Mid Market Staircase Photograph

MidMarket Corporate Finance Q&A Series: Part 1

First in the Series

“How It Really Works: Sale of Founder-Owned Private Company”

The focus here is on middle market businesses (under $100 million in revenue) owned by the founder, family and management, rather than a sale by a corporate parent or a private equity investor.

What do business owners wish they knew before starting the sale process?

  • No matter what, the deal won’t go the way you think it will.
  • Allowing specifics to be worked out later (after letter of intent/term sheet) is a bad idea.
  • Management distraction leads to missed forecasts and then the buyer drops the price.

How does the sale process start?

  • You are approached by a large strategic buyer which should pay more than equity players.
  • A private equity firm entices you to get cash now and a lot more later.
    If it is your idea to sell, your board or CFO or lawyer begin to suggest how to proceed.

Why are there so many surprises?

  • You probably won’t be realistic about potential problems until it is unavoidable.
  • Only real nitty gritty due diligence by the buyer uncovers the unexpected.
  • Even if you have sold a business before, values, processes and taxes have changed.

Why do some people seem to do so much better than others?

  • They know exactly what they want and clearly lay that out to bidders.
  • They disclose potential deal killers up front to buyers and offer realistic solutions.
  • They understand deal dynamics and then all the stars become aligned for their deal.

What determines price?

  • Your company’s strategic contribution to the buyer’s business.
  • Deal structure and buyer’s profile govern financing limitations for the prospect.
  • The buyer knows that you have another prospect ready to take its place.

How do buyers decide what to offer?

  • They ask what you expect and gauge how much competing buyers will offer.
  • If you don’t tell them what you want, they will rely on conservative analysis.
  • If you allow them to confirm your earnings growth or cost savings, they will stretch.

What should the founder-owner know about the agreement of sale?

  • It will be much more detailed and complex than you think is needed.
  • The term sheet is the roadmap, so make it comprehensive.
  • It is best to thoroughly read the contract and exhibits of a relevant deal before you start.

Why can’t the Founder-Owner get a clean break at closing (or take the money and run)?

  • Because the post-closing price adjustments have serious consequences.
  • Representations and warranties insurance has limitations and exceptions.
  • Private equity buyers nearly always have a roll-over investment requirement.

How does a Founder-Owner know whether a deal is fair?

  • Your deal can be compared to others that are most relevant.
  • A well-orchestrated process produces an accurate reflection of the market.
  • Experienced advisors will have informed opinions that you can rely upon.

What other topics will the MidMarket Q&A Series include?

  • Details and nuances on company valuation and deal structuring.
  • Negotiation of acquisition agreements and debt and equity agreements.

Notes on Upcoming Hong Kong Event

Cropped portion of invitation1We are hosting an event at MidMarket on Thursday evening, March 7th. It has to do with the ins and outs of doing business in Hong Kong and China. We will be joined by some people whose experiences and insights may be very different than you might expect. This is made possible through the auspices of our good friend Louis Ho and the Hong Kong Trade Development Council and we have asked our client Frank van Lint to share some comments about an IPO his Dutch investment group sponsored in China which debuted on the Hang Seng.

Last month marked the ninth anniversary of our entry into China. You may remember it. Marriott Conshohocken : Patrick Hurley, late in the evening in Hong Kong, interviewing group of public company executives in a live feed to a big TV screen at the Marriott, where Graeme Howard led a discussion with a panel of executives of companies here with activities there. You may also remember Jim Papada of Technitrol, a Philadelphia company, which in a few short years had most of its employees in China, saying that if you are not already there it’s over.

This was all pretty interesting and activities around the event helped to get MidMarket into China in a meaningful way.

We’ve remained active in China, an ever interesting and ever complicated place to do business and have worked for a number of companies and some very large entities. But it’s such a big and diverse country, that if you’re not careful, you can end up trying to do business in the wrong places for the wrong reasons.

MidMarket partner Telu Tsai is pretty good at spotting the tight situations and navigating clients through them. Time and again, he would say to me “You need to understand, Chinese people think differently.” I think we understand that now. We’ve learned some other things; for example, it’s not only companies with high labor content products that can lower costs there. It can work just as well for those with high material content too.

For example, we are working with a company with a product where material amounts to 75-80% of total cost – surely not a candidate for off-shoring? Wrong. It’s done its homework, knows how significant its savings could be, and knows it would be foolish not to seriously plan manufacturing in Asia. There are many other stories like this. You have to know where and how to look.

There’s been one constant through it all, and that’s Louis and HKTDC. The HKTDC is conducting an event in New York City in June, with the March event at MidMarket serving as a preview. We will be joined by Lewis and his team along with other guests with interesting experiences in China.

This will be a good opportunity to get an update, to find out what predictions made way back when at the Marriott came true, hear something about a cross-border deal involving European investors in a now public HK Exchange company actually worked, and finally to get some insights into what’s going on and where you might want to be, and how to get there.