Archive for category: General

By James Cassel

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Companies have been known to postpone making major decisions as they wait to see what happens with elections and the economy.

For many middle-market business owners, the American Dream of selling their businesses for financial security or turning them over or selling them to their children before retiring seems more distant today than it did 20-plus years ago.

A recent study by The Wall Street Journal and Vistage International shows that almost half of the 799 small-business owners surveyed plan to retire after age 65, with 38 percent saying they plan to retire later than they expected five years ago. For some, it’s a matter of choice, for others, it’s simply not possible to give up the cash flow.

Whatever the case, many business owners today are locked in a state of “analysis-paralysis” — not making any major business decisions related to transitions as they wait to see what happens with the elections, the economy and their businesses. Why aren’t they looking to sell now? This is what we’re hearing:

Uncertainty about the future. Although the Federal Reserve has promised to stimulate the economy if it doesn’t show significant improvement, the inconsistency of the recovery, combined with uncertainty about key issues like the tax laws, has many business owners feeling skittish and opting to postpone transition plans. Although many think business is OK now, they feel they might get better valuations in the future as the economy improves.

Low expectations of returns on investments. Fact is, while 20 years ago you didn’t question a financial advisor who said that you could expect to average 10 percent per annum on your investments, today you don’t believe that same advisor who says you can get five or six percent return per annum over a 10-year period. The past 10 years have been flat. You cannot price a business based on the income you need to live on or replace your income with the proceeds of the sale. Often, the choice boils down to either having to sell for much less than you think you deserve or having to make the decision to continue running the business in an ownership position.

Income needed to survive. Many business owners don’t want to part with their businesses because they still need the income to fund their lifestyles. As I’ve mentioned, you will never be able to replace the income of your business with the proceeds of its sale. The fact that people are living longer these days — well into their 70s and 80s — is contributing to the trend as they simply have a different approach to life and need the money to continue to enjoy themselves.

Others think their businesses are doing well, and they feel no urgent need to sell at present. According to the Wall Street Journal and Vistage study, more than half those surveyed say the lion’s share of their net worth is wrapped up in their businesses, so they don’t think selling and retiring is in the cards any time soon, mainly because they will not have enough income. Instead of retiring, some are now considering hiring someone to operate their businesses for them so they can retain their current lifestyles and cash flow while relinquishing some of their responsibilities and freeing up more of their time. However, this has inherent risks. For starters, you’re putting your biggest asset in someone else’s hands.

In the old days, most people looked forward to retiring in their late 50s and enjoying the final chapters of their lives with the equivalent of 60 percent of their income upon retirement. These days, with most people living longer and enjoying healthier, more active lifestyles, they’re lucky if they can retire in their 60s or 70s, and they also need the equivalent of 100 percent of their current income upon retirement to continue living their current lifestyle.

What many business owners are failing to see, however, is the bigger picture. While we should always keep an eye on the specific political, economic and legislative issues of the day, we must maintain a close pulse on the potential threats and opportunities and be prepared to take action when needed. It’s also critical to continue to adhere to the basic principles of “good business” that are relevant no matter who is in office or what type of economic cycle we’re in.

History is ripe with examples of companies that suffered major losses because they didn’t take the right steps to identify potential issues and seize opportunities that came their way.

Look at what happened to Polaroid: There are no more Polaroid cameras. Blackberry is going through something similar now, and some say the company should have been sold a long time ago. Same may go for Yahoo!, which didn’t sell when it had the chance at what in hindsight looks like a very favorable price.

Furthermore, while most business owners will agree that losing their biggest client could be devastating, many don’t take the right steps to prepare for this. I know of a local business owner who turned down a significant offer from a potential buyer, only to regret it about six months later when he lost his biggest customer and eventually went out of business.

Another topic to consider: Is the industry consolidating? If so, survival could require becoming bigger. Sometimes, you only get one shot to sell to the consolidator — and if you don’t seize the opportunity, it’s gone forever. It can change the competitive landscape.

Without doubt, you must always be prepared to seize any strategic opportunities that come along. The following advice is always good to keep in mind:

Plan ahead: Work with qualified legal and financial advisors to develop appropriate written agreements, such as shareholder or partnership agreements that include succession plans and buy-sell provisions. That way, you’ll be more prepared to act quickly when the need arises. Too often, opportunities are missed and/or these matters end up in court because people failed to plan in advance.

Establish an effective board of directors: Appoint members with the right mix of experience, knowledge and contacts who can bring good value to your board and won’t be mere yes men. Particularly for family businesses, it’s always good to add independent members who can help handle the important, potentially divisive, decisions.

Build relationships: Don’t underestimate the power of relationships, introductions and good advice from those in the business, like lawyers and investment bankers.

Be realistic: Whether you’re thinking of buying, selling, or staying put, don’t make rash decisions. Be realistic about your business, the valuation of your company and the amount you seek. Also, be realistic about the timing, as it will take longer than you imagine.

Indeed, new threats and opportunities will always present themselves no matter what’s happening with politics, the law, or the economy — and often, it happens when it’s least expected. The current “analysis-paralysis” that many business owners are stuck in can be a dangerous proposition if they’re not ready to react when needed.

If you’re one of those businesspeople choosing to take the “wait and see” approach, remember that not making a major business decision is a major business decision.

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

By: James Cassel, March 18, 2012

Now is an interesting time to consider acquisitions. Baby boomers are beginning to retire, and their children may not have interest in the family business. As a result, plenty of opportunities will arise in the next few years as businesses change hands. This year may present additional opportunities because of uncertainty about tax increases on capital gains.

Many investment bankers and business brokers are working with businesses that are for sale. However, finding a business to buy — one that’s not already on the market for an exit — is a major challenge. There are ways to find these opportunities, such as talking to your competitors or your accountant, but this is like finding a needle in a haystack. Engaging an intermediary such as a mergers and acquisition attorney may be a wise choice.

Managing the risks involved in an acquisition can be equally complicated. Acquisitions might provide business owners with a way to grow and strengthen their companies, but they can also present unique challenges.

For a smooth acquisition process, get your strategy in place now.

Know why acquisition as a growth strategy makes sense for your business. You might think buying a business is only for large corporations, but this is not the case. An acquisition can jumpstart growth — buying an existing enterprise means the foundation is already in place. For example, the firm may have employees with talent and experience as well as a hard-to-replicate customer base. By finding a business with a good track record or a desired geographic footprint, you can improve your own company.

Stick to what you know. Looking for a business to acquire so you can expand? Choose wisely. While buying direct competitors is one way to approach acquisitions, you can also consider similar companies in different geographic areas or complementary companies for cross-selling purposes.

Don’t bet the farm. Be sure you have the financial resources available for the acquisition, which include integration costs and working capital. Be realistic about estimated costs and the time investment required to complete the deal. You cannot take your eye off your existing business or starve it for capital for the sake of an acquisition. Even the cost of lawyers, accountants, and other professionals who will assist during the due diligence phase can be a significant expense, and you don’t want to cut corners when it comes to professional guidance.

In most cases, it is not worth “betting the farm” — taking on too much debt or using all of your capital— to purchase another company. If it turns out that the deal isn’t as good as expected, your existing business may be threatened. And considering many business owners have the majority of their net worth in their business, excessive risk can threaten your financial security.

Research in advance. Acquiring companies can be a shortcut to growth, but there is risk involved. Before contacting the company you want to buy, get as much information as possible. Some of the best opportunities might be competitors you have known for years who are ready to sell. You may have an advantage over other rivals if you know the families and have an existing relationship.

Don’t rationalize buying a business. Be objective regarding what you arereally getting and what it is worth. A team of experts can help you analyze your potential purchase, its value and its fair price so you do not overpay. Be careful not to get caught up in a deal simply for the sake of the deal. Many times it is better to just walk away, because the opportunity may reappear later on more favorable terms. A deal can be like a train – one might leave the station, but generally it will be followed by another train.

Plan your approach. As enthusiastic as you might be to expand, many small business owners feel threatened during initial contact. Even if you and your representatives experience a lukewarm reception, keep in mind you can see results in the future. Playing your cards right means you could be contacted in six months, one year, or later. It is important to stay in touch. Sellers generally need a reason to sell, such as illness, divorce, or retirement. Since they generally cannot replace their income with the proceeds of a sale, they need a triggering event.

Prepare an employee transition plan. Employees make up a significant part of a company’s value, so make sure they are on board with the transaction. Keep them informed and engaged to avoid hostility, anxiety or demoralization. Not only is a communications policy extremely important, but so is face-to-face interaction. Never underestimate the value of employees.

Know how you are going to pay for the business. Can you borrow? Do you have excess capital? If you don’t have the capital to fund an acquisition, you can also look at the assets or cash flow of the company you’re acquiring. The appropriate mix of equity and debt is deal-specific. Many times, sellers will be part of the solution by taking back seller financing. Creativity is a plus. Banks are eager to lend, but only in the right circumstances.

Plan the integration of your new business up front. Many companies don’t plan their post-acquisition integration strategy with enough foresight to anticipate changes in company culture. Without proper execution, the strategic advantages that attracted you to the deal in the first place may disappear. A poor integration plan can minimize the value of the acquired business as well as your own.

Let’s say that you’re not looking for acquisition opportunities at this time. Establishing relationships with businesses that you could acquire in the future will keep you informed about how you can leverage your business in your industry, and how certain geographic locations might be acquisition targets. You might also discover opportunities to buy a division or product line of a company.

Although companies are not always available when you are looking, sometimes you just need to be opportunistic. Don’t let them pass you by.

By James Cassel, November 20, 2011.

Leveraged buyout firms, private equity firms — call them what you want — these companies have dug their heels into the South Florida sand. Certainly, 2011 has seen volatile market swings, and the general state of the economy pretty much stinks. Nevertheless, South Florida has attracted a growing roster of private equity firms that have identified our turf as fertile ground for their operations, and that means more options for Florida-based companies contemplating a sale or recapitalization.

Buyout firms raise capital from deep-pocketed investors — or leverage their capital — using equity along with borrowings to purchase or invest in companies that have the potential for growth. In addition to these companies with growth potential, buyout firms are looking for undervalued or underperforming companies, businesses with strategic value to other companies in a firm’s portfolio, or companies in financial distress or bankruptcy. Many of these companies are capital constrained.

After a firm purchases a company, it may rely on existing management or regime change (new management) to grow the company and ultimately sell it for a profit, typically after a period of five to seven years. The profits get distributed back to the investors, and a portion, along with a management fee, goes to the private equity firm itself.

South Florida’s oldest private equity firm, Trivest Partners, has operated here since the 1980s and has handled high-profile transactions such as Aerobed, Banana Boat and Polk Audio. It also has the good company of other legacy firms based in South Florida including HIG Capital, Brockway Moran, Sun Capital, ComVest, Palm Beach Capital, Pine Tree Equity Partners and Boyne Capital Partners. Newcomers to South Florida include Empire and Huntsman Gay, to name a couple.

What brings private equity firms to South Florida? As simple as it may sound, many come here for the same reason as tourists and snowbirds — the lifestyle! Come January, it’s a heck of lot nicer to do a deal on the beach than on Wall Street. The strategic value of our location means private equity firms can attract sun-starved talent from the northeast as well as investors who enjoy a yearly meeting in the subtropics. Since most travel regularly, a good hub airport is a must.

There are solid financial reasons as well — the tax benefits. Florida’s low corporate income tax and absence of state individual income tax are notable draws. Plus, Florida has many entrepreneurs, a magnet for private equity firms operating in the state.

Perhaps most significant is that Florida — and South Florida in particular — has grown up. South Florida has a growing finance community. As the fourth-largest state in the nation, and with a more sophisticated international business community, private equity firms have come to recognize that South Florida is a viable alternative to New York, Boston and California.

Whether your business has revenue of a few million dollars or over a hundred million dollars, it’s good for you to have an army of eligible buyers right outside your door. Business owners no longer have to travel to New York to find someone high-profile to sell to or to recapitalize.

This applies to distressed companies as well. Sun Capital and HIG have been two of the most active buyers of distressed and healthy companies in North America and Europe over the last few years.

There are other firms with established specialties, such as MBF Healthcare Partners, which focuses on investments in healthcare, and Trivest, which specializes in family-owned businesses. Firms have honed their expertise to suit particular segments of the Florida business landscape.

Entrepreneurs can benefit from this enhanced investment activity. Venture capital is available to high-risk and early-stage companies.

During the first two quarters of 2011, businesses in Florida had more funding opportunities. We saw increased investments in small and mid-size businesses, increased inquiries from business owners seeking to acquire firms, and, best of all, increased buzz.

We anticipate merger and acquisition activity in 2012 to expand to a wider range of companies, with many deals involving private equity firms. Specifically, we will see more acquisitions in industries like technology, healthcare, distribution and manufacturing.

The growth of buyout firms in Florida spills over into lots of other industries, including sectors like my own, investment banking. We also see commercial lenders, the legal community, and the accounting industry benefiting from the increased deal activity these private equity firms generate.

If you’re a business owner, watch what’s happening here — what businesses are being bought and sold, who’s joining forces, and what new firms form. Private equity firms in Florida made national headlines and drove a lot of attention our way this year, and they are poised to continue to do so. Also, keep in mind middle-market firms, distressed companies, and family-owned businesses are the specialties of several Florida firms.

And if you are in the market to sell right now and want to get the best deal, try the direct approach by calling a firm directly or getting an introduction from a law firm. When trying to sell or raise capital, don’t forget that competition is good — it generally gets you better terms or a better price.