Florida Trend: Deal Making

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By Rochelle Broder-Singer

James Cassel and Scott Salpeter are two of south Florida’s best-known investment bankers. Their Miami-based Cassel Salpeter & Co. specializes in midmarket firms.

Florida Trend: Is it harder for you to make the connections you need to private equity buyers or financing for deals because you’re not based in New York?

Scott Salpeter: We used to have to go to New York to have relationships with these potential buyers that were in New York. (But) in today’s environment, there are many sources of capital that are outside the money centers like New York … and plenty of private equity/hedge funds throughout the United States. An example: We’re selling a firm in Florida right now. It’s selling to a private equity firm that’s in Tennessee.

James Cassel: There is a growing community in Florida of financial firms. Today, we have a growing number of private equity firms that don’t just have offices here, but have headquarters here. Two big examples are HIG and Sun Capital. Orlando and Tampa have growing private equity communities. And you look at Raymond James — a major firm — headquartered in Florida.

FT: Do firms from elsewhere come to you?

Cassel: November through April, there is the pilgrimage of private equity people who come from (up north) to visit us on Thursday afternoons and Friday mornings. I’m up in New York at least once a month. Scott’s traveling about the same, whether it’s to Tampa or Philadelphia or Delaware — wherever we have relationships.

FT: What kind of M&A activity are you seeing from your Florida-based clients?

Salpeter: Anecdotally, we think that there’s probably more activity than there was two years ago, but there’s probably less activity than there was five years ago.

Cassel: There’s no gold rush going on. People are holding their businesses. For the most part, we’re not hearing from people that they’re desperate like they were two years ago. We’re hearing business is OK.

FT: Is this a good time to sell a business?

Salpeter: This is a good time to sell because the financial community has a lot of capital to deploy. (But) we’re hearing high (valuation) numbers for healthy companies, and we’re hearing low numbers for unhealthy or low-growth companies.

Cassel: I think there’s plenty of bank money out there. The banks are making spreads that I don’t think they have ever made because their cost of money is so low.

Business owners need to move beyond state of uncertainty

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.

MIAMI, Florida, October 22, 2012 -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

 

Growing Your Business through Acquisition

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By: James Cassel

MIAMI, Florida, 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.

When Working with Relatives, Plan for the Unexpected

By: James Cassel
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Family members can be great assets in a business, but to make it work, you need to face some harsh realities.

Family owned businesses, when run correctly by the right family members, can be wildly successful. But when they’re dysfunctional, family businesses can be a real nightmare for everyone involved – and even destroy families and their financial well being.

There’s no question that our own flesh and blood can offer a level of loyalty, trust, commitment and vested interest in the business’ long-term success that’s not usually given by those who aren’t our family. On the flip side, things can quickly get ugly with family members who feel jealousy, resentment, entitlement, greed and other emotions that can get in the way of sound business judgment. When problems occur, the more family members involved, the worse things can get. Moreover, family businesses can also chase away great non-family talent if they are not sensitive to their needs.

While family owned businesses are the backbone of the U.S. economy, many family businesses fail or are sold before the next generation has taken the reins. I watched firsthand the third generation of two families kill a business. It could have been avoided if they had been more rational or had proper legal documents in place.

Having spent decades counseling owners of family businesses in all sorts of industries, not to mention having worked very successfully in several businesses with my own family members, including at Cassel Salpeter, I’ve pretty much seen it all. Here are a few important things I’ve learned that are critical for those who want to sustain healthy family owned businesses and healthy family relationships:

1. Plan ahead. Simply put, you have to put in place the equivalent of a “business pre-nup.” 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. We all know couples that have built fabulous businesses together – only to see those businesses fall apart at tremendous financial and emotional expense when they divorce. Same goes for siblings who fight turf wars after the parent who owned the family business passes away or retires, and one sibling wants to run the business while the others want to sell or take out money. Too often, these matters end up in court because people failed to plan in advance. It’s important to have plans in place when dealing with family so everyone knows where they stand and agrees in advance to what can and cannot be done.

2. Communicate. In fact, over-communicate. Most families don’t do this very well or often enough. It becomes difficult to handle issues because the family members don’t know how to discuss their opinions, reach consensus and make decisions efficiently. So talk it out. Lack of communication is one of the main causes of litigation and failure in family businesses.

Need help? There are plenty of business psychologists and coaches who specialize in helping family businesses. Don’t wait until things go wrong to consult professionals.

Years ago, a couple contacted me for advice regarding their plans to sell their business. Although they had spent years grooming their very capable son to eventually take over the business and he was doing a great job, they decided to begin entertaining buyout offers without consulting him.

I reminded them that if they sold the business without their son’s involvement or consent, they might burn their relationship with him and his wife and never get to see their grandchildren. I recommended they discuss their plans upfront with their son, bring him into the process and, if they still wanted to sell the business, offer to sell it to him first rather than anyone else. A few weeks later, they sent me a bottle of champagne and a note that read: “Thank you. You saved our family and our business.”

3. Be picky. Recognize that not everyone is good for the business or should be in the business. Yes, even family members must understand that the “there’s always a place for you here” school of thought may not be in everyone’s best interest. Some companies are populated by next-generation members who failed in other businesses or spent the early part of their careers as aspiring athletes, artists, ormusicians before ascending to leadership positions as unprepared 40-somethings – clearly not a good business model. Finding the right positions for the right people is crucial. Not everyone is CEO material.

4. Implement safety measures. Require training and implement a screening process for new family hires and promotions. When possible, ensure that new family hires have obtained solid industry experience before they join the business. This will help ensure that only dedicated, qualified relatives join and lead the firm. I know families who “traded” their children to get experience at other businesses before the children joined their own families’ businesses.

Additionally, some family run businesses appoint independent members to the board of directors along with family members and/or a family council, which functions like a board of directors and handles the important, potentially divisive decisions. Some have lawyers develop proper succession plans for use after retirement, death or disability. Measures like these can help prevent many of the common headaches that occur when it comes time for the second or third generations to take the reins.

5. Think creatively. Many family businesses are run for decades by the same leaders, often making it difficult to implement creative solutions or necessary changes like new technologies, business models and schools of thought. Don’t let this be the case for you. Young family members may have great ideas.

Years ago, I watched a business owner successfully devise a clever escape route from a touchy family situation. One sibling had taken over the family business and grown it to unprecedented levels. Thinking they needed extra support after sales skyrocketed, they invited another sibling to assume a leadership role. They soon learned this was a big mistake, as everything this new sibling touched turned to ashes. Rather than cause more turmoil by booting out the problem child, they offered to double his salary in exchange for staying home. He wisely accepted, and the business got back on track.

Most important, don’t be afraid to say “no” or terminate problematic or unhappy family members. No matter how tricky or delicate the situation might seem, it can be in everyone’s best interest. Having done this personally, I can tell you firsthand how hard it can be. Many family businesses suffer unnecessarily because they over-extend their resources to accommodate every family member who wants a piece of the pie. By putting the right systems in place, you can minimize the potential for trouble and maximize the potential for success while retaining everyone’s priceless peace of mind.

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.

What Does Affordable Healthcare Act Mean for Business?

Making the right choices now could go a long way toward protecting your bottom line later.

By: James Cassel

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MIAMI, Florida, July 22, 2012 – With all the debate surrounding the Affordable Care Act, one could easily get lost in the rhetoric and lose sight of the issue that’s important now: The law is here, whether you like it or not. Clearly, the new or expanded coverage slated for millions of additional people will bring more costs – whether in the form of a tax or penalty. No matter how you feel about that fact, it’s time to set aside politics and take an objective look at the implications of this new law for your business.

One of the most frustrating challenges that middle-market business owners will likely soon face is continued uncertainty. While some people say that the Affordable Healthcare Act will save a substantial amount of money over time and others say it will do just the opposite, nobody knows the ultimate implications because this law is still new. Even the threats ranging from slight modification to repeal of this law will probably remain unknown until after the November election and beyond.

Although it’s impossible to predict the future, we know at least one thing is certain: Because some provisions have already gone into effect and other provisions will be phased in during the next three years, companies will have to redesign their current plans and/or offer new plans to employees.

The time to begin studying this is now. If not managed properly, the issues associated with this law could hurt the bottom line for businesses. For example, automatic enrollment provisions for businesses with more than 200 employees make it critical for businesses to gauge how many of their employees are likely to opt out and to develop appropriate strategies.

Some key points to keep in mind:

• Many businesses that currently provide employee group coverage at reduced premiums may face higher costs. If this happens, some business owners might feel motivated to simply pay the penalties for not offering health insurance to their employees, which was not the intended effect of this law. On the other hand, some believe that insurers may end up competing for your business, bringing down premiums (although this seems highly unlikely).

• Businesses that provide the top-tier plans for certain employees may face higher costs with a 40 percent excise tax tagged onto those “Cadillac” plans if the values of those plans exceed $10,200 for individuals or $27,500 for family coverage. To help prevent this from happening, you should examine your current policies and determine if you will be subject to the new tax. If so, you might want to modify the benefits.

•  Another issue facing the business community: the non-discrimination provision in the new law. Businesses will not be able to continue to offer top-tier “Cadillac” plans to some employees while offering others more basic coverage. Offering the same coverage to all employees can be a costly proposition for many business owners. Some small-business owners who cannot afford to offer the same high-quality coverage to all employees worry that this could motivate senior talent to look for jobs at bigger companies that offer better coverage. It is possible that supplemental coverage will be available.

• Owners of some smaller businesses may benefit from tax credits aimed at helping to reduce the costs of providing insurance. However, make sure to understand the fine print, as there will be certain restrictions based on income and other criteria. For example, businesses with 25 or fewer employees who pay average annual wages of less than $50,000 and provide health insurance may qualify for asmall business tax credit of up to 35 percent (up to 25 percent for nonprofits) of the costs of their premiums. Starting in 2014, some small businesses could qualify for tax credits as high as 50 percent. This might sound good, but how many businesses will actually qualify?

• Businesses with employer-based health insurance plans that cover retirees between 55 and 64 years of age can now obtain financial help through the Early Retiree Reinsurance Program.

• It’s said that businesses with fewer than 100 employees may be able to shop for insurance in anAffordable Insurance Exchange, a new “marketplace” where individuals and small businesses may look for affordable health benefit plans. Employers with fewer than 50 employees are said to be exempt from new employer responsibility policies and don’t have to pay an assessment if their employees get tax credits through an Affordable Insurance Exchange. There are still unanswered questions, however, about if and how these exchanges will be established.

Some additional key points relevant to coverage:

The new law makes it easier to obtain insurance for children and adults with pre-existing conditions, many of whom have historically been unable to afford or obtain coverage. It also requires insurance companies to cover certain types of preventive care, including things like screenings and immunizations, without requiring you to make co-payments or co-insurance or meet your deductibles. Starting Jan. 1, 2014, the new law will do away with the dollar limits on benefits that had been previously imposed by many health plans, meaning that health plans can no longer cap their yearly or lifetime spending for your covered benefits.

Again, it’s difficult to know with any certainty either how the new law will affect middle-market business owners or how middle-market business owners will respond. For example, this new law could motivate some businesses owners to do more outsourcing or use temporary labor through third-party providers. Companies in medical and biotech industries, for example, could benefit from provisions in the law that allow for intellectual property protection.

The bill is highly complex and exceeds 2,000 pages. The bottom line: every business has unique needs, and it’s important to consult with qualified insurance professionals who can provide a detailed analysis of all the implications of this law to your business and help you consider all your options. Making the right choices now could go a long way toward protecting your bottom line later.

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.www.casselsalpeter.com

Obtaining Equity Capital in Today’s Market

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There are several types of investors and equity securities from which to choose. However, they won’t all be a good fit.

By: James Cassel

MIAMI, Florida, July 1, 2012 – Growing a company is seldom easy, and today’s economic environment doesn’t make it much easier. However, even in today’s economy, there are ways to raise equity capital.

But first, put yourself in the place of a potential investor. While investors are by nature willing to take risks, they generally will not just give you money without terms and conditions. Keep in mind that money comes with strings.

When seeking equity capital, there are several types of investors and equity securities from which to choose. However, they won’t all be a good fit. In many situations, the company’s stage of growth and amount of equity financing sought will determine what type of investor, equity, and terms and conditions will be available and most appropriate.

INVESTMENTS

To navigate these waters, here’s a look at the types of equity investments and investors.

Angel Investors: Although angel investors may be friends and family, in most cases they are the type of investors who come after friends and family but before venture capitalists for early stage companies. Angels are people with money and an appetite for risk. These investors may potentially: bring a wealth of experience to this process, have significant relationships with key individuals or companies, and provide valuable management advice. They also may be willing to provide seed money, i.e. startup money, which can become expensive because of the relatively high risks associated with starting a business. Bottom line: Angel investors can be an attractive option for higher-risk, small businesses poised for rapid growth at favorable valuations.

Venture Capitalists: With a more formalized vetting process, venture capitalists invest in a small percentage of the deals they review, as they tend to be extremely selective. Their risk tolerance is often high, and therefore, so is the required rate of return. When they do become interested, it’s usually early in a company’s life. This is usually the first investment by institutional investors. They add expertise, contacts, advice and money. They invest with a planned exit event, such as an initial public offering (IPO) or sale.

Private Placements (of equity): Private placements can include debt, equity or both. While raising money quickly is possible from a legal and structural basis, finding investors of any kind takes time. Private placements can be a good option for growth companies, mature companies looking to expand, and those that want to expand without going public. This money can come from individuals or institutional investors. There can be great flexibility in both the structure and valuation of the deal.

One consideration in private placements is the Jumpstart Our Business Startups Act (JOBS), signed into law in April. The bill basically removes the prohibition on general solicitation and advertisement by issuers relying on Rule 506 of Regulation D (Reg D) under the Securities Act of 1933, as amended. In other words, thanks to Reg D, you may, subject to certain rules and regulations, advertise for investors. The SEC has yet to issue the required regulations under the JOBS Act.

IPOs: Going public for most companies provides an infusion of capital as well as the ability to use its stock as currency for making acquisitions. While IPOs can be expensive, and becoming a public company involves much higher levels of accountability and regulatory requirements, IPOs can also bring many benefits. Although generally thought of for large, established companies, they can be good for small, highly visible, rapidly growing businesses. IPOs take all kinds of shapes and forms. One of the recent notable IPOs, Facebook, was clearly not a particularly well-executed offering. Although its success has been debated, it undoubtedly provided an effective exit strategy for some of its private investors and raised substantial funds for the company.

Private Equity Funds: Private equity (PE) funds are professionally managed funds that invest or purchase control of a wide variety of companies. These organizations usually want majority control, though some funds might be willing to only purchase a minority stake. Some prefer mature, stable companies that can show significant growth opportunities, while others like distressed businesses. PE firms focus on multiple factors such as industry, size and geographical location. Perhaps the biggest advantage is that these organizations can provide access to capital beyond what a traditional bank would finance, as well as strategically assist a company. However, companies considering private equity funds must plan long in advance, and they must be ready to withstand the scrutiny of the due diligence of the PE firm. And remember, the investors will impose many restrictions and conditions.

EQUITY SECURITIES

There are a variety of equity securities from which to choose. Depending on the type and situation of the company seeking growth capital, several choices may make more sense.

Common Stock: Common stock represents a form of ownership in a corporation. The common stockholders own the economic benefit of the company. They are inferior to the rights of preferred shareholders. They receive the profits as well as losses of the enterprise.

Preferred Stock: Preferred stock, like common stock, is an equity security. It can take many forms and have lots of flexibility. It can provide for, among other terms, special voting rights, preference on liquidation, dividends, conversion into common stock and certain restrictive covenants.

Warrants & Options: Warrants are a derivative security that represents a privilege or right to purchase securities at a specified price within a certain time period. Warrants are long-term instruments that typically last several years, but will lapse if the right isn’t exercised during the specified time. The intrinsic value of a warrant is found by comparing the price to exercise your right (also known as the subscription price) with the market price of the stock. If the price of the stock increases in value, the warrant represents an opportunity for an investor (option holder) to profit by exercising his or her right.

Mezzanine Financing: Mezzanine (mezz) financing is debt capital that can be convertible and gives the lender the right, if he or she so elects, to convert to an ownership interest in the company. Many times mezz financing is coupled with warrants. Generally, they are not control investments, and because it may be treated like equity on the company’s balance sheet depending on the structure, it might be easier to get bank financing. However, while mezz financing is less expensive than pure equity, it is still more expensive than debt.

TIPS

Whatever path you choose, the following tips can help:

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

• Be realistic about your business, the valuation of your company, and the amount you seek.

• Conduct due diligence on your investors, as they will check out you and your company. All money is not equal. Make sure you are compatible with the investors because they will own a part of your company and may partake in important business decisions.

• Think about the timing. It will take longer than you imagine. Don’t make rash decisions.

• Consider seeking the counsel of seasoned lawyers, as well as an investment banker.

Tips for Picking the Right Business Loan

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The size of your business, the purpose of the loan and how you operate your firm play a big part in the type of loan that’s available and right for you.

By: James Cassel

MIAMI, Florida, May 21, 2012 – Thinking about taking your business to the next level, or simply sustaining it through challenging times? You’ll need effective management, stamina and, most importantly, money. However, accessing funds for growth capital, cash-flow shortages, an acquisition, or because your lender cut you off can be a complex and daunting challenge. Let’s ignore equity for now. Loans have different risks and costs, and the size of your business, the purpose of the loan and how you operate your company play a big part in the type of loan that’s available and right for you.

Many owners “bootstrap” their businesses — looking to personal savings, credit cards and their regular income as a source of capital. But, when those options are exhausted, where can an entrepreneur turn for cash? Getting to know your options is a good first step. If you’re seeking to borrow in excess of $5 million, you can turn to an investment banker who can identify sources of capital and evaluate terms of a deal. Regardless, every business is different, and all business loans are not created equal. Remember, with money comes strings.

Friends and family: If you’ve thought about friends and family as a source of financing, you’re not alone. However, don’t assume these loans are “free.” Even when working with friends and family, the deal should be an arm’s-length transaction (although this is not always the case). Therefore, the interest rate, loan-to-value, and terms must reflect — or nearly reflect — market rates, no matter what the relationship between lender and borrower.

Pros: Since these loans are based on relationships, not necessarily credit worthiness, they can be good for business owners with less-than-perfect credit or collateral. In addition, if you are running short on time, you can often get a loan more quickly than from banks or other financial institutions. You might also be able to get lower interest rates and less-restrictive terms, even in the context of an arm’s-length transaction.

Cons: Every loan carries risk, and if your ability to pay back the loan changes, then your relationship with the friend or family member could be jeopardized. Plus, when you borrow from friends and family, there are often strings attached, including unsolicited business advice, feelings of entitlement and expectations of continued involvement after the loan is paid off.

Cash-flow loans: As the name implies, cash-flow loans are generally unsecured loans, whereby the lender looks to anticipated cash flow to repay the loan and requires certain financial and nonfinancial covenants be met. With this type of loan, you take advantage of the reliability and regularity of your company’s revenue stream. Traditional commercial banks and certain finance companies frequently make these loans. For smaller businesses, the lenders will generally require personal guarantees.

Pros: Cash-flow loans can be useful to fund an acquisition because you can use the cash flow of the company you are acquiring (in addition to your own) to repay the loan. If you have a stable credit history, as well as predictable and growing cash flow, cash-flow loans provide a fairly flexible source of funding.

Cons: Small and mid-sized companies with fewer customers, smaller contracts and less-reliable income may have more difficulty obtaining these types of loans. Similarly, companies with shorter operating histories may not be able to demonstrate the necessary consistency of cash flow to secure a loan.

Asset-based loans: Both small and large businesses can consider asset-based loans, which are based on the value of hard assets, receivables and inventory for determining borrowing limits. The amount of money available to borrow is generally based on a formula.

Pros: Asset-based lending is flexible, since you can use accounts receivable and inventory as collateral. If your company has less-than-perfect credit, asset-based lending could be for you — especially if you find a lender who specializes in your industry. You may also be able to access capital more rapidly than through a loan based on operating income and other financial measures.

Cons: One of the drawbacks to an asset-based loan is the formula. One example: If you are only allowed to borrow on accounts receivable less than 90 days old. If you are not paid by then, you will need to pay back that portion of the loan anyway. In addition, if the assets reduce in value, you may owe more than those assets are worth. Plus, lenders discount assets when determining how much they will loan your business. For example, a lender may not loan anything against foreign receivables, 50 percent of the value for work in progress and perhaps 80 percent of the value of U.S. receivables.

Factoring: Factoring, or selling your accounts receivable for cash, provides your business with working capital. However, the value of your receivables will be greatly affected by your customers’ payment history. If you have had a hard time collecting from customers, the factoring company will likely have a difficult time as well. Accordingly, the amount of money you can expect — and the cost of that money — will be reflected by this. Factoring can be with or without recourse. There may also be certain holdbacks on the purchase price.

Pros: Instead of waiting for clients to remit payment, you’ll have faster access to money owed to your business. Also, since factoring focuses on your customers’ credit worthiness and not yours, you can access capital without the lender scrutinizing your business’ credit worthiness.

Cons: Factoring can be expensive. Factoring companies charge fees and buy the receivables at a discount (the equivalent of interest). They charge a premium for the risk of nonpayment by your customers.

Other Options for Small Businesses: Even in today’s post-credit-crunch environment, business owners might perceive that lending options are scarce. In addition to what I have mentioned, other available types of loans include purchase-order financing, international accounts receivable financing, and mezzanine financing, as well as hard-money lenders.

The fact is, commercial lending is more plentiful than it has been in several years. Banks and other financiers have lots of cash to lend. So, always consider your primary banking relationship as a viable source of capital.

In addition, companies have access to resources, including the U.S. Small Business Administration (SBA). The SBA guarantees loans issued by commercial banks and has a variety of programs based on your company’s size, industry and stage of development. This can enhance your credit worthiness. And, don’t let the word “small” fool you. The SBA defines small businesses differently from what you may think.

Today’s entrepreneurs can also use the Internet to find loans. There are a growing number of sites trying to assist with both debt and equity. Try Boefly.com for loans or examine “crowd-funding” sources. Microloan financing destinations like Kiva.org may be able to provide businesses with the financial boost they need.

Aside from evaluating loans, you should also compare lenders. Look beyond interest rates at terms, fees and costs. Also, consider how much experience your lender has in your industry and its willingness to stick with you over time. When you think you have found the right lender, examine how it addressed past crises and current media attention. And, no matter what you decide, never finance a long-term asset with a short-term loan.

With an honest evaluation of your borrowing potential, you will be set for the next stage in your business, whatever that may be.

Family Business Sales Can Be Emotional

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Decisions about the future of a company can be a source of great stress and family conflict.

By: James Cassel

MIAMI, Florida, April 15, 2012 – Between 80 and 90 percent of all U.S. companies are family businesses, according to the Family Business Review. Over the course of the next decade, more than 40 percent of those companies’ top executives will retire, making family business succession a major issue for thousands of enterprises and thousands of families.

With this massive change on the horizon, it’s safe to assume many of these companies will address succession by selling the family business or transitioning to the next generation. In addition, many family businesses contemplate a sale for myriad other reasons besides succession. Regardless of the motivation, selling may not be the right choice. And for those business owners who choose to sell, the process can be a source of great stress and family conflict.

Here are five questions to help your family-owned company navigate the prospect and process of selling.

1. Why are you considering a sale? 

It’s important to identify the reasons why you want to sell the business, because the motivation for a sale can have a large impact on the best course of action to take. For instance, if there’s not another family member or generation in line to take over the business, then a sale may be the best way to monetize your asset. By contrast, market opportunities may be the driving force, making the urgency for a sale more present. Other criteria could include divorce, death, family members’ seeking alternative career directions, or tax and estate planning considerations.

2. Is an outright sale the best choice?  

Before hanging the “for sale” sign, consider strategic alternatives. In this regard, consult with your accountant, your attorney, or an investment banker. Depending on your goals, there may be a number of other options available to meet your family’s objectives.

For instance, recapitalizing the company could provide cash to the exiting generation (or exiting family members) while allowing the remaining family members to continue in management roles. If liquidity is not an issue, then identifying non-family members for executive management positions can address succession issues while allowing the family to retain ownership (and therefore the cash flow). And of course, if a sale does make sense, then be certain to engage the appropriate professional advisors to ensure you realize the greatest possible value from your family business as early as possible.

3. Are your decisions driven by emotions or good business sense? 

Despite the prevalence of family members that work together, few can avoid the potential divisiveness that money and business dealings can have on their relationships. Whether it’s a case of siblings facing off with each other, cousins in conflict, or parents and children disagreeing, the emotions of a family quarrel can lead to bad decision-making that can have catastrophic economic impact on a family business. I have seen this more than once: As a result of ego clashes or a lack of common sense, much money is left on the table. And once again, one of the best defenses a family can take is to engage the right assistance. A corporate psychologist, family therapist, or professional mediator can often prevent emotions from hijacking a family business’ potential and ensure that equity and “cool heads” prevail.

Emotions can also affect owners’ sense of what a business is worth. While your business is your baby, prospective buyers are often uninterested in the characteristics you consider most significant. Many buyers are extremely disciplined in their approach to value. Look to your advisors to provide an accurate valuation and to negotiate without bias.

4. Are family members on the same page?  

Families sometimes struggle during a sale because some members are risk takers and others are more conservative. One owner (or group of owners) may want to hold out for a premium price while another owner may want to take the first offer. As a seller, the investment bankers representing your company should engage all of the selling parties before going to market to ensure that everyone is on the same page, speaking with one voice and mindful of the same goals. Sometimes it might even be better if one family member buys out the other if that person will be an obstacle in the sale process.

5. Are you ready for what comes next?  

The excitement of a deal and the lure of what looks like a windfall can distract business owners from the reality that, after a transaction, they will no longer own and control their family business. What will you do with your proceeds? What will you do with your time? Many successful small business owners aren’t ready to wind down after selling their companies, and they sorely miss the stimulation of running a company. They still want to be in the game. For other family business owners, a sale can mean their children, siblings, or spouses are left without a job. Still, for others a sale can mean their legacy becomes uncertain.

It’s helpful to contemplate and visualize how you and your entire family will move forward after the sale of your family business.

10 Tips to Consider Before Selling Your Business

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By: James Cassel jcassel@casselsalpeter.com

MIAMI, Florida, February 19, 2012 – As an investment banker who represents clients during the sale, merger and acquisition process, I frequently hear comments from those who regret not planning more carefully — or not planning early enough — for the sale of their businesses.

A common mistake is to wait until the day you decide to sell your business to begin preparing, and by then, you may have lost a great planning opportunity. So, if you plan on selling today or any time in the foreseeable future, here are a few tips.

1. Hire a professional team. Assemble a team of advisors to navigate the sale process from personal tax planning to valuation and marketing, through negotiations and closing. Your team should include an investment banker or business broker (depending on the value of the business), a financial planner, a lawyer (perhaps a team of lawyers), and an accountant.

Tip: Remember, the advice you get before you go to market with your business can be just as valuable as the advice you get during negotiations. So engage your advisors early.

2. In connection with family, talk to yours early on in the process.Failing to involve your family at the front end can spoil a deal on the back end, especially when a second or third generation is involved, and they expect to take over or profit from the family business. I frequently advise potential sellers who haven’t discussed the situation with their family members to come back after they have the conversation. And, not surprisingly, family members have strong feelings that may affect the owners’ decision to sell.

Tip: When selling a family business, determine who will have a say in the deal and who will not. Even minority owners should be consulted to avoid acrimony.

3. Consider if you want to work after a sale and for how long. Do you want to exit immediately, or do you want to keep working for a few years? For many, age and lifestyle dictate this decision. For instance, a 75-year-old business owner may be ready to retire, but a younger owner might need a regular income to augment revenue from the sale. Many times it is more than age: The business owner’s personality helps shape the company, so selling is difficult. Sometimes the personality of the business and the owner’s personality are alike. Your desires will affect how you position yourself.

Tip: In the event of a successful sale, be prepared to continue working in some capacity during the transitional period.

4. Consider the best ownership structure. Each of the business ownership structures, such as C-corps, S-corps, limited partnerships, and limited liability companies, offer various advantages and raise different considerations during the sale process. Be cognizant of the potential for lower overall tax rates and the state-level tax implications.

Tip: Ownership structures have long-term implications that can dramatically affect the net amount of money you realize from selling your business. Planning well in advance of the sale may permit you to modify the structure to be the most tax-advantaged.

5. Organize corporate documents, including financial records. Organized record keeping makes good business sense in any circumstance. Getting the books and records in order now will keep you from scrambling for documents when potential buyers conduct their due diligence. Having an up-to-date corporate book is important; making sure your financial records and tax returns are available is a must.

Tip: Ensure easy access to financials, vendor contracts, and customer contracts. What you owe and what is owed to you will have a direct bearing on the value of your business.

6. Decide how you will keep the process confidential. You don’t want to scare away important customers who may be afraid that a change in ownership will threaten their level of service. You do not want to give your competitors something to use against you. There is always concern with how and when your employees will be informed of a possible sale. Likewise, you may want to present the company to the largest number of prospective buyers.

Tip: Your employees are an asset, so the loss of key personnel can hurt a sale. In this regard, carefully consider whether to disclose the possibility of a sale to your most important team members (and the timing of when you will do that).

7. Determine whether you want a partial or total exit. Financial buyers such as private equity firms are both control and minority buyers. Your intended exit strategy will impact transfer of ownership differently. For a total exit, you will maximize the consideration you receive. For a partial exit, there are many social issues to consider that might be equal to or more important than what you receive.

Tip: Your financial advisor can help you determine your necessity for ongoing income in the context of your overall wealth, including sale proceeds.

8. Be realistic with your expectations of value and understand how a buyer will calculate it. In our current economic climate, a multiple of earnings or EBITDA (earnings before interest, taxes, depreciation and amortization) are typically the most accurate measures of a company’s value. The higher your earnings, the more you can expect a buyer to pay for your business. What multiple a buyer will pay will vary greatly depending on numerous items, such as size, industry, capital and working capital needs, and future projections.

Tip: In addition to earnings, look at the diversity of your customer base. If your revenue is concentrated with one or two clients, this will hurt your valuation. While the seller wants to be compensated for the future, the buyer wants to pay for past results.

9. Identify your company’s most attractive feature. Figure out what characteristic or asset will help you best sell your business. Perhaps you have a steady stream of recurring revenue, a sought-after client, real estate assets, or valuable intellectual property or processes.

Tip: Work with an investment banker to put together a sales memorandum and management presentation. This is the sales document that will tell your story and put your best foot forward.

10. Be prepared for newfound liquidity. Most sales of businesses include purchase considerations such as cash, stock, or both. They can also include additional consideration in the form of earn-outs and non-compete agreements. Make sure you have an investment plan to address the investment of your new wealth. Likewise, contemplate the tax liabilities before transacting a sale.

Tip: Seek the advice of an estate planning attorney to ensure that your assets remain protected from generation to generation. Remember that you generally will not replace your current income with the proceeds of a sale.

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment banking firm headquartered in Miami that works with middle market companies.

Small Business Owners Should be Aware of ‘Lender Fatigue’

Small businesses have a responsibility to evaluate their lending relationships and to look for signs of lender fatigue.

By: James Cassel

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MIAMI, Florida, January 16, 2012 – Earlier this month, it was reported that Bank of America capped credit lines and restructured repayment plans for an undisclosed number of its small business customers. The move came as a complete surprise to some of these business owners. After all, the capital market is supposedly rebounding, and economic forecasts for 2012 have been encouraging. So, could these small business owners have predicted a falling out with their bank?

Perhaps. Small businesses, more vulnerable and considered more risky by lenders, have a responsibility to evaluate their lending relationships and to look for signs of lender fatigue – signals that their ability to borrow capital may be threatened. I have identified some of the reasons why your bank might consider changing its relationship with you. Some may be the result of what you do, and some may be out of your control. Stay aware of these signs, so you’re not caught by surprise.

Sinking revenue: Smaller businesses have a smaller “capital cushion” to deal with lean times. Even as the economy recovers, your business’ revenues may be lower, and they may not be keeping pace with expectations. Your bank can interpret your revenue challenges as signs of operational issues. In the past, the bank may have been patient, but now they may feel pressured to talk action.

Depreciating collateral: In a crunch, assets – and therefore collateral – may take a hit. Perhaps the value of the property you used as collateral for your business loan has declined in value. If the value of your collateral falls precipitously, your lender may look twice at your credit line, ask for more collateral or pull the plug altogether. Here’s a tip: Think twice before mortgaging an additional property. It may satisfy your lender for a while, but it may hurt you in the long run.

Poor communication: Have you been out of contact after making promises that did not come to fruition? You may lose credibility if communication breaks down between you and your lender during financial troubles. An open line of communication can go a long way.

Lack of customer diversity: If your business works with only a few large customers or clients, especially if your revenue is concentrated with a finite number of sources, your lender may consider this a liability.

Certainly, all small businesses cannot predict their lenders’ moves, but they can be proactive about finding alternative sources of funding. Every year, you should examine your access to capital and your lender’s portfolio.

If you are unhappy with your loan, make a move to change it. Don’t wait until you’re in trouble. Money is available, particularly from local banks, and small businesses are the key to economic stabilization in the United States.

Lenders (and I’m not only referring to big banks) want to put their increased liquidity into potentially profitable small business loans. After all, lenders and banks make their money by lending money.

To make the most of these opportunities, business owners need a diverse approach to sourcing capital. Sometimes, that means calling in the help of an intermediary like an investment banker, and sometimes it’s as simple as knocking on the doors of community banks and credit unions or finding lenders’ business cards in your desk drawer. Regardless, when it’s time for tracking down new money, keep these tips in mind:

1. It’s not just about the interest rate.

When shopping for a loan, compare more than interest rates. Be sure to determine what, if any, prepayment penalties exist, and on what basis your lender can demand full payment. Look at the loan covenants to make sure there is sufficient leeway to prevent a minor glitch from causing a default. Grace periods, notice and right to cure are crucial.

2. Look for a lender who works with small businesses.

When you research lenders, look for ones with a healthy balance of small businesses and large companies in their portfolios. This means they are willing to work with more than just large loans and “safe” options.

3. Take a closer look at the diversity of lenders’ portfolios.

Ask how much exposure the lender has in your industry. It is not uncommon for lenders to reduce their concentration in an industry by asking borrowers to find a new lender.

4. Wait on an independent valuation.

Paying for a valuation – before you have a lender – is a waste of money. Wait to get a bank in the process. If you appraise first, you will end up requiring a second appraisal. Many times, they will examine the collateral internally.

5. Embrace alternative capital sources available to middle-market companies.

Don’t forget about capital sources that can fund operations until you can secure funding from a bank, like factoring (the purchase of receivables), purchase-money financing, and asset-based, non-bank lenders.

While finding a lender always requires some “heavy lifting,” this year you will also face more funding sources in your community and a friendlier lending market.

Also, don’t forget that sourcing capital can require outside professional advisors, such as investment bankers or even fellow middle market business owners. Even if you’re not looking for a loan, you should make a resolution to evaluate where you stand with your bank – and look at those “warning signs” – so that you can make an informed decision.

If your lender calls your loan or sends you a default notice, it is important to contact a lawyer before you sign anything or agree to the terms of a forbearance agreement. Don’t despair if your bank severs ties or restricts your existing line of credit – at least you’re not looking for a loan in a credit crunch. Smaller companies are invigorating our economy, and they need capital to continue. It’s up to you to find out where they are – or enlist a professional to help you do it.