By James S. Cassel
Many middle-market business owners struggle to determine whether to continue pouring significant time, money and other resources into non-core business divisions or subsidiaries— that is, those that are not vital, essential or are no longer necessary to a company. For many, finding the right answer is a difficult task that often gets deprioritized while they focus almost exclusively on the immediate needs and daily operations of their businesses. Unfortunately, neglecting to address these questions often ends up hurting their businesses and diminishing their success.
How should you approach a division that is troubled, not growing, no longer fitting your core business or strategic plan, and/or consuming a disproportionate amount of time and capital? Following is some practical guidance based on my experience helping middle-market business owners evaluate the alternatives and navigate these complex issues.
First, an easy answer could be: If the non-core division is losing money and/or dragging down the rest of your business, you might shut it down. However, this quick fix is not always the best course of action. Another party might find value in the division and give you additional capital that you can redeploy for growth. Keep in mind that what is not good for you might be ideal for someone else. If the line of business has this type of potential, you might try to find a buyer capable of maximizing it.
So, how should you begin your analysis?
▪ Start by closely evaluating the financials for the business unit you might be looking to sell or shut down. You should also examine on a pro forma basis the financial situation of the remaining business as a standalone unit, thereby enabling you to examine the financial implications of the potential divestiture and make sure it will not hurt your business financially or otherwise. For example, the division might actually be contributing to help cover a part of your overhead. In this case, a divestiture could have more serious financial implications on your overall bottom line than you had imagined.
▪ Evaluate your company’s current management and employee headcount. If you divest the division, do you need to reduce management, as well as your company’s overall headcount? How would this impact your company? Would losing these employees hurt other areas of your business?
▪ You must also evaluate the potential impact of the sale on your clients or customers. Do they currently choose to do business with you because of your ability to serve as their one-stop shop and offer those products or services, even if those products or services are non-core business areas that are unprofitable or loss leaders? Could the sale potentially cause you to lose customers or diminish their satisfaction? Also, what about your competitors — do they currently provide any of those sought-after products or services? If you were to eliminate that part of your business, would you be in effect giving your competitors a greater advantage by positioning them to serve your customers and steal your market share?
Big companies continuously evaluate the return on equity, performance and viability of their non-core business divisions or subsidiaries. This helps them to ensure that these lines of business are not hurting their growth rates, overall profitability and success by forcing them to devote disproportionate amounts of time and energy to these areas. Many large companies like GE and P&G continuously evaluate their varied lines of business and remain ready to sell any non-core assets. This best practice helps make them stronger and better focused on growth and acceptable levels of profitability.
Some companies may have the in-house expertise to handle these evaluations independently, but others may need assistance from outside consultants. Whatever the case, it is important for middle-market business owners to work with qualified professionals with proven expertise helping companies similar to theirs navigate these issues. While this may require some investment in terms of time, money and other resources, it will pay off in the long run by helping ensure your business is well positioned for continued success.
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.
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MIAMI & ORLANDO, Fla.– Cassel Salpeter & Co., a middle-market investment banking firm providing financial advisory services, represented Reservations.com in a capital raise. The investment enables the company to continue to expand its business and online hotel booking platform.
“We appreciate the Cassel Salpeter team’s ability to secure the necessary capital to take our rapidly growing company to the next level”
Reservations.com is an Orlando-based provider of online booking services for more than 150,000 hotels across the United States and worldwide.
The Cassel Salpeter team, led byPhilip Cassel, identified and approached Versant Funding LLC, which provided the capital. Cassel Salpeter assisted Reservations.com through the closing of the transaction.
Cassel Salpeter, with its headquarters in Miami, has experience providing clients in diverse industries with a range of advisory services including: mergers and acquisitions; equity and debt capital raises; fairness and solvency opinions; valuations; and restructurings, such as 363 sales and plans of reorganization.
“We appreciate the Cassel Salpeter team’s ability to secure the necessary capital to take our rapidly growing company to the next level,” said Yatin Patel, co-founder of Reservations.com. “This capital will enable us to strengthen our business, expand our global roster of hotels, and implement a strategic digital marketing program. It also enables us to secure additional capital in the coming years from Versant Funding that will further strengthen our business operations.”
Reservations.com is one of the fastest-growing hotel reservation platforms helping millions of travelers per month easily search and book hotel reservations for top destinations worldwide. Reservations.com (https://www.reservations.com) aims to provide the latest technology, information and features to help travelers research and book hotels on Reservations.com website or over the phone. Travelers can save big with the best hotel room deals available online including group discounts (http://groups.reservations.com). Reservations.com offers excellent customer support including a 24/7 reservations help desk.
About Cassel Salpeter & Co.
Cassel Salpeter & Co., LLC is an independent investment banking firm that provides advice to middle market and emerging growth companies in the U.S. and worldwide. Together, the firm’s professionals have experience providing private and public companies with a broad spectrum of investment banking and financial advisory services, including: mergers and acquisitions; equity and debt capital raises; fairness and solvency opinions; valuations; and restructurings, such as 363 sales and plans of reorganization. Co-founded by James Cassel and Scott Salpeter, the firm provides objective, unbiased, results-focused services that clients need to achieve their goals. Personally involved at every stage of all engagements, the firm’s senior partners have forged relationships and completed hundreds of transactions and assignments nationwide. The firm’s headquarters are in Miami. Member FINRA and SIPC. More information is available at www.CasselSalpeter.com.
By Nina Lincoff
There were 96 private equity deals closed in Florida in the first half of 2016, which is slightly down from the 103 deals closed the same time last year, according to a new report form Miami-based private equity and investment banking firm Cassel Salpeter & Co.
But before investors run with news and declare a decline in private equity investment in the Sunshine State, there are a couple of factors to consider.
At this time last year, data revealed just 75 private equity deals in Florida – the first half of the year projections were updated later as a few more deals were reported.
“It’s a common thing that happens,” said James Cassel, chairman and co-founder of the firm. “Sometimes, a couple months later, adjusted numbers will come out and it’s not that the original data was wrong, it’s just that was the data available at that point in time.”
Cassel & Salpeter release private equity deal flow reports using data from PitchBook, an industry database and analyst. The reports include all private equity investments related to business growth – buyouts, add-ons, growth, recapitalization – made to companies headquartered in Florida, excluding real estate investments.
As with most businesses, deal flow has a lot to do with timing. Second quarter closures are often preceded by months of work, and when a deal closes, it’s largely circumstantial. Big events like tax changes and possible interest rate spikes can mean that companies prefer to close deals in one year as opposed to another, but largely when a deal closes depends on the players.
“Sometimes deals can slow down because of the due diligence,” Cassel said. “But everybody wants to close sooner rather than later. It’s just better that the deal is done.”
In talking to peer private equity firms, Cassel noted that some said January and February were slower months, which in turn affected second quarter closures.
Despite the slight drop in deals that close in the first half of 2016, the Florida market is still relatively stable.
“There are reasons why it should be a pretty healthy market. There is still plenty of private equity available, there is still plenty of debt available at [largely] historically low prices,” Cassel said.
One factor that could be contributing to a slowdown in private equity investments is simply a depleted supply of quality Florida-based deals. But it’s too early to tell whether or not supply has begun to dry up.
“There are businesses available,” Cassel said. However, private equity firms can cycle through businesses and do secondary buyouts, when one firm sells to another and that could buoy the deal flow pipeline in Florida.
Deal flow is also dependent on the buyer. Classic private equity firms buy on a five-year horizon, which limits possible investments. Strategic buyers can invest for life, or until it’s time to divest. Typically, when a family goes into business, it’s for a long time.
“Every private equity firm is a seller, whereas a strategic buyer is not and a family business may or may not be depending on the time,” he added.
Along with deals being down in the first half of the year, private equity exits are also up, meaning a firm has timed out and sold off the company. The Florida private equity investment-exit multiple hit an all-time low of 2.4x in the first half of the year. And while that’s a record low, it’s not a significant enough drop from 2015’s 3.1x multiple to sound an alarm, Cassel said.
The industries where private equity deals closed in Florida were largely consistent with past years. Business to consumer deals were high, as were business to business deals and healthcare. Financial services and IT were slightly less but consistent proportionally with last year, and energy and manufacturing were small to non-existent.
Florida is not an energy-rich or manufacturing state, so that’s not very surprising.
One challenge facing the business community in general is the difficulty of scaling up. It’s easier to start a small business and grow to five or 10 employees, but it gets exponentially harder to scale up to 50 employees or 100 or 500, Cassel said. As the inventory of small business increase, but middle-market firms remains stagnant or decrease slightly, private equity deal flow could be affected.
Moving forward through 2016, there are a couple variables that make it difficult to predict how deal flow will continue – the November elections, potential interest rate hikes, and in Florida, Zika.
“People are talking about one interest rate hike in December after the election, and there’s also talk about one in September, but who knows,” Cassel said. “If we really knew, my gosh what we could do with futures.”
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