Archive for year: 2020
What You Should Know About Company Mergers
By Skye Schooley
• A company merger is when two companies combine to form a new company.
• Companies merge to expand their market share, diversify products, reduce risk and competition, and increase profits.
• Common types of company mergers include conglomerates, horizontal mergers, vertical mergers, market extensions and product extensions.
• This article is for business owners who are considering merging their company with another business.
A company merger can happen for many reasons. Although very few business owners build their business in anticipation of one day merging with another company, the right business mergers can be very beneficial. Learn about the different types of mergers and their benefits.
What is a company merger?
A company merger occurs when two firms come together to form a new company with one combined stock. Although a merger is typically thought of as an equal split in which each side maintains 50% of the new company, that’s not always the case. In some mergers, one of the original entities gets a larger percentage of ownership of the new company. [Read related article: You Bought a Business … Now What? 5 Post-Acquisition Steps]
Key takeaway: A merger is when two companies come together to form one company with new stock.
Why do companies merge?
Mergers are a great way for two companies with unique experience and expertise to come together and form one business that is more profitable than the two entities were on their own.
There are several reasons why two companies might want to merge. Sometimes, it is out of convenience, and other times, it is out of necessity. Regardless of the specifics, the goal of a merger is to take advantage of opportunities in the marketplace that benefit both businesses.
“The companies may be looking to take advantage of financial synergies, opportunities for efficiencies, new market dynamics or a chance at product diversification, to name a few things,” James Cassel, chairman and co-founder of Cassel Salpeter & Co., told Business News Daily. “The companies may see opportunities by merging product lines or by cutting redundancies, like having two CFOs when one will suffice for both companies if they come together.”
Key takeaway: A merger can benefit companies by increasing profits, enhancing expertise, expanding market share, diversifying products and minimizing redundancy.
How does a company merger work?
A company merger occurs when two businesses with similar synergies decide that being one company together will yield more profits than being two separate entities. During a merger, the companies involved are likely to undergo quite a bit of restructuring in terms of corporate leadership and operations.
When a company merger happens, the two equal companies can convert their previous stocks into one new, combined company stock. First, they must decide what each company is worth, and then they split the ownership of the new company accordingly. [Read related article: How to Calculate Your Business Valuation]
“For example, it may be determined that company A is worth $100,000,000 and company B is worth $200,000,000, making the combined value of the new company worth $300,000,000,” said Terry Monroe, founder and president of American Business Brokers & Advisors. “Therefore, the stocks from each of the companies will be surrendered, and new stock will be issued in the name of the new company based on the valuation of $300,000,000. The stock owners from company A would get one share of stock in the new company, and stock owners from company B would get two shares of stock in the new company.”
Although the creation of a brand-new stock with the new entity is ideal in theory, it is not always what happens. In fact, oftentimes, when two companies merge, one company chooses to buy the other company’s common stock from its shareholders in exchange for its own stock.
Key takeaway: When entities merge, both companies can convert their current stock into one new stock and divide it among the new owners based on previous worth.
What is the difference between a merger and an acquisition?
Mergers and acquisitions are often confused as interchangeable terms, but there are a few differences. Although both involve combining two entities, an acquisition is when one company buys and controls the other, whereas a merger is when two companies come together to form a new entity.
“A lot of the time, no money is involved in a merger, whereas an acquisition is when one company pays to purchase another company, either with money or the issuing of stock or assumption of debt or a combination of all of these methods,” Monroe said. “With an acquisition, the acquiring company will remain in business, and the company that was acquired will no longer be in existence.”
Since an acquisition, or a takeover, involves one company consuming the other, the leadership in both companies often stays the same. Mergers, on the other hand, frequently involve the restructuring of corporate leadership, which can cause problems when both companies have headstrong leaders with different ideas on how to run the new organization.
For example, you will likely have to decide which CEO or president of the two merging companies will run the newly merged company. Although some merging companies attempt to have the CEOs of both companies share leadership through a co-CEO structure, this strategy rarely works out well, Monroe said. This is something business leaders should keep in mind when considering mergers versus acquisitions.
Key takeaway: A merger is when two companies combine to form one new company; an acquisition is when one company buys out and controls another company.
What are the different types of company mergers?
There are five main types of company mergers: conglomerate, horizontal, vertical, market extension and product extension. The merger type is based primarily on the industry and the business relationship between the two merging companies.
Conglomerate merger
A conglomerate merger is the combination of two companies from different industries and unrelated business activities. The benefits of a conglomerate merger include diversifying business operations, cross-selling products and minimizing risk exposure. A well-known example of a conglomerate merger was when The Walt Disney Company merged with the American Broadcasting Company (ABC).
Horizontal merger
A horizontal merger is the combination of two companies from the same industry; these companies can include direct and indirect competitors. The benefits of a horizontal merger include greater buying power, more marketing opportunities, less competition and a larger audience reach. Monroe said this type of merger is common in the restaurant industry, where different brands of restaurants merge to reach a wider customer base and gain greater buying power from the same vendors.
“For example, in 2019, Papa Murphy’s, a company in the pizza business, merged with a company called MTY Food Group – which owns restaurants such as TCBY, Cold Stone Creamery and Planet Smoothie – which would allow the new company to have a centralized marketing and advertising department and franchised sales department,” Monroe said.
Vertical merger
A vertical merger is the combination of two companies that operate in different stages of the same supply chain, producing different goods or services for the same finished product (e.g., one company sells something to the other company). The benefits of a vertical merger include a more efficient supply chain, lower costs and increased product control. An example of this type of merger is when The Walt Disney Company merged with Pixar Animation Studios for its innovative animations and talented employees.
Market extension merger
A market extension merger, similar to a horizontal merger, is the combination of two companies from the same industry; however, in this merger, the two companies are from separate markets. The primary benefit of this merger is to expand and increase market share. Monroe said this type of merger is commonly seen with banks.
“With the government implementing more regulation and compliance from banks, it sometimes behooves smaller bankers to merge with other banks of similar size to reduce the cost of operations and regulatory compliance and increase their market share, since they all offer essentially the same product,” Monroe said.
Product extension merger
A product extension merger, also known as a congeneric merger, is the combination of two companies that sell similar, but not necessarily competing, products. The benefits of a product extension merger are expanding customer reach and increasing profits. Monroe said this type of merger is very common in the software industry, where one company may offer a virus protection software and another company may offer financial protection software for your personal financial data.
“The idea of these two companies merging would be a good idea, as both of their products would be applicable to the same customer,” Monroe said. “The product merger can continually be extended with add-on services and products once a customer has been acquired.”
Key takeaway: There are five main types of company mergers: conglomerate mergers, horizontal mergers, vertical mergers, market extension mergers and product extension mergers.
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Sadly, for some middle-market businesses, the next chapter will be bankruptcy
By James Cassel
Many middle-market companies have tightened their belts, raised capital, and availed themselves of emergency government funding, but it may not be enough, and they might yet be moving toward an economic cliff. If they act fast, they may still have a few options left.
Troubled middle-market businesses are struggling to endure and adjust to the economic squeeze presented by the ongoing pandemic. Despite availing themselves of PPP funding, scaling back product lines and services, laying off or furloughing employees, while increasing efficiencies, retooling marketing strategies, and reinventing themselves, for many the light at the end of the tunnel continues to dim. Even with the possibility of more government funding, the on-again-off-again reopening process, accompanied by new COVID surges, has them headed for a crash.
As survival options dwindle, here’s what to ask:
Knowing time may be the enemy, the overarching question is: Can the business survive long enough to prosper again, and is the struggle worth the effort?
Finding the answer begins with realistically assessing your projected revenues and expenses for the next 12 months. With those numbers in mind, it’s time to ask the following questions:
Is there more government assistance available? And if so, will it be enough, and will you qualify?
Do you have enough capital and resources, or can you somehow obtain it to save your business?
Can you sufficiently further right-size your business, conserving cash to give you the needed time to survive?
Do you have any personal guarantees on loans or other obligations that will affect you if the business fails?
If your answers suggest you won’t secure the needed survival capital, and the risk ahead looks high, here’s what to consider next:
Small businesses can take advantage of the newly created SBRA, or Subchapter V of Chapter 11 of the Bankruptcy Code, which is less expensive and faster than a Chapter 11 bankruptcy. It offers one-step confirmation and allows a debtor to spread their debt over three to five years with administrative costs paid over the life of the plan. While a trustee is appointed to facilitate the development of a consensual plan of reorganization, the debtor retains control of assets and operations.
Also, consider a traditional Chapter 11 bankruptcy. It might give you time to reorganize to save or sell your business, or to liquidate in an orderly fashion.
But if you have to act fast to get the situation out of your hands as quickly and completely as possible, a Chapter 7 liquidation may be best. Here, a trustee takes control of your assets and liquidates, or sells them.
Another option is an Assignment for the Benefit of Creditors (ABC), a state, rather than a federal, alternative. It’s generally less expensive, faster, more discreet, and simpler compared with a traditional bankruptcy. Here, you get to not only choose the assignee to manage the process, but you also have a chance to play a role in that process. This helps ensure that the assignee is an expert in liquidating the assets, and also knows how to operate the business for a time to get the best return by attaining the going-concern value when possible.
Your final option may simply be shutting your doors and closing the business. It’s important to note that if things are going south and you can’t save the business, you may have to sell in or out of bankruptcy. Selling in bankruptcy affords certain protections from creditors, allowing an acquirer to buy the business free and clear of all, or non-assumed, liabilities.
While none of these options is easy, in this economic climate some business owners must cut their losses and sell. By asking tough questions now and consulting experts at restructuring firms, law firms and investment banking firms, you can find your way to a new beginning, as opposed to getting mired in a reputationally hazardous calamity. Talk to professionals sooner rather than later. You may still have options.
This column was contributed to Business Monday by James S. Cassel, co-founder and chairman of Cassel Salpeter & Co., which is 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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U.S. DIRECT LENDING WRAP: ‘Green Shoots’ Emerge for Shadow Banks
By Kelsey Butler
August 03, 2020
U.S. direct lending activity is starting to see some signs of life, though volume remains depressed as borrowers and their private equity backers tread cautiously.
* “Any which way you look at it, volumes are low,” said Suhail Shaikh, head of U.S. direct lending for Alcentra Group in an interview. “But we’re starting to see some green shoots, we’re seeing some more inbound activity, but by no means at the same pace as before Covid”
** A resurgence in activity could “evaporate very quickly depending on what happens in the broader economy,” according to Shaikh
* Private equity sponsors focused on middle-market businesses that typically tap direct lenders are exploring add-on transactions for their portfolio companies and buyouts in coronavirus-resistant industries, according to market participants
** The volume for PE deals is higher in July than it was in June, but still remains relatively muted, according to James Cassel, co-founder of middle-market investment bank Cassel Salpeter & Co.
** “When the water mark is so low, it doesn’t take much to float it higher,”Cassel said
* Spreads, which widened out considerably in the early stages of the pandemic, have eased slightly
** Pricing for most unitranches has settled back in the high L+500 to low L+600 range, down from around L+700 at the start of the pandemic, but above the L+500- 550 range pre-Covid, according to market participants
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Tweaking your middle market company to survive the crisis
By James Cassel
Despite the bumpy rollout, the CARES Act PPP program provided forgivable loans to about 4.5 million businesses. There is concern that many middle market businesses have exhausted much of the available assistance, although Congress has extended the Paycheck Protection Program until Aug. 8. With the crisis continuing and no end in sight, here are four areas business owners should address as they look to ride out tough times ahead.
- REAL ESTATE
An obvious avenue for adjustment is a reevaluation of your company’s office space needs, both short and long term. How much real estate do you really need to operate in this new era? If your business is work-from-home friendly, maybe your best play is to shrink your footprint. In the short term, consider not renewing your lease and putting your furniture, fixtures and equipment (FFE) in storage, or approaching your landlord for rent relief. It’s best not to rush this decision. It could result in growing pains and inefficiencies later, but in the near term, until we can find a vaccine, this might make sense for your company. If your business has employees who cannot work from home and are scattered across a large area, consider splitting your office space into multiple, smaller locations.
- EMPLOYMENT AND STAFFING
With consumers spending less and leaving their homes infrequently, the next area worth evaluating is whether your business is rightsized from a staffing perspective. It’s a tough decision, but now is the time to act, especially with PPP money running out. If you must cut employees, do you reduce hours and retain more employees, or do you concentrate on your core staff and let others go? The nature of your business should tell you which direction to take.
Remember, it’s not all doom and gloom. This pandemic has also presented some companies with opportunities, while others may need to add employees with new and flexible skill sets. There is a lot of newly available talent, hire now if you need them. This might be a great time to strengthen your team and acquire human capital not previously available.
- HEALTH AND SAFETY
If you want to retain and attract more customers, you need to make them feel safe. Have policies in place for the health and safety of your team, which translates into health and safety for your customers. Consider providing COVID-19 testing options for returning employees and have a policy in place for employees who test positive, including a return-to-work plan. The CDC has guidance that is available. There are even companies like FocusPoint International that provide pandemic screening and business continuity services. Aside from testing, medical screenings, or even quarantining a large workforce, they can also implement software that tracks the infected, provides contact tracing and lets management know when it’s safe for employees to return. Consult with an attorney to ensure confidentiality and privacy is not violated. Many of these protocols can help to limit health concerns for your customers before they enter your place of business.
- PRODUCTS & SERVICES
If your products/services are particularly suited to addressing needs raised by the pandemic, then focus on and expand those offerings. But for most companies, this may be the time to consider reducing or tweaking inventory/product mix to increase efficiencies and help cash flow. With consumers and businesses wary of spending, hone your marketing messaging to distinguish your offerings from competitors. Stay in front of customers and continually refine your message. The new normal is a moving target, it’s crucial that you show your clients and customers that you know this.
We seem to have moved past the period of generous government assistance to help keep businesses afloat. More assistance may be coming, but we do not know when or how much or to whom. More and more, company owners must look to themselves to endure through turbulent times. Focus on what you need to survive over the coming months, so that you can be a survivor in the years to come.
This column was contributed to Business Monday by James S. Cassel, co-founder and chairman of Cassel Salpeter & Co., which is 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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The Pros and Cons of Business Partnerships
By Skye School
July 16, 2020
• A business partnership is a shared business venture between two parties.
• It can be an informal agreement, although you should always have a written contract.
• Business partnerships are great for financing, expertise and division of labor, but be wary of disadvantages like partner liability and conflicts of interest.
• This article is for entrepreneurs and future business owners who are considering entering a business partnership.
When starting a business, you may have the option to either go it alone or form a business partnership. Both options have advantages and disadvantages, and the best one for your business depends on your unique situation. We spoke with business owners and legal experts to map out what you should consider when evaluating a business partnership opportunity.
What is a business partnership?
A business partnership is formed when two or more parties come together to carry out a business venture, sharing both profits and losses. A business partnership can be formed by individuals and/or business entities (e.g., limited liability companies or corporations).
The terms of the partnership can take many shapes and forms. For example, a business partnership can occur when a pharmaceutical company takes on a development partner to develop a specific drug, said James Cassel, chairman and co-founder of Cassel Salpeter.
“A partnership can also consist of a musical artist partnering with a record company, or it can be a case where two people just decide to go into business together, or an attorney wants to partner with another attorney,” Cassel told business.com.
Although it is possible to have a business partnership without a formal agreement, it is always wise to have a written contract with detailed terms.
Key takeaway: A business partnership can be a shared business venture between two people or between two business entities.
Types of business partnerships
There are four types of business partnerships you can enter: a general partnership (GP), limited liability company (LLC) partnership, limited liability partnership (LLP), and limited partnership (LP). Each partnership type has varying levels of liability and control.
General partnership
A general partnership is formed between two or more parties who run a business venture together. GPs don’t require formal agreements or state registration, so they are easiest partnership to start. They offer tax flexibility; however, they don’t offer personal liability protection, so you are responsible for the actions of your partners actions, and your personal assets are at risk.
Limited liability company partnership
A limited liability company partnership (also known as a multimember LLC) consists of two or more owners (individuals or corporations) who are referred to as members. In an LLC partnership, a member can be held responsible for another member’s actions, but it does offer the added benefit of personal liability protection and tax flexibility.
Limited liability partnership
A limited liability partnership is a formal agreement between two or more individuals to run a business venture together. Owners of an LLP are protected from the actions of their partners, and they are not personally responsible if a lawsuit is filed against the business (excluding cases of personal negligence or malpractice). LLPs offer management and partnership flexibility, but they do not offer tax flexibility. In some states, only certain professions can form LLPs. This is something to investigate if you are operating in an unapproved profession in multiple states, as some may not recognize you as an LLP.
Limited partnership
A limited partnership consists of two or more partners, including at least one general partner and one limited partner. The general partner has control over business decisions and is personally responsible for the business. The limited partner (also known as a silent partner), though, does not make business decisions and is not personally liable. There is some tax flexibility with LPs.
Compare each partnership type to see which level of liability and control suits your needs. When evaluating partnership types, it is important to be mindful of the state rules and regulations that apply to your business type.
Key takeaway: You can enter a general partnership, limited liability company partnership, limited liability partnership or limited partnership, depending on state guidelines and the level of liability and control each partner wants.
How are business partnerships formed?
Matt Odgers, attorney at Odgers Law Group, said a partnership can be unintentionally formed based on the actions of the partners, unlike other business entities that require state fees and registration documents (such as articles of incorporation).
“While strongly recommended, a partnership does not require a written agreement, and it can be formed based on an oral agreement or based on the actions and relationship of the partners,” said Odgers.
It is always best to clearly communicate what your intentions are when working with someone else. If you decide you would like to officially partner with that person or organization, Odgers advised drafting a partnership agreement, applying for a tax ID number, and filing a statement of partnership with your state government.
Key takeaway: Partnerships can be created through formal written contracts or informal agreements.
Business partnership taxes
Partnerships are generally taxed as pass-through entities, meaning that each partner reports their share of the income and expenses on their personal tax returns. Because of this, partners who own more shares of a business are responsible for paying more in taxes.
“The partnership will file a Form 1065 with the IRS, and each owner receives a Schedule K,” said Odgers. “The Schedule K spells out that owner’s share of the income and expenses from the partnership. The owner then uses that information when filing their own taxes.”
Key takeaway: Partnership taxes are reported on each partner’s personal tax returns, according to their ownership shares in the company.
Pros of business partnerships
A business partnership can be a desirable option for many reasons. The core benefits pertain to funding, taxation, division of labor, and knowledge.
• Access to capital. Perhaps the most obvious advantage to having a business partner is splitting the finances. Starting and running a business is an expensive venture, and when you share the financial responsibilities of a business with another individual or entity, you are at a greater advantage of getting your business off the ground. Partnering with one or more other business members (regardless of partnership type) can increase financial security and cash flow, and lower the stress of funding your operation.
• Taxation. Another advantage to a partnership is taxation. Most business partnerships are taxed as pass-through entities. Because of this, you file and pay taxes on your share of business ownership. This can reduce the burden of paying taxes on the entire business yourself.
• Division of labor. Just as partners can split the financial burden of a business, they can split the responsibility of operations as well. A business partner is someone you can share day-to-day business operations and major business decisions with (unless you operate under a limited partnership). Splitting up the responsibilities and duties of your business can help with efficiency and productivity, enabling you to accomplish more than you would alone. If you have a problem with your business, you have someone to consult with.
• Knowledge and expertise. Every business owner brings unique experiences and skills to the table. When you operate your business with a partner, you can benefit from their knowledge and expertise. It is ideal to have a business partner that excels in areas where you are lacking. Additionally, if you are a first-time entrepreneur, it can be beneficial to partner with a seasoned business owner who can help guide the business.
Key takeaway: The benefits of business partnerships include additional funding and expertise, tax benefits, and division of labor.
Cons of business partnerships
Operating a business with someone else is not always easy, and sometimes it can end terribly if you are not properly prepared. There are a few challenges to be aware of, primarily regarding profit, liability, and conflicts of interest.
• Informal arrangement. Partnerships allow for great flexibility, but this can be a problem as well. When setting up a partnership, it might be easier to just settle on a verbal agreement, but it is always best to sign a clear, written agreement for protection. Coming to terms about the percentage of ownership, liability, and responsibility can be difficult to agree on, which can cause setting up a partnership to take more time and money than you might have anticipated.
• Lower percentage of the profit. In contrast to the benefit of having additional funding, a business partnership can also yield lower profit per person. Since you will be dividing the profit of the business based on share of ownership, you must be okay with not receiving the full income that the business brings in.
• Partner liability. Depending on the type of business partnership you enter, you may be personally responsible for any actions brought against the company. You also may be liable for a mistake your partner makes. Liability is a big factor in partnership, so it is important that you trust your potential partner and enter a partnership that protects your best interests.
• Conflict. When you are running a business with someone else, you are bound to have occasional differences in opinion. If you and your partner have different work ethics, or have a disagreement you can’t resolve, your business can suffer immensely. This is especially true in cases of partnerships with family members or close friends, where personal issues can cloud professional judgement.
Key takeaway: The disadvantages of business partnerships can include lower profit percentages, added partner liability and conflict.
“While easy to form, partnerships can lead to a lot of trouble down the road if there is a disagreement or if litigation arises,” said Odgers. “It is strongly recommended to work with an attorney to determine whether the partnership is your best option.”
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Cassell Salpeter & Co. Welcomes New Associate Edward “Eddie” Kropf and Analyst Tahz Rashid, Adding Rising Talent to a Veteran Team
Committed to providing world-class independent investment banking services, never more critical to middle-market and emerging growth companies, Cassel Salpeter is delighted to announce the addition of two outstanding professionals, Eddie Kropf and Tahz Rashid.
“As part of our firm’s continued commitment to addressing client needs, made more urgent by these challenging times, we are thrilled to welcome Eddie and Tahz to our team,” said chairman and co-founder James Cassel. “These exceptional professionals bring with them fresh insights, a diligent work ethic, and sharp intellect that will help propel our firm and clients forward.”
EDWARD “EDDIE” KROPF
Eddie will leverage his consulting and research expertise in his role as associate to assist all areas of the firm, from financial analysis to advisory services. He earned a bachelor’s degree in economics from Reed College and a master’s in business administration from the University of Miami.
TAHZ RASHID
Tahz will support the team as an analyst, actively contributing to the firm’s issuances of valuations. He earned a bachelor’s in economics with a focus in mathematics from the University of Wisconsin-Madison and a master’s in finance from the University of Miami.
Both Eddie and Tahz served as interns with Cassel Salpeter prior to assuming their respective positions.
Click to learn more about Eddie and Tahz.
About Cassel Salpeter & Co., LLC
Cassel Salpeter & Co. is an investment banking firm with professionals who have more than forty years of financial experience. They deliver smart, straightforward advisory services to middle-market companies across America. With a thorough understanding of their clients’ industries and a keen sense of the economy, the Cassel Salpeter team provides independent, timely advice so clients can capitalize on a rapidly changing global environment. Headquartered in Miami, Florida, Cassel Salpeter is led by James Cassel and Scott Salpeter. Member FINRA and SIPC.
