Look beyond the traditional valuation metrics when selling a middle-market company

May 22, 2020
By James S. Cassel and Paul Berkowitz

Economic uncertainty has increased for most middle market companies, with many owners weighing whether to sell their business. Even during this difficult time, some want to sell sooner rather than later, driven by concern about future prospects, the emergence of liquidity issues, or just because they’re ready to move on. The question is whether there is a buyer willing to pay an acceptable price.

In today’s environment, a successful sale means looking beyond traditional valuation metrics. Selling during the pandemic, and even the post-pandemic era, makes earnouts — promising the seller future consideration tied to predetermined financial goals — the best strategy for bridging the valuation gap and getting the best price. Used for years, earnouts will now become more prevalent.

For buyers prior to COVID-19, projections, along with trailing 12 months EBITDA — earnings before interest, taxes, depreciation, and amortization — or free cash flow, were in most cases the go-to performance metrics for establishing a company’s value. Comparable transaction values were also considered. Today, these may not be as relevant.

Approaching the negotiation table, the typical seller may claim business will get back to “normal,” pre-pandemic levels. But with most businesses having gone off a cliff in March and uncertainty helping to make historical metrics poor indicators, accurate projections are difficult to come by. Meanwhile, the savvy buyer has no guarantee if, or even when, business will get back to normal.

So, for the seller that has an interested buyer, earnouts and sharing the risk can bridge the valuation gap. But the devil is in the details when it comes to earnouts. Get them wrong and you could see trouble ahead. A great investment banker is a critical resource in getting them right, but here are some issues to consider:

  • What metric should you use? Should you base an earnout on revenue, gross margins, EBITDA, or net profit? Sellers should push for the metric most likely to hit earnout goals.
  • Include parameters outlining what the buyer must do to maximize the earnout, showing what operational procedures and expenditures made the company successful prior to the sale. Ensuring your consideration doesn’t fall short may mean pushing for continued funding for R&D, products/services promotion, and/or other initiatives.
  • Include provisions making the buyer keep separate books from their other businesses, while requiring they regularly provide financial information on the company you sold them.
  • Specify prohibitions on the buyer selling significant company assets, charging fees for overhead, or on diverting assets to other businesses. Require that the business continue to run as it has historically.
  • Determine how the day-to-day operations of the business will proceed and whether the seller will continue to operate the business.
  • Review all earnout tax considerations to maximize the value received.
  • Establish appropriate, reasonable periods for With getting to the new normal expected to take some time, longer earnouts may be better.
  • Include provisions for resolving disputes without litigation, with guidelines for hiring independent dispute resolution experts.
  • When defining rules that establish if a buyer breached the contract, avoid standards that require proving the buyer’s intent to reduce the earnout, which is hard to do.
  • Finally, a liquidated damages provision may be appropriate, providing for an earnout payment if the buyer breaches the contract.

Given today’s economy, with its uncertain future, earnouts are an effective means of bridging the valuation gap for a company sale. But availing yourself of this timely deal tool means thoughtful attention to details now, to avoid friction and/or litigation later, especially given courts often favor the buyer in earnout disputes.

Specific, detailed, unambiguous terms are best. Play it right, and you will achieve a win-win where you get fairly compensated, and the buyer feels they got a fair deal with a shared risk profile.

James S. 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. jcassel@casselsalpeter.com or https://www.linkedin.com/in/jamesscassel.

Paul Berkowitz is a shareholder in the Miami office of Greenberg Traurig, P.A. with a practice focusing on business matters. berkowitzp@gtlaw.com or https://www.linkedin.com/in/paul–berkowitz–68821219/

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What Can You Do With a Finance Degree?

By Ilana Kowarski
May 21, 2020

The ability to manage money is a skill that can be applied in nearly any industry, experts say.

PEOPLE WHO ENJOY working with numbers, excel at math and take pride in their ability to manage money wisely should consider pursuing a finance degree.

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“Is the field you want to enter associated with quantitative and logical thinking? If so, a finance degree might be a good challenge for you to consider,” Ahmed Mir, who earned a master of science degree in finance and investment from the University of Nottingham in the United Kingdom, suggested in an email.

Mir – the founder of Nature & Bloom, a London-based firm that sells CBD supplements – notes that a finance degree can pave the way for a career as an entrepreneur. “If you intend to own your own business, the ability to manage and understand your own finances is crucial to long term success and as a result, a degree in the field would set you up well to manage cashflow.”

Furthermore, individuals who prefer to work for an established company rather than for themselves can expect to qualify for a variety of jobs with a finance degree. Though it is common for finance professionals to work at banks, they can find employment elsewhere, experts say.

Mir, for example, entered the tech sector after obtaining his finance degree and spent more than six years working for Amazon. His personal experience aligns with the observation of recruiters who say that finance credentials are highly marketable in many industries.

“A finance degree qualifies you for careers as a financial analyst, financial advisor, accountant, or financial manager for businesses of all sizes and industries,” Matt Erhard, a managing partner with Canadian recruiting firm Summit Search Group, wrote in an email. “This is one of the reasons these degrees are so valuable and versatile. Every company needs people who are knowledgeable about finances and accounting in order to run and grow effectively.”

What You Can Expect to Learn in a Finance Program

The field of finance focuses on the many strategic considerations involved in monetary decisions, including choices about borrowing, lending, saving, spending and investing, according to finance academics and practitioners.

Finance students are typically taught the art and science of financial analysis and financial modeling, including lessons on how to interpret complex data and create solid forecasts.

Knowledge of this academic discipline can help someone determine where to allocate limited financial resources when drafting a budget, and it can also inform financial predictions and facilitate financial planning. A sophisticated understanding of finance can clarify which business opportunities have the greatest profit potential as opposed to ventures that are unlikely to be successful, experts note, adding that such insight is essential for investment careers.

[ SEE: Best Graduate Finance Programs. ]

Finance training is also valuable when calculating how much an asset or company is worth and determining what price a company should charge for its product or service.

“Finance and the understanding of how money flows is the foundation of every business,” Adam Sanders, who has a bachelor’s degree and an MBA in finance, explained in an email. Sanders says the wide range of job options for finance grads is a significant advantage of pursuing a finance degree. “Any type of general business or money-related career is an option with a finance degree.”

Risk management is a career path where a finance degree often comes in handy, notes Sanders, an alumnus of Northwestern University’s Kellogg School of Management and director of Successful Release, an organization that helps former felons reenter the workforce. “It prepares you to better understand, evaluate and address the many risks that companies face. Risk management ultimately comes down to how much it will cost if things go wrong and how much it will cost to prevent it which is where finance professionals shine!”

[ READ: What You Need to Know About Becoming a Finance and Financial Management Services Major. ]

Finance degrees cultivate problem-solving skills that are attractive to employers, resulting in numerous career opportunities, according to experts. Degrees in finance-related fields such as economics, accounting and actuarial science can yield similar job prospects and serve as viable alternatives to finance degrees, experts say.

Additionally, industry-recognized certifications in finance such as Chartered Financial Analyst, or CFA, and Certified Financial Planner, or CFP, are extremely marketable and allow finance grads to differentiate themselves from their peers when competing for jobs.

Experts say the following positions are the sorts of jobs where finance training is especially helpful:

  • Financial analyst
  • Financial associate
  • Financial planner
  • Investment analyst
  • Budget analyst
  • Corporate planner
  • Portfolio manager
  • Wealth manager
  • Financial manager
  • High net worth money manager
  • Product manager
  • Head of product
  • Head of planning and analysis
  • Comptroller
  • Chief financial officer
  • Chief executive officer

Finance careers can be highly lucrative, especially for individuals who become managers in the field. According to the U.S. Bureau of Labor Statistics, the median annual salary among U.S. financial managers in 2019 was $129,890.

However, experts caution against pursuing a finance degree simply because of a desire to become rich, warning that it’s important for prospective finance students to think about whether they would actually enjoy a finance job and perform well in it.

[ READ: How to Choose Among the Many Types of Business Programs. ]

Andrew Temte, who has a Ph.D. in finance and a CFA certification, says liking money isn’t a good enough reason alone to enroll in a finance program, noting that he has witnessed many students make that mistake.

Temte, CEO of Kaplan Professional, which provides licensing exam preparation and continuing education, cautions that entry-level finance jobs aren’t necessarily glamorous. He encourages prospective finance students to arrange informational interviews with practicing finance professionals to get a sense of whether a finance career is a good fit.

Finance jobs require creativity and people skills in addition to hard skills, Temte notes. A finance professional must be able to make sense of numbers and explain those numbers, he emphasizes.

James Cassel, co-founder and chairman of the Miami-based investment bank Cassel Salpeter & Co., acknowledges that it is possible to work in a finance job without a finance degree. Cassel notes that he hires some individuals who have that credential and others who lack it.

Experts emphasize, however, that the technical skills gained via a finance degree can be very useful.

Steve Shreve, a mathematical sciences professor and co-founder of the master of science in computational finance program at Carnegie Mellon University, notes that quantitative finance programs are ideal for mathematically gifted students who are looking for practical ways to apply their numerical abilities.

The enormous amount of financial data available nowadays signals a growing need for data analysis, Shreve says.

Richard Bryant, the program’s executive director, says students who obtain more general, less math-focused finance degrees can follow a wide range of career paths ranging from mergers and acquisitions analysis to private equity investing.

Finance programs ultimately teach students how to use money optimally and increase wealth, a valuable skill no matter which sector they enter, experts say.

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This is the time for businesses to prepare for the ‘new normal’

By James Cassel

Take a deep breath: After weeks of enduring the pandemic’s economic challenges, middle-market leaders should take a step back to consider the transition to the new normal. Whether we see a dramatic reopening of business in May, as the president has suggested, or a later restart with a more gradual transition, this is the time to prepare.

Cash flow is your business’s lifeblood. Review your needs for the next six months, considering different scenarios for business ramping up during that time. With money now flowing, apply for loans and assistance through the CARES Act’s Paycheck Protection Program (PPP), and the Small Business Administration. The sooner you get started, the better. Support dollars are limited and banks like Wells Fargo and others are overwhelmed and turning away new and existing customers, but many aid programs operate on a first-come-first-serve basis.

Also, if you haven’t already, seek relief from landlords, banks, and creditors. It is in all your best interests. It’s very hard for landlords to find new tenants right now, and banks and suppliers/creditors want to keep your business.

Communicate with customers, clients, suppliers and partners regularly. This is about caring first and business second, but do discuss where they expect to be in the coming weeks and months, then plan your business strategy accordingly. Reflect on how you are going to relaunch and communicate your availability, products and services. Consider discounts or sales to jumpstart your reopening and generate cash.

Take care of yourself and your employees, physically and mentally. Remember, the CARES Act offers payroll protection with loan forgiveness, so examine bringing back furloughed or laid-off employees, but make sure you carefully comply with the requirements to assure you get the maximum forgiveness amount.

Strike the right tone while communicating. Understand there may be tough decisions ahead resolving the return of personnel. Not being sure how things will play out or how fast, companies must be cautious as they ramp back up, while being transparent with employees. Let your team know where your company is and where it’s headed and listen carefully. Employees should feel engaged and see themselves as part of the solution. Be attentive to their contributions, incorporating the best into your planning. Don’t forget they’re suffering too.

Now that many of us are smarter about social distancing, protection, and remote working, use your learnings to promote and codify developed efficiencies. If the virus reemerges, or some other disaster strikes, your business can act faster and more seamlessly transitioning to a remote, resilient operation.

Don’t forget that marketing and messaging still matters. Consumers, clients, and partners expect you to remain a trusted industry presence and a part of the conversation through this difficult period. Plan for the restart now, and start developing your future messaging so that it is in place and fine-tuned when the crisis subsides.

We need to be prepared for the new normal. Restaurants and entertainment venues, for example, may want to do more cleaning and disinfecting once they begin to reopen, as well as maintain some form of social distancing protocols whenever possible. There may also be new standards for wearing masks and gloves even after this lockdown. Will we ever shake hands again? I don’t know, but those are the types of things we should be thinking about now.

Work on becoming a better and a more efficient company. Don’t focus on the negative. Instead, communicate and strategize for coming out on the other side after things take a turn for the better. It’s hard to predict when, but we will eventually get back to business.

Remember, even though we’ve been through a major economic/health disruption, this crisis has also provided the opportunity to spend more time with our families and working on ourselves. It has allowed us to share more home-cooked meals surrounded by those closest to us, while trying out new things like Zoom and Instacart. Likewise, it provides an opportunity for your business to come out of this stronger, leaner and battle-tested.

S. 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. He may be reached via email at jcassel@casselsalpeter.com or via LinkedIn at https://www.linkedin.com/in/jamesscassel.

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