James S. Cassel: The time to begin succession planning is now

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By James S. Cassel

August 17, 2014

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James S. Cassel

Death and taxes are not the only certainties in life: Like it or not, at some point, you will have to leave your business. Hopefully, you will do so when and how you want, and with the benefit of an appropriate succession plan to help ensure the best-possible outcome.

Although most people don’t dispute the benefits of succession plans, they don’t pay enough attention to this important aspect of business ownership. Most of us would love to think that we will leave our businesses when we are good and ready, but we must be prepared for unforeseen circumstances that may lead to our sudden departures. The trouble with unexpected events is that they occur unexpectedly. So, when is the right time to begin planning? Simply put: “Now.” In my experience, I have seen many businesses suffer serious consequences, including everything from divisive family feuds among potential heirs to dissolution of the businesses, simply because the owners had failed to develop the necessary succession plans with appropriate documentation.

Here are some key considerations and tips to help ensure you are on the right track. First, it’s important to think about how you would like to leave your business. Will you step away all at once, abruptly, or will you do so gradually, transitioning slowly? Part of your transition plan can include extracting yourself from the day-to-day logistics and moving to a more advisory or consulting role.

Among the many considerations when planning a succession, exit or transition in a business, you will have to ask yourself if and how your family will play a role going forward. First, are family members involved or do any want to be involved? Do they have the skills, experience, wherewithal and drive to be responsible stewards of the company’s interests and the family’s assets? Perhaps a family member who initially wasn’t interested in playing a role in the company becomes interested over time.

Consider the age of your successors. If you’re approaching retirement, anointing a sibling or near relative of comparable age may be counterintuitive, depending on your age. In that case, ask yourself how you will integrate the next generation into the business. In some cases, this can include bringing in a daughter-in-law or son-in-law. Another consideration to keep in mind is that sometimes the best successors are not family members but rather long-time employees. How all of this differs from bringing in blood relatives is ultimately up to you, but in any case it’s always wise to speak with qualified consultants to afford yourself certain protections and, above all, peace of mind.

Failure to establish a clear succession plan can cause complications later as familial involvement in the business expands. For example, I worked with two families that owned a business together. The grandfathers had started the business, and when their sons, the second generation, inherited the business, the company continued to grow and prosper and the successors got along great. However, the third generation did not get along professionally or personally. The combination of unsolvable issues cost them the entire business. Everything that everyone had worked so hard to build was eventually destroyed, and they lost it all.

Could this have been avoided? Absolutely, if the second generation had established a clear plan for familial succession with appropriate agreements and provisions in the event of problems.

Remember, though, that family members are not the only stakeholders you’ll have to consider when you’re planning your exit. If you went into business with a non-family partner, ask yourself how you will navigate the channels of exiting if you want to sell and your partner doesn’t. This is particularly problematic when business partners are of disparate ages.

The matter can become even more complicated with multiple partners. For instance, two of the three partners of a successful firm I know were ready to retire last year, but the third wanted to stay and continue building the business. It took months of planning and preparation and going back and forth, and ultimately the best they were able to manage was to allow one of the partners to retire while the other had to wait longer before exiting. The business simply couldn’t absorb the transition of two of three stakeholders at the same time from both an operational and financial sense.

Finally, we are always subject to the unexpected. Passing away without planning the succession of your business can be logistically disastrous for your company and financially stressful for your family and legal heirs. No matter your industry, number of stakeholders or types of stakeholders, your company’s longevity is best served by spending time planning for succession. This plan should be drafted with the guidance and input of experienced lawyers, accountants, insurance professionals as well as other appropriate consultants and should provide for the possibility of disability, in the event that you may not be able to participate in traditional operations. Sometimes selling the business is a better option.

Although planning for the inevitable is not always pleasant, the consequences of unforeseen events may be mitigated by thoughtful preparation. Similarly, the discomforts of retiring from a company you have run for years can be ameliorated by the knowledge that you are taking the right steps to protect your legacy.

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. He can be reached at jcassel@casselsalpeter.com and www.casselsalpeter.com.

Practical tips for growing small businesses into middle-market businesses

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By James S. Cassel

July 20, 2014

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It’s a common question for small-business owners: “How can I take my company to the next level and become a middle-market business?” Although at Cassel Salpeter we focus on working with middle-market businesses, I often run into small-business owners in the community who ask for some practical tips.

I define the middle market as any business with $10 million to $250 million in enterprise value. Although there are more than 27 million businesses in the United States according to the last census, only about 300,000 have more than $5 million in revenues. So, becoming a middle-market business clearly is not easy. However, in many cases it may be attained with hard work and the right strategy (and a little luck does not hurt).

No matter how you position your business for growth into the middle market, you will have to prepare your business strategy.

First, evaluate the size of the market for your product or service and your position within the market. Is it saturated with competitors? Is it a stagnant market or are there growth prospects? Are you in a unique position to capitalize on growth opportunities? There’s more than one way to expand: you can expand organically by opening additional locations or by buying a competitor or similar business in your current market or a new market. You might market or advertise more or hire additional sales people.

When looking to grow, find out if there’s room for innovation with your products or services. Do you make standard nuts and bolts with little room for improvement, or can you innovate and expand your product line? It’s always great to survey your current and potential customers or clients and determine what would most interest them.

Furthermore, do you have adequate capital for growth? Again, you have multiple options. You can pursue a Small Business Administration loan or identify a Small Business Investment Company to provide a loan or invest in your organization. Alternatively, you can decrease your distributions and instead retain earnings to build up your equity base. You might get additional vendor financing. For the right plan, capital should be available.

Sometimes a simple policy change can help. Take inventory of your current policies and determine if they are aiding or impeding your growth. For example, online retailer Zappos instituted a 365-day return policy, a sharp departure from the then industry standard of 30 days. Zappos figured out that customers would feel more comfortable buying more items knowing they could return them without hassles. Although counter intuitive, its return rates actually dropped. This helped propel Zappos toward explosive growth.

Next, you’ll need to evaluate your distribution model and channels. Generally, the more distribution channels you have, the more opportunities you will have to move product. Before the advent of online shopping and commerce, brick and mortar stores were the primary means for purchasing goods along with catalogs. Remember the Sears catalog? Catalogs and mail order shopping expanded in popularity over time, vastly expanding the reach of businesses like Victoria’s Secret and other consumer and apparel outlets. But now there are a wide variety of multichannel distribution options. Potential consumers search for items, they receive emails and notifications about new products and specials, they walk past storefronts, and their friends share content about brands on social media channels. To maximize growth, make sure you are present and easily accessible wherever your customers and referral sources are, and keep a close pulse on which channels are working best for you and why.

Growing your business also means hiring and retaining the right talent. Turnover is costly; pay good people fairly and incentivize them to stay.

Finally, a primary external factor you will contend with is the economy. In a growing economy, retailers grow; in a slowing economy, those same retailers shrink. Ensure you have the capital and systems to weather a downturn so you can capitalize on the peaks. You must look at the trends as sometimes things shift, i.e. from the store to the web. Other external factors can play a role such as governmental regulation at the municipal, state, or federal levels, and a changing market. It is always a good idea to keep an eye on what your competitors are doing.

It’s important to have a sound business plan in place and update it several times a year to ensure you are on track for the goals you set for your business. Even if you are not ready to expand right now, conduct an evaluation and ask yourself how you would tackle each of your challenges. Identifying how you will overcome these standard growth obstacles early on will aid you in forming the long-term strategic thinking and planning you’ll need to propel your business to middle-market status. Moreover, it’s always a smart idea to consult qualified advisors with experience handling these issues who can help ensure that you are on the right path.

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. He can be reached at jcassel@casselsalpeter.com and www.casselsalpeter.com

Cassel Salpeter & Co. represents DynaVox in section 363 sale

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June 19, 2014

Cassel Salpeter & Co. represented DynaVox Inc., debtor-in-possession, in connection with a Section 363 sale transaction approved by the Delaware Bankruptcy Court to Tobii Technology AB, a Swedish technology company with offices worldwide.  In a competitive auction on May 21, Tobii was the successful bidder for substantially all of the operating assets of DynaVox with its $18 million bid.  The transaction closed on May 23.

Tobii expects the purchase of DynaVox to solidify the position of its assistive technology division as the international leader in the augmentative and alternative communication and accessibility markets.  DynaVox, with headquarters in Pittsburgh, provides speech-generating devices and symbol-adapted special education software to help people overcome speech, language, and learning challenges.

Cassel Salpeter advised DynaVox in completing the sale in an expedited three-week time frame and provided assistance throughout all phases of the sales process, due diligence, and auction.

“We are pleased to have successfully represented our client in this complex sale in a tight timeframe,” said James Cassel, co-founder and chairman of Cassel Salpeter, who led the assignment along with Philip Cassel, an associate with the firm.

Added DynaVox’s bankruptcy counsel Paul J. Battista:  “The sale was a great success in that it assures all creditors will be paid in full and money will be available to be distributed to shareholders.  Jim and his team jumped into the process, came up to speed quickly and were invaluable in helping generate this great result.”

Tobii is noted as a global market leader in eye tracking and a pioneer in gaze interaction. Its products are widely used for communications by people with disabilities. They are also used within the scientific community and in commercial market research and usability studies.

The debtors were represented by Paul Battista and Heather Harmon, partners with Genovese Joblove & Battista, P.A., and William Chipman, Jr., partner, and Mark Olivere, counsel, with Cousins Chipman & Brown, LLP.

Cassel Salpeter & Co. is an independent investment banking firm that provides advice to middle-market and emerging growth companies in the U.S. and worldwide. Together, the firm’s professionals have more than 50 years of experience providing private and public companies with a broad spectrum of investment banking and financial advisory services, including: mergers and acquisitions; equity and debt capital raises; fairness and solvency opinions; valuations; and restructurings, such as 363 sales and plans of reorganization.

For older business owners, knowing when to sell the business is critical

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By James S. Cassel

June 15, 2014

I was recently introduced to a successful entrepreneur business owner in his 90s who is considering selling one of his businesses. After our first meeting, his question became one that puzzles many older business owners: “Should I sell my business while I’m still alive Untitledor let my family sell it after I’m gone?”

In the weeks following our meeting, he has continued to ponder this question, as he wants to make sure that his decision will be in the best interests of his family and the business.

His financial advisors are encouraging him to wait to sell until after he has passed away. What they are suggesting, which is not a novel concept, seems to make perfect financial and tax sense on paper. Their recommendation is based on the assumption that by waiting to sell after his death, his estate can enjoy significant tax benefits from a “step-up in basis” (a readjustment of the value of an asset when it is inherited).

In simple terms, here’s how this generally works: Let’s assume you own a $50 million business and your tax basis in it is $5 million. If you sell the business during your life for $50 million, you will pay capital gains tax on $45 million; after you pass away, your family will pay an estate tax on the net remaining monies.

However, if the business is sold after your death for $50 million, the basis is recalculated. Your heirs would pay the estate tax on the $50 million but wouldn’t owe any capital gains taxes. The logic here is that you are mathematically better off retaining your business and having it sold after your death to greatly reduce the amount of taxes due.

Here are some of the flaws in that line of thinking: His advisors are neglecting to take into consideration the fact that the value of the business might drop after the owner — who has been the heart and soul of the business for decades — is no longer part of the business’ daily operations. Indeed, business valuations tend to suffer after the individuals who were the primary business drivers die.

Moreover, the course of action recommended by his advisors would put the burden of selling the business on his wife and brother in his 80s, who might not be the best-qualified person to handle the process under the emotional duress that is likely to follow his death.

This business owner should consider other key issues, such as the effects of his passing on the employees, customers, lenders, management and suppliers, to name a few. For example, if customers become concerned about the future operation and stability of the business and decide to explore other suppliers, this decrease in business could adversely affect the business’s value. Even with ample preparation, this business owner would have very little control over how his death will affect the valuation, or how a divestiture would affect his family as well as the business.

What did this gentleman decide to do? The jury is still out, as he is still evaluating the options. One of the reasons he probably likes the suggestion of his advisors is that it would enable him to continue working in a business that has been part of his persona for more than 50 years. Like other business owners in his position, he might feel sentimentally attached to his business. The danger in sentimental attachment is that decisions are often made for emotional reasons and not based on what may be in the best interest of the company and its stakeholders.

Based on my experience helping business owners navigate these complex issues, I am confident that he and his family will be better off if he sold the business while he is still alive. During our meeting, I explained to him that there are a wide variety of alternatives to selling outright at this time, if he wishes to continue working at his business as long as possible. Finding a partner to whom he can sell part of the business now and then sell the remainder after he has died could make sense under the right circumstances for the business and his family.

Although finding an appropriate partner can be a challenge that requires help from qualified advisors, it can be well worth it in the long run. For example, this approach could ease some of his business tax burdens and create a clearer succession path for the business. The best alternative might, in fact, be to sell the business to a strategic buyer who might pay the maximum amount and put in place an employment agreement if the owner wants to remain involved.

Without a doubt, letting go of a business that you have owned and nurtured for years is no easy task. When it comes to finding the right time to sell, there are no cookie-cutter approaches or crystal balls. It is crucial to consult with qualified advisors, including investment bankers, who can provide the necessary strategic counsel and perspectives to help protect your best interest.

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. He can be reached at jcassel@casselsalpeter.com and www.casselsalpeter.com

Cassel Salpeter & Co. Represents DynaVox in $18 Million Sale

MIAMI – June 12, 2014 Cassel Salpeter & Co., a middle-market investment banking firm providing merger, acquisition, divestiture and corporate finance services, represented DynaVox Inc. (OTCPK: DVOX.Q), debtor-in-possession, in connection with a Section 363 sale transaction approved by the Delaware Bankruptcy Court to Tobii Technology AB, a Swedish technology company with offices worldwide.  In a competitive auction on May 21, Tobii was the successful bidder for substantially all of the operating assets of DynaVox with its $18 million bid.  The transaction closed on May 23.

Tobii expects the purchase of DynaVox to solidify the position of its assistive technology division as the international leader in the augmentative and alternative communication and accessibility markets.  DynaVox, with headquarters in Pittsburgh, provides speech-generating devices and symbol-adapted special education software to help people overcome speech, language, and learning challenges.

Cassel Salpeter advised DynaVox in completing the sale in an expedited three-week time frame and provided assistance throughout all phases of the sales process, due diligence, and auction.

“We are pleased to have successfully represented our client in this complex sale in a tight timeframe,” said James Cassel, co-founder and chairman of Cassel Salpeter, who led the assignment along with Philip Cassel, an associate with the firm.

Added DynaVox’s bankruptcy counsel Paul J. Battista:  “The sale was a great success in that it assures all creditors will be paid in full and money will be available to be distributed to shareholders.  Jim and his team jumped into the process, came up to speed quickly and were invaluable in helping generate this great result.”

Tobii is noted as a global market leader in eye tracking and a pioneer in gaze interaction. Its products are widely used for communications by people with disabilities. They are also used within the scientific community and in commercial market research and usability studies.

The debtors were represented by Paul Battista and Heather Harmon, partners with Genovese Joblove & Battista, P.A., and William Chipman, Jr., partner, and Mark Olivere, counsel, with Cousins Chipman & Brown, LLP.

About Cassel Salpeter & Co.

Cassel Salpeter & Co. is an independent investment banking firm that provides advice to middle market and emerging growth companies in the U.S. and worldwide. Together, the firm’s professionals have more than 50 years of experience providing private and public companies with a broad spectrum of investment banking and financial advisory services, including: mergers and acquisitions; equity and debt capital raises; fairness and solvency opinions; valuations; and restructurings, such as 363 sales and plans of reorganization. Co-founded by James Cassel and Scott Salpeter, the firm provides objective, unbiased, results-focused services that clients need to achieve their goals. Personally involved at every stage of all engagements, the firm’s senior partners have forged relationships and completed hundreds of transactions and assignments nationwide. The firm’s headquarters are in Miami. Member FINRA and SIPC.

Deals dip in Florida amid squabbles over price

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Money: Deals dip in Florida amid squabbles over price

By Brian Bandell

May 30, 2014

The number of private equity firm investments in Florida-based companies declined in 2013 as haggling over pricing made finalizing deals difficult.

James Cassel

James Cassel

Miami-based investment banking firm Cassel, Salpeter & Co. analyzed private equity activity in Florida using data from Pitchbook. There were 135 private equity investments in local companies in 2013, down from 146 in 2012. That’s still better than the 113 deals during the 2009 financial crisis.

During the Great Recession, many of the private equity investments in Florida were in struggling firms at discounted prices, but now companies are doing better, said James Cassel, chairman of Cassel, Salpeter & Co.

“There’s somewhat of a disconnect on value between sellers and buyers,” he said. “There is so much competition for deals and, in some cases, they aren’t willing to pay the prices others are willing to pay.”

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In order to justify purchasing a company for well above its book value, a private equity firm must know it could get a strong return down the road, Cassel said. With interest rates likely to rise, that means adjustable-rate loans tied to company acquisitions should be paid off as soon as possible – otherwise they’ll become more expensive, Cassel said.

Companies in the IT and health care industries have been acquired for strong multiples of their book value, he added.

Lately, Cassel’s firm has been busy working for Florida companies looking to sell. Meanwhile, he found the number of Florida-based private equity firms has grown from 26 in 2010 to 33 in 2013.

 

Before buying a business, do your due diligence

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By James Cassel, Special to the Miami Herald
May 25, 2014

 JAMES CASSEL

JAMES CASSEL

Like it or not, due diligence is necessary before buying any business. In my experience, I’ve seen business owners neglect to invest the time, money and resources required for this, only to regret it later when they have closed on the transactions and discover issues and problems they hadn’t expected and could have avoided.

Unfortunately, there are no crystal balls, purple pills, or shortcuts when conducting due diligence. While most people agree it’s important, they often feel disinclined to do all that is necessary for myriad reasons, including thinking they should save the money, don’t need due diligence because they’re buying from people they trust, can do it themselves, and/or are getting what has been represented. Some only conduct partial or minimal due diligence, which isn’t the due diligence that is needed, particularly not if they miss major items that bring great exposure.

Although every deal is unique, I’ve found some key fundamentals to be important for potential buyers to keep in mind relative to due diligence. These include:

•  A strong team to conduct due diligence: Buyers who don’t dig deep enough into potential acquisitions often fail to bring together a complete team of experienced professionals. This team includes the right lawyers, accountants, and investment bankers as well as other consultants and specialists that may be needed, such as professionals to conduct environmental studies or evaluate technological infrastructure.

•  Employment and human resources: Confirm whether the company has its HR department in order and keeps accurate and updated files on employees, benefits packages, etc. Also find out whether there are any union contracts or employment or discrimination litigation. Inheriting a legacy of HR liabilities can be a nightmare. Find the right consultants to assist you.

•  Finances: You and your accountants must dig much deeper than looking at receivables and payables. Financial due diligence means reviewing all the books and records, bank reconciliations, balance sheets, and the data behind any audited or unaudited financials that will enable you to see the big picture as well as the details.

•  Information technology and IP: The need may vary depending on the type of company you’re looking to acquire, but for a technologically based or supported company, you should determine what IP the company has, whether it’s using proprietary or home-grown technology, has solid patents, and if all the software is properly licensed and documented.

•  Real estate: You may need to conduct an environmental audit as well as have title checked. Have a real estate lawyer examine all leases.

•  Suppliers: You need to know what the existing relationships with the suppliers are like, whether there are multiple suppliers, if the pricing is strong or weak compared to the industry average, if there are any product shortages, and how to get the most advantageous pricing if the company isn’t already doing so. All supply agreements must be reviewed.

•  Customers: What is the customer concentration, how steady are customer relationships, do sales depend on contracts or purchase orders, and do customers pay on time? These are only a few questions you should ask about the customers of the business you’re looking to acquire. Money invested in niche customer due diligence firms is money well spent.

•  Management: This is a particularly important one. Are you going to keep the current management? You have to determine what the full extent of the current management team’s relationship is to the company and whether or not the company is capable of flourishing with or without the team. Also, it is also good to determine whether there are non-compete agreements and non-solicitation agreements in place.

•  Legal: It’s crucial that you conduct state and federal litigation and judgment searches on the company and all of its principals. Although litigation is not necessarily a red flag since many companies have been involved in some form of litigation in their history, all litigation should be investigated thoroughly nonetheless.

•  Competitive market: You need to know about the company’s market share, the size of its market, and who its competitors are.

•  Agreements: All company agreements should be closely reviewed, particularly the terms and conditions, as well as whether change of control provisions exist.

•  Common sense: Big problems are often sitting right before our eyes, so keep your eyes open and use common sense. For example, I always recommend that people begin with Google searches — it’s amazing what can be found on Google! Also, if you’re considering buying a business, you should take a walk around the property and look for anything that might seem out of the ordinary. When helping a client conduct due diligence before buying a factory, I noticed dead grass in a particular spot. An environmental search revealed that the seller had been dumping chemicals there. The cleanup cost was substantial, and because it was discovered before any acquisition action, the seller paid for it. This matter could have been costly had it not been discovered in the due diligence process.

Keep in mind, these considerations don’t represent an exhaustive due diligence checklist. This is a high level summary overview that should be supplemented by a meticulously detailed checklist, tailored to the transaction and a thorough investigation by an experienced team of acquisition professionals.

There are few things that business owners regret more than getting burned and losing millions of dollars because they tried to save some money upfront on the due diligence. Don’t be one of those: Take the right steps now to protect your best interest in the long run.

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. He can be reached at jcassel@casselsalpeter.com and www.casselsalpeter.com

Family Businesses are More Willing to Entertain Offers Now

M&A Interview with James Cassel as featured on TheMiddleMarket.com

Business owners are more receptive to thinking “Is it time to sell?” says James Cassel of Cassel Salpeter & Co. at ACG InterGrowth 2014. Family-owned businesses are growing more comfortable with private equity firms, which bodes well for M&A.

10 questions to consider when you receive an unsolicited offer to buy your business

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By James Cassel, Special to the Miami Herald
April 20, 2014

 JAMES CASSEL

JAMES CASSEL

When middle-market business owners receive unsolicited offers from potential buyers, they often fail to take the offers as seriously and evaluate them as strategically as they should. As a result, they often end up hastily accepting or rejecting the offers and regretting their decisions in hindsight days or years later.

The common mistakes made by business owners in these cases are varied and numerous. They close doors on offers that would have been in their best interest in the long term, sell prematurely, take the first deal that comes their way without looking for better ones, or fail to use the opportunities to strategically analyze their businesses and determine what the offers potentially represent.

Here are some of the key considerations that my investment banking firm generally takes into account when counseling clients who come to us after having received unsolicited offers:

1. Are you interested in selling your business at this time? An unsolicited offer should, at a minimum, prompt reflection and evaluation.

2. If it turns out that you have an interest in exploring the possibility of a sale, should you negotiate with the party who approached you on an exclusive basis or explore other possible buyers by running a limited or broad sales process, which may help you maximize value?

3. Is the offer coming from a sincere, legitimate potential buyer or from a buyer with ulterior motives, such as acquiring intelligence about your business and its customers? It’s critical to conduct proper due diligence upfront to understand the suitors’ motivations and whether to engage.

4. Do you have enough capital to continue to grow your business and stay competitive, or is now a good time to sell? Would seeking external capital or recapitalizing by selling a minority or majority part of your business be better options?

5. Is now the right time for you to sell? There are internal and external considerations. Many owners wait to begin considering selling their businesses until their businesses are headed downhill or they have been hit with unexpected major events, such as divorces or deaths in their families. They take reactive, emotional approaches rather than proactive, strategic ones. This is the opposite of what should be done, as they’re more likely to extract higher values for their businesses if they sell when their businesses are highly profitable and positioned for continued growth. Also, with today’s low interest rates, limited supply of available quality businesses for sale, and high number of buyers with available capital, prices are high.

6. What do the near- and long-term prospects look like for your business? Does the marketplace in the coming years look promising or does it look increasingly challenging as a result of emerging business trends or new technologies that may hurt your business? Although perhaps you were not thinking about selling your company, selling might be in your best interest if, for example, the offers are significant enough or if the competitive landscape is likely to intensify and you would be well served to make a timely exit.

7. Is your business too dependent on its current owners or on a handful of specific customers, and how likely is your business to survive without them? Buyers are not likely to pay top dollar for businesses they believe may be threatened by factors like these. Thus, it’s always helpful to make necessary adjustments to ensure businesses are in the best possible position when they are marketed and sold. This process takes time, and it is simply not possible to get all this done in a few days or weeks.

8. Do the potential buyers have the financial wherewithal to acquire your business? How likely are they to close on the deal?

9. Are the potential buyers likely to be good stewards of your legacies and keep up aspects of your business that you might consider important, such as providing a certain quality of services or products, financial opportunities for your employees, or certain support to your community?

10. What are the potential buyers relying upon to value your business? Owners of family businesses should seek professional assistance to prepare normalized financial information with appropriate add backs to reflect their true business earnings. This is critical for business owners looking to maximize value. Price is generally based on a multiple of something. Therefore, higher adjusted earnings equate to higher purchase prices.

There always will be advantages and disadvantages to selling or keeping any business, so it’s critical to know how to evaluate and respond to potential unsolicited offers. For important decisions like these, it’s wise to consult qualified advisors such as attorneys, accountants and investment bankers who can bring significant value by helping you understand all of the options, avoid making emotional decisions, and protect your best interest.

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. He can be reached at jcassel@casselsalpeter.com and www.casselsalpeter.com

 

Yahoo’s Alibaba Cash Enables Tumblr-Sized Deals: Real M&A

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By Tara Lachapelle
March 18, 2014

Alibaba Group Holding Ltd. may give Marissa Mayer a $10 billion chance to accelerate her dealmaking.

Since Mayer became chief executive officer of Yahoo! Inc. (YHOO) in July 2012, she’s focused on acquisitions of small companies, with the exception of Tumblr Inc. for $1.1 billion last year. While the Sunnyvale, California-based Web portal gained engineering talent with the three dozen deals Mayer struck, that won’t be enough to keep revenue from falling again this year, according to analysts’ projections compiled by Bloomberg.

Yahoo’s stock has been buoyed by its about 24 percent stake in Alibaba, China’s biggest e-commerce company, which is preparing to go public. The chunk of Alibaba shares Yahoo plans to sell could at least double its $5 billion cash stockpile for buybacks and acquisitions, JMP Group Inc. said, giving the company firepower to restore growth faster. Yahoo also could go after mobile-applications and websites such as Pinterest, Snapchat or OpenTable Inc. (OPEN), SunTrust Banks Inc. said.

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Yahoo! Inc. CEO Marissa Mayer
Chris Ratcliffe/Bloomberg
Since Marissa Mayer became chief executive officer of Yahoo! Inc. in July 2012, she’s focused on acquisitions of small companies, with the exception of Tumblr Inc. for $1.1 billion last year.

“They’ve been doing these tuck-in acquisitions, but on the table is something larger,” Robert Peck, a New York-based analyst at SunTrust, said in a phone interview. “Mayer wants to focus on mobile, video and even social, so anything that plays to those means would be interesting.”

Sarah Meron, a spokeswoman for Yahoo, declined to comment on the company’s plans for its cash or acquisitions it may make. Tiffany Fox, a spokeswoman for OpenTable, and Mithya Srinivasan, a spokeswoman for Pinterest, said the companies don’t comment on takeover speculation. Representatives for Snapchat didn’t respond to a request for comment.

Growth Potential

“We want to acquire companies that would have inherent growth themselves so that they are, what I call, growth accretive,” Ken Goldman, Yahoo’s chief financial officer, said at a Morgan Stanley conference March 4.

Yahoo’s revenue declined in four of the past five years, data compiled by Bloomberg show. The exception was 2012 when it increased by less than half a percent. Analysts estimate the company will generate $4.5 billion in sales in 2014, a 3.8 percent drop from last year, the data show.

Even so, the stock has surged almost 80 percent in the past 12 months as investors await the IPO of Alibaba, which has yet to price. Alibaba said in a statement this week that it has decided to start the process for a U.S. listing, which may be the biggest since Facebook Inc. in 2012.

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Photographer: Brent Lewin/Bloomberg
Yahoo’s stock has been buoyed by its about 24 percent stake in Alibaba, China’s biggest e-commerce company, which is preparing to go public.

“There’s a fair amount of excitement over the windfall that’s going to land on Yahoo’s balance sheet,” Colin Gillis, a New York-based analyst at BGC Partners Inc., said in a phone interview. Exactly how much “comes down to what Alibaba prices at. But either way, it’s going to be a nice chunk of change.”

Alibaba Value

Last month, the average valuation forecast for Alibaba was $153 billion, based on 10 analysts’ estimates compiled by Bloomberg News. That implies almost $37 billion for Yahoo’s stake in the Hangzhou, China-based company. Yahoo’s own market value is about $40 billion.

Even if Alibaba commanded just $100 billion, Yahoo could sell a 10 percent position and still receive more than $6 billion in cash after taxes, according to Ronald Josey, a New York-based analyst at JMP Securities, a unit of JMP Group. That would leave Yahoo with at least $11 billion of cash.

“Alibaba is the spark,” Josey said in a phone interview. “The big debate right now is, post-Alibaba, what do they do with this cash and can the core business actually start growing again?”

While much of the Alibaba proceeds will probably be used to repurchase shares, there will still be plenty left over to continue making acquisitions, Peck of Suntrust said.

Expensive Targets

Yahoo could pursue a larger deal for a content provider such as Pinterest, which lets users bookmark images or recipes to share with their social network, or Snapchat, a photo-sharing app, he said. Another possibility is a website focused on local data such as OpenTable, the $2 billion online restaurant reservation service, according to Peck.

Valuations for Internet companies are high right now and many of them don’t yet generate sales, Gillis of BGC said. Yahoo is also competing against the likes of Facebook Inc. and others for those targets, he said.

Facebook announced last month that it’s buying WhatsApp Inc. for $19 billion, without disclosing whether the text-message service had any sales.

“My concern, if I were in Marissa Mayer’s shoes, is that with a significant acquisition you’re going to pay a big premium and you’re putting an awful lot of eggs into one basket,” James Cassel, chairman and co-founder of investment-banking firm Cassel Salpeter & Co. in Miami, said in a phone interview.

Pricey Purchase

Under Mayer’s watch, Yahoo bought Tumblr in May for $1.1 billion, which represented the richest valuation for a dot-com company since 2000, according to data compiled by Bloomberg on deals for which revenue figures were available.

Yahoo could instead look for targets that would bolster its revenue from advertising technology, Josey of JMP said. Yahoo’s share of the U.S. digital-ad market is projected to shrink to 5 percent in 2015 from 5.8 percent last year, while rivals Google Inc. and Facebook may expand their shares to 42 percent and 9 percent respectively, according to an EMarketer Inc. report published Dec. 19.

“Companies that have revenue are going to be less flashy,” Gillis at BCG said.

Mayer unveiled updated advertising services in January, including a service to help marketers more accurately target audiences and a new ad exchange, which gives companies more tools to manage promotions on their websites.

Yahoo’s “stock has done very well based on Alibaba, but really as far as Mayer’s regime, it will start to be gauged by the success” in turning around Yahoo and bringing back its growth, Peck said. “That’s really where her legacy will start.”