Get Your Ducks In Row On Shareholder Buyout Terms

As the climate for mergers and acquisitions improves, savvy companies are seeking and evaluating good candidates. Tuning up their own shareholder buy-sell provisions is an important step that acquiring companies need to take to get their ducks in a row. This should be done before an m&a deal that adds or changes shareholders.

Shareholder buyouts may arise in many ways. For example, upon certain fundamental corporate changes, Minnesota statutory law allows a minority shareholder to dissent and demand a buyout at fair value. Alternatively, a buyout may be an available remedy for certain types of improper conduct by the majority toward minority shareholders. Other buyout scenarios include a shareholder’s death, retirement, or termination from employment. However, buyouts can cause vexing problems if not structured and executed carefully.

Here are five proactive suggestions:

(1) Written agreements should spell out shareholders’ intentions about buyouts. All buyout terms, procedures, and valuation methods should be clearly spelled out in signed shareholder agreements and buy-sell agreements. Be sure to state what discounts do and don’t apply and all other necessary details and be crystal clear in stating these terms. This is particularly important when shareholders are added by a merger or acquisition because the new shareholders probably haven’t discussed buyout intentions with the preexisting owners.

(2) Spell out contractually that shares are subject to immediate buyout when an employee-shareholder terminates. It is best to end the relationship entirely if parties can no longer work together effectively.

(3) Have written employment agreements with all employee-shareholders stating that employment is at-will and can be terminated at any time and for any reason. This enables management to run the business effectively and weed out poorly performing employees and also has other benefits.

(4) Get a quality appraisal to determine how much departing shareholders should be paid. It doesn’t pay to cut corners here. Make sure the appraisal is prepared by a reputable, well-qualified appraiser who is knowledgeable about the industry.

(5) Be careful not to compound the situation. Although bad feelings and friction often arise from managerial conflict and deteriorating personal relationships, the company and majority should never engage in oppressive or retaliatory conduct toward minority shareholders because that could lead a court to award a higher buyout sum than minority shareholders likely would otherwise receive.

Steve Marino
Marino Law Firm PA
Email: steve@marinolawfirm.com
Tel.: 651.631.8508
www.marinolawfirm.com

Fueling Acquisition Success

5 Hidden Causes for Failure
5 Remedies for Increasing Success Rate

Contributed by Joe Torrez http://www.torrezbv.com/

As a corporate development specialist or a transaction advisor, you have a vested interest in increasing the likelihood of success of the transactions you manage. Whether that interest is,

• To grow the bottom-line and enhance the value of your company (or those in your portfolio) and generate increased returns for shareholders, or

• As transaction advisor, to satisfy your customers and create a significant competitive advantage for your firm. The more successful deals you close, the more transaction customers you attract.

• And perhaps that interest extends beyond the success of your company or clients to your own professional aspirations and benchmarks of personal success.

You probably don’t engage in a transaction if you lack the confidence of reaping the benefits of a successful acquisition such as…

• The financial targets of the acquisition are achieved as fast as possible to build cash flow (and minimize burn rate) and profit.

• Added shareholder value is created in the combined enterprise.

• Productivity is maintained during the transition and shows sustained increase over time.

• Employees and customers remain engaged to the company.

Despite having high confidence in the transactions we engage in, they continue to fail or underperform. And this failure comes despite all the published accounts and analysis we have read about…

Mitigating Acquisition Risk July 15

We are pleased to announce the next session in our “First Wednesday” seminar series, “The Life Cycle of a Business Acquisition–Mitigating Risks on the Road to Success”.

This interactive panel presentation will cover effective candidate search & profiling, financial due diligence, and integration of businesses.

You will leave with a better understanding of the risks of not paying attention to these areas and a checklist of key success factors.

OnPoint Consulting – Steve Sapletal

Olsen Thielen CPAs – Mike Bromelkamp

Packard Acquisitions – Cliff Allen

The seminar will be held on Wednesday, July 15 at Olsen Thielen CPAs Roseville office, 2675 Long Lake Road (just west of 35W and County C). ST Paul MN

To register, send an e-mail to events@otcpas.com or leave a message at 651-621-8557.

Olsen Thielen CPAs and EBITDA Partners

Barbara Graf | Marketing Coordinator | Olsen Thielen & Co. Ltd. | 2675 Long Lake Road | St. Paul, MN 55113 | Phone: 651-621-8557 | Fax: 651-483-2467 | www.otcpas.com

Preparing to Make an Acquisition

Preparing to Make an Acquisition

Given the current economic conditions, you may

be facing an opportunity to acquire a long-time

competitor who is now struggling. Acquisition

might open the door to a new market, or it might

mean the addition or expansion of a line of

complementary products.

Some acquisitions, like marriages, are made in

heaven. Such a union of two companies can

boost revenues, cut costs and increase market

share. Other deals – also like some marriages –

are made in hell. There are turf battles,

management deadlocks and employee morale

issues that can easily undermine the entire deal.

The challenge in making an acquisition work is

to define and then stick to a solid process – from

target selection to approaching your commercial

bank for financing.

Assuming you have decided to embark on an

acquisition strategy, how do you identify an

appropriate target?

The “right” opportunity might mean gaining

access to a cutting-edge technology, or bailing

out a financial or management distress situation.

The result may be reduced costs due to increased

synergies, or positioning the new organization

for growth.

When selecting a target, one or more of the

following outcomes should be expected:

1. The deal will lower your overall costs.

2. You will be able to increase the combined

company’s market power by spreading the

stronger brand name over a wider product or

service base.

3. The acquisition will change the competitive

landscape.

Once you have eyed your target, serious due

diligence begins. Let’s look at some potential

pitfalls that would need to be addressed:

1. Compelling strategic rationale. Make sure

you can answer the question, “Why am I doing

this?”

2. SWOT analysis. Have you identified the

company’s core strengths, market

opportunities, and any potential threats?

3. Customer satisfaction. What are the

customers of the target company buying, and

what do they define as satisfaction?

4. The “people” factor. If you are not paying

attention to employees and what this means to

them, you can kiss a great outcome goodbye.

Now, when it comes to actually financing the

acquisition, you’ll no doubt talk to your

commercial banker. At Fidelity Bank, we

consider ourselves an impartial third party in

helping our clients in acquisition mode,

beginning at the exploration stage. Let’s take a

look at some critical issues we like to keep in

mind when working with a client who is

seeking financing for an acquisition:

1. Payback. Before making that critical “go,

no-go” decision, you need to measure

objectively the payback period on the purchase

price.

2. Not So Sudden Impact. Set realistic

expectations. Do not underestimate the

challenge of achieving synergy and savings.

3. Consider Collateral. Remember, however,

that advance rates on many asset types have

decreased during this economic downturn.

4. Structurally Sound. The important thing

here is to keep in mind that all the pieces of the

deal have to cash flow, especially with bank

financing playing a smaller role in the overall

structure of acquisitions.

Showing your commercial banker that you

have considered each of these last four areas

and have addressed all the issues covered above

will contribute significantly to getting the deal

done, quickly and efficiently.

First appearing in the Minnesota Business Journal 4/19/09

Given the current economic conditions, you may be facing an opportunity to acquire a long-time competitor who is now struggling. Acquisition might open the door to a new market, or it might mean the addition or expansion of a line of complementary products. Some acquisitions, like marriages, are made in heaven.

Such a union of two companies can boost revenues, cut costs and increase market share. Other deals – also like some marriages – are made in hell. There are turf battles, management deadlocks and employee morale issues that can easily undermine the entire deal.

The challenge in making an acquisition work is to define and then stick to a solid process – from target selection to approaching your commercial bank for financing. Assuming you have decided to embark on an acquisition strategy, how do you identify an appropriate target? The “right” opportunity might mean gaining access to a cutting-edge technology, or bailing out a financial or management distress situation. The result may be reduced costs due to increased synergies, or positioning the new organization for growth. When selecting a target, one or more of the following outcomes should be expected:

1. The deal will lower your overall costs.

2. You will be able to increase the combined

company’s market power by spreading the

stronger brand name over a wider product or

service base.

3. The acquisition will change the competitive

landscape.

Once you have eyed your target, serious due

diligence begins. Let’s look at some potential

pitfalls that would need to be addressed:

1. Compelling strategic rationale. Make sure

you can answer the question, “Why am I doing

this?”

2. SWOT analysis. Have you identified the

company’s core strengths, market

opportunities, and any potential threats?

3. Customer satisfaction. What are the

customers of the target company buying, and

what do they define as satisfaction?

4. The “people” factor. If you are not paying

attention to employees and what this means to

them, you can kiss a great outcome goodbye.

Now, when it comes to actually financing the

acquisition, you’ll no doubt talk to your

commercial banker. At Fidelity Bank, we

consider ourselves an impartial third party in

helping our clients in acquisition mode,

beginning at the exploration stage. Let’s take a

look at some critical issues we like to keep in

mind when working with a client who is

seeking financing for an acquisition:

1. Payback. Before making that critical “go,

no-go” decision, you need to measure

objectively the payback period on the purchase

price.

2. Not So Sudden Impact. Set realistic

expectations. Do not underestimate the

challenge of achieving synergy and savings.

3. Consider Collateral. Remember, however,

that advance rates on many asset types have

decreased during this economic downturn.

4. Structurally Sound. The important thing

here is to keep in mind that all the pieces of the

deal have to cash flow, especially with bank

financing playing a smaller role in the overall

structure of acquisitions.

Showing your commercial banker that you

have considered each of these last four areas

and have addressed all the issues covered above

will contribute significantly to getting the deal

done, quickly and efficiently.

ANTHONY GIZINSKI

Vice President

Fidelity Bank

anthony@fidelitybankmn.com

http://www.fidelitybankmn.com

Have something to add? Your own business wit?

Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.

SOMETIMES, ALL YOU HAVE TO DO IS ASK!

As a proactive business buyer, whether a one-time buyer or someone who acquires companies on an ongoing basis, you must define and pursue various creative means to locate viable companies that potentially offer extraordinary acquisition potential.

Understanding that the best acquisition opportunities are among companies not “officially” for sale and knowing that finding a business to buy that has solid financial return on investment potential can realistically be bought with favorable purchase terms, should be enough motivation for a serious buyer to tenaciously put forth the required effort to find one.

There is a similar challenge within the sales profession for finding high performance sales personnel. This objective is comparable and directly relates to business buyers pursuing quality companies to buy. The old adage: “All the good salespeople are already employed”, should be especially thought provoking for a serious business buyer. The best sales personnel to hire are there for the taking.

It is not that extraordinary businesses cannot be bought; it is just that their business owners have not been asked if they’ll sell or have they been made to make a conscious decision or reached a compelling level of justification to consider selling their company. In most cases, they also have not applied any effort or resources to define their company’s market value to determine if the selling effort would be worthwhile. The best companies to buy are there for the taking.

Sometimes the first person to effectively pursue an opportunity has the easiest course to success. Initiating a compelling company purchase process does not have to be a complicated procedure, the first step can be very obvious and simple. Again, as in selling, sometimes all you have to do is ask!

Mark Smock is President of BUSINESS BUYER DIRECTORY, LLC, “BBD”. His firm is an established M&A listing referral services provider, an integrator of global M&A business-for-sale listings referred to specific BBD business buyer clients. Their business buyer clients pay a nominal, “success only” referral fee only if they purchase the BBD referred company. There is no cost or obligation to look at any referred deal. BBD only refers established companies for sale, with minimum annual EBITDA of $1MM, headquartered within N America, control interest for sale and within any industry. Start up’s, venture opportunities, funding solicitations or joint ventures are not considered.

msmock@business-buyer-directory.com

SEE LISTINGS @ >> http://www.business-buyer-directory.com

Have something to add? Your own business wit?

Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.

2009 Is A Horrible Time To Sell My Business-You Could Be Horribly Wrong

http://blog.mandaadvice.com/2009/04/23/2009-is-a-horrible-time-o-sell-my-businessyou-could-be-very-wrong.aspx

2009 Is A Horrible Time To Sell My Business-You Could Be Horribly Wrong

Posted by Brian J Reilly at 4/23/2009 1:35 PM

If you own a business you presumably have a working knowledge of business basics such as: supply and demand, supply chain dynamics, availability of capital, and valuation. As a Mergers and Acquisition Intermediary, I like to think I know how they apply to my business and how they can have a huge impact recapitalizing or exiting your business.

I talk to business owners and groups who seek to buy established businesses every day. In this blog I will focus on the lower Middle Market businesses with annual revenues of $5-$75 million, but these concepts apply to larger and smaller businesses as well.

Supply and Demand and Supply Chain Dynamics: There is a huge industry called Private Equity that has thrived for last 10 years and they are still around, even in a recession. Private Equity buys businesses, runs them, merges them, grows them, sells them and sometimes takes them public. There is a food chain in Private Equity: from groups that acquire businesses with as little as $2-3 million dollars in revenues-to The Carlyle Group, Blackstone, KKR, Goldman Sachs, and others who acquire multi billion dollar companies; and the thousands of groups that fall in between these ends of the spectrum. These groups all have one thing in common they need to acquire companies to keep their businesses running.

Many business owners are currently afraid to sell in a recession creating a huge lack of supply of companies, short supply-same demand-raise prices. Bigger fish are paying more for bigger companies and it trickles all the way down to the lower middle market.

Availability of Capital: You say this is all nonsense Private Equity can’t get capital from frozen Banks, you’re right they can’t so they are either buying bank assets (IndyMac acquired by a group lead by Dune Capital), or becoming banks like Goldman Sachs. The Private Equity business generates profits for private individuals and groups who invest capital with them. They have used banks for leverage in huge deals in the past but there are now more then enough alternative sources to replace bank capital at historical interest rates. No one wants to put investment capital into banks or very low fixed interest securities for the longer term.

ost Private Equity have far more cash then can deploy in the current market, leading to a spike in demand for business to acquire. Every day I have private equity groups calling me saying “We have to deploy capital”, “30 day closings”, “No bank financing”, “No owner financing” there is simply too much cash and not enough product for Private Equity to conduct business.

Valuation: Business are valued on historical performance typically in a multiple of EBIT or EBITDA; and this multiple is set by what the market will pay.

What the market will pay is based largely on the availability of companies. So the two questions you have to ask yourself are: Do I want my company valued base primarily on 2007-2008 EBIT or 2009-2010 EBIT? and, Do I want to sell my company when there is a huge shortage in the market or do I want to wait until 2011 and beyond when baby boomers start turning 65 and flood the market?

As you can read in previous blog entries, companies down 10-15% are widely considered to be thriving in the current economy and those that are flat are big growth stories. We consistently have demand for distressed companies and those in need of capital infusions, no matter what shape your company is in, now is the time to look to Private Equity. Finding private equity for middle market companies is what we do, click on the Transact Partners International link ( www.transactint.com ) and lets talk.

Have something to add? Your own business wit?

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Beyond Financial Due Diligence, By Cary Tutelman

Beyond Financial Due Diligence

By Cary Tutelman

When companies are considering acquiring another company, they do extensive due diligence. They analyze balance sheets, income statements, debt history, customer lists, physical assets and equipment, the product and/or service offerings, etc. This is done to make sure that the buyer knows what they are buying.

However, there is another aspect of due diligence that is typically not done. I call it the non-financial audit. This is an analysis of the organization: its strengths and weaknesses, biggest needs, strength of management, culture, values, work environment and impact of a sale on customers and employees.

Mark’s Story

I was hired by a company to do a non-financial audit. My client was interested in going beyond the financials and getting an analysis of the organization. Here are the highlights of what I found:

- Mark, the owner/entrepreneur/President, maintained all the relationships with the key customers. The customers didn’t know anyone else in the organization except a few customer care employees who they dealt with exclusively by phone. The key customers told me that they trusted the President and if he left, they had no reason to continue buying from the company because their loyalty was to the President, not the company.

 

Mark told me that he was only willing to remain with the company for 30 days after the sale. Then he was retiring. He would not accept any consulting contract beyond the 30 days. My conclusions: the financial health of the company was at stake when the Mark left and the new owners should expect significant drops in revenue right away.

- Mark was a typical entrepreneur with the typical command and control style of management. He made all the critical decisions and everyone else did what they were told. The managers were weak, untrained, underdeveloped, not really involved in management matters and took no initiative to improve the company. The employees were complacent and set in their ways. My conclusions: The new owners couldn’t rely on management for guidance or leadership and it would take a massive effort to change a system and the culture that had been build over 30 years.

My recommendation to the client: Don’t buy this company. Although it looked good financially and the market and products were sound, the overall risk was very high and the probability of failure was too great. My client bought a different company.

Non-financial audits are critical to the due diligence process and provide the buyer with a vivid picture of what “life” would be like if they completed the purchase. Yes, some buyers have told me that they can muscle through any organizational situation as long as the company is financially strong. I think this overconfidence is a mistake. A savvy buyer wants and weighs all pertinent information about a possible acquisition. That way, they will make a well-considered decision.

Cary has been a business consultant and the owner of CJT Company since 1981. He works with closely held and family owned businesses in transition. He guides them through the complicated web of ownership, management, board and family issues that transition brings.

Cary is a co-author of The Balance Point: New Ways Business Owners Can Use Boards, a book written specifically for owners of closely held and family businesses. It clarifies what owners do, what boards do and when they are needed and how owners, boards and managers can work together. Cary is a co-founder of The Board School, which helps business owners understand how to use boards in running and transitioning their company.

Cary J. Tutelman CJT Company Phone: 952-941-8864
Email: cary@cjtco.com
http://www.tutelmanconsulting.com

Have something to add?

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