Swings in China stock market: For middle market, impact is more about perception than reality

By: James Cassel
September 21, 2015

For South Florida’s middle-market businesses, the greatest threat from China’s recent stock market swings and economic slowdown is the negative perceptions — more so than any possible bottom-line impacts. Although the recent news of China’s unstable market and slowing economy has given rise to institutional panic, the continued direct volume of business between U.S. middle-market companies and Chinese companies — in China, as well as the current state of Sino-American trade relations — confirm that the situation is not as grim as some folks would have us believe.

One of the key complications of America’s economic relationship with China is a lack of transparency. It is difficult to say with any certainty whether the data is authentic or manufactured by the Chinese government. Either way, the impact of China’s stock market fluctuations is more about perception than reality. If people begin blaming any U.S. stock market drops on China’s stock market or the slowing Chinese economy, they will begin to clam up and buy fewer luxury products and focus more on necessities. Indeed, we have to be careful that perception does not become reality. If your middle-market business sells to Chinese companies or consumers, you may have a problem. Most Chinese consumers are not wealthy, but members of the middle class and even the wealthy who love Western luxury products are significantly cutting back on their purchases. We have seen this evidenced by major brands like Burberry, Chanel and Cartier, whose sales in China have taken a major nosedive. For Burberry in particular, China drives approximately 25 percent of total sales, which is indicative of how much luxury retailers have leaned on China for growth in recent years. It also has an effect on U.S. multinational corporations that rely on China for their growth.

Furthermore, the recent devaluation of the Chinese currency, the Renminbi, may also adversely affect middle-market businesses with ties to Greater China, as Chinese products are likely to become less expensive and thus more competitive on a global market.

In addition, the currency devaluation also may affect the number of middle-market companies that have been reaping the rewards of on-shoring: lower labor costs due to mechanizing and robotics, faster release to market, and reduced shipping costs. Despite China’s increasing labor costs, its lower currency value and production costs today may be beneficial in making it more attractive again to manufacture products in China, or at least stay in China. As China’s economy slows, it will be important to consider that its expected use of fewer natural resources may have a global ripple effect in terms of lowering the costs of natural resources as well as shipping and transportation, which may also negate some of the fiscal benefits of on-shoring.

Beyond this, there are some opportunities for middle-market businesses to reap benefits. Consider: Chinese companies have made a lot of money in recent years, posting an average 9.5 percent year-over-year growth since the 1990s. Wealthy Chinese nationals, eager for an exit strategy, are trying to get as many assets as they can out of the country, so there is a strong opportunity to sell to companies or partner with Chinese nationals who come to the U.S.

Another benefit: Since many U.S. manufacturers buy from Chinese manufacturers, lower prices will give those businesses greater margins, assuming that their sales numbers don’t otherwise dip. Lower costs of natural resources will also help increase margins.

So, what are the likely bottom-line impacts to South Florida’s middle-market businesses? Unless you have direct sales ties to China or have material customers who sell or supply a great deal to Chinese companies, it is not clear whether there will be any impacts. Since the economic fundamentals in the U.S. remain generally solid, the greatest threats will not come from the Chinese market swings but rather from any negative perceptions and concerns about possible impacts. So let us all relax, take a deep breath and keep our perceptions in check — it is in our best interest.

Five Tips to Consider Before Selling Your Business

By: James Cassel
September 10, 2015


There may not be better time to sell a business in the next few years than now. Values are high and interest rates are low. They may not stay that way for long. If you would like to sell your business now or any time in the foreseeable future, the time to begin planning is now. This can help minimize many of the obstacles that often delay or kill deals and help maximize your value and ensure a successful outcome.

Based on my experience as an investment banker helping clients during the sale, merger, and acquisition process, here are five tips to consider and act upon now:

  1. Early in the process, consult key decision-makers and those who will be affected by the deal. Determine who will have a say in the deal and consult with them, even if they are minority owners. If your business is family owned, talk to your family members as soon as possible. Involving your family at the outset can help minimize potential family problems later. This is particularly important if a second or third generation is involved and family members expect to take over or profit from the business. Making sure that family members understand what is going on can help keep harmony in the family.
  2. Determine whether and for how long you would like to continue to work after the sale. This can be a tough one. You have to be honest with yourself. It is not a bad idea to discuss this with your significant other. This decision is dictated for many by their age, health, and lifestyle preferences. Older business owners may be more prepared to retire and step away than younger ones who may need or want regular incomes to support their lifestyles or remain active. In general, at a minimum, it is a good idea to be prepared to continue working in some capacity during a transition period. In some cases with financial buyers, you might continue to run the business for years until the next sale.
  3. Organize your documents in advance.Well-structured corporate and financial documents and sound record-keeping practices always make good business sense. Getting your books and records in order now will help keep you from scrambling for documents when potential buyers conduct their due diligence. Keep all your financials, vendor contracts, and customer contracts easily accessible. You will derive immediate benefits from this, as you will be in better shape running your business today with good, timely information.
  4. Determine whether you want a partial or total exit. Private equity firms and other financial buyers can either buy control or minority positions. In a total exit, you might maximize the consideration you receive, especially if you sell to a strategic buyer (although financial buyers are currently aggressive when it comes to pricing). In a partial exit, there are many social issues to consider that might be just as important as what you receive. If you are going to partner with a private equity firm, the comfortability factor may be more crucial than the dollar amount, since you will not get that until the final exit when you sell your remaining ownership interest.
  5. Have realistic expectations of value. Ask your advisors to provide realistic guidance on the value of your business. Too often, I hear stories from frustrated sellers who regret having hired advisors who gave unrealistic valuation numbers just so they would get the job. It is equally important for sellers to be realistic and not merely pick whatever numbers they think they need to sustain their lifestyles. A multiple of earnings or EBITDA (earnings before interest, taxes, depreciation, and amortization) is the way most buyers determine what they are willing to pay for a business. The more you earn, and the higher your future projected growth, the more you can expect buyers to pay for your business. The amount buyers are willing to pay also will vary depending upon factors including your company’s size, stability, industry, and working capital needs. It also is important to have a diverse customer base, as your valuation will be hurt if your revenue is heavily concentrated with one or two clients.

Without a doubt, a little planning now can go a long way to help ensure you obtain the maximum value for your business and achieve your specific goals associated with the sale of your business.

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



Flow of private equity deals in Florida slows

By: Nina Lincoff
September 8, 2015

CS Pic


Private equity deals slowed in the first half of 2015, according to a report from Miami-based Cassel Salpeter & Co.

The flow of private equity into Florida is slowing after a record number of deals in 2012, according to a recent report from Miami-based investment banking firm Cassel Salpeter & Co.

Just 75 private equity deals closed in the first half of 2015, compared to a record 180 in 2012, 175 in 2013, and 199 in 2014.

The lower volume of private equity deals doesn’t necessarily mean that the alternative lending source has dried up in Florida, said James Cassel, chairman and co-founder of Cassel Salpeter & Co.

“It’s hard to really say that it’s a trend. We’ll have to see how it plays out over the last six months of 2015,” Cassel said. “There are still all of the factors that inspire deal flow, expect for one. The availability of quality companies, because they did their deals in 2014.”

It’s possible the market is normalizing after an over-saturation of available deals.

“Even if they are slowing down, it’s not because of the economy. They are not slowing down because they ran out of money,” Cassel said. “They are slowing down because there aren’t deals on the market.”

However, for the companies still looking to close private equity deals in Florida, 2015 and early 2016 is the time to do it, Cassel said. “One of the driving forces is interest rates, because we all know interest rates are going to go up. They’re just not sure which quarter,” he said. Smart companies are looking to close deals before the Federal Reserve hikes interest rates.

“Interest rates will effect valuation, because as interest rates go up, you’ll be able to leverage a little less,” Cassel said.

Other factors that contribute to a wealth of private equity deals include an increase of firms in-state and an overall healthy economy. In the first half of the year, four new Florida-headquarter private equity firm popped up, bringing the total in-state to 41, according to the report. In all of 2014, just three new firms headquartered in Florida.

In terms of industry, business-to-business deals compromised the largest part of Florida private equity deal flow in the first half of the year at 36 percent, followed by business-to-customer at 18.7 percent, and then health care, IT, financial services, and materials and resources, respectively.

The report considered all private equity investments including buyouts, growth, investment in public equity, recapitalization and add-on.

Florida banks grow loans faster than the national rate in Q2

By: Nina Lincoff
September 4, 2015

Florida continued to be a sunny environment for those seeking a loan, as the state’s banks grew loans in the second quarter at a faster rate than banks across the nation.

Total loans held by Florida’s 168 banks in the second quarter rose to $121.1 billion from $118 billion in the first quarter, or a 2.9 percent increase.

That’s a faster rise than the 2.2 percent increase reported by banks across the nation, which collectively grew loans by $185 billion in the second quarter.

The number of banks however, shrunk in the Sunshine State, falling to 168 institutions from 175 in the first quarter. But while the number of banks shrunk, profits didn’t.

Florida’s 168 banks reported a profit of $347 million, up from $236 million in first quarter.

The most profitable Florida banks in the second quarter were:

  • Petersburg-basedRaymond James Bank (NYSE: RJF) with a net income of $51 million.
  • Miami Lakes-basedBank United (NYSE: BKU), with a net income of $47 million.
  • Jacksonville-basedEver Bank (NYSE: EVER), with a net income of $43.4 million.
  • Weston-basedFlorida Community Bank (NYSE: FCB), with a net income of $19.9 million.
  • Coral Gables-basedCapital Bank (Nasdaq: CBF), with a net income of $14.3 million.

The Florida banks with the deepest second quarter losses were:

  • Miami-based Brickell Bank, formerlyEspirito Santo Bank, with a net loss of $2.9 million
  • Tampa-basedBay Cities Bank, with a net loss of $1 million.
  • Lake Mary-basedIndependent Banker’s Bank of Florida, with a net loss of $806,000.
  • Fort Walton Beach-based Beach Community Bank, with a net loss of $740,000.
  • Miami-based Banco do Brasil Americas, with a net loss of $717,000.


According to the Federal Deposit Insurance Corp., banks earned a collective profit of $43 billion in the second quarter, the highest quarterly income on record.

“Bankers generally reported another quarter of higher earnings, improved asset quality, and increased lending,” FDIC Chairman Martin J. Gruenberg said. “There were fewer problem banks, and only one bank failed during the second quarter.

Despite the lending and profit gains, Florida banks struggled with tight interest margins. Their combined net interest margin – the spread between interest earned on loans and paid out on deposits – declined to 3.40 percent in the second quarter, from 3.58 percent a year ago.

Across the country, the average interest margin rose to 3.06 percent in the second quarter from 3.02 percent in the first, but still remained below the 3.15 percent reported in the second quarter of 2014.

“Revenue growth has been modest and net interest margins continued to decline – even as banks extended asset maturities to mitigate the impact of low rates,” Gruenberg said.

Loan quality declined slightly in Florida, with banks’ collective noncurrent loan ratio rising to 3.44 percent in the second quarter from 3.42 percent in the first, although that is still less than the 4.15 percent reported for the second quarter of last year.

The amount of reposed property at Florida banks fell to $1.1 billion in the second quarter, from $1.2 billion in the first quarter. Deposits, on the other hand, increased to $131.6 billion in the second quarter from $130.6 billion in the first quarter.

The number of banks on the FDIC’s Problem List continued a nearly seven-year fall, from 253 to 228 during the second quarter.

Low interest rates have been hurting banks, and it is expected that Federal Reserve will raise U.S. interest rates before the end of the year, according to media reports.

“Revenue growth has lagged behind asset growth, as exceptionally low interest rates put downward pressure on net interest margins,” Gruenberg said.

While a hike in interest rates will likely help banks boost revenue in the medium- and long-term, some are saying that there will be an inflection point immediately following a rate hike where banks will lose money due to floors set for loans before the increase.

“One interesting comment has been that most asset-based loans have a floor in them,” said investment banker James Cassel, chairman and co-founder of Miami-based Cassel Salpeter & Co.

With a low interest rate, the cost of banks’ money is very low, but there will be a short period of time where, following a rate hike, banks’ money will cost more than money coming in, Cassel said.

That will normalize, of course, but it is something to consider in the lead up to a rate hike.

Swisher, August 2015