Archive for year: 2014

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By James S. Cassel
February 16, 2014

James Cassel
NEED A SMALL BUSINESS MAKEOVER?
If you would like a makeover, here’s what you need to do:
• Tell us why your business needs a professional makeover. No more than 250 words, please. Concentrate on one aspect of your business that needs help, and tell us what your problems are.
• You must be willing to share company information with our consultants so they can help you. (Businesses selected for makeovers will need to fill out a short financial form.)
• The makeover is open to anyone who has been in business at least two years. No start-ups.
• The business must be your primary source of income.
• Your venture must be in Miami-Dade or Broward.
• E-mail your request to ndahlberg@Miami Herald.com and put ‘Makeover’ in the subject line.

When middle-market business owners begin looking outward for potential investors or buyers, they often limit their searches to a lineup of the usual suspects: private equity firms, venture capitalists, strategic buyers, and so forth. But often overlooked alternative investors — family offices — can be a good fit for those seeking investment relationships with longer term horizons and less complicated approval processes. South Florida in particular has a growing group of family offices. Family offices primarily manage the family affairs of ultra-wealthy families and make investments and asset allocations on their behalf. Their duties can also extend beyond this to include managing philanthropic efforts, the family’s many homes and bills, and estate planning.

Cascade Investment was established to serve as Bill Gates’ family office, Michael Dell employs 80 people at his own MSD Capital, and Oprah Winfrey hired notable investment manager Peter Adamson in 2010 to run operations at her family office. According to a recent article in Forbes, single-family offices are arithmetically multiplying, and with the wealth or influence they control, they are probably exponentially multiplying. Moreover, single-family offices currently oversee a larger pool of investable assets than all the hedge funds today combined.

Traditionally, family offices have been primarily focused on managing assets through the selection of the right investment managers to conduct their asset allocations. Recently, however, driven by many factors including historically low yields in fixed-income markets as well as volatility in equity and commodity markets, family offices have begun to make more direct investments in mid-market businesses.

While most family offices are the result of a family selling its principal business, others were formed as a method of diversification by taking substantial capital out of the business to diversify its investment holdings. Some family offices may limit themselves to specific industries and business verticals with which they are familiar. For example, if the family sold a manufacturing company, it may impose that limitation and discipline on itself to only look outward to similar ventures where it has relevant experience to make direct investments. In turn, these family offices can be intimately knowledgeable partners in certain verticals.

Whatever the case, family offices represent strong potential sources of buyers and capital for organizations looking to expand or sell. Generally speaking, family offices don’t often have the same kind of time horizons as private equity firms. This is for fairly transparent reasons: Family offices take a longer term view of the businesses they buy. Those family offices that have acquired businesses with stable long-term growth have no reason to look toward fast-approaching liquidity events. It’s in their best interest to cultivate longer horizon investment relationships that will provide consistent returns. Selling a growing business would just require them to redeploy the assets and face all the inherent risks of making new investments.

Private equity firms, on the other hand, are not investing their own capital, and as a result, they typically acquire with a four- to seven-year time horizon in mind. They raise money with the expectation that they will invest during a five-year period and exits or sales will take place during the four to seven years after they acquire. The funds have a finite life. As private equity firms go to market periodically to raise their next fund, they need to show their historical returns in order to garner interest from potential investors.

Another important difference between family offices and private equity firms is that the former can be distinctly agile decision makers. Private equity firms are far more formal, have investment committees and require multiple rounds of approvals before definitive action may be taken. On the other hand, family offices generally boil down to one or two key decision-makers who can act and react nimbly with executive authority. Additionally, family offices don’t have stiff fund structures.

Multi-family offices have also become more prevalent in recent years, as have more robust options for those seeking to establish their own family offices. For example, GenSpring Family Offices, an affiliate of SunTrust Banks, provides highly customizable wealth management advice and service options for single-purpose and multi-function family offices, ranging from multi-generational sustainment to administrative management, and more.

Without a doubt, family offices offer key differentiators and benefits as prospective partners and buyers. Middle-market business owners seeking capital sources from flexible partners with a sharp focus on their industries and the proclivity to make long-term investments should keep family offices in mind along with private equity firms. Wondering how you can find and access them? It is not easy. Unlike private equity firms, they are harder to find, as many try to fly under the radar. However, as they get more active, they become more visible. Therefore, a good start is reaching out to trusted investment bankers, attorneys, accountants and other plugged-in advisors who can help get you connected.

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC — www.casselsalpeter.com — an investment-banking firm with headquarters in Miami that works with middle-market companies. He can be reached at jcassel@casselsalpeter.com

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By James S. Cassel
January 19, 2014

When it comes to middle-market mergers and acquisitions, 2014 is positioned to be quite a happy new year — the best one yet since 2008. For middle-market business owners seeking to sell their businesses, borrow money or raise capital, it looks like the stars may align to present attractive opportunities.

Typically, the M&A market gets bifurcated into large deals and small deals. In 2013, the large deal business came back but the middle market lagged. In 2014, we will see the large deal business continue while more small deals and middle-market deals begin to happen.

M&A last became bullish in 2006, and the market has since been hungry for another peak. Q4 2012 was particularly strong, and some middle-market analysts projected that 2013 would post record-breaking valuations for businesses, creating an ideal climate for exits and driving bidding wars. However, preliminary data show that the middle market lagged a bit in 2013, as the overall dollar value of deals closed in 2013 was only slightly higher than the dollar value of deals closed in 2012. According to a January 2014 S&P Capital IQ report, the dollar value of deals surged by 20.1 percent across the board between 2012 and 2013, predominantly driven by a few megadeals, but the number of deals actually slipped by 3.9 percent.

The end of 2012 was particularly strong due to the tax law changes. The slower deal volume can be attributed in 2008-2012 to a wide array of factors, including posturing in Washington over tax and estate issues, the slow debt market recovery, lack of job growth, and the stalled economy. Granted, this slow upward trend has been building since 2008, and early projections for 2014 indicate that this gradual increase will continue throughout the year. There could be pent up demand to sell.

In my experience at Cassel Salpeter, an investment banking firm that focuses on the middle market, several industries — namely healthcare, media, telecom and technology, financial services, insurance and real estate, retail, energy and manufacturing — enjoyed more concentrated deal-making opportunities. Companies with predictable cash flow were able to leverage multiples of four and five times cash flow, and companies with EBITDA in excess of $25 million gleaned even more. Calling 2013 a bad year or a good year all depends on where you happen to be standing, but across the board, it was a year of learning, and those lessons shed a telling light on what the market can expect from 2014.

In a recent KPMG survey of more than 1,000 M&A professionals, approximately 63 percent responded that their U.S. companies or clients will initiate at least one acquisition this year, and 36 percent expect their companies or clients will complete a divestiture. In a similar survey among 145 C-level executives, almost three quarters indicate that they expect their companies to make an acquisition in 2014 — almost double from last year. Are they righteously optimistic or kidding themselves?

The key drivers of this uptick in M&A confidence include: employment is improving; GDP has increased and is expected to be north of three percent in 2014; customer confidence has improved; home values are improving; the stock market is up; and interest rates remain relatively favorable. Despite the doom and gloom forecast that has been permeating some media, which is now finally subsiding, there is still a powerful notion of stability and safety in North America’s M&A markets. So, while regions like Western Europe and China might have some opportunities, the U.S. will undoubtedly attract dollars from investors seeking stability and growth.

Although 2014 might produce some megadeals, the middle market will be the main driver of M&A. According to the KPMG survey, approximately 77 percent of survey respondents say they expect their M&A deals to be valued under $250 million. This is an important detail: Middle-market executives have expressed confidence regarding their ability to access credit markets to finance deals, and simultaneously, a wide swath of companies are sitting on large reserves of cash, so these middle-market deals will become attractive targets for larger companies in the coming 12 months. The savvy ones have spent the past few years paying down lines of credit to prepare for the next bullish era of opportunities.

On the subject of credit, interest rates will remain low for at least the first six months of the year, maybe longer. Simply put, it’s ideal to borrow now, because if and when the Federal Reserve reduces its stimulation, interest rates may begin to move. A small uptick will produce minimal impact, but more significant increases could shake things up.

That doesn’t mean there isn’t money out there, particularly in the private equity markets and strategic buyers. Private equity firms are flush with cash and credit availability as are companies. Companies are looking to buy, and the convalescence of factors like cash reserves and increased consumer confidence will produce a favorable environment in 2014 for companies looking to make acquisitions. In addition, we can also expect that this will be a good year for initial public offerings, particularly for technology, financial services and health care ventures.

The unknown is not whether there are buyers but whether there are sellers willing to sell. At some point, aging business owners will make the difficult decision and take the plunge. As with all things, time will tell how the New Year will treat the middle market’s M&A sector, but insights from last year and new developments in the market are promising a healthy and strong 2014.

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies. www.casselsalpeter.com