using feel-good terms such as respect, integrity and values without walking the talk, this is a “false positive” culture that the best employees quickly recognize and quietly prepare to leave. The problem is a lack of sincerity and authentic leadership.

One question I always ask a client when performing a cultural assessment is “How much time do you spend with your employees after 5 p.m.?” Having a beer, playing a round of golf or playing softball shows a human face and empathy that build good relationships and demonstrate both individual concern and trust.

Now that I’ve discussed the bad, what does a good corporate culture look like? More often than not, good culture environments are led by “servant leaders” who provide a clear set of sincerely held values, expectations, norms and guidelines that determine how employees behave and decisions are made.

Here are five signs that signal true servant leadership that can lead to a good company culture and, perhaps, make the difference between success and failure.

  • Servant leaders put shareholders, customers and employees ahead of themselves.
  • Servant leaders are trustworthy. A strong example is how insurance giant USAA acted after the first Gulf War. USAA suspended the auto insurance premiums of several thousand soldiers while they were overseas and sent them unsolicited refunds when they returned home. The employee culture at USAA is based on a simple, clear expectation: Treat each customer the way you’d want to be treated. The acid test of a company’s culture is its willingness to make financial sacrifices to uphold its stated values. (For the record, nearly 2,500 people sent back the refund checks, some telling USAA to keep the money and just be there “when we need you.”)
  • Servant leaders create a culture of free-flowing ideas and individualism. Employees are assured that management is always listening.
  • Servant leaders back up words with actions. Open communication and tolerance of dissent are hallmarks of strong cultures. Employees are valued and rewarded with autonomy and leadership opportunities, not just pay raises and bonuses.
  • Servant leadership is transparent. It openly addresses bad news early. If employees make mistakes, corrections are made and lessons are learned, but management stands firmly behind them.

Transparency is like a disinfectant for business. It will purify things and help start the healing process, but sometimes it’s going to sting.

A truly good company culture and authentic servant leadership increase customer loyalty, repeat business, employee retention, top- and bottom-line performance, and shareholder value.

Gary Miller is managing director of SDR Ventures Inc.’s consulting division, where he helps middle-market business owners prepare to raise capital, sell their businesses or buy companies, and develop strategic business plans. He can be reached at 720-221-9220 or gmiller@sdrventures.com.

View article on denverpost.com >

TelecomEngine

Urge to Merge in the Telecom Industry

SDR Vice President Jodi Burrows discusses recent M&A activity in the Telecom Industry

In an article published on TelecomEngine, Jodi Burrows helps identify what is driving recent M&A activity in the telecom industry. She points out that the high market saturation of smart phones has companies looking to keep existing customers rather than focusing solely on attaining new customers. In order to do so, they are looking to expand their service offerings.

“The number of telecom players is dwindling, but industry consolidation is still robust between mobile and fixed line/cable operators, resulting in bigger players occupying more dominant positions,” Jodi says.

Companies are building more one-stop-shops that offer landline, broadband, TV and mobile services, which has been termed “quad-play.” “Quad-play can help streamline and improve the overall customer experience, while reducing customer churn and thereby reducing new customer acquisition costs,” Jodi says.

Jodi also identifies a trend toward companies making acquisitions in completely different markets in order to offer more unique services to their customers. By tapping into new markets through newly acquired companies, the acquirer gains happy existing customers and the ability to provide broader services.

Similarly, this can be seen in the fiber optic space. As customers demand faster connectivity, “fiber optic providers have made for attractive acquisition targets,” Jodi says. “Deals that allow providers to enhance their infrastructure by tapping fiber optics experts are becoming quite common.”

Jodi expects these consolidation trends to continue throughout 2016 as consumer demand and evolving technologies continue.

To read Jodi’s full article on TelecomEngine, please click here.

EBN

How the West Coast Port Shutdown Revealed Logistics Industry Holes

SDR Vice President, Jodi Burrows, explains current issues facing the international logistics industry in the online global supply chain publication EBN.

The West Coast port shutdown, which lasted six months due to labor disputes, caused major bottlenecks and slowdowns for the logistics industry, but there is a lesson to be learned from the disruption. “The shutdown highlighted the fragility of the global supply chain, the dependence of logistics companies on the West Coast gateway and the need for technology to improve port efficiency,” Jodi states.

Due to the shutdown, many importers and suppliers moved to East Coast or Gulf Coast ports. With the upcoming opening of a third lane of wider locks in the Panama Canal, those ports will become even more competitive. However, the West Coast still accounts for 40% of U.S. trade, meaning moves toward efficiency still remain necessary.

“The long-term solution may lie in technology — specifically, software that improves port efficiency and allows shippers to determine if diverting freight makes sense,” Jodi states. “Greater transparency in information should allow terminal operators to more efficiently allocate resources. And that, ultimately, will help reduce congestion and create additional capacity.”

To read Jodi’s full article, please click here.

Axial

Essential Considerations When Hiring an Investment Bank

In a recent article on the Axial Forum, SDR’s Director Karl Edmunds helps provide insight on how to pick the right investment bank to help you sell your business.

First off, find an investment bank that has experience in your industry. The bank’s expert understanding of your niche market and business model will likely help you find the best deal.

Equally as important is finding a bank that has experience with deals at your price point. “You want your investment bank to have the staff to serve you and to be willing to dedicate the necessary resources to close a deal in line with your company’s value, regardless of the other deals the bank might be working on,” Karl says. “Your advisor should understand your business — your operations, geographic coverage, and the competitive landscape of your industry.”

Ensure your banks has the correct approach to valuation. Do they provide specific information on market conditions? Do they have concrete examples of what comparable businesses have sold for? The article also advises you to choose a bank that leaves you with a new perspective on your business and realistic prospects for sale after your first few meetings.

Next, the bank needs to understand your unique goals. “You should have a sense of the bank’s intangible qualities and its deal process. While ultimately all business owners are after the best valuation, it shouldn’t come at the expense of due diligence,” Karl says. “Too many investment banks become fixated on price and then, when they find a buyer, they try to convince you, the business owner, that the deal represents market value, and that the buyer is the only one out there. You should be assured that your investment bank has your needs and objectives in mind, not just its own.”

Hiring an honest advisor is also crucial. “Exceptional investment bankers form strong relationships with their clients and help them craft a legitimate and defensible story without drifting into spin. Find a banker who doesn’t hesitate to give you clear and courageous advice even though they might get fired,” the article states.

Read the full article on Axial ForumTo visit Karl’s SDR profile, please click here.

Oil & Gas Journal

U.S. Refining Flexibility Sustains Export Opportunities and Profits

SDR’s Steve Crower published an article in Oil & Gas Journal’s most recent issue. Steve’s article gives in-depth market analysis regarding the U.S. oil refining industry and why refining flexibility is supporting opportunities and profits.

“A lower crude oil price environment has sparked concerns that projected reductions in US light, tight oil (LTO) production will lead to reduced profitability for US refiners as readily available supplies of low-cost feedstock and natural gas dwindle. Domestic LTO and associated gas production have served as stable cost-advantaged feed and energy sources in the last few years. But the steady growth in refined product exports during the last decade, alongside substantial investments in downstream processing before the US light crude production boom, have left US refiners well-positioned to maintain near-term profitability.

Incremental reduction in US demand for finished petroleum products (diesel, naphtha, and gasoline) amid growing global demand have prompted a trend of dramatically higher exports of finished products from US refineries. The decline in US domestic demand for products was prompted by consumers seeking more fuel-efficient transportation, including ride-sharing and alternative-fueled vehicles, as gasoline prices followed crude prices higher starting in February 2009.”

To access to the full article, please click here (PDF).

To read the article on the Oil & Gas Journal website, please click here.

The Denver Post | Business

Four Major Mistakes Startups, Early-Stage Firms Make When Raising Capital

Young companies need to think like investors before trying to raise capital

Gary Miller By Gary Miller – Managing Director, Consulting Division, SDR Ventures

I am concerned. No, I am worried — about how unprepared entrepreneurs of startups and early-stage companies are when attempting to raise capital, particularly over the next 12 to 18 months.

It’s no secret the capital markets (debt and equity) are rapidly withdrawing from funding high-risk investments. For example, there were no IPOs in January. Zero. According to Dow Jones VentureSource, 58 percent of IPOs completed last year traded below their issue price for all of 2015.

Why? Investors doubt the future performance of the U.S. and global economies. Adding to these doubts is political uncertainty, tensions between businesses and government and anxious investors. This is evidenced by even the largest investment banks struggling to raise both equity and debt.

Recently, the Wall Street Journal reported that mutual funds are cutting their allocations to startup investments at an accelerated pace and are making fewer new investments. This has shocked many venture capital firms and startup executives.

The receding tide of capital is forcing startup companies, of all kinds, to focus on the bottom line rather than growth at any cost.

There is a lesson here. Lower deal volume and lower valuations are ominous signs for any young company, and spell trouble for entrepreneurs seeking capital. So what can you do to increase your chances of a successful capital raise? Avoid these four major mistakes:

1) Not thinking like investors. Understanding investors’ sentiments, fears and concerns regarding investment risks is critical to raise funds successfully. Entrepreneurs often are far too enamored with their concepts and believe that the market is waiting for their “better mousetraps.” While passion is important, it must be tempered with realities of the marketplace.

2) Not having well thought-out business plans. Serious investors expect to see a detailed business plan including the following: realistic pro formas; financial models; detailed uses of funds; addressable target markets and segments; competitive threats; potential disruptive technologies; market research; first mover advantage; buyer resistance/acceptance; and exit strategies. Without addressing these issues clearly and head-on, investors can become confused, lose confidence in the company’s management team and come away without compelling reasons to invest.

3) Not raising enough capital during each round. Most entrepreneurs have not developed a capital formation strategy. Therefore, they do not know how much capital they really need or whether to borrow or sell equity.

Since many entrepreneurs have never raised capital, they tend to ask for too little from each investor in every financing round, often fearing that they won’t get any capital at all. Also, often they seek investors who may have only $15,000 to $50,000 to invest and who don’t have more to invest in subsequent rounds. The result is entrepreneurs frequently raise capital from hand to mouth, meeting “burn rate” (the monthly rate a company spends money) just to stay alive.

I call this the capital-raise treadmill. This treadmill can be perpetual and push entrepreneurs to take any amount of money from anyone who will invest and on almost any terms no matter how onerous to the entrepreneur. Eventually, they run out of investors, and their companies die on the vine.

4) Not generating revenue streams and profits quickly enough. Today, investors want substantial revenue building early in the growth stage of commercialization and profits soon after. In today’s financial environment, investors examine how fast revenues are being generated, how steep the revenue growth curve is and how soon profits can be generated.

Unless entrepreneurs can prove up their revenue models and scalability early in their growth stage (i.e., realistic plans to generate what all investors want — revenues and profits), they will fail to secure the capital they need.

Gary Miller is managing director of SDR Ventures Inc.’s consulting division, where he helps middle-market business owners prepare to raise capital, sell their businesses or buy companies, and develop strategic business plans. He can be reached at 720-221-9220 orgmiller@sdrventures.com.

View article on denverpost.com >

Forbes

Middle-Market M&A Recap

While Activity Spiked in 2014, 2015 Numbers Were Still Strong

In a recent Forbes article, Contributor Todd Ganos recaps 2015 middle-market M&A activity and compares the data to historical figures. While year-over-year middle-market activity dropped 20% from 2014, 2015 was actually still in line with other recent years.

When taking a closer look, Ganos cites granular data from SDR Ventures on price multiples that indicate that “overall middle-market M&A activity in 2015 saw an average price multiple of roughly 14.51 times EBITDA, with companies in the $51 million to $100 million value range trading at the highest average multiple, 17.33 times.” However, multiples did decrease quickly as values went up.

While mega-deals and larger middle-market deals gained headlines in 2015, the article again cites SDR’s findings that show that companies with values below $100 million actually made up 87% of all middle-market deal volume and 56% of middle-market transaction value. This competitive seller’s market likely helped push multiples to their high levels. Ganos points out a key takeaway: the transaction multiple that a company may achieve via M&A can’t just be determined based on industry averages; the revenue range of the firm must be factored in as well.

In all, Ganos summarizes middle-market M&A activity in 2015 as “pretty good.” When looking to 2016, he wonders what another hike in interest rates may mean for the deal environment.

Click here to read the full article on Forbes.com.

Albuquerque Journal

Executive’s Desk: Technologies, Shifting Standards Roil Business

Gary Miller By Gary Miller – Managing Director, Consulting Division, SDR Ventures

Last year was a big year for businesses around the globe as major industries in America were shaken up by disruptive technologies and shifting definitions of traditional marketplace standards. While many of the developments concerned the bigger household names, they were no less relevant for the smaller business trying to grow to the next level.

This year promises even more progress, upheaval, disruption and innovation, all of which can be very good for growth-minded business owners. While new technologies pop up every day, the basic premise for growing a business remains the same: grow the top and bottom lines while cutting costs wherever possible.

With this in mind, here are six trends that business owners will have to focus on in 2016 and beyond. I predict that these “trends” will become the business “norms” of the future.

    • The rise of the remote and freelance workforce. The future workplace is more work and less place. Given the impact of new technologies, an uncertain economy, and the demands of a new generation of employees, workers will spend more time out of the office than in the office. Many will now call in to meetings from the road. Most will use online collaboration tools and cloud services to get work done on the weekends and – unfortunately for family harmony – check emails at all hours.As a result of this environment, top performing companies will make a commitment to electronic tools to teach, monitor and mentor team members regardless of their physical locations. Podcasts, webinars and online courses will allow for on-demand support whether it is for technical issues, strategy or sales tactics. This type of career development will lead to a more engaged workforce and will help recruit top-quality talent.Utilizing freelance talent can benefit growing businesses especially, as the model allows owners to cut down on the overhead costs of paying full-time employees who may only be needed for a few specific projects a year. Fortune magazine is predicting that almost half of the workforce will be freelance by 2020.

 

    • The move to a connection economy. Many thought leaders – Seth Godin, Clay Hebert and Ian Altman among others – believe we are now in, or rapidly moving to, a “connection economy.” The connection economy rewards value created by building strong relationships and creating enduring connections with customers. The most valuable companies will connect buyer to seller, or consumer to content. Personalized, data-driven marketing will become more refined. Business owners will measure and deliver results, not just solutions. Customers are sick of investing in “solutions” that do not deliver the intended results. Top-performing companies will invest in products and services that ensure success of each project for each customer. Doing so will lead to high customer satisfaction, customer retention and referral business.

 

    • The focus on customer retention. Reports from Forbes show that customer retention is the proven quickest way to maximize growth profits for business and is often cheaper than the cost of marketing for new-customer acquisition. Making products better and services stronger and more dynamic will be required to remain competitive. In a connection economy, customer retention is paramount to survivability.

 

    • The importance of millennials. The largest group of individuals, according to the Census Bureau, is people in their 20s (80 million compared to 78 million “baby boomers’). The group, often categorized as millennials, now represents the largest customer and employee segment. They will also become the largest business-owner segment. From 1947 to 2010, baby boomers represented the largest segment of the population. Smart business owners will shift from complaining about millennials to embracing them.

 

    • The mobile device will become the center of marketing. From cellphones to smartphones, tablets to wearable gadgets, the evolution of mobile devices is one of the prime factors influencing the marketing world. Businesses will be able to strike up a more personalized customer relationship in the connection economy by leveraging the power of mobile.

 

  • The continuing need for strong content. Content, particularly visual content, will rule the roost in online marketing. User-generated content will be the new hit. The power of user-generated content will surpass branded content as brands begin to relinquish control of their own brands’ marketing to customers. Business owners will tightly integrate content marketing into their sales process. When looking to make a purchase, how much research do you do on your own compared to the information you get from salespeople? Customers value impartial input from outside sources such as other users, third-party endorsements from editorial reviews and impartial research.

Gary Miller is the managing director of the consulting division of SDR Ventures, a Denver-based investment banking firm. Gary advises business owners on strategic business planning, M&A, raising capital and growing your business. Gary often speaks at conferences on M&A matters. Contact: 720-221-9220 or gmiller@sdrventures.com.

View article on abqjournal.com >

Axial

How to Improve Your Company’s Strategic Planning and Drive Growth

Gary Miller By Gary Miller – Managing Director, Consulting Division, SDR Ventures

Recently, I was visiting with a client who told me he believed that his strategic plan was only 30% effective. He said, “I know our strategic plan is not producing the profits we had hoped for, but I don’t know if the problem is the plan or my people.”

Most CEOs know that profitable growth is the key driver to creating shareholder value and that developing effective business strategies is the key to profitable growth. Successful strategic planning is not a mysterious process available only to an exclusive group of top-performing companies that can afford to hire an expensive outside consulting firm. It is the result of executive commitment, hard work, and a well-defined approach.

Before any successful planning process is developed or reevaluated, business owners must create a platform for success. This “platform” includes five critical steps:

1) Build the Foundation.

Senior management commitment and adequate planning resources are hallmarks of all top organizations and are essential prerequisites for an effective strategic planning process. Owners and senior staffs of top performing companies build a successful, high-performance culture that drives their decisions by executing their chosen initiatives. Maximizing shareholder value should be the overarching objective. Here are a few ways to do so:

  • Explicit shareholder value goals permeate all levels of the organization including “frontline” employees.
  • Define and measure key performance indicators (KPIs) across the entire business.
  • Reward superior performance generously at all levels.
  • Do not tolerate poor performance at any level.
  • Gather and analyze market intelligence to close gaps in management’s understanding of the business environment.
  • Provide management development programs to teach employees to think like owners.
  • Makes sure communication up and down the organization is consistent and continuous.

2) Implement Strategic Planning Processes.

The best companies have more than one model in their strategic arsenal and use the best one to suit the occasion. For example, the outcome of a strategic performance review (evaluating if a business unit is “on strategy”) and an environmental scan (evaluating if major threats or unanticipated opportunities exist) would determine whether a comprehensive strategy work-up is required or whether a less comprehensive approach is adequate at that time.

3) Develop Strategy Support Systems.

The best support systems increase both the efficiency and the quality of strategic planning. They help key insights to be broadcast and understood internally and ensure that current situations are addressed properly. Owners and senior executives are in a unique position to increase the value of cross-business synergies and align business functions with corporate objectives, while enhancing the business skills and tools to improve operational planning.

At its best, corporate planning is used to facilitate SBU (strategic business unit)-level planning and align business function plans. For instance, pressure testing SBU plans should be seen as a benefit to the SBU head, not part of corporate-level interference or validation.

A number of tools and frameworks are used by leading companies throughout the strategic planning process to achieve optimal results. Tools used to identify key strategic issues include external customer research, competitive benchmarking, technology evolution mapping, market segmentation and scenario analysis. An external focus on customer and competitor developments helps an organization identify strategic opportunities as well as threats. Porter’s Five Forces and SWOTs (Strengths/Weaknesses/Opportunities/Threats) analysis are effective frameworks for assessing market attractiveness and competitive position, while value driver mapping is useful for identifying potential sources of value creation and communicating what is expected of people across the organization. Using analytic tools and technology (e.g., structural equation modeling and predictive modeling simulators) can help speed up and support the planning process.

4) Promote Information Technology.

Leading companies develop a culture promoting the use of IT in the strategic planning process. For example, IT can help delayer interaction between hierarchical levels and cross organizational boundaries.

IT resources provide shared tools to manage the planning process timeline and activities, support decision making, provide online documentation of the strategy, and communicate the finalized plan.

Leverage IT to ensure key information is made available to all employees. This will make the information more likely to be used and reduce the cycle time to conduct manual activities. Best practice also includes systems that provide information at an aggregate level to corporate functions and at a detailed level to business units – preferably in a format that managers can query.

IT also supports broader communication of ongoing results and the follow-up activities after initial implementation.

5) Align Organization Decision-Making to the Plan.

Organizational alignment can be a powerful tool to change behavior and achieve sought-after performance. While most would agree that managers usually want to do the right things, misalignment prevents optimal performance by diffusing focus and undermining process credibility.

To achieve alignment of people and management systems when executing a business strategy, companies should invest in thoughtfully designed communication programs to communicate strategic objectives. They also should invest in formal programs for tracking actual results against performance commitments, create accountability, and share information appropriately throughout the organization.

Takeaways

Strategic planning is hard work. To do it properly, it demands strong commitment, adequate resources and the well-defined disciplined processes described above. Decision processes must be tied to the strategic planning process and incentive programs have to be aligned to the plan. But strategic planning does not need to be mysterious, overly complicated, and/or excessively costly. Done properly, strategic planning can pay huge dividends that justify the effort.

Owners and senior managers play an essential role in the planning process by setting direction and expectations, and by providing resources that match the plan goals. Finally, communicating the Plan’s goals and results is key to consistent improved performance.

Gary Miller is managing director of Denver-based SDR Ventures Inc.’s consulting division. SDR is an investment banking firm that advises privately held middle-market businesses. Miller specializes in helping companies prepare for sale, exit planning, company valuations, strategic business planning and M&A consulting. He can be reached at 720-221-9220 or gmiller@sdrventures.com. For more info about SDR Ventures’ consulting division, please click here.

View article on Axial Forum >

The Denver Post | Business

The Economy’s Uncertain, Are You Sure You Want to Sell a Business?

The macroeconomic conditions might be tough, but there are still opportunities for companies trying to grow through acquisition

Gary Miller By Gary Miller – Managing Director, Consulting Division, SDR Ventures

I am often asked: “Given the economy, is this a good time to sell my business?”

The answer lies in understanding a number of internal and external factors, not the least of which are U.S. and global economic and market conditions.

It is no secret that the last seven years have produced, at best, a tepid economic recovery. Many companies are facing slow growth rates, more federal and state regulations, increased health care costs, and a lack of confidence in the economy. U.S. economic growth in last year’s final quarter was only 0.7 percent.

On the global front, China, the world’s second-largest economy, grew last year at its slowest rate in more than 20 years. BRICS countries — Brazil, Russia, India, China and South Africa — are all facing a cloudy future. According to Citibank, the global economic outlook is bleak and the International Monetary Fund has lowered its 2016 growth estimates for the world economy. The U.S. economy is projected to stay flat throughout 2016 and potentially 2017. With slow global growth, a strong dollar, weak oil prices, and a low labor participation rate, some would say that the U.S. economy looks like a field hospital after battle.

Capital markets are changing too. The number of mergers and acquisitions that closed in 2015 was lower than in 2014. Deal multiples were lower for the same comparable period. The Wall Street Journal reported, just a few days ago, that the number of initial public offerings by young companies in January 2016 was … zero. The reason is “a broad retreat from risk by investors.”

With $19 trillion in U.S. national debt and the lowest labor participation rate since 1978, it’s no wonder that business owners are uncertain about selling.

While macroeconomic conditions are important factors to consider, often personal factors — such exit planning issues as health, family status, retirement goals, etc. — play an even more significant role in the owner’s consideration. If health issues, a looming divorce, transferring the business to family members or retirement concerns are important factors in your decision process, then I recommend that you begin now to prepare your company for sale.

Strong preparation is critical for successfully closing a transaction, even more so today as buyers are on the hunt for quality companies to add to their portfolios and accelerate their own growth plans. Depending on the condition of your company, it can take six months to three years just to prepare to go to market, and another six to 12 months to close a transaction. Don’t wait another day to get started.

If you need help, hire high quality, experienced advisers to speed up the pace of preparation so that you can concentrate on growing the top and bottom lines while cutting expenses wherever possible.

In spite of the current state of the U.S. economy, there is some good news for business owners: Companies with quality performance drivers (consistent earnings, solid management and consistent growth) are still being sold successfully — and with high valuations and high multiples.

So if you are ready, I recommend that you move quickly before the markets change significantly. Most experts predict that the M&A environment will remain steady for the next year or two. After that, some economists predict a mild recession beginning in late 2018 or early 2019.

Not sure? Many large and small companies trying to grow before putting themselves on the market use acquisitions of their own to speed expansion. Today, interest rates are low and terms and conditions are reasonable, and lenders and investors have money they want to put to work.

My advice to business owners is to consider all of the factors discussed above. But if you decide that it’s time to sell or buy, strike while the iron is still hot.

Gary Miller is the managing director of the Consulting Division of SDR Ventures, a Denver-based investment banking firm. Gary advises business owners on strategic business planning, M&A, and raising capital. Gary often speaks at conferences on M&A matters. Contact 720-221-9220 or gmiller@sdrventures.com.

View article on denverpost.com >

DC Velocity

Logistics Industry Looking to Streamline Operations Through M&A

DC Velocity, an online publication for logistics and supply chain managers and executives, reported that the logistics industry is exercising caution due to the decelerating global economic rebound. The article cited SDR’s Q4 Logistics M&A Report.

“Despite that uncertain outlook, the industry is showing optimism by investing in improving operations and keeping up a quick pace on mergers and consolidations,” the article states.

You can read the full DC Velocity article here. SDR’s Q4 2015 Logistics M&A Report is available here.

Albuquerque Journal

Executive’s Desk: Advisory boards can provide myriad benefits

Gary Miller - advisory board articleBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Rarely can business owners build great businesses alone. Whether it’s a startup or an established business, having access to high-quality advice increases an organization’s odds of success.

Owners seeking advice can obtain it from consultants, attorneys or accountants. Increasingly, though, attention is being given to “advisory boards.”

The benefits of an advisory board include setting aside time to think strategically; obtaining feedback and insights from outside the company; and gathering information and expertise from peers who have knowledge and experience in areas different than your own.

The advisory board can provide advice from marketing to product development, to operations, to manufacturing, to identifying acquisitions or potential buyers for your company. Typically, business owners seek experts in technology, sales and marketing, operations, finance, and the financial services industry. Thinking carefully about an advisory board’s role and composition will maximize its contribution to the organization’s success.

An advisory board is an informal group. It is not a corporate board of directors. It is a group of mentors. This is a group of outside advisers/experts who share their knowledge to help you be more competitive, help you think strategically and offer specific advice.

When forming an advisory board, first determine what skill sets you are seeking. You may want to include industry experts if you are expanding in new markets, or people who will introduce you to potential investors. Choosing the right people is critical. I recommend that you do not accept any member to an advisory board who is unwilling to sign a nondisclosure agreement and a noncompete agreement.

Normally, advisory boards have from four to seven members, meet quarterly and can serve indefinitely or for a limited term – from two to three years.

Advisory boards provide “safe harbors” for executives to “test-drive” or brainstorm ideas before taking them to the board of directors or investors.

Also, advisory boards may be needed, as a practical matter, in certain deal or ownership structures. For example, investors in limited partnerships may require a voice in business operations, but may not wish to lose the benefits of limited liability by participating in the management of the business directly. Advisory boards are used frequently to avoid that potential risk.

Advisory boards can help address fiduciary duties and other liability concerns. Corporate boards of directors potentially expose themselves to a variety of legislated liabilities (responsibility for unpaid wages, unpaid taxes, environmental damage, etc.), and are subject to fiduciary and other legal duties that can lead to civil or regulatory liability. It is unlikely that advisory board members could be subject to these potential exposures. While I have heard concerns expressed about potential liabilities of advisory board members, I am unaware of any situation in which that liability actually has come home to roost. The legislated duties and responsibilities apply only to corporate directors pursuant to applicable entity law. Accordingly, qualified individuals who may not be prepared to assume board of director responsibilities might well be encouraged to assist business owners as advisory board members.

Choosing among potential advisory board candidates is much more than evaluating their résumés and accomplishments. Strong advisory board candidates are objective and honest. They have knowledge and expertise outside your skill sets, and have a genuine interest in helping you/your business succeed. They are good problem-solvers, communicators, have diverse skills and are well-respected in their respective fields. Strong advisory board candidates are well connected with networks that might be leveraged to assist you.

I do not believe in “cosmetic” advisory boards. These are individuals you post on your website because their résumés are filled with many accomplishments or they have high “personal brand” recognition. More often than not, the reality is they do little to genuinely give their time or expertise necessary for you to be mentored by them.

I am often asked about advisory board compensation. Depending on the stage of the business (startup to mature), I believe that the compensation can range from providing food for each meeting to covering expenses, to providing stock options, to making cash payments, or a combination of these. Advisory board compensation is a matter of agreement. Since advisory board members have less time commitments and no fiduciary responsibilities, they should be paid less than the board of directors.

Note, however, an advisory board member is expected to contribute substantively – and not just paid a fee for showing up or answering email/the phone from time to time.

Gary Miller is the managing director of the Consulting Division of SDR Ventures, a Denver-based investment banking firm. Gary advises business owners on strategic business planning, M&A and raising capital. Gary often speaks at conferences on M&A matters. Contact: 720-221-9220 or gmiller@sdrventures.com.

View article on abqjournal.com >

Healthcare Matters

Healthcare Industry Experiences Major Consolidation

Healthcare Matters, an online publication that covers the healthcare industry’s supply chain, explores the potential aftermath and political implications of the healthcare industry’s massive consolidation in 2015. The article cites SDR’s Q4 2015 Healthcare M&A Report.

The article reports that more than 100 deals were completed last year and these deals represented a 262% increase in transaction value from 2014. The article likens the consolidation to an industry move to reduce competition. This increased concentration is attributed to the high cost of providing care and the emerging practices of defensive and preventative care.

You can read the full Healthcare Matters article here. SDR’s Q4 2015 Healthcare M&A Report is available here.

EnterpriseTech

M&A in Telecom Industry Likely to Remain Active

EnterpriseTech, an online publication covering high performance computing technologies, reported that M&A activity in the telecommunications industry is expected to remain strong. The article cited SDR’s Q4 2015 Telecom M&A Report.

“A series of mergers and acquisitions during the last quarter of 2015 illustrates how the networking and telecom sectors are, like other IT industry sectors, likely to see more consolidation in 2016,” the article states.

The article cites the growing reliance on cloud-based services and manufacturers’ plans to expand industrial connectivity as driving factors behind industry activity. As telecom vendors attempt to keep pace and expand network capacities, companies will turn to acquisitions designed to stretch their global footprint and expand capacity.

You can read the full EnterpriseTech article here. SDR’s Q4 2015 Telecom M&A Report is available here

The Denver Post | Business

Six New Ways to Grow Your Business in the New Year

Columnist Gary Miller forecasts six business trends likely to become the norm of the future

Gary Miller - advisory board articleBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Last year was big for businesses around the globe as major industries in America were shaken up by disruptive technologies and shifting definitions of traditional marketplace standards. While many of the developments concerned the bigger household names, they were no less relevant for the smaller business trying to grow to the next level.

This year promises even more progress, disruption and innovation — all of which can be very good for growth-minded business owners. While new technologies pop up every day, the basic premise for growing a business remains the same: grow the top and bottom lines while cutting costs wherever possible.

With this in mind, here are six trends that business owners will have to focus on in 2016 and beyond. I predict these trends will become the business norms of the future.

The rise of the remote and freelance workforce. The future workplace is more work and less place. Given the impact of new technologies, an uncertain economy, the demands of a new generation of employees, workers will spend more time out of the office than in the office. Many will now call in to meetings from the road. Most will use online collaboration tools and cloud services to get work done on the weekends and — unfortunately for family harmony — check e-mails at all hours.

As a result of this environment, top-performing companies will make a commitment to electronic tools to teach, monitor and mentor team members regardless of their physical locations. Podcasts, webinars and online courses will allow for on-demand support whether it is for technical issues, strategy or sales tactics. This type of career development will lead to a more engaged workforce and will help recruit top-quality talent.

Using freelance talent can benefit growing businesses especially, because the model allows owners to cut down on the overhead costs of paying full-time employees, who may be needed for only a few specific projects a year. Fortune is predicting that almost half of the workforce will be freelance by 2020.

The move to a “connection economy.” Many entrepreneurial leaders — Seth Godin, Clay Hebert and Ian Altman, among others — believe we are now in, or rapidly moving to, a connection economy. The connection economy rewards value created by building strong relationships and creating enduring connections with customers. The most valuable companies will connect buyer to seller or consumer to content. Personalized, data-driven marketing will become more refined. Business owners will measure and deliver results — not just solutions. Customers are sick of investing in solutions that do not deliver the intended results. Top-performing companies will invest in products and services that ensure success of each project for each customer. Doing so will lead to high customer satisfaction, customer retention and referral business.

The focus on customer retention. Reports from Forbes show that customer retention is the proven quickest way to maximize growth profits for business and is often cheaper than the cost of marketing for new customer acquisition. Making products better and services stronger and more dynamic will be required to remain competitive. In a connection economy, customer retention is paramount to survivability.

The importance of millennials. The largest group of individuals, according to the Census Bureau, is people in their 20s (80 million compared with 78 million baby boomers.) The group, often categorized as millennials, now represents the largest customer and employee segment. They will also become the largest business owner segment. From 1947 to 2010, baby boomers represented the largest segment of the population. Smart business owners will shift from complaining about millennials to embracing them.

The mobile device will become the center of marketing. From cellphones to smartphones, tablets to wearable gadgets, the evolution of mobile devices is one of the prime factors influencing the marketing world. Businesses will be able to strike up a more personalized customer relationship in the “connection economy” by leveraging the power of mobile.

The continuing need for strong content. Content, particularly visual content, will rule the roost in the online marketing. User-generated content will be the new hit. The power of user-generated content will surpass branded content as brands begin to relinquish control of their own brands’ marketing to customers. Business owners will tightly integrate content marketing into their sales process. When looking to make a purchase, how much research do you do on your own compared with the information you get from salespeople? Customers value impartial input from outside sources such as other users, third-party endorsements from editorial reviews and impartial research.

Gary Miller is the managing director of the Consulting Division of SDR Ventures, a Denver-based investment banking firm. Gary advises business owners on strategic business planning, M&A, and raising capital. Gary often speaks at conferences on M&A matters. Contact 720-221-9220 or gmiller@sdrventures.com.

View article on denverpost.com >

Axial

2016 M&A Sector Outlooks

In a recent article on the Axial Forum, author Karen Sibayan cites analysis from SDR Ventures and other industry experts and features commentary from SDR’s Chris Bouck to help put numerous 2016 M&A sector outlooks into perspective.

Sibayan identifies technology, healthcare, manufacturing and telecom as industries that are “thriving in this prolific deal environment.” However, the massive M&A deals that occurred within the technology industry in 2015 likely means that smaller, middle-market deals will happen this year, says Bouck.

Both the manufacturing and healthcare industries saw strong growth in M&A activity in 2015, which should continue into 2016. “One of the main driving factors for this growth was the advancements made in medical technology over the past year,” Bouck says. “As medical technology continues to advance, medical equipment companies are making transactions in order to fill gaps in their portfolio of products offered.”

The outlook is less positive for the oil and gas and retail sectors; however, opportunities are still available. Online retailers, Sibayan reports, will continue to see growth over storefront retailers. And with the low price of oil, “there should be plenty of buyers who will be looking to get a deal,” Bouck says.

Both the food and beverage and pet foods industries will continue to be influenced by consumers’ desire for healthier, natural and ethically sourced ingredients. Bouck says companies that occupy this food space “will continue to trade for premium valuations with larger strategic buyers attempting to stay on trend and acquire strong brands that can be scaled.”

Read more 2016 sector outlooks in Sibayan’s full article.

CIADA Insider Magazine

Auto Dealership Market Sees Growing M&A Activity

SDR’s Mike Grande discusses the latest M&A trends in the auto dealership market and what they mean for dealership owners

In the latest issue of CIADA Insider Magazine, a publication from the Colorado Independent Automotive Dealers Association, Mike Grande, Director at SDR Ventures, provides his expert insight behind the upward trend of M&A activity in the auto dealership market.

“A good portion of the strength in today’s auto market is clearly the result of making up for lost sales during the economic downturn,” Mike says. Since the economic downturn, revenue for dealers has grown approximately 28 percent per year; this has led to greater incentives for buyers to acquire dealerships.

Mike points out that dealership owners are in a good position to monetize their investment due to the economic upswing. Current financial conditions have made it more expensive to build brand new dealerships, but they have also made financing institutions more willing to lend to those looking to acquire. These two factors, combined with the fact that there are more buyers than sellers, has created favorable market conditions for owners.

For those looking to buy, there is a major advantage in acquiring well-established and well-run auto dealerships that survived the economic downturn. Forced into a “sink or swim” ultimatum during the recession, the auto dealerships that survived have consolidated costs and maximized profitability. Buyers should keep an eye out for dealerships with high earnings and a track record of profitability. “A well-run service department will contribute significantly to gross profit while increasing store traffic even more than the best advertising campaign,” Mike adds.

Check out Mike’s full commentary in CIADA Insider Magazine on page 20.

Axial

The Challenge of Sorting Valuation Realities From Fantasies

Karl EdmundsBy Karl Edmunds, SDR Ventures

Think about that last lunch or conference where you met a new friend or an old business connection, and over dinner or a drink you were told that your business is absolutely worth 6-8x EBITDA. Effortlessly, you calculate a quick number and begin to dream of your future exit with this reward in your pocket.

For many business owners, the prospect of selling a business is like the classic dream of how you would spend millions from winning the lottery. You hear that large number, and then your mind kicks in and for a few moments you are lost in the fantasy of spending that winning sum.

But then you confront the realities of the market when you prepare to actually exit your business, and you are told your business is more likely worth 3-4x EBITDA.

The question to consider is whether you want to hear a sugar-coated message or be told the honest realities of the market. Granted, these market realities can play out in both directions. You may find that your business is worth more than you expected, but more often business owners get locked into a higher exit value that doesn’t align with the market.

When faced with this challenging dilemma, some owners are so committed to the original number they have in their head that they decide to wait in the hope that the market will catch up to their expectations.

Be careful with this strategy. If waiting takes you outside the realities of the broader market cycles, you may face the necessity of having to work and manage your business much longer than you anticipated. Just ask some of the business owners who were determined to wait and finally readied their business for an exit in 2008. Some are still in the game trying to drive value back into their businesses.

A better approach may be to first consider the qualitative, rather than just quantitative, goals that you’d like to realize from the sale of your business. Consider the lifestyle you are seeking, or your retirement aspirations, and prioritize what matters most to you. You can then work backwards, perhaps with the help of a financial planner or other professional advisor, to determine the exact value that would satisfy all of your goals.

The bottom line: what you want or think you need in the sale of your business has to be realistic and aligned with market realities. If not, your overall exit strategy may be in jeopardy.

The fact also is that business size drives different valuation results even if you are in the same industry vertical. Just because you heard that a competitor who is in the same industry, but is significantly larger, sold for a strong multiple of EBITDA, doesn’t necessarily mean that your smaller business will sell for a comparable multiple.

My last word of advice: be wary of the investment advisor or broker who agrees with everything you say about the value of your business and is immediately prepared to bring your business to the market at exactly the price point you want.

Unfortunately, this tactic all too often has the investment advisor/broker hoping that the market will drive the price point down and that the stresses of selling will have you cave in to a lower offer. This isn’t what you hire a professional investment banking advisor to do.

If you want the most productive exit strategy, find an advisor that will give you fact-based market information, constructively offer recommendations that will enhance business value, and help you do all of the needed preparatory work to bring your business to the market with high confidence in achieving the value that you both desire and can actually achieve.

Karl Edmunds is a director at Denver-based investment bank SDR Ventures. Karl is a recognized business leader with over 30 years of business experience in banking, consulting and exit planning for business owners. You can reach Karl at kedmunds@sdrventures.com.

View article on Axial >

HR.com

Need for Talent Continues to Drive M&A

SDR commentary on HR.com highlights role of human resources in acquisitions

A recent issue of HR Strategy and Planning Excellence, a publication of HR.com, featured an article from SDR Vice President, Anthony Wong.

In his column, Anthony notes the increasing prevalence of “acqui-hires” — full company acquisitions designed to snare employees and their skillsets. “In many cases, acquisitions for talent are not a factor of differentiation, but a necessity for survival,” he writes.

He also points out demographic changes that are forcing companies to be more cognizant of their talent needs. Low unemployment, for instance, has made finding talent more challenging, and millennials continue to replace aging baby boomers in the workforce.

Anthony concludes his column by emphasizing the importance of human resources professionals in talent-driven acquisitions, noting their “role in making sure there is a seamless merger between the acquirer and the target.”

To read Anthony’s full commentary, check out the latest issue of HR Strategy and Planning Excellence on HR.com.

The Denver Post | Business

Advisory Board Can Help Boost Business

You might be getting solid advice from lawyers and accountants, but lately more attention is on peer advisory boards

Gary MillerBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Great businesses are rarely built by owners alone. Whether it’s a startup or an established business, having access to high-quality advice increases an organization’s odds of success. Businesses seeking advice can obtain it from a corporate board of directors, consultants, attorneys or accountants. Increasingly though, attention is being given to advisory boards.

The benefits of an advisory board include setting aside time to think strategically, obtaining feedback and insights from outside the company, and gathering information and expertise from peers who have knowledge and experience in areas different than your own.

The advisory board can provide assistance with marketing, product development, operations, manufacturing and identifying acquisitions or potential buyers for your company.

An advisory board is an informal group, and thinking carefully about its role and composition will maximize its contribution. It is not a corporate board of directors. It is a group of mentors. The group has no financial interest in your firm.

When forming an advisory board, first determine what skill sets you are seeking. You may want to include industry experts if you are expanding in new markets or people who will introduce you to potential investors. Choosing the right people is critical. I recommend that you do not accept any member to an advisory board who is unwilling to sign a nondisclosure agreement and a noncompete agreement.

In many cases advisory boards are “feeders” to boards of directors. They might be expert in technology, sales and marketing, operations or finance. Normally, advisory boards have four to seven members and meet quarterly. Members can serve indefinitely or for a limited term — from two to three years.

Advisory boards provide safe harbors for executives to test-drive or brainstorm ideas before taking them to the board of directors or investors.

Also, advisory boards may be needed, as a practical matter, in certain deal or ownership structures.

For example, investors in limited partnerships may require a voice in business operations but may not wish to lose the benefits of limited liability by participating directly in the management of the business. Advisory boards often are used to avoid that potential risk.

Advisory boards also can help address fiduciary duties and other liability concerns. Corporate boards of directors potentially expose themselves to a variety of legislated liabilities — responsibility for unpaid wages, unpaid taxes, environmental damage, for example — and are subject to fiduciary and other legal duties that can lead to civil or regulatory liability. It is unlikely that advisory board members could be subject to these potential exposures.

While I have heard concerns expressed about potential liabilities of advisory broad members, I am unaware of any situation in which that liability actually has come home to roost. The legislated duties and responsibilities apply only to corporate directors pursuant to applicable entity law.

Choosing among potential advisory board candidates is much more than evaluating their résumés and accomplishments. Strong advisory board candidates are objective and honest and have a genuine interest in helping you and your business succeed. They are good problem solvers and communicators, have diverse skills and are respected in their fields. Strong advisory board candidates are well-connected with networks that might be leveraged to assist you.

I do not believe in cosmetic advisory boards — individuals you post on your website because their résumés are filled with many accomplishments or they have high personal brand recognition.

I often am asked about advisory board compensation. Depending on the stage of the business, compensation can range from providing food for each meeting to covering expenses, providing stock options, making cash payments or a combination of these. Advisory board compensation is a matter of agreement. Because advisory board members have fewer time commitments and no fiduciary responsibilities, they should be paid less than the board of directors.

Note, however, an advisory board member is expected to contribute substantively — and not just paid a fee for showing up or answering e-mails or phone calls from time to time.

Gary Miller is the managing director of the Consulting Division of SDR Ventures, a Denver-based investment banking firm. Gary advises business owners on strategic business planning, M&A, and raising capital. Gary often speaks at conferences on M&A matters. Contact 720-221-9220 or gmiller@sdrventures.com.

View article on denverpost.com >

Beverage World

SDR Commentary in Beverage World Reveals Consumer Trends

Industry driven by consumer preference for health, functionality and convenience

The latest issue of Beverage World magazine features commentary from our own Ben Rudman on the state of the non-alcoholic beverage industry. In the article, Ben identifies current trends that he believes will continue to play a role in future industry growth.

Ben notes that health and fitness drinks have increased in popularity in recent years, as consumers have started paying more attention to their health. The growing popularity of coconut water could mean that we see increased demand for beverages with similar nutritional value, such as maple and watermelon water. Additionally, high protein shakes and “meal replacement” beverages present major opportunity, as demand continues to rise.

Another trend Ben highlights is the rise of “functional beverages” with benefits such as high fiber and protein. These drinks tend to use Stevia as sweetener, which makes them lighter in calories. This trend drove Dr. Pepper’s 2012 purchase of a minority stake in Bai Brands, which produces antioxidant-infused beverages.

“Today’s consumers are looking for health and convenience,” Ben says. Companies that pay attention to these trends, while also meeting key criteria in terms of what the consumer believes is important, will likely continue to thrive.

To read Ben’s full commentary, check out the latest issue of Beverage World.

The Denver Post | Business

More Businesses are For Sale than Ever, But 8 Things Can Dog a Deal

Being good at building a strong business doesn’t mean you have the chops to structure and close a merger

Gary MillerBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Many business owners are jumping on the bandwagon to sell their companies, trying to take advantage of the current hot market and the frothy multiples being paid by buyers. Combined with the baby boomer tsunami, more businesses are for sale today than ever before.

This trend creates a competitive environment in which buyers anxious to grow their businesses through acquisitions, as well as organic growth, are looking more closely at the quality and price-value relationship of any potential acquisition.

However, 80 percent of owners who put their businesses up for sale never close the transaction. Over years of observation, I have found there are eight basic reasons deals fall apart:

Value expectations too high. The top reason deals fail to close is a seller’s unrealistic expectations about value.

Many business owners read and hear about companies or competitors selling their companies for very high sums and believe that their businesses are worth the same.

Unclear story elements. Business owners need to think like buyers. Attracting a buyer is like preparing for a beauty contest. Companies that show best win. Often, because of poor strategic planning, the business owner cannot articulate clearly the company’s competitive advantages, its growth opportunities, its revenue potential, and its ability to produce significant returns on invested capital.

Quality of earnings. Audited financial statements confirm financial accuracy and help validate forecasted performance. Lack of clarity about key business drivers, sales pipeline backlogs, back office operations, and the consistency of growth and earnings inhibit a buyer’s enthusiasm.

Length of time. Every deal has its own momentum and a life of its own. But time is the enemy of all deals. As the deal process drags on, buyers and sellers start to lose interest.

Material changes. Material changes in the business’s operations can occur at any time. While these changes may be completely out of the seller’s control — recession, loss of a large client, loss of a key employee — these changes can stop a deal from closing. However, if a material change occurs, the seller must disclose it promptly and fully to the potential buyer. Nothing will destroy a buyer’s trust more quickly than the seller failing to be upfront about a material change in the business.

Renegotiating terms of the deal. Renegotiating the terms, conditions, structure, representations and warranties of a settled deal can be a deal killer. At the very least, backtracking components that have been previously agreed to kills momentum, adds time and causes deal fatigue. Worse, it fosters distrust and can call into question all other components of the deal structure previously negotiated.

Reaching for the last dollar. It is completely understandable that sellers who have put everything into their businesses want to get every dollar out. Often, the owner traps herself mentally by fixating on a specific price. Multimillion-dollar deals have been lost over a few thousand dollars. I recommend to clients that they should examine all components of the deal’s structure — not just the final offering price.

Inadequate advisers. Selecting a quality deal team is critical. In my experience, owners who are very good at building successful businesses, often stumble in a sale.

Selling a business is a once-in-a-lifetime event for most owners. But most also have never sold a business and do not have the skills to complete a deal on their own, which increases the likelihood that they’ll leave money on the table.

Gathering a team of skilled advisers can help. These aids should include an experienced mergers and acquisitions consultant to lead the transaction team; a skilled wealth management firm to help owners preserve their proceeds and to minimize tax obligations; a law firm with significant transaction experience; an accounting firm familiar with the tax implications of various deal structures; and a strong investment banking firm with deep industry experience, solid valuation expertise and keen negotiating and closing skills to get the deal done.

Gary Miller is the managing director of the Consulting Division of SDR Ventures, a Denver-based investment banking firm. Gary advises business owners on strategic business planning, M&A, and raising capital. Gary often speaks at conferences on M&A matters. Contact 720-221-9220 or gmiller@sdrventures.com.

View article on denverpost.com >

Albuquerque Journal

Executive’s Desk: Selling a business requires planning, timing

Gary Miller - Sell your businessBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Over the past several months, a number of business owners have told me that they are ready to sell, but haven’t “pulled the trigger.” Most think that, if they wait, their business valuations will continue to increase. But they are gambling at best.

There is much talk about the strength of the current seller’s market over the next six to 12 months. Most qualified mergers and acquisitions advisers will tell you that you need to maximize the value of your business to receive the highest price with the best terms and conditions. Three factors – business optimization, exit planning and the state of the capital markets – significantly affect the value of your business.

  • Business optimization. Generating attractive future earnings streams for the business is critical. Various performance drivers (strategic business plans, management bench strength, sales, competitive positioning, marketing, operations, financials, intellectual property and market share) impact the buyer’s investment risk. An M&A consultant can identify what needs to be done to optimize each of the internal factors.
  • Exit planning. Focus on how satisfied the seller will be after the transaction closes. If you are willing to sell now, plan what your life will look like after the sale. To help you think through your future, hire an M&A consultant to help you establish your life’s goals and exit plans, and prepare your company for sale before you sell. Once your goals, exit plans and company is ready to go to market, hire a knowledgeable wealth planning team to help you with estate, tax and wealth management plans that conform to your exit strategy. Your wealth plan should be in place at least three to six months before you go to market. Next, hire a strong investment banking firm, followed by an experienced transaction law firm and accounting firm, to help you complete the deal.
  • State of the capital markets. This last factor is beyond your control. The state of the capital markets depends on various economic conditions. They influence how available funding is for an acquisition. Capital markets are cyclical and are consistently moving from a “sell environment” to a “neutral environment” to a “buy environment” – in that order. These cycles repeat approximately every 10 years, as illustrated below.

Key indicators drive the transitions between the phases in the capital markets. But predicting those takes expertise.

As Yogi Berra once said: “Predicting is really difficult, especially when it’s about the future!”

Understanding these phases is not top-of-the-mind of most business owners. This is one reason successful business owners engage a qualified investment banker to help maximize business value and identify these phases before the owner goes to market.

Market conditions fall into two distinct time frames: The present state and the future state.

The present state of market conditions includes cost of debt, leverage multiples, industry betas and public company valuations. The economic outlook provides a perspective on the future state and is influenced by currency, Federal Reserve policy, unemployment rates, GDP growth, shocks (terrorism, wars and disease outbreaks) and bubbles (technology, real estate, etc.).

The trick is to be able to accurately predict the economic outlook far enough into the future to be meaningful for a business owner, especially if he/she is considering selling a business sometime in the next 12 to 24 months.

It normally takes an owner from six to 36 months to prepare a business for sale and another nine to 18 months to complete a sale’s transaction. By then, depending on where you are in the cycle, things can change dramatically.

Advice from capital market analyst Jeff Mortimer, chairman of BNY Mellon, suggests that, barring a major “market shock,” frothy multiples paid for privately held companies over the past two years will not change any time within the next year and a half. But, after that, he believes the market will soften and move to a “protect” market state, then to a “buyer’s” market state, which will require perhaps another five years to return to its current “seller’s market” state.

My advice to clients is as follows: (1) Hire an M&A consultant to help you with your exit planning strategy and getting your business prepared for market if you are ready to sell. Next, hire a wealth planning firm to help you preserve your cash generated from the sale of your business. If both are completed, then pull the trigger! (2) If you are ready to sell and have a wealth plan in place, but your company isn’t ready to go to market, hire an M&A consultant to help you get there. Regardless of where you are in any of the two situations, don’t “dilly-dally.”

Gary Miller is a managing director consulting division at SDR Ventures, a Denver-based investment banking firm. Gary specializes in strategic business planning, mergers and acquisitions advice, exit strategy consulting and post-integration services. Contact: 720-221-9220 or gmiller@sdrventures.com.

View article on abqjournal.com >

The Denver Post | Business

Know the differing goals of strategic, financial buyers before selling

Knowing the key differences in the way these two groups think can help improve your chances of a successful outcome

Gary Miller - Sell your businessBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

I work with business owners who need to raise capital or want to sell their companies. Most are unprepared to do either. There are many reasons for this, but three of the most important ones are: They lack a well-thought-out business plan, they do not know whether to raise debt or equity, or they do not understand which kind of buyer or investor to reach out to — either a strategic buyer or a financial buyer.

Knowing the key differences in how these two groups think can help improve your chances of a successful outcome.

Strategic buyers and investors are operating companies that sell products or services. Some may be your competitors, suppliers or customers. Others could be unrelated to your company’s specific business, but are looking to grow in your market space to diversify their revenue sources.

Financial buyers and investors are private equity firms, venture capital firms, hedge funds, family investment offices and ultra-high net worth individuals. These firms and individuals make investments in companies expecting a significant return on their investments. They identify privately owned companies with solid growth records, consistent earnings, strong management teams, attractive future growth opportunities and sustainable competitive advantages.

Strategic and financial buyers have fundamentally different goals. Therefore, the way they approach a business purchase or investment can differ significantly.

Here are six major ways that these two groups differ when considering a potential purchase or investment:

  • Strategic buyers evaluate acquisitions largely in the context of how the business will “fit in” with their existing companies and business units. For example, as part of their due diligence and analysis, strategic acquirers will focus on to whom products or services are sold. They will examine market segments, economies of scale in your manufacturing processes and your intellectual property that could give them a competitive advantage.
  • Conversely, financial buyers won’t be integrating your business into a larger company, so they generally evaluate an opportunity as a stand-alone business. In addition, they often buy businesses with debt, which causes them to scrutinize the business’ capacity to generate cash flow to service the debt and to ensure that the company can generate an acceptable return on investment. While both buyer groups will carefully evaluate your business, strategic buyers focus heavily on synergies and integration capabilities whereas financial buyers focus heavily on stand-alone cash-generating capability and earnings growth capacity.
  • Strategic buyers are usually more up to speed on your industry, its competitive landscape and current trends. They will spend less time deciding on the attractiveness of the overall industry and more time on how your business fits in with their corporate strategy. Conversely, financial buyers typically build a comprehensive macro view of the industry and a micro view of your company within the industry. This macro view analysis might ultimately determine that they do not want to invest in any company in a given industry. This risk is usually not present with a strategic buyer that is already operating in the industry.
  • Strategic buyers focus less on the strength of your company’s existing “back-office” infrastructure as these functions will often be eliminated during the post-transaction integration phase. Since financial buyers will need this back-office infrastructure to endure post-transaction, they will scrutinize it during the due diligence process and often seek to strengthen such infrastructure post-acquisition.
  • Strategic buyers often intend to own an acquired business indefinitely. Therefore, they fully integrate the company into their existing business. Financial buyers typically have an investment time horizon from four to seven years, at which point they seek to sell or exit the acquired business. Financial buyers will be more sensitive to business cycle risk than strategic buyers. Financial buyers will be thinking about various exit strategies well before investing in or buying your company.
  • Financial buyers are in the business of making acquisitions. It is one of their core competencies to execute deals in a timely and efficient fashion. Strategic buyers may not have a dedicated M&A team. Therefore, a strategic buyer may be encumbered by slow-moving boards of directors, bureaucratic committees, and conflicts with senior management.

From my experience, the factors and processes that strategic buyers employ can often take longer than with financial buyers. Regardless of which buyer category you choose, be prepared for a six- to 12-month thorough preparation process before you decide to sell.

Gary Miller is the managing director of the Consulting Division of SDR Ventures, a Denver-based investment banking firm. Gary specializes in strategic business planning and providing advice regarding M&A, exit planning and capital formation. Gary often speaks at conferences on M&A matters. Contact: 720-221-9220 or gmiller@sdrventures.com.

View article on denverpost.com >

Food Dive

M&A in the Food & Beverage Industry Not Slowing Down

Food Dive, an online publication covering the food industry, reported that the market for mergers and acquisition remains strong. The article cited SDR’s Q3 Food & Beverage trend report and a recent survey from EY, which showed that 59% of global companies are anticipating a deal over the course of the next year.

Notable deals include Diamond Foods’ possible merger with Kellogg and Anheuser-Busch InBev’s proposed acquisition of SABMiller, which — according to Dealogic — would be the largest ever transaction in the beverage industry.

SDR’s Travis Conway put the industry’s Q3 success in context: “With over 190 reported M&A transactions in the third quarter of 2015, the US-based food and beverage industry is on pace to match 2014’s record levels of M&A activity,” he told Food Dive.

You can read the full Food Dive article here. Our Q3 Food & Beverage report can be found here.

Axial

SDR Provides Insight into Two Hot M&A Sectors

Axial Healthcare Whitepaper Takes You Beyond the “Mega Deals,” while Business Services Whitepaper Explores Active and Emerging Sectors Likely to Drive Future M&A Activity

In a detailed whitepaper recently released by Axial, author Karen Sibayan cites data from SDR Ventures showing 2015 Healthcare M&A deal volume on pace with 2014, and invested capital set to triple the amount invested last year.

As the whitepaper states, “This healthy pipeline is spurred by various factors. The most prominent of these is the Affordable Care Act (ACA), the landmark legislation that has expanded health coverage to millions of Americans.”

The impact of the ACA for M&A activity: “A jump-ball” effect where “smart players and money are chasing after growing areas,” states SDR Ventures Principal Chris Bouck in the whitepaper. “Investment bankers and other M&A players are now at the center of industry consolidation and are using their expertise to help companies take advantage of deal opportunities presented by the regulatory changes,” writes Sibayan.

Specific hot healthcare sectors include service areas that drive cost out of the system, such as specialized practices, urgent care, outpatient services and ambulatory care, according to Bouck. Additionally, states Bouck, physician groups have become hot targets, particularly as roll-ups and consolidations for private equity.

With the fierce competition has come elevated valuations, with EBITDA multiples reaching 12x. But as of yet, valuations haven’t created a sizable roadblock to getting deals done. “Buyers are looking for fast-growth and profitable companies right now, and we haven’t seen this being a problem in getting deals done,” Bouck says.

To download the free Axial whitepaper, “Wealth in Health: The Current State of Healthcare M&A,” follow this link.

An additional Axial whitepaper just released explores another momentous industry, business services. As with the healthcare industry, business services M&A activity is on pace with 2014, and several key segments are standing out as big winners right now, and likely for some time to come.

The whitepaper quotes SDR’s Chris Bouck on the topic: “It really now is an information-driven economy.” Bouck points to “continued outsourcing, the large addressable market, and the implementation and management of technology. We see these as really huge drivers in the business services space and we don’t see that abating.”

Software as a Service (SaaS), and cloud-based software, in particular, are driving the industry upward.

In the whitepaper, SDR’s Bouck highlights specific segments in which he expects to see heightened acquisitions activity. These include:

  • Education and training
  • Regulatory services (as government gets bigger)
  • IT services (due to the information-driven economy)
  • Logistics services (with technology being used to move goods)
  • Business process outsourcing (BPO)
  • Asset integrity management services (AIMS)

Bouck highlights asset integrity management software and systems as a small, yet rapidly growing segment as companies are attempting to better track and maintain existing infrastructure.

As for business services M&A activity, the industry is ripe for massive consolidation. The whitepaper cites a highly fragmented industry and companies looking to supplement organic growth with acquisitions as key drivers of future business services M&A.

To download the free whitepaper, “Ripe for More Mergers: Business Services in an Information-Driven Economy,” please click here.

SDR Ventures offers transaction advisory, private capital formation and business consulting services across a wide range of industries including healthcare and business services. SDR serves business owners and operators of privately held companies and provides them with a professional-class experience. Learn more about SDR’s services here.

The MHEDA Journal

SDR Commentary in The MHEDA Journal Highlights Key M&A Trends

The Material Handling Industry’s Distribution Expansion, Strategic Alliances and Dealership Consolidation Are Brought Into Focus

The latest issue of The MHEDA Journal features commentary from our own Ben Rudman on the state of mergers and acquisitions in the material handling industry. In the article, Ben lays out three clear trends that have informed successful M&A strategies for Original Equipment Manufacturers (OEMs) and equipment dealers.

The first strategy is focused on expanding distribution networks. Ben explains that OEMs seeking to improve their distribution have done so by acquiring dealerships, competing manufacturers and manufacturers of adjacent products. He cites manufacturers Crown, Mitsubishi Heavy Industries and Toyota as proof of these strategies in action.

Other companies have chosen to improve operations through strategic alliances, rather than outright mergers or acquisitions. MHI’s partnership with Jungheinrich is one such example.

The third strategy driving M&A in material handling, according to Ben, is consolidation of dealers. He maintains that consolidation can offer access to capital, regional efficiencies, new customers and greater influence for transacting dealers. He concludes by noting that “strategic mergers and acquisitions, at both the OEM and dealer levels, can improve margins, reduce the competition and lead to firmer control over the business.”

To read Ben’s full commentary, check out the Q4 issue of The MHEDA Journal.

The Denver Post | Business

Ready to sell your business? Strike before market conditions change

Gary Miller: Waiting for your operation’s value to increase is a gamble — at best

Gary Miller - Sell your businessBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Over the past several months, a number of business owners have told me that they are ready to sell but haven’t pulled the trigger. Most think that if they wait, their business valuations will continue to increase. They are taking a gamble.

There is much talk about the strength of the current seller’s market over the next six to 12 months — but that could change.

Three major factors significantly affect the value of your business: business optimization, exit planning and the state of the capital markets.

It’s the capital markets that are the unknown. So let’s first examine business optimization and exit planning.

Business optimization is an internal factor controlled by the owner. Generating an attractive future earnings stream is critical. Various performance drivers — strategic business plans, management bench strength and leadership, sales, competitive positioning, marketing, operations, financials, intellectual property and market share — impact the buyer’s investment risk. Owners can continuously improve the strength of these drivers to enhance business value.

Exit planning, another internal factor, focuses on how satisfied the seller will be after the transaction closes. If you are willing to sell now, plan what your life will look like after the sale. Once your goals and exit plans are firmed up, and once your company is ready to go to market, a wealth planning team can help you with estate, tax and wealth management plans that conform to your exit strategy. Your wealth plan should be in place at least three to six months before you go to market.

The state of the capital markets is the last factor but, of course, this is beyond your — and everyone’s — control. Economic conditions influence how available funding is for an acquisition. Capital markets are cyclical, and move from a “sell environment” to a “neutral environment” to a “buy” environment — in that order, repeating approximately every 10 years.

Key indicators sometimes can signal the transitions between the phases in the capital markets. But predicting those transitions takes expertise and luck — and complete accuracy is impossible.

Market conditions fall into two distinct time frames: present state and future state.

The present state of market conditions includes cost of debt, leverage multiples, industry betas and public company valuations. The future state is influenced by such things as Federal Reserve policy, unemployment rates, GDP growth, shocks (terrorism, wars, disease outbreaks) and bubbles (technology, real estate).

It is not possible to accurately predict the economic outlook far enough into the future to be meaningful for an owner, especially if he or she is considering selling a business sometime in the next 12 to 24 months.

Preparing a business for sale can take six to 36 months, and then another 12 to 18 months to complete the deal. Depending on where you are in the cycle, things can change dramatically during such a time frame.

BNY Mellon capital markets analyst Jeff Mortimer suggests that barring a major market shock, the frothy multiples paid for privately held companies over the last two years will not change any time within the next year and a half.

But after that, he believes the markets will soften and move to a “protect” state, and then on to a buyer’s market before taking perhaps another five years to return to the current seller’s market.

My advice to owners who are considering selling their businesses is as follows: Hire an M&A consultant to help develop your exit strategy and prepare your business for market and then hire a wealth planning firm to help you manage the proceeds of the sale.

If both tasks are completed to your satisfaction, and you’re ready to sell, pull the trigger — before it’s too late.

Gary Miller is the managing director of the Consulting Division of SDR Ventures, a Denver-based investment banking firm. Gary specializes in strategic business planning, mergers and acquisitions advice, exit-strategy consulting and capital formation. Gary often speaks at conferences on M&A matters. Contact: 720-221-9220 or gmiller@sdrventures.com.

View article on denverpost.com >

Denver Business Journal

DBJ Article Reveals Unique Wage Trends in Denver

SDR’s Chris Bouck Provides Insights into Colorado’s Appeal for Financial Services Employees

As the Denver Business Journal’s Monica Mendoza reports, real-estate agents in Denver are significantly out-earning the national average, while Denver financial services wages are falling below the national mark. Yet as the article explains, the common thread between both trends may be the same: millennials moving to Denver.

Ultimately, Colorado has become a very desirable place to live, and work. The real-estate market is hot, leading to success in that sector, and the influx of millennials into Colorado has set up a unique situation in the financial services industry.

While Denver has been labeled the “Wall Street of the West,” its culture offers distinctive advantages over New York and other large cities. The result: vast appeal for millennials.

As SDR’s Chris Bouck states in the article, “Millennials are about work-life blend. For millennials, pay is not the score card it was for [Baby] Boomers.” As Bouck states, 80-hour work weeks are simply “not for the millennials.”

Additionally, since most financial services sectors are concentrated in major cities, cost of living must be factored into the equation when comparing national wages. As the article states, Denver’s cost of living is still lower than other big cities in the U.S., despite the recent rise in home prices.

For more insights, please read the entire Denver Business Journal article.

The Denver Post | Business

How not to ask too much when selling

Valuing a company for sale is some science with a lot of consideration to art

Gary Miller - Investment Banking FirmBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Last month in New York, 100 CEOs, bankers and lenders at a conference were asked for their thoughts about middle-market merger and acquisition activity for the second half of the year.

Top of mind among dealmakers: 58 percent thought valuations are too high, and 23 percent thought business owners have unrealistic pricing expectations for their companies.

Many sellers of midsize businesses are unfamiliar with how to value their companies. Most successful business owners will hire an investment banking firm or a third-party valuation firm to bring them a realistic estimate.

But what if your adviser comes back with a price lower than you expected? Isn’t valuation as simple as applying a relevant revenue, earnings before interest taxes depreciation and amortization, or free cash-flow multiple to your business?

While multiples provide helpful data points, conducting a thorough valuation is much more complex — and it is not an exact science.

A reputable banker is going to start a robust valuation exercise by using multiple methods to narrow in on the right value range. Once the numbers have been crunched, a banker is most likely going to end up with a handful of independent estimated values for your business.

Here’s where the real work begins. For each method, a banker is going to consider a variety of non-quantitative factors and adjust the valuation accordingly.

Let’s look at some of the most common valuation methodologies that a banker will use to estimate the value of your business.

Discounted Cash Flow, or DCF: If bankers had a crystal ball into the future, a DCF analysis would be a great way to value a business. In reality, DCF analyses involve a huge amount of discretion in projecting what a company’s business will look like for the next five to 10 years. Operational assumptions for the model are typically provided by a company’s management team, so a banker needs to consider that the data rely heavily on management’s ability to predict the future accurately.

Most buyers, as they start to negotiate with the seller, are going to attack many of the assumptions that have been made about future growth. If the owner and the banker understand which line items are highly predictable and which are more variable, the banker will be able to estimate a more accurate valuation and help the seller negotiate.

Trading Comparables: Analyzing trading-comparable multiples reflects real-time and real-world valuation data. The key consideration is to ensure that the banker has the right universe of peer companies — which companies reflect most closely to yours in terms of size, product mix, growth potential, market segments and other major considerations.

Bankers ideally will evaluate five to 15 peer businesses, focusing on the companies that look most like your business, and weight those companies’ multiples more heavily than the group’s average.

Transaction Comparables: Using transaction comparables is another common methodology, but it can be hit-or-miss. The challenge with transaction comps is that often there are few, if any, truly comparable transactions for a banker to consider.

When such data are available, a banker isn’t going to know what portion of the price paid was stand-alone valuation and what portion was attributable to other factors, such as synergies, management strength and culture fit. And finally, the timing and age of the transaction matter because market conditions and industry sector dynamics often change rapidly.

For these reasons, transaction comparables can run the gamut from being virtually ignored to being the linchpin in a valuation process.

As an industry insider, you’ll likely have information about recent company acquisitions your banker isn’t aware of. By providing your banker with more details, he or she can build a more realistic valuation model for your business.

If it sounds like conducting a high-quality valuation analysis isn’t quite as formulaic as you thought, that’s because it’s not.

No method can truly account for all the attributes and idiosyncrasies of a particular business. The best banker will account for as many variables as possible and settle on a valuation range that makes the most sense. By staying involved in the process and providing information for your banker, you can help ensure getting to the most realistic valuation range.

And remember, the only true financial value of your business is the price that a serious buyer is willing to pay.

Gary Miller is a managing director at SDR Ventures, a Denver-based investment banking firm. Gary specializes in strategic business planning, mergers and acquisitions advice, exit-strategy consulting and post-integration services. Contact: 720-221-9220 or gmiller@sdrventures.com.

View article on denverpost.com >

Lifestyle Entrepreneur Magazine

Video Insights for Business Owners and Featured Article in “Lifestyle Entrepreneur Magazine”

SDR Ventures Director Karl Edmunds has shared his latest insights and tips for business owners in the video interview below and in the summer edition of Lifestyle Entrepreneur Magazine. In this interview, Karl discusses the importance of market-based business valuations, how Baby Boomer business owners can position themselves for successful business exits and the powerful effect of owners stepping out of day-to-day operations to focus on driving overall business prosperity.

Watch the 10-minute interview now >

You can also read Karl’s full length article, “A Proven No Nonsense Approach to Successfully Sell Your Business,” in the Summer 2015 edition of Lifestyle Entrepreneur Magazine by clicking here and signing up for your free digital edition of the magazine.

Article Preview: A Proven No Nonsense Approach to Successfully Sell Your Business

By Karl Edmunds

Think back for a minute to your first day of business ownership. Everything was fairly simple. Delegation was easy. Why? Because you did it all.

Over time, you were fortunate, and the business grew. New employees were added, you began to build a management team, and then the efforts to figure out all the steps from first client contact to delivery of goods and services were put in place.

But, all too often and over years of time, businesses slowly get into a rut of routine, or unplanned complacency. Management keeps doing what it has always done, and everyone is measured by this standard.

Register to read the full article on lifestyleentrepreneurmag.com >

Albuquerque Journal

Executive’s Desk: Acquisitions can fuel growth, but be prepared

Gary MillerBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Many companies are facing slow growth due to a tepid economic recovery, more federal and state regulations, the Affordable Care Act and a lack of confidence in the economy.

Faced with these conditions, small- and middle-market companies are developing acquisition programs as a part of their strategy to accelerate financial growth.

Banks want to lend and have money to invest; interest rates are low; and there is a tsunami of companies for sale. It’s a buyer’s market, and companies are charting a path to the next era of opportunity and wealth.

However, growing significantly in a flat environment requires a bold combination of careful planning, savvy thinking and well-executed tactics.

There are six basic steps to develop a robust but risk-averse acquisition program:

Plan an acquisition program: Careful planning includes determining acquisition goals, selecting the acquisition strategy and rationale, determining acquisition criteria and matching them against available financial resources. A company must compare its acquisition program to natural/organic growth alternatives to determine if buying other companies is the most effective path to growth objectives. Select an outside management consulting firm with transaction experience to help guide this process.

Search, find and approach acquisition candidate: Searching for a target comes from leads generated inside and outside the company. Internally, leads often come from boards of directors, employees, sales staffs, suppliers, databases and customers. Externally, they come from accountants, attorneys, investment bankers, management consultants and business intermediaries. Approaching the acquisition candidate might well set the atmosphere throughout the acquisition process. Developing detailed information about the candidate before the approach is made is crucial in developing a narrative that details how the target company fits into the buyer’s plans.

Rarely will you get a second chance to make a first good impression.

Conduct robust due diligence: Due diligence is critical. It centers on helping the buyer recognize what the buyer is buying, understanding how it fits in an overall growth strategy and developing the post-acquisition plan.

Due diligence requires strategic analysis of the company’s market position, competitive position, customer satisfaction, unanticipated strategic issues, valuation, synergies, cultural fit, technology and scenario analysis.

Acquiring companies must analyze the target’s financial statements, accounting methods, quality of earnings, revenue recognition policies and taxes.

Also, it’s important to assess the target’s contracts, leases, real estate, patents and intellectual property, current or pending litigation, employee agreements, compensation and retention, and other legacy risks.

Structure the proposal: The first step is to value the company. A third-party valuation company, investment banks and public accounting firms are the best sources. The valuation serves as the basis for the amount the buyer is prepared to pay.

Information gleaned from the process can be used to further refine a proposal. The proposal is intended only to provide a basis for negotiations and will probably undergo numerous changes.

When the offer is presented to the principals of the target company, expect one of three possible outcomes: acceptance without changes, which rarely happens; acceptance with changes; or outright rejection. Regardless, further negotiations will be needed to get to an agreement in principle.

Prepare transaction documents and close: A number of formalities must be accomplished in order to close the purchase. Acquisition agreements are relatively standard and the emphasis should be on thoroughness, not complexity. About half of the agreement is expressed by “representations and warranties.” The “exhibits” to an acquisition agreement are almost as important to the contract as the representations and warranties.

At this point, attorneys for the buyer and the seller are negotiating and refining the final documents for closing.

Integrate the acquired company: Integration plans are extremely important and are often the reason an acquisition fails to add value for the buyer.

Blending both companies’ cultures is the most important function of the integration process. While integrating accounting systems, manufacturing, infrastructure, computer systems, strategic plans, sales territories, distribution systems, contacts and human resources systems are all important, nothing is as important as building a unified culture. Consultants are often used to help in this process.

Following these six steps can add significant value to the enterprise and more rapidly create shareholder wealth than staying with organic growth plans only. Research indicates that companies that complete more deals than companies that do not generate higher returns on investment and deliver stronger financial performance.

Gary Miller is managing director of the Consulting Division, SDR Ventures Inc. (www.sdrventures.com), a nationally known investment banking firm. He can be reached at 720-221-9220 or gmiller@sdrventures.com.

View article on abqjournal.com >

The Denver Post | Business

Want to grow the company? There may be extra cash in the balance sheet

M&A advisor Gary Miller says finding cash in processes and inventory beats borrowing

Gary MillerBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

I am often asked by business owners how to generate cash — beyond their company’s immediate cash requirements — to make an acquisition, expand into new territories, hire additional staff or buy a new plant and equipment.

All of these growth scenarios take significant cash. Since many companies have existing debt, their borrowing capacity is often limited. Therefore, generating additional cash strengthens a company’s balance sheet and allows the company to increase its credit facility.

In today’s environment, lenders and sellers are vetting operating companies’ and buyers’ capacities to repay loans — particularly if an acquisition is structured with an earn-out or includes seller financing as part of the deal structure.

Generating additional cash, whenever an owner can, is important since a company’s cash requirements are generally extensive. The more cash the owner can bring to the table, the less the owner will have to borrow.

Before developing a strategic borrowing plan, I advise clients to first examine the full potential of resources within their own companies.

This examination is applicable to almost any cash need a company has, whether it is for an acquisition, for growth and expansion purposes or just for improving profits.

The most obvious place to look for internal cash generation is the current asset section of the company’s balance sheet.

The conversion of under-utilized assets to cash provides a triple bonus: It reduces the amount of the funds needed, it improves the balance sheet, thus improving debt coverage ratios, and it improves cash flow.

If an owner examines each element of his or her current assets, receivables can offer substantial opportunities for generating additional cash.

For example, if a company with $25 million of annual revenues shortens its average receivable collection period by only two days, it will produce almost $150,000 of additional cash.

Also, changing sales terms, or tightening credit standards, procedures and follow-up, often can improve the average collection period by as much as a week. If that $25 million company, for example, reduces its collection period by a week, then as much as $500,000 of interest-free cash can be added to the company coffers. Regardless of the company’s size, shortening the collection period to as few days as possible will generate significantly better cash flow and additional cash.

Analyzing inventory is another resource often overlooked. In addition to the obvious tactic of reducing gross inventory levels, there are often more subtle elements that can be explored. Three questions owners should ask themselves:

  • Are there product lines that contribute nominal amounts of sales but absorb significant inventory resources?
  • Are there inventory items that are in small demand but are required to produce low volume products with high margins?
  • Are there suppliers that can be induced to assume some inventory functions, even though it may require entering into annual supply contracts?

Finally, another place to find additional cash is examining the fixed asset accounts on the balance sheet.

In addition to the obvious tactic of outright disposition of assets (excess land, unused/underutilized equipment and similar items), there are opportunities to sell and then rent or lease back such items as vehicles, computers, plant and equipment. While these arrangements can be more costly than owning, it is worth examining them as another source of cash.

Since many of our clients are looking for acquisitions or to sell their companies, I advise those looking to buy companies to use these and other techniques to find “synergies” that can lower their acquisition costs and add cash to the acquired company’s operations.

All of these techniques should be examined during the due-diligence process of any acquisition or expansion.

After the owner has squeezed every last nickel out of the various balance sheet items, it’s time to develop a strategic borrowing plan.

Start with the owner’s cash flow statement. The historical cash flow of a company is the surest prediction of how much money can be borrowed solely on the strength of the company’s own resources.

Regardless of your needs for generating additional cash, whether it be for profit improvement, growth and expansion or acquisitions, a review of your asset utilization — particularly receivables, inventory and fixed assets — will provide opportunities to generate additional cash, improve the balance sheet and profit and loss statement, and lower borrowing needs.

Gary Miller is a managing director at SDR Ventures, sdrventures.com, a nationally known, Denver- headquartered investment banking firm. Gary specializes in strategic business planning, M&A advisory, exit strategy consulting and post integration services.

Gary can be reached at 720-221-9220 or gmiller@sdrventures.com.

View article on denverpost.com >

Greater Wilmington Business Journal | Health Care

Local Mental Health Software Company Acquired By Tech Company

By Jenny Callison

A local provider of software and back-office services to mental health organizations has been acquired by Kansas-based Mediware Information Systems, the latter announced in a news release.

AlphaCM, headquartered on Corporate Drive in Wilmington, was founded in 2005 to “fulfill an overwhelming need by Mental Health Providers for Quality Management Consulting and Technical Services,” the company states on its website. Its management system is tailored to the needs of organizations in the mental health, developmentally disabilities and substance abuse sector, aimed at increasing those organizations’ productivity.

A majority of managed care organizations (MCOs) in North Carolina are currently using AlphaCM software, according to a news release from SDR Ventures, which served as AlphaCM’s advisor through the purchase transaction.

Mediware’s executive said the addition of AlphaCM to his company’s portfolio expands its capabilies across a continuum of care.

“This acquisition broadens Mediware’s solution set and subject matter expertise in the mental health, developmentally disabled and substance abuse markets. AlphaCM’s expertise is a great complement to Harmony, our existing long term services and supports business unit,” said Thomas Mann, President and CEO of Mediware. “We’re thankful that SDR Ventures presented this unique opportunity to us, and we’re excited to expand on the technology and relationships that AlphaCM has built.”

Mann said that, as the demand to provide care outside the hospital grows, “MCOs will be able to turn to AlphaCM and Mediware’s complementary software solutions to meet their needs. Combining AlphaCM’s proven solutions and expertise with our sales and marketing platform, we expect growth for both AlphaCM and Mediware’s existing products.”

View article on wilmingtonbiz.com >

Albuquerque Journal

Executive’s Desk: Before raising capital, research sources, pitfalls

Gary MillerBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Lacking sufficient capital to grow is the major constraint for most small- and middle-market companies. To reach the next level of success, capital is the fuel that drives the company’s growth engine. Without it, reaching that “next level” is almost impossible.

Many entrepreneurs are skilled at starting and building small, successful companies. But growing a small company into a big one is very different and, in many ways, a more difficult task – which is why raising growth capital is so important. Entrepreneurs and business owners often stumble in obtaining growth capital because they are inexperienced and unprepared.

  • Prepare your company to raise capital: Hire an experienced management consulting firm to help you prepare your company and to help you raise the capital. Raising capital means seeking investors, whether it is debt financing through a bank loan or other lender, or investor equity through an investment banking firm. To prepare for either choice: a) clean up your books and records; b) prepare for due diligence; c) update your strategic business plan; d) detail how much capital is needed, including its purpose and uses; and e) plan the optimal deal structure (lean on your consultant for help).

Develop detailed growth and expansion plans. Prepare detailed financial pro formas showing monthly income and expenses. Institutional investors look to invest in companies that have a clear differentiation, scalability, execution capabilities and a great management team. Your growth plans must be “creative and strategic.” Consider forming a joint venture/strategic partnerships or strategic alliances with your customers, vendors or competitors.

Hire a valuation company to render a “market valuation” opinion. Don’t expect the sky-high valuations that entrepreneurial companies enjoyed in the past. Investors have returned to ground level and realize that many of their investments will not qualify for an initial public offering 12 to 24 months later. Therefore, be prepared to give up more ownership for smaller amounts of capital and possibly even more control if you need to raise equity capital.

  • Prepare a “leave behind” presentation: Prepare marketing materials, such as an executive summary, management presentation and due-diligence materials.

Your knowledge, confidence, experience, track record, commitment and enthusiasm are critical components to your success. Practice the presentation. Know your numbers!

First, decide if you are willing to give up some equity and some control of your business.

If not, then your options may be limited. The path you will then follow is to seek debt financing through a variety of sources: 1) Small Business Administration (SBA) loan programs have significantly expanded over the past decade, ranging from loan program guarantees to women’s business centers; 2) asset-based lenders (ABLs); 3) factoring companies; 4) mezzanine financing companies (a hybrid of debt and equity); 5) self-funding (second mortgage on your home; IRAs and 401(k)s; 6) friends and family; 7) banks (revolving lines of credit and structured financing); 8) small-business investment companies (SBICs); 9) business incubators; 10) peer-to-peer lending/investing; 11) OFIs (other financial institutions, i.e. GE Capital); and 12) insurance companies.

If you are willing to give up some equity and some control of the business, then your options expand significantly, and you can follow both paths of debt and equity financing. I tell our clients to look at a variety of sources: 1) angel/super angel investors; 2) high and super-high net worth individuals; 3) family offices; 4) venture capitalists; 5) private equity firms; 6) investment bankers; 7) merchant bankers; 8) crowdfunding; 9) joint ventures/partnerships/alliances; and 10) SBA venture capital programs.

Make no mistake about it: Plenty of growth capital sources are waiting for the right opportunity. However, there is a price to pay and costs to bear for growth capital. Expected returns vary significantly depending on the source of capital. The cost of capital is considerably higher for privately held companies than for listed public companies. Investors in the private capital space are seeking high returns.

I advise clients it is best to raise capital when you can, not when you need it. It doesn’t matter who or what the capital sources are: If you’re desperate for funds, they will smell it a mile away. Your chances of success will be reduced significantly if you are playing with a weak hand.

The best institutional investors act as partners. They bring in other investors, open doors for business development, help in recruiting, act like coaches, are objective in their advice as your company grows and guide you through the inevitable difficult times.

Choose your capital sources wisely. Match your choice to your goals. Be aggressive, creative and persistent. Develop the ability to convince others to buy into your vision, and share your dream on a foundation of substance, trust and integrity. Remember, growth is the greatest driver of enterprise value.

View article on abqjournal.com >

Special to the Las Vegas Business Press

Employee stock ownership plan can serve as exit tactic

Gary MillerBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

As they near retirement age, many entrepreneurs are considering selling the businesses they built. When considering their exit strategies, they face difficult decisions for monetizing their businesses’ enterprise value. Although owners want to receive “fair market” value for their businesses, they may not want to sell to a third party (a strategic buyer or a private equity firm).

The owner may want to reward loyal employees who have significantly contributed to the business’s successes. If the owner is willing to receive fair market value versus strategic market value an employee stock ownership plan may be a practical exit strategy.

What is an employee stock ownership plan?

Employee stock ownership plans are qualified retirement plan similar to a profit-sharing plan with one main difference. An employee stock ownership plan is required by statute to invest primarily in shares of stock of the plan’s sponsor (the corporation selling the stock). Unlike other qualified retirement plans, these plans are specifically permitted to finance the purchase of employer stock by borrowing from the corporation, other lending sources or from the shareholders selling their stock.

When Congress authorized employee stock ownership plans in 1957 and defined their rules in 1974, it had two primary goals:

(1) To provide tax incentives as a vehicle for owners of privately held companies to sell their companies;

(2) To provide ownership opportunities and retirement assets for working-class Americans.

How does an employee stock ownership plan work?

First, the corporation’s board of directors adopts an employee stock ownership plan and trust and appoints an independent plan trustee. Then the corporation’s equity is appraised.

The trustee negotiates the purchase of all or some of the corporation’s issued and outstanding stock from one or more selling shareholders. The corporation may borrow money for a portion of the shares from an outside lender and loan the proceeds to the plan so it can purchase the shares. (Rarely does the corporation have enough cash on its balance sheet to loan to the plan; hence the corporation typically will borrow from an outside lender).

If only a portion of the shares is funded with senior financing, the remaining shares often will be purchased through subordinated promissory notes given to the selling shareholders. They will receive an interest rate appropriate for subordinated debt.

The corporation is required to make tax-deductible contributions to the employee stock ownership plan each year, similar to contributions to a profit-sharing plan. The trustee uses the funds to make payments to repay the outstanding loans. In addition to the mandatory contributions, the corporation can declare and issue tax-deductible dividends (C corporation) or earnings distributions (S corporation) on shares of the corporation’s stock held by the plan. Often the trustee will use these dividends/distributions, too, to pay down the plan’s loans.

Tax benefits of an employee stock ownership plan exit strategy accrue to the selling shareholders, the corporation and the employees who participate in the plan. The tax benefits to the selling shareholder and corporation vary depending on whether the corporation is taxed as an S corporation or as a C corporation.

Nontax advantages

The advantages of an employee stock ownership plan exit strategy are many. They include:

  • A ready-made market for the owner’s stock;
  • A ready-made buyer for the owner’s business;
  • A lower marketability discount (typically 5 to 10 percent) when valuing shares on a “fair market value basis” vs. a “strategic market value basis”, since the employee stock ownership plan is the market for those shares;
  • A business owner who can gradually transition the ownership over a period of time and thus remain actively involved in the business;
  • A vehicle for the owner to receive the desired liquidity without selling to a competitor or other third parties;
  • A retirement benefit for employees;
  • Avoidance of integration plans and associated costs to restructure operations, reorganize management or reduce staff because management and staff continue in place after the transaction closes;
  • Avoidance of giving out confidential information to a competitor or other potential buyers;
  • A long-term financial investor (the plan) that will not seek to sell the corporation in a relatively short time.

Some disadvantages

Like most business decisions, there are trade-offs to any exit strategy.

It is important to remember that an employee stock ownership plan is a qualified retirement plan governed not only by the Internal Revenue Code, but also by the fiduciary and disclosure rules of the Employee Retirement Income Security Act. High fiduciary duty standards must be met.

This adds additional costs to the corporation including the cost of:

(1) Retaining an independent trustee, an independent financial advisor and independent legal counsel to advise the ESOP trustee;

(2) Engaging qualified employee stock ownership plan counsel experienced with employee stock ownership plan stock purchase transactions in addition to corporate counsel;

(3) Ongoing administrative, fiduciary and legal expenses associated with an employee stock ownership plan that might not be present in a sale to a third party;

(4) Maintaining the plan and trust documents, a recordkeeper/third-party administrator, a trustee and annual valuations of the share value of the plan;

(5) Calculating amounts of tax-deductible contributions made to the plan each year;

(6) Monitoring who can participate in the plan depending on the Code section 1042 election, even if they are employees of the corporation;

(7) Implementing anti-abuse provision, Section 409(p), which restricts any one participant or family from receiving excessive share allocations in the plan or other synthetic equity issued by the corporation;

(8) Obligating the corporation to have a stock repurchase plan; this requirement must be monitored and funded on an ongoing basis for participants eligible to receive a distribution of their employee stock ownership plan stock accounts as they retire or terminate employment. The corporation is then required to repurchase the stock at the current fair market value.

Employee stock ownership plans are technical and complex. If business owners are considering them as an exit strategy, they should plan carefully with a wealth management firm, a qualified employee stock ownership plan tax adviser and a qualified employee stock ownership plan transaction law firm.

Gary Miller is the managing director, consulting division, SDR Ventures Inc. in Denver. SDR, an investment banking firm, provides “buy-side”, “sell-side”, private capital formation and business consulting advisory services for middle market business owners of privately held companies. Reach him at 720-221-9220 or gmiller@sdrventures.com.

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California CEO

Planning is Key to Selling a Business

Gary MillerGary Miller – Managing Director, Consulting Division, SDR Ventures, Inc.

A crisis is looming on the horizon for business owners wanting to sell their companies. Currently, 80% of business owners of small and middle market companies who put their businesses up for sale never close the transaction. The reasons: (1) poor planning; and, (2) over valuation.

With the impending Baby Boomer tsunami, more businesses will be for sale than at any other point in history creating a buyer’s market. This buyers’ market will cause significant downward pressures. Business owners who do not plan well or over value their companies will be left out in the cold.

Many strategic and financial buyers with significant funds to invest are more cautious and reluctant to pay premiums for companies than a few years ago. Owners should take these three steps to significantly increase their chances of selling their businesses on favorable terms.

1. Think like a “buyer.” Most buyers want to purchase a company with the following characteristics.

  • A proven entrepreneurial management team in place that can continue rapid growth and expansion after the transaction closes. Most buyers do not want to replace current management of the company they buy.
  • A strong and realistic growth plan to continue value creation through market penetration and expansion.
  • An ability to produce significant returns on invested capital coupled with strong positive cash flows.
  • A sustainable competitive advantage.

2. Prepare before you go after a buyer. Attracting a buyer is like preparing for a beauty contest. Companies that “show best” win “first”. It takes 6 to 18 months to prepare your company for the market place. Strong preparation could mean a much higher selling price. Strong preparation steps include:

  • Quantify the business value through a third party valuation firm.
  • Shed obsolete inventory. If your financial records show a higher value than market value, take the write off now so that it doesn’t become an issue for the buyer.
  • Have an independent audit firm audit your financial records.
  • Strengthen legal and contractual affairs.
  • Install and improve operating systems and processes.
  • Tell your management team (confidentially) that you plan to sell the company. Be truthful. Include them in the preparation process.
  • Create management and key employee long term retention incentive plans.
  • Prepare for buyer due diligence. If you were buying your company, what would you drill down on first, second and so on? Conduct your own due diligence. It allows you to correct potential concerns or to put the best possible explanation forward to the potential buyer.

3. Select the right deal team to help prepare you to go to market and complete the transaction. Obtaining professional advice, on alternative exit strategies, tax issues, alternative deal structures and negotiations is critical. A strong deal team will more than pay for itself, and includes,

  • A management consulting firm with strong business strategy and transaction experience.
  • A law firm with significant transaction experience.
  • An investment banking firm with deep transaction experience in your industry.
  • A transaction accounting firm to guide you through the tax issues.
  • A wealth management firm to help you plan wealth preservation.

Following these three steps will help you find the right buyer at the right time, paying the right price to close the transaction.

Gary Miller is the Managing Director, Consulting Division, SDR Ventures, Inc. www.sdrventures.com a nationally known, Denver headquartered, investment banking firm. SDR provides “buy-side”, “sell-side”, private capital formation and business consulting advisory services for middle market business owners of privately held companies. Gary specializes in strategic business planning, M&A advisory and exit strategy consulting. Gary can be reached at 720.221.9220 or gmiller@sdrventures.com.

View article on californiaceo.net >

The Denver Post | Business

5 traps to avoid when negotiating

Gary MillerBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

Bill had been thinking about selling his company for a couple of years. He and his wife, Carol, wanted to spend more time with their grandchildren and travel together to make up for all those years when they couldn’t.

One day Bill received a call from George, a friend and business competitor, who wanted to discuss a deal.

George’s timing was perfect. Bill had built a distribution company generating $25 million of annual revenues and $4.8 million of earnings before interest, taxes, depreciation and amortization, or EBITDA.

It was a solid company with strong management, consistent growth and earnings and opportunities for expansion into new territories. Bill expected a high purchase price.

He had decided that he didn’t need professional advisers with strong transaction experience. He believed that his regular accounting firm and corporate law firm could handle any deal he negotiated. He had previously made one small acquisition on his own and felt he was perfectly capable of selling his own firm.

After several discussions, Bill and George finally came to an agreement. George had his deal team present Bill with a term sheet specifying several items yet to be negotiated. As Bill found out, the problem with negotiating the deal yourself is the same problem a lawyer has in representing himself: He has a fool for a client.

About 75 percent of business owners who go it alone emerge at the end of their sale like Bill, regretting the deals they made.

There are risks that a business owner negotiating his own deal can bring to the table. Industrial psychologists define them as cognitive biases and they can be mitigated by using professional advisers who maintain their objectivity through the transaction process.

Here are five major biases that can ensnare owners when they negotiate their own deals:

Framing bias: This is context in which the buyer’s presentation to the seller significantly impacts his or her impression of a deal. The deal is framed so positively that the seller’s impression is “this deal could really work.” It can make the seller more relaxed and risk-tolerant.

If the price looks good, the remaining items in the term sheet look like they’re easy to be worked out. Take care to react to the quality of the complete deal — not the quality of the presentation.

Anchoring bias: This is the tendency to rely on the first piece of information in the term sheet. Most people tend to use an initial piece of data as the strongest reference point, or the “anchor,” for the entire term sheet. It can be particularly impactful when negotiating valuations of your company. For example if you are told by an investment banker, accountant, or a valuation company that your firm is worth 6.5 to 7.5 times EBITDA, you likely will remain pegged to those numbers. If you fixate on the price, you might rationalize away the rest of the deal’s points.

Confirmation bias: This is the tendency to favor information that reinforces or confirms a person’s existing beliefs. It can become particularly problematic for buyers during the due-diligence process. The bias to purchase can cause the buyer to selectively remember information that supports the desire to close the deal. If the opportunity seems strong, the buyer will seek out evidence to support its strength. Professional advisers can help by conducting objective and complete due diligence.

Cognitive dissonance bias: This occurs when your initial hypothesis is challenged, perhaps by conflicting sets of information. In the deal process, the bias most often appears when a disappointing realization develops — such as discovering a risky skeleton in the closet of an otherwise seemingly perfect company. You can either satisfy the dissonance by believing that the risk is not that great, or by backing out of the investment. If you choose to stay in the deal, make certain you understand the full impact of the skeleton.

Groupthink bias: This is the tendency for an individual to adopt the mind-set of a larger group. The pressures of conformity and the desire to fit in often drive those with minority opposing opinions questioning the deal to silence their doubts. Fix it by conducting thorough due diligence and reporting the findings to senior managers. Give them the chance to express any concerns, doubts or reservations about the deal.

Gary Miller is managing director of Denver-based SDR Ventures’ consulting division. SDR is an investment banking firm that advises privately held middle-market businesses. He can be reached at 720-221-9220 or gmiller@sdrventures.com.

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The Denver Post | Business

An ESOP could be an alternative exit strategy for business owners

Gary MillerBy Gary Miller – Managing Director, Consulting Division, SDR Ventures

As business owners approach retirement age, many consider selling and often face difficult decisions related to the value of their enterprises.

While a business owner wants to receive fair-market value for the business, he or she may not want to sell to a third party. The owner may want to reward loyal employees who have made significant contributions to the success of the business, and for these owners, an employee stock ownership plan, or ESOP, may be a practical exit strategy.

What is an ESOP? It is a type of qualified retirement plan similar to a profit-sharing plan with one main difference. An ESOP is required by statute to invest primarily in shares of stock of the ESOP sponsor (the corporation selling the stock). Unlike other qualified retirement plans, ESOPs are specifically permitted to finance the purchase of employer stock by borrowing from the corporation, other lending sources or from the shareholders selling their stock.

When Congress authorized ESOPs in 1957, and defined their rules in 1974, it had two primary goals: to provide tax incentives as a vehicle for owners of privately held companies to sell; and to provide ownership opportunities and retirement assets for working-class Americans.

How does an ESOP work? The corporation’s board of directors adopts an ESOP plan and trust and appoints an independent ESOP trustee. An appraisal of the corporation’s equity is obtained. The trustee negotiates the purchase of all or a portion of the corporation’s issued and outstanding stock from one or more selling shareholders.

The corporation may borrow funds for a portion of the shares from an outside lender and loan the proceeds to the ESOP so the ESOP can purchase the shares. (Rarely does the corporation have enough cash on its balance sheet to loan to the ESOP; hence the corporation typically will borrow from an outside lender.)

The corporation is required to make tax-deductible contributions to the ESOP each year, similar to contributions to a profit-sharing plan. The trustee uses the funds to repay the outstanding loans. In addition to the mandatory contributions, the corporation can declare and issue tax-deductible dividends or earnings distributions on shares of the corporation’s stock held by the ESOP. Often the trustee will use these dividends/distributions, too, to pay down the ESOP’s loans.

Tax benefits of an ESOP exit strategy accrue to the selling shareholders, the corporation and the employees who participate in the ESOP. The tax benefits to the selling shareholder and corporation are significant.

Nontax advantages of an ESOP exit strategy are many and should be considered by the business owner depending on the owner’s goals. Some of the advantages:

  • A ready-made market for the owner’s stock or business.
  • A business owner can gradually transition the ownership over a period of time and thus remain actively involved in the business.
  • A vehicle for the owner to receive the desired liquidity without selling to a competitor.
  • A retirement benefit for employees.
  • Avoidance of integration plans and associated costs to restructure operations, reorganize management or reduce staff because management and staff continue in place after the transaction closes.
  • Avoidance of giving out confidential information to a competitor or other potential buyers.
  • A long-term financial investor — the ESOP — that will not seek to sell the corporation in a relatively short time period.

Like most business decisions, there are trade-offs to any exit strategy. An ESOP is no different.

It is important to remember that an ESOP is a qualified retirement plan governed not only by the Internal Revenue Code, but also by the fiduciary and disclosure rules of the federal Employee Retirement Income Security Act.

The cost of meeting these fiduciary duty standards can be high, including hiring financial and legal advisers to the ESOP trustee and the seller, as well as additional expenses related to ongoing administrative management.

ESOPs are highly technical and complex. If business owners are considering an ESOP as an exit strategy, careful planning and consideration among professional advisers, including a wealth management firm, a qualified ESOP tax adviser and a qualified ESOP transaction law firm are musts.

Gary Miller is managing director of Denver-based SDR Ventures’ consulting division. SDR is an investment banking firm that advises privately held middle-market businesses. Miller specializes in strategic business planning, and merger and acquisition and exit-strategy consulting. He can be reached at 720.221.9220 or gmiller@sdrventures.com.

View article on denverpost.com >

The Denver Post | Business

SDR Ventures running to catch merger wave coming to Colorado

By Aldo Svaldi, The Denver Post

SDR Ventures co-founders Andy Limes, left, and Chris Bouck, center, and director of investment banking Travis Conway.

SDR Ventures co-founders Andy Limes, left, and Chris Bouck, center, and director of investment banking Travis Conway. “We are starting to get recognized,” Bouck said. (Mark T. Osler, Mark Osler Photography)

 

SDR Ventures, a Greenwood Village investment bank, took about 10 years to grow to 11 employees, but only one year to double to 23.

“Something magical happened after 10 years,” said Chris Bouck, who co-founded the firm with Andy Limes back in 2002. “We are starting to get recognized.”

The firm helps owners of small- and medium-sized companies arrange financing, make acquisitions or sell. And its profile is rising as the ranks of locally owned competitors shrinks.

This summer, a subsidiary of accounting giant KPMG acquired St. Charles Capital, one of the state’s best-known investment banking brands. That leaves Headwaters MB, Q Advisors and SDR as leaders among the locally owned independent brands.

Once boutique investment banks get acquired, they tend to pursue bigger and bigger deals, leaving a void for smaller firms like SDR Ventures to fill.

“They pull these banks upstream to bigger deals,” said Travis Conway, the firm’s director of investment banking.

SDR focuses on companies in manufacturing, health care, technology, distribution, professional services and consumer products, and has developed a national reputation in the pet industry.

SDR’s average deal size is about $35 million, and the companies it counts as clients have a typical value of $10 million to $30 million, Conway said.

Part of its marketing pitch is that its bankers aren’t masters of high finance, but have been in the trenches running companies.

“We weren’t deal guys; we were operators,” Conway said.

Deal activity nationally is starting to rev up again after a long hiatus following the 2008 financial crisis. SDR Ventures has seen its revenues shoot up 90 percent in the past year alone.

“The economy is not roaring. The surge is due to pent-up demand, ” said Ned Minor, a mergers and acquisition attorney at Minor & Brown in Denver.

Investors are holding billions in cash they want to deploy and banks are more willing to lend for acquisitions. That has led to higher prices, in turn luring more sellers, but not as many as expected.

Despite a decade of speculation that baby boomer business owners, those born between 1946 and 1964, would seek retirement in droves, it hasn’t really happened.

Minor said that could reflect owners, scarred by the downturn, who are more confident about the returns they can generate through a business than by investing in stock, bonds and other passive vehicles.

But aging, like gravity, can’t be avoided. Bouck expects that in the next five years, there will be a big wave of boomers exiting the business world.

“They are approaching retirement age,” he said. “They will sell or transfer. That is why we keep investing in the infrastructure.”

SDR has worked with some clients since their early days, resulting in multiple transactions.

The firm did 10 different transaction for HealthTrans going back to 2002 when the health care management firm had 18 employees. That assistance culminated in the January 2012 sale to SXC Health Solutions Corp. for $250 million cash. HealthTrans by then had grown to 263 people.

“The engine of the economy are these small businesses,” Bouck said. “And we have always had a focus on business owners.”

Aldo Svaldi: 303-954-1410, asvaldi@denverpost.com or twitter.com/aldosvaldi

View article on denverpost.com >

 

Media Contact

For media inquiries, please contact Nate Lyon at nlyon@sdrventures.com or 720.221.9220.