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When is the BEST Time to SELL?

BY: Huxley Nixon July 26, 2011 I am frequently asked this question by owners of private companies, especially the boomer generation owner, of which approximately 14,000 are turning 65 daily since January 1, 2011 and this will continue for the next fifteen years. When asked if they are ready today, many respond -WHY would I sell into the worst recession in my lifetime? They want to wait for the return of the good times. My response is this may be BEST of times for the next decade! Situation Lets use my fictitious owner, Bob, majority owner of ABC Builder Distributors, LLC (ABC) from my previous blog about the importance of competition when selling your company. Bob wants to buy out two siblings that are shareholders that would like to retire but Bob still wants to buy his biggest competitor and exit in five years. ABC is still the largest privately owned company in their industry segment but Bob wants to find a financial partner to provide his siblings liquidity and to contribute the additional equity that would allow him to acquire his largest competitor without over leveraging the company. However, since ABCs valuation has dropped from the $130 million he was offered in 2007 he feels he should wait several years. Below is a summary of ABCs financial performance since 2007. Bobs industry has been hammered by the recession and ABCs sales dipped to $150 million and EBITDA to $8 million in 2009 but because the company only carried modest debt on its balance sheet and Bob had placed excellent management and financial controls in place prior to 2008, he was in an a position to remain profitable and take advantage of weaker competitors when the market began to turn. Historical Facts about ABC: 2007 Revenues $220 EBITDA (% of Rev) $20 9.1 ($millions) 2009 $150 $8 5.3

2008 $200 $14 7.0

2010 $160 $10 6.2

Jun 2011 TTM $175 $14 8.0

While ABCs Trailing Twelve Month (TTM) revenues and EBITDA are off 20% and 30% respectively from the high-water mark in 2007, buyers are more interested in knowing that you have successfully managed through the bottom of the recession (March 2009) and they are concentrating on performance over the past twelve months and where you are headed versus where you have been. When looked at in this light, ABC looks like the star it is (especially when compared to its peers). Its TTM growth of 9.4% and 40% in revenues and EBITDA clearly shows a strong platform to build upon an ideal equity recap candidate for PEGs. ABC may not be at their pre-recession value of $130 July 27, 2011 1 Time to SELL

A faster and better way for business owners to connect with buyers million BUT neither is its peer group! ABC is still the largest private company in their industry segment and NOW is an excellent time to acquire some of its less fortunate competitors. The Mergers and Acquisitions market (M&A Market) for quality lower middle market private companies like ABC has rebounded from its trough in Q1 2009. SEE GRAPHS BELOW

Quarterly M&A Activity

Enterprise Value < $250 MM
3,500 3,000 2,500 2,000 1,500

1,000
500 0

Deal Volume

Source: Merger Stat & Flashwire

Average EBITDA Multiple Trend

Enterprise Value < $250 MM

EBITDA Multiple

Source: Merger Stat & Flashwire Monthly

July 27, 2011

Time to SELL

A faster and better way for business owners to connect with buyers

The scale numbers on the above EBITDA Multiple chart have been deliberately removed since they represent average EBITDA multiples over many different industry verticals that have wide variances when it come to value (i.e. low margin wholesaler does not command the same multiple as a technology company). Both charts demonstrate the M&A Market is back to 2008 levels for Quality companies. Having said this, I am assuming that our politicians will avoid economic suicide over the debt ceiling issue. Why should Bob do something NOW? Value is driven by TWO Factors: 1. EXTERNAL Which we DO NOT CONTROL! (Government Regulation & Taxes, demographics, global economic and political risks, WAR in the Middle East, etc.) 2. INTERNAL Which we do have control over (strong Mgt Team, good financial and management controls/systems, competitive barriers to entry, strong margins and revenue growth, etc). Assuming you run your company in a way you are always prepared for this day and we do not go into a economic meltdown, there are several compelling reasons when looking at EXTERNAL RISKS that would suggest between NOW and the end of 2012 will be the best time in the next decade to sell part or all of your company. Supply FACT: There is MORE un-invested cash sitting in Private Equity Funds (PEGs) earning virtually zero percent interest than any time in our history - approximately $500 Billion. Most PEGs have a 10 yr lifespan and need 3 to 5 years to acquire, grow and exit companies they buy. Most of these funds will have their 5th anniversary by Dec 31, 2012! With Washington seeking ways to increase revenue to help reduce the $14+ Trillion deficit, hedge fund managers and PEGs are likely targets after the 2012 election. They make their money when they sell their portfolio companies for an amount over their costs basis and currently these profits, known as their carried interest, are taxed at long term capital gain rates (15%). Many on Capitol Hill want to tax these profits as Ordinary Income (39.6% after 2012).

FACT:

FACT:

Demand FACT: Approximately 14,000 boomers are turning 65 every day since January 1, 2011 and will continue to do so through 2025. It is estimated that 6 million of these boomers own

July 27, 2011

Time to SELL

A faster and better way for business owners to connect with buyers private companies that will not pass to family members. By the end of 2012 only 800,000 potentially could come to market thus, before the wave crests! FACT: FACT: By the end of 2015 2 million of these owners will have turned 65. Bush-era tax cuts EXPIRE at the end of 2012 LT Capital Gains rate increases to 20% from 15% (33.3% INCREASE). In simplistic terms a seller must receive a premium over todays value to remain the same after 2012.

CONCLUSION: 2011 & 2012 1. SELLERS market, lots of buyers seeking quality opportunities good valuations. 2. Boomers WAVE just beginning. 3. Owners should NOT wait for the Good old Days to return Now may well be the best they will see for the next decade. 4. FAVORABLE tax environment compared to 2013 and beyond. 2013 & Beyond 1. DECREASING Buyer Pool (Investment window closing for Private Equity funds started 2006-2007). 2. Boomer wave begins to crest (2 million sellers at end of 2015 and 4 million by 2020) versus declining number of buyers! a. LT Capital Gains rate 33.3% higher after 2012 and pressure to increase taxes to reduce deficits going forward. b. Probability increases for higher interest rates. 3. UNCERTAINTY regarding US and Global economy - Inflation, Negative Demographics (declining birth rates to support exploding aging populations) in most industrialized/westernized countries, Destabilization of Middle East and Central America, etc. Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary. He is founder of the M&A MARKETPLACE by CHC (www.mamarketplace.com) where the buyer pays all success fees and the process is only 120 days. For owners of private companies considering a sale of part or all of their company - it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

July 27, 2011

Time to SELL