| Achieving a successful
exit from a company requires both careful preparation and
extensive consideration of the many alternatives. Developing
a strategy to maximize the value and avoid the pitfalls is
critical.
In the article below, “Finding an Exit:
Options and Their Implications,” Alain
Chetrit shares the expertise he gained as CEO of First
Regional Telecom and as a majority interest owner of HBS Holdings,
the holding company for Hugo Boss stores.
Alain, a Partner at FOCUS Enterprises, specializes
in new technology, telecommunications and retail and franchise
companies, with an emphasis on corporate finance, corporate
development, marketing, positioning and investment banking
services. Alain also has extensive international trade experience
and is the recipient of the prestigious "M Award"
for merchandising and marketing.
Please feel free to forward this newsletter
to friends, colleagues, and networking contacts. (Go to www.focusbankers.com
for newsletter archives.)
Active
FOCUS Deals
Although our firm has over 21 years of experience across many
verticals, Focus currently has active transaction engagements
in the following business sectors:
- Application Software, CRM and LIMS Applications
- Business Process Outsourcing
- Digital Video Surveillance and Networks
- Fire Protection
- Government IT Contracting
- Government Program Management and Organizational Change
Management
- Healthcare
- HVAC Products
- Information Services & Consulting
- IT Services and Staffing
- Manufacturing
- Medical Devices and Equipment
- Pharmacy / Distribution
- Physical Security Integration and Access Control
- Promotional Products Distribution
- Systems Integration
- TeleHealth
- Warehouse, Distribution and Logistics
Our transaction process provides us with up-to-the-minute
market knowledge in these sectors which may be of interest
to you.
Inquiries should be addressed via e-mail to
info@focusbankers.com, by telephone to 202-785-9404 x341,
or by fax to 202-785-9413.
Finding
an Exit: Options and Their Implications
By Alain Chetrit
Once the decision is made to sell a company,
it is important to develop a strategy to maximize value and
obtain the highest price available in the marketplace. Let’s
examine the pros and cons of a variety of typical exit strategies:
PASS THE BUSINESS TO
FAMILY
While this popular strategy may provide estate planning opportunities,
ongoing cash flow to the entrepreneur and peace of mind for
future generations, it does not necessarily maximize value
for the selling owner. In fact, it is not unusual that a family
sale leaves the business burdened with debt. The buying family
member needs to have the skills and financial savvy to establish
authority within the organization in order to generate profits.
Mismanagement can render company worthless in a short period
of time, not withstanding what it might do to family relations.
INITIAL PUBLIC OFFERING
(IPO)
As an exit option, the dream of many entrepreneurs is, in
fact, a rare exception. Notwithstanding the recent bubble,
an IPO requires the confluence of a hot financial market,
a hot business sector, outstanding results and excellent short-term
prospects for the business.
Out of the millions of private businesses in
the United States, the most robust years have seen only about
250 IPOs. According to VentureXpert, in 1999 and 2000, 257
and 232 respectively, venture-backed companies went public.
In many ways, for owners and/or managers, an
IPO is not an exit, but rather a new beginning. In a typical
transaction, the management team receives restricted stock,
highly increasing the pressure to perform. An IPO is more
of an exit for the investors in earlier rounds that it is
for the owners/managers.
However, for companies that do successfully
become public, the eventual rewards for the owners can be
dramatic.
SALE TO A STRATEGIC
BUYER
This exit approach generally yields the highest valuation
at the time of sale due to the synergies a strategic buyer
will realize from combining the businesses. A typical strategic
buyer may factor the potential long-term synergies of combining
operations into the offering price. However, after the sale,
the longevity of the owner, management team and employee base
can be at jeopardy. If conditions change, the acquirer may
not have the same commitment and loyalty to the employees,
causing aggravation to the former owners who now have little
or no power.
If maximizing the valuation is critical, a significant
portion of the purchase price will likely be stock in the
acquirer’s company which raises another level of uncertainty
and risk. While there are numerous entrepreneurs who have
actually made more on appreciation of the acquirer's stock
than the value of their company, there are many who, in hind
sight because of a drop in stock prices, wish they had pushed
a little less on valuation and taken cash.
SALE TO A FINANCIAL
BUYER
A significant number of Private Equity and LBO funds provide
another avenue of exit for the business owner. Because these
buyers generally will not recognize the same degree of synergies
as a strategic acquirer, sale valuations almost always are
lower.
However, the owners can generally get a "second
bite at the apple" by retaining a minority interest in
the business, which often can be boosted by achieving performance
targets. While management longevity may be better than with
a strategic buyer, independence still can be significantly
reduced. Other factors also come into play, including control,
leverage and the timing of the re-sale or "flip"
of the business.
RECAPITALIZATION
This partial exit involves taking on debt and possibly outside
investors in order to redeem a portion of the existing equity
base. The owners can monetize a portion of the wealth they
have created in the business and, at the same time, continue
to own a significant piece of the equity.
But significant other issues come into play,
including leverage, control and restrictive covenants. Highly
leveraged or cash poor companies may no longer have the financial
resources to weather unexpected economic conditions or even
carry on their business. Moreover, creditors and shareholders
may have a claim if the company becomes insolvent and no longer
has the capacity to repay its debts.
STRATEGIES FOR VENTURE
CAPITAL FIRMS
For Venture Capital (VC) firms, an exit is a clear goal from
the time of an initial round of funding. Companies need to
gain enough scale so that within three to seven years they
can become candidates for IPOs, be sold or be merged. Alternatively,
the company may provide a higher valuation for their VCs'
portfolios via an up round (new investment made at a higher
valuation).
With an IPO market that is practically closed,
portfolio companies that are not "stars" continue
to require time and effort. It is generally in the VC's interest
to continue positioning the company for an exit, be it with
a financial acquirer or a strategic buyer.
A gain is realized only when a sale transaction
of some sort occurs. According to Jesse Reyes at Venture Economics,
"9,900 venture-backed companies are still scrambling
for the exits. Most of them won't make it. A mere 22 went
public in 2002."
STRATEGIES FOR INSTITUTIONAL
INVESTORS
For institutional investors investing in VC funds, if the
fund does not reap the fruit of its investments within five
to seven years, the likelihood of reinvestment in subsequent
funds is diminished. For all investors, exits and ROIs are
the scorecard. The availability of capital for the next group
of entrepreneurs depends on the successful exits provided
by the previous group.
Very frequently, VCs have "Put" rights
that allow the VC to require that the company redeem the VC's
investment at fair market value, which most often occurs through
a sale of the company. Additional terms can include "drag
along rights" which essentially allow the VC to "drag
along" all other owners if the VC is in favor of a sale
of the organization.
SOURCES OF INFORMATION
Once the decision is made to sell a company, it is critical
to develop a sound exit strategy in order to maximize value
and obtain the highest price available in the marketplace.
Investment bankers and other professionals are
an excellent source of information and may be able to connect
the parties so that a CEO continues to run a business while
an exit partner is identified and the highest value is derived.
FOCUS Enterprises hears frequently from private
equity and buyout firms looking for candidate companies for
which they will pay cash. The willingness of such buyers to
pay cash is an offset to lower valuations in the current market
environment.
For more information about exit
strategies, contact Alain Chetrit at 202-362-8032 or chetrit@focusbankers.com.
Selling Your
Business—Securing What You Want for Yourself, Your Family
and Your Employees
Seminar for Owners and CEOs in Bethesda
October 21
To help business owners and CEOs assess the
risks and opportunities of selling a business, FOCUS Enterprises,
Inc., along with four additional leading firms--Right
Management Consultants, Shared
Equity Strategies, McCullough
& Nicholas, P.L.C. and Bernstein
Investment Research and Management--will host private
breakfast presentations from 7:30 to 11:00 am on October 21
at the Columbia Country Club, Bethesda, MD and on December
2 at The Center Club, Baltimore, MD.
Participants can select the most convenient
time and location.
Business owners and CEOs attending the seminar
will gain a wealth of valuable financial information quickly
and easily, including how to:
- Position a company to maximize the valuation multiple
- Prepare a company to maximize the sale price
- Time when to begin preparing for the sale
- Minimize personal taxation on the transaction
- Determine exactly how much is needed to retire comfortably
- Execute the process successfully
Individuals who will benefit most from this
unique seminar include presidents, CEOs and owners of companies
who are considering some type of sale or recapitalization
within one to five years. Relevant companies are: private
companies, public companies with revenues under $100M, government
contractors, venture-backed companies, companies who have
or are considering ESOPs and individual or family-owned companies.
Participation, strictly limited to company owners
and CEOs, is $49 each, payable in advance. Register online
at www.focusbankers.com or call 202-333-4493.
The FOCUS
Transaction Process
Project execution is the key to a successful
merger, acquisition, divestiture, corporate finance or partnering
assignment and FOCUS Partners have developed a proven methodology.
Precise planning of the project is the first step where project
mileposts are specified resulting in detailed deliverables
from FOCUS as well as from the client.
Next a research plan is developed by the firm’s
research department and the client. If the project is a sell-side
engagement, a buy-side assignment, or a partnering assignment,
the firm’s research department will go to work to identify
a target listing of potential buyers, sellers, or partners.
If the assignment is to source debt or equity investment capital
for the client, FOCUS Research will develop a target list
of potential investors that may have strategic or financial
interest in investing in the client company…more.
About FOCUS Enterprises,
Inc.
For 22 years, FOCUS has successfully assisted
clients with corporate development consulting assignments;
merger, acquisition, and divestiture engagements plus capital
raising and capital formation assignments. In a mixture of
services uniquely beneficial to clients, FOCUS
integrates consulting and transactional expertise with superb
research capabilities and precise, proven methodologies.
Unlike larger investment banks, FOCUS processes
are optimized and proven effective in our target marketplace
-- private companies or operating units with revenues in the
$5 million to $100 million range. Eleven full-time FOCUS
Partners provide well over a century of C-level operating
experience in a variety of industries. Operating nationally
and internationally, FOCUS works with buy-
and sell-side corporate clients, private equity groups, holding
companies and early stage venture capital firms in the following
areas:
- Aerospace
- Government Contracting
- Healthcare
- Manufacturing and Distribution
- Media and Communications
- Retail
- Technology (hardware, software and services)
- Telecommunications
Your comments, suggestions and questions are welcome and
encouraged. We want to hear from you.
You are receiving this newsletter because you have had personal
contact with a FOCUS Enterprises partner
or principal or have requested this newsletter on our website
or have been contacted by FOCUS on behalf
of a buyer, seller, corporate finance client or consulting
client.
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