Blog

17 Sep
Former IBM M&A Practice Leader Joins LockeBridge to Lead Technology Investment Banking Practice

For Immediate Release
September 17, 2019 

 

LockeBridge Capital Partners is pleased to announce that the firm has expanded its Technology and Healthcare investment banking practice with the addition of Mr. Jack Jacchino.  Jack joins LockeBridge after a successful career of over twelve years as the North American M&A Leader for IBM’s Global Business Services.  Jack was recruited by the CEO of IBM to initiate, build, and lead the corporation’s global business services practice.

Having completed over 250 acquisitions and 135 divestments, ranging in size from $5M to well over $1B,  during his thirty-year career Jack has proven to offer his clients sophisticated M&A advisory, joint venture and consulting services.

Refer to Jack’s Bio for more info.

Scott Waxler, LockeBridge Managing Partner, comments: “Accelerating adoption rates and shortening product life cycles require more responsive M&A and capitalization implementation. The pace of change in the TMT and Healthcare sectors will only continue to increase. With the addition of Jack to the team, LockeBridge is  positioned better than ever to promptly and efficiently assess, advise and execute on the rapidly changing transaction and capital demands of our clients .”

17 Sep
LockeBridge Expands Healthcare Facilities & Services M&A Practice with Addition of Four Industry Veterans

For Immediate Release
October 17, 2019 

 

LockeBridge Capital Partners is pleased to announce that the firm has expanded its Healthcare Facilities & Services investment banking practice with the addition of three industry veterans.

Changes in healthcare costs, reimbursement rates, and federal policies are impacting the plans of most healthcare participants. As a result, we have never been more active advising on M&A transactions, strategic partnerships, and financing alternatives across a range of healthcare verticals. LockeBridge clients range from early revenue companies raising capital to fund innovative healthcare IT initiatives to multi-billion-dollar international medical device companies seeking acquisitions and divisional divestitures to post-acute care facilities seeking to acquire, merge or divest.

 

WELCOME FOUR NEW LOCKEBRIDGE DIRECTORS
Healthcare Facilities & Services Vertical

David Carter, LNHA
David has been working with skilled nursing homes and healthcare operations since the mid-1980s. David’s mergers and acquisition advisory expertise is complimented by his experience as an administrator in 20 facilities across seven states as well as his leadership of numerous teams as a Regional Director of Operations.

David has successfully implemented cutting edge programs that created sustained stability in this ever changing and growing healthcare environment. David eventually became known as a change agent of facilities, implementing technology solutions resulting in increased efficiency and improved quality outcomes. David served 6 years as a Medic in the Ohio National Guard and is a graduate of The Ohio State University.

Vincent Brown
Vincent has built sustainable business solutions for healthcare providers, insurers, and investment banking and advisory services. Vincent loves to build exceptional businesses with outstanding people. He has held C-Suite leadership roles in several healthcare startups and owned management service organizations. One of Vincent’s numerous successes includes the co-founding of a healthcare technology company focused on chronic disease management and medical weight loss.   He was a Principal and Senior Vice President of Strategy and Business Development during his tenure.

Rick Marciniak
Rick not only has significant successes in raising capital and growth advisory, he is an accomplished executive with a strong portfolio of successes driving strategy, revenues and innovation for both early stage and mature organizations ranging in size from $1M to $4B.

With more than thirty years senior management experience building and managing brand and marketing communications departments for international agencies and corporations, Rick significantly impacted organizational growth and profitability by expanding core capabilities with new products, services, technology and personnel.

As a senior management consultant, he has leveraged that experience to bring a video technology start-up from $0 to $11M in the first 18 months and a healthcare services company from inception to publicly traded status in just under two years. Rick is a former board member of the International Foundation for Chronic Disabilities and the Boston Chapter of the Family Firm Institute.

Chris Walls
Chris has more than 35 years’ industry experience managing large operations and delivering complex services.  He is a veteran healthcare executive leader and expert in healthcare IT and hospital and medical practice technologies and services.

Chris has worked with some of the largest healthcare systems in the county such as Ardent Healthcare, Ascension Health and Anthelio Health Solutions in capacities such as President of Service Delivery and Global CIO. He has significant experience managing end-to-end solutions including IT infrastructure services, IT applications management, EHR optimization, Patient Engagement, Analytics, and Revenue Cycle Management.

Chris is an experienced board member, having held board positions with organizations such as Pulse Systems Inc., Venyu Inc., and Summit Technologies. Chris is also the author of numerous healthcare articles.

Scott Waxler, LockeBridge Managing Partner, comments “For non-healthcare sectors deep subject matter expertise within the vertical is often not necessary.  Within the healthcare sector however, industry specific expertise on matters pertaining to compliance, regulations, processes & methods and numerous other industry specific issues is often critical know-how for investment bankers. 

At LockeBridge our Directors not only have a thorough understanding of industry specific issues impacting the merger, acquisition and selling process, they have first-hand operational knowledge only garnered by those that have years of operational experience working with providers” 

18 Jul
LockeBridge Recruits Healthcare Industry Leader to Clinical Advisory Board

For Immediate Release
July 18, 2019 

 

LockeBridge Capital Partners and HydraCor, LLC, a LockeBridge banking and advisory services client, announced today that Dr. Charles Safran, an internationally renowned expert in applied healthcare informatics, has been named Chairman of the Clinical Advisory Board of HydraCor, LLC.

Dr. Safran is a Professor of Medicine at Harvard Medical School and the former chief of the Division of Clinical Informatics at Beth Israel Deaconess Medical Center. In 2014, he was awarded the Morris F. Collen Award, the highest honor given by the American College of Medical Informatics for his unique contributions to the field.

Scott Waxler, LockeBridge Managing Partner, comments; “Our strategy of offering deep subject matter expertise across multiple verticals is a major differentiator amongst middle-market investment banks.  LockeBridge offers clients unparalleled expertise within healthcare information technology, medical device and several other verticals, which can be invaluable when executing transactions and implementing growth strategies. By integrating growth advisory and transactional (e.g. M&A, capital raise) services under one roof LockeBridge has been able to materially increase the value of its clients’ businesses.”

According to Dr. Safran; “Industry leading healthcare providers increasingly recognize that it is not enough to deliver positive clinical outcomes and that they must improve the total patient experience in order to thrive in a fast-changing US healthcare system. I look forward to advising HydraCor on how to best meet this urgent need through the expansion of the AdvoCor® Platform’s clinical applications,” said Dr Safran.

Ryan Sawyer, HydraCor President, stated; “We are very pleased to add Dr. Safran as an advisor, as his deep knowledge of advanced healthcare informatics will provide invaluable guidance as the Company expands the innovative applications of the AdvoCor Platform to all phases of patient care.  LockeBridge’s  recruitment of Dr. Safran is exemplary of LockeBridge’s differentiated Growth Advisory Services and how they participate far more than typical banking and consulting services firms to advise middle market companies like HydraCor to better execute their growth strategies”, added Sawyer. LockeBridge Capital Partners is a Boston area investment banking firm advising middle-market companies, such as Hydracor, on mergers, acquisitions, divestitures, capital sourcing and growth consulting strategies.

More on Dr. Charles Safran
Dr. Charles Safran has served as the President and Chairman of the American Medical Informatics Association and Vice-President of the International Medical Informatics Association. He is an elected fellow of both the American College of Physicians and the American College of Medical Informatics. Dr. Safran was also Editor-in-Chief of the International Journal of Medical Informatics for two decades. Currently, he is a council member of the Health on the Net Foundation in Geneva Switzerland and a Director of Intelligent Medical Objects, a medical terminology software company that helps clinicians capture clinical intent. He serves on the scientific advisory boards of Datavant, a San Francisco based company organizing health data, and the Multiple Myeloma Foundation.

Dr. Safran has been teaching physicians and nurses to use information and communication technology to transform healthcare for over three decades. He is the Clinical Informatics track chair for the Harvard Medical School master’s program in biomedical informatics and the NLM informatics fellowship, as well as a professor with the Harvard Business School. Dr. Safran is a widely sought speaker on the future of healthcare technology, has testified before the U.S. Congress and has over 200 publications.

For more information contact: Bob Seltzer, LockeBridge Capital Partners, 617-510-0746, bob.seltzer@hydracor.net or bseltzer@lockebridge.com.

21 Mar
Metal Processing, Fabrication & Recycling

Although subject matter expertise in not a requirement for bankers operating in many verticals, LockeBridge believes that the metal industry represents an exception. A thorough understanding of industry specific issues such as inventory valuation, trading and hedging strategies and processing technologies is critical in evaluating and representing businesses operating in the metal markets.

 

ADVISORY EXPERIENCE

LockeBridge has substantial experience advising companies across various metal sub-sectors including recycling, fabrication, plating, capital equipment and brokering. We have published numerous metal industry related articles and have advised, sold and received offers from many of the most well-respected companies in the metal industry.

In addition to our experience in most manufacturing process steps (e.g. Plating, Welding, Machining, Forming, Cutting, Shearing, Rolling, Punching, Stamping) we also have significant experience in in most major metal end markets such as Building & Construction, Automotive, Electrical & Electronics and Industrial Machinery and Energy & Power.

19 Mar
LockeBridge Capital Partners Expands Metal Industry Investment Banking Coverage with Addition of Michael Locker

For Immediate Release
March 19, 2019 

LockeBridge Capital Partners is pleased to announce that the firm has expanded its investment banking coverage in the metal industry vertical through the addition of Michael Locker to its advisory board.

Mr. Locker represents a valuable addition to our metal industry vertical. He brings deep expertise which will enable LockeBridge to broaden the scope of its global representation. Michael is a subject matter expert in the iron and steel production and fabrication industries. For the last thirty years he has published a monthly newsletter, Steel Industry Update and has authored and directed dozens of steel and steel-related industry market studies. He has conducted over 150 joint labor-management projects at steel plants throughout North America and served as an expert in cases involving Inland, Bethlehem, National, LTV, Wheeling-Pitt and Republic Engineered Steel. Mr. Locker is frequently quoted in the trade press, as well as the Wall Street Journal and New York Times, and has presented to the Steel Success Strategies conference.

Scott Waxler, LockeBridge Managing Partner, comments “Deep subject matter expertise is critically important for bankers operating in the metal markets. A thorough understanding of industry specific issues such as inventory valuation, trading and hedging strategies and processing technologies is critical in evaluating and representing businesses operating within the metal sector”

Mr. Locker joins a team of three other members having significant metal industry transactional expertise in addition to expertise in forex and commodity hedging and trading strategies. LockeBridge has advised companies across various metal sub-sectors including recycling, fabrication, plating, capital equipment and brokering. We have published numerous metal industry related articles and have advised, sold and received offers from many of the most well-respected metal industry participants ranging in size from $10M to $950M in revenue.

04 Feb
Valuation Accuracy & Adjusting the Financial Statements

Learn From the Past, Value the Future.

The terms recasting, adjusting and normalizing are often used interchangeably and refer to adjusting items on a company’s financial statements that are unrelated or unnecessary to the ongoing operations of the business. Financial reports are generally composed to minimize business tax liability which in turn, results in an inaccurate presentation of a company’s true earnings and profitability. Because the objective of reporting to the IRS is generally in contrast to financial reports composed for company shareholders and perspective investors, financial adjustments made to expose the real performance of a company usually result in higher profits and an increase in the fair market value of the business.

Keep in mind that buyers are paying for the company’s future expected free cash flow, not the historical financial performance.  In fact, one can often hear LockeBridge bankers saying, “Learn from the past, value the future”.  In other words, past performance is only meaningful in so far as it provides insight into the future potential performance of the company.  Ultimately the prospective purchaser is attempting to estimate what the cash flow will be under its ownership.

There are numerous financial items that may need to be adjusted. The process is as much an art as a science. Understanding what the potential purchaser will accept as an adjustment, relevant to both the income statement and the balance sheet, requires significant experience and is a critical component in accurately estimating the value of the company.

There are a handful of categories which define the majority of adjustments. Below is a summary of these items.

 

INCOME STATEMENT ADJUSTMENTS

Owners Compensation
The objective is to account for the cost of all benefits received by Shareholders (passive and active) and their family members which have been expensed to the business.  After accounting for the foregoing, we adjust the total compensation to the fair market rate one would reasonably expect to pay for replacement personnel.

Owner Compensation may include, but is not limited to:

  • Salary
  • Bonus
  • Profit Sharing
  • Health Insurance
  • Life Insurance
  • Club Membership Fees
  • Personal Travel, Meals & Entertainment
  • Personal Vehicle Expenses

One-Time, Non-Recurring Adjustments
Expenses and Income which are not anticipated to reoccur under the new owner’s tenor are called One-Time or Non-Recurring and may include such items as:

  • Legal Expenses (e.g. litigation expense)
  • Broker Fees (e.g. M&A retainer)
  • Consulting/IT Projects (e.g. new web-site development)
  • Non-Performing Employee Expense
  • One-Time Recruiting Expenses
  • Start-Up Expenses (e.g. organizational documents, patent applications, moving costs, hiring costs, etc.)
  • Insurance claim proceeds and lawsuit settlements.
  • Gains or losses from the disposition of assets such as the sale of vehicles.

Note that there are plenty of potential “abnormal” income and expenses which may not be intuitively obvious to business owners. An example of such are:

  • Business interruption costs.
  • Gains or losses from discontinued operations.
  • Abnormal high or low profits (e.g. large one-time orders, inventory clearance event)

Rent Expense
If the property upon which the business operates is owned by the Company or one or more of the company Shareholders often times the rent expense is not in line with the market.  If the Company owns the property only the costs associated with supporting the property such as insurance, property tax, maintenance and utilities, will be expensed without any consideration for arms-length rental rates.   If the purchaser is not acquiring the real estate the property expenses must be adjusted to fair market. Even if the property is being sold along with the operating entity, because the method used to value real property differs from the methods employed to value operating entities, the real property cost must be normalized to fair market so that each of the two assets can be valued independently.

 

BALANCE SHEET ADJUSTMENTS
The profit and loss statement is generally much better understood and garners more attention by business owners than the balance sheet. Consequently, balance sheet adjustments are often overlooked.

Regardless of the depreciation method used assets need to be “marked to market”. Mark-to-market accounting can change values on the balance sheet as market conditions change. For example, your 20 year-old desk may be fully depreciated and show no value on the balance sheet but it works just as good today as it did when it was new. In fact, it may even be valued higher today than the original purchase price. For profitable going concerns the value of the fixed assets generally does not impact the enterprise valuation, however what about the value of the inventory.

Depending on both the inventory accounting method utilized and the type of assets held in inventory, a mark-to-market adjustment can substantially impact the enterprise value.

LockeBridge does a significant amount of business in the metal industry.  Consider a metal processing company using LIFO.  In this case there should be a LIFO reserve footnoted on the financial statements. Depending upon the company’s inventory turn-over and the volatility of metal commodity prices adding back the LIFO reserve can substantially change the value of the current assets.  Even if FIFO is used consider a metal recycler, for example, which may need to accumulate enough inventory to fill a shipping container to be sent to a Chinese buyer. It may take a smaller recycler several months to accumulate this volume. During such accumulation period recent metal prices may differ significantly then the recorded cost of the inventory.

Various factors must be considered in valuing a company. One such factor is how much weight to be placed on a cost-based methodology such as the replacement cost method.  In any event, accurately adjusting the balance sheet may be essential in valuing the company.

 

ENTERPRISE VALUE
After accounting for all of the relevant adjustments, how does one then determine the value of the company? Thorough and credible adjustments are a critical factor in any valuation but even if the job is done perfectly there are many other factors to consider when valuing a company.

For example, most business owners are familiar with the concept of EBITDA “multiples”, and sometimes applying these multiples to a properly adjusted EBITDA can indeed approximate market value, however there are several other variables to consider.

Consider two shipping companies both with the same EBITDA, but one company leases their trucks and the other purchases their trucks. Because the leasing cost is already accounted for as an expense, most likely the company that leases has a higher value.  Even if both companies purchase their trucks the company with the lower capital expenditure, all else equal, will be valued higher. Capital expenditure doesn’t come into play when considering EBITDA. That’s why free cash flow (FCF) is really the relevant number. Most non-professionals, and many professional for that matter, do not fully understand FCF because it takes into account more complex issues such as capex, debt leverage, and tax rates.

As previously mentioned, purchasers value the future expected FCF. To do this they project the entity’s adjusted earnings into the future and then “discount” or “present-value” them back into today’s dollars using a discount rate which accounts for their cost of both debt and equity, the weighted average cost of capital (WACC). One critical job of the valuation professional is to estimate the prospective purchasers WACC.  The methodology used for such estimation varies widely and is often the determining factor in the valuation accuracy.  A discussion of the various methodologies used to determine WACC is beyond the scope of this paper but suffice it to say that the WACC is based on numerous factors including, but not limited to:

  • The Risk Free Rate of Return
  • Small Company Risk
  • Industry Specific Risk
  • Company Specific Risk
  • Availability and Cost of Debt (i.e. leverage)
  • Forecast Credibility

This article has mentioned only two valuation methodologies, the replacement cost method under the cost approach and the discounted cash flow method using the income approach,   however a number of methods should be considered to accurately value a company. Each method has its strengths and weaknesses.  Refer to below Appendix for LockeBridge Valuation Accuracy.

 

THE BOTTOM LINE
No owner one should enter into the merger and acquisition (M&A) process prior to obtaining a very credible estimate of value.  It is critical that selling Shareholders have reasonable and relatively accurate expectations, which reflect how the market perceives the value of the company. Additionally, if not credibly performed Shareholder’s can be subject to a material conflict of interest with their M&A Advisors, whose compensation is usually substantially based upon the value and structure achieved.  Refer to www.lockebridge.com/engaging-an-investment-banker  for a brief discussion of potentially advisor conflicts.

Both offer prices and valuations can range substantially. Refer to www.lockebridge.com/case-studies to see numerous sell-side transactions, bid prices and composition. Here you can see that it is not uncommon for offers to range +/-30% or even more.

The M&A process is not to be taken lightly.  It should be done effectively and optimally, the first time around. Obviously, unanticipated circumstances out of the control of both the Advisor and Owner can and do occur, however a failed process requiring the business to be placed back on the market a second or even third time is rarely a good thing.  An offensive position the first time around can easily morph into a defensive posture. An accurate estimate of value and an effective selling process should minimize the time, energy and potential defocus and exposure which can all result in substantial costs to both the Shareholders and the Advisor.

APPENDIX

Valuation Accuracy
Valuation accuracy is critical to sellers in order to properly assess alternatives. Over the last 10 years LockeBridge’s understanding of key value drivers has resulted in extremely accurate estimates.

  • LockeBridge’s average valuation is 93.3% of the average offer price.
  • LockeBridge’s valuation ranges within +/-13.05% of the average offer price.

07 Dec
Increasing Economic Uncertainty & Valuation Volatility

Warning Signs Abound. Business Valuation Volatility is High.

December 2018Dear Colleagues and Business Owners:

We are concerned that mid-market valuations may soon be compromised and many business owners do not have the time to ride out a potential downturn.

The purpose of this memo is to share LockeBridge’s current perspective on the potential shift in economic trends and the impact such may have on middle-market business valuations

LockeBridge Economic Forecasting – Highly Accurate Track Record
In 2006 and 2007 LockeBridge published numerous articles, sent thousands of emails  and advised dozens of business owners of the impending economic crisis and resulting business devaluation, which subsequently put thousands of companies out of business.

Refer to Appendix below for select articles.

While we do not believe that we are heading into a major down cycle, we do believe that volatility is the highest it has been since the 2008 downturn and such volatility can cause significant buyer hesitation.  Over the past couple of years we again authored many articles and have advised small business owners, who do not have at least 5 years to sustain a cyclical downturn, to consider the sale of their business sooner rather than later.  One such LockeBridge authored article, which has received material attention, is titled “Business Value Decreases With Fed Rate Increases” and can be viewed at:
https://www.lockebridge.com/bus-value-decreases-with-fed-rate-increases.

BACKGROUND
The economy is starting to tilt. In fact, current macro-economic uncertainly is already repressing valuation multiples and creating buyer hesitation. J. Powell just this week announced that the Fed is on edge and closely watching leading economic indicators.  Powell indicated the Fed is now closer to a neutral interest rate policy and Jame Bullard, CEO of the  Federal Reserve Bank of St. Louis, stated that the Federal Reserve should consider pausing hiking interest rates at its December meeting to give itself more time to understand why financial markets have become so volatile.

This foregoing represents a dramatic change in tone from the Federal Reserve.  Mr. Powell noted the slow-down in forecasted car sales, which was evidenced by GM’s announced plant closings, as well as the dramatic slow-down in housing sales. The point is that after an unprecedented nine years of economic growth we are now facing signficant economic uncertainty. This uncertainty is further exacerbated by the tenuous Chinese/US trade issues.

To add further fuel to the file The U.S. Treasury yield curve just inverted for the first time in more than a decade. An inverted yield curve occurs when long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. The inverted yield curve has preceded the last seven recessions going back to the late 1960’s.

Curent Volatility Drivers
-Inverted Yield Curve
-China/U.S. Political Uncertainty
-Fed Policy Uncertainty
-Slow- Down in Housing Sales
-Slow-Down in Auto Sales

SHOULD I SELL OR SHOULD I HOLD
While we do not pretend to have a crystal ball regarding the future of the economy, one thing that most economists agree upon is that economic uncertainty is currently the highest it has been during this exceptionally long nine-year cycle. Considering this current economic volatility and warning signs it seems only prudent for business owners who have been contemplating a near term exit to seriously consider at least preparing for such a sale now.   

Stock Price Recovery Time (S&P 500)

As can be seen in the chart above, from 1950 – 2018 there have been 11 periods when the S&P 500 dropped from its previous all-time high. On average it took 2.7 years for stock prices to recover. That stated, it took an average of 7 years for stock prices to recover from the previous two drops.

The Take-Away
Those business owners that continue to postpone a potential sale should be prepared to hold the business through a potential downturn and/or period of cyclical volatility. History shows downturns can last as short as one-year, on average approximately three-years and as long as eight-years.

 

Note
To execute an effective selling process generally takes nine months to a year. Therefore, owners considering a sale need to project what their company will look like a year from the date one begins the exit process.


APPENDIX

 LOCKEBRIDGE ARTICLES PUBLISHED PRE-2008 CRASH

  1.  For What its Worth”,
    Walls & Ceilings Magazine, May 2006,
    https://www.wconline.com/articles/84852-for-what-it-s-worth

Article Synopsys
In this article LockeBridge is warning all business owners whose businesses are sensitive to the health of the housing market to seriously consider selling their business if they do not have an appetitive to ride out a potential down cycle in the industry, which can easily last for five years.

Article Extract
“Timing is everything.   A significant decline in the National Association of Home Builders’ Housing Market Index over the last five months indicates a continued slowing in the housing market.  There does seem to be a relatively high level of uncertainty in the industry, so if your time horizon is relatively short, less than five years, you may want to consider selling in the near future while merger and acquisition activity is still relatively strong and there is an abundance of money searching for good companies.”

 

  1. “Should I Sell or Should I Grow. How Will the Slowing Housing Market
    Effect the Value of Your Company?”, Walls & Ceiling Magazine, June 2006.

Article Synopsys
This article explains how macro-economic trends occurring in 2006 can dramatically negatively impact the enterprise value. Additionally, the article discusses common value deflators and how to minimize their impact on the business value.

Article Extract
“As I write this article on the 31st day of March, the Chairman of the Federal Reserve Board, Mr. Bernanke, presides over his first meeting of the Federal Open Market Committee, the group that sets interest rates. Today they announced that they are continuing the gradual interest rate-raising campaign. It was the 15th such increase since the Fed started tightening credit in June 2004. The prudent building supply company owner has to ask himself “at what point will rates hurt my business?

 The prime rate is at its highest since the spring of 2001. The National Association of Home Builders Market Index, a measure of builder sentiment, fell to 55 yesterday (see graph), the lowest figure since April 2003. At the same time, mortgage applications as measured by the Mortgage Bankers Association have fallen five out of the past seven weeks. These figures indicate a market slowdown. What does this mean to the value of your company?”

 

  1. Metal Industry Owners Face a Difficult Decision, Should I Sell or Should I Grow?”,
    Recycling Today Magazine, June 2006

Article Synopsys
This article explains how industry specific variables, relevant to the metal industry, such metal commodity prices, overseas shipments, etc., lead one to believe that valuations may have peaked and industry risk is high.  The article also provides pointers on how to mitigate such risk and ways to optimize valuation.

Article Extract
“As previously stated, the metals industry is at an all-time high. Where we go from here is anyone’s guess.  There does seem to be a relatively high level of uncertainty in the industry, so if your time horizon is relatively short, less than five years, you may want to consider selling in the near future while the industry dynamics are extremely positive and merger and acquisition activity is strong with an abundance of money searching for good companies.”

 

  1. “For Sale?  How have unprecedented metals prices affected the value of your company?”
    Recycling Today, August 2006, https://www.recyclingtoday.com/article/for-sale-/

Article Synopsys
This article emphasized that there is a high level of uncertainty in both the macro-economy and within the metal industry.  It urges Business Owners that are not prepared to own their company in a potentially highly volatile business environment to seriously consider selling. The article further discusses how best to prepare for a sale of their company.

Article Extract
The objective of this article is to ensure that readers understand that several considerations will affect their businesses’ values and to encourage prospective sellers to put as much effort into the selling process as they have into their companies’ operations. After all, the average selling process lasts about one year, but when executed correctly, it can yield as much as the total cumulative earnings that the owner has made over the life of his or her company.

  

  1. “Metal Industry Valuations”
    Recycling Today Magazine, October 2007

Article Synopsys
The author, Scott Waxler, is extremely sensitive to the historically high run up in metal prices and the implication on enterprise value for companies participating in the metal industry.  The article discusses valuation methods and how to account for metal price variability.

Article Extract
The unprecedented run up in base metal prices has necessitated the creation of alternate valuation techniques. Dynamically changing metal prices have resulted in a widening of valuation ranges for companies dealing with these commodities. Profit increases resulting from the increases in the underlying commodity price are not viewed as sustainable or controllable and therefore must be normalized.

02 Nov
Raising Capital & Equity Retention

We created the Value Plateau Model© (VPM), to better explain
the importance of timing the capital raise and tranched financing.

Today’s highly variable and unpredictable economy creates a large discrepancy in opinions about the future. As a result, valuation ranges are much wider than normal. It is not unusual for a company to attract a range of bids of plus or minus fifty percent as compared to a more typical plus or minus thirty percent range experienced during a more stable economy. No matter how strong your company’s performance or outlook, no company is totally insulated from macro- economic forces. In fact, the performance of most companies is highly dependent on the state of the economy including external factors such as Gross Domestic Output, Interest Rates, Balance of Trade, Consumer Sentiment and Consumer and Government Spending. This uncertainty has a significant impact on the capital raise process. Whether the raise is in the form of equity or debt or to fund early stage or mature company growth; capital’s worst enemy is the fear of uncertainty. So what can you as a business owner do? Don’t add unnecessary risk on top of the inordinate risk already existing in the  economy and your industry. Focus on tactics which reduce risk such as substantial proof of efficacy, well defined business plans and milestones, and limit the amount of capital per raise while increasing the frequency.

Startup Equity Capital
For early stage companies seeking to raise equity capital, the principal variables are: Timing, Amount of the Raise and Credibility/Validity of the Business Plan. Each of these variables are highly inter-related. The primary objective of the early-stage entrepreneur/founder during the capital raise process is to manage these issues effectively, in order to retain as much equity as possible. This is especially critical during the early stages where risk is high, value is low and many entrepreneurs are scrambling to raise much needed capital,  and in many instances even “survival” funding.

Timing, Credibility, Amount of Capital
No doubt that that timing of the capital raise, the amount of the raise and the credibility of the business plan are critical variables for both mature and early stage companies alike, however; for early stage companies that properly manage these variables it can mean the difference between retaining a majority of ownership versus next to nothing. Too many startup entrepreneurs have failed to manage the capital raise process effectively, only to be left with a small fraction of ownership by the time the company actually turns cash flow positive.

For startups there are several value plateaus during the lifecycle of the company. Obviously, the value of the startup increases as risk decreases and the business starts to achieve its major milestones or “value plateaus”. During the early stages, it is critical to identify these value plateaus. Each value plateau represents an increase in efficacy; an achievement which enhances the company’s probability of success. Timing the capital raise to be in concert with the value time line (see diagram below) is essential. This requires an extremely well thought out plan with crisp execution. It is essential to understand when and how much to raise at each plateau, and factor time-to-market into the equation. Since most early stage entrepreneurs view the capital raise process as a total defocus and “necessary evil” they want capital on the balance sheet as soon as possible. Therefore, the decision of delaying a capital raise until the next value plateau is always a sensitive trade off.

Timing the Raise
The Value Plateau Model (VPM)©.  When speaking with early stage entrepreneurs, I often refer to the Value Plateau Model© (VPM), which LockeBridge created to better explain the importance of timing the capital raise and tranched financing. The word tranche is derived from the French, meaning slice or portion. In the world of investing, it is used to describe a security, either debt or equity, that can be divided into smaller pieces and subsequently sold to investors.

Tranched financings, historically used in life science companies, has expanded into other industries.  Simply stated, for the entreprenuer, the principal benefit of tranching is a reduction in dilution or preservation of equity. Tranching is not for everybody, however.  This type of financing requires careful structuring and is unique to every company. More conservative entreprenuers, or those that may not have the highest level of confidence in achieving their interim milestones may opt to take the full amount of required capital upfront.  Word of caution; be very careful that you dont get caught in a corner by presenting an adversion to tranching.  Experienced investors can easily interpret such an adversion as a material weakness in your confidence.

To best illustrate the stages of the Value Plateau Model © (“VPM”), we will use terminology which generally relates to the lifecycle of a technology-based product, however; the same concept can be applied to any product or service.

 The Value Plateaus

A.  Idea Inception (Seed Financing)

The first activity which generates value is the inception of an idea. Financing at this level is made to support the founder’s exploration of the idea and is referred to as seed financing. Value at this stage depends upon several factors which include the incremental benefit the idea provides to the consumer, the amount of required investment, time-to-market, barriers to entry, total available market size, etc.  At idea inception, there is little or no proof of efficacy, therefore value is very low.  As such, unless the idea is superior, you can count on funding coming from your own pocket or those of family and/or friends (thus the term “family & friends money”).   Typical seed capital ranges between $50,000 – $250,000

B.  Alpha – Proof of Efficacy in the Lab

For newly developed products, the first test of efficacy is generally conducted in a laboratory setting and referred to as alpha testing.  Since there is a huge gap between lab testing and actual application of the idea in a real world environment, risk is still very high.  As with the prior step, unless the idea is a blockbuster, value will still be low.  The name of the game in this stage is to have highly documented, controlled testing.  At the end of this stage, a prototype may be developed.  The typical value for companies operating between the Proof of Efficacy and Beta stages,  which have product with attractive characteristics (i.e. relatively large total available market, defensible position, growing market, good projected ROI, etc.) falls in the $2 million range.  This $2M is just a general rule of thumb and can vary signficantly.   A  more accurate valuation methodology may be achieved by present valuing the expected free cash flow over the life of the company.  Of course, the forecast itself is generally the largest variable. So, to the extent the forecast lacks credibility the present value discounted cash flow method will not be favorable.  Typical discounts rates at this stage can be in excess of 70%. 1

C.  Beta

Beta generally involves controlled use of the product in a third party, real-world environment.  At each plateau there are varying levels of efficacy.  At the Beta stage the highest level of efficacy typically occurs when an operator, working in a production environment, is operating the product without assistance from the product engineering team. When this occurs, the product is typically running effectively enough for the Company to enter into production,  producing and shipping multiple systemsor componets to be used in the customers production environment.  At this point, efficacy is very high. The investors’ focus now shifts more to operating and marketing issues such as customers’ perceived value and the costs of manufacturing and pricing.  Although still pre-revenue, if milestones are being achieved on-time and on-budget the company’s enterprise value will have increased significantly.  Typical discounts rates applied at this stage are between 50% and 70% 1

D.  Production Stage (Series – A Financing)

At this stage, the company is filling orders for the product to be used in a production environment.   The company is not profitable but has an organization, a working product and some revenue.  At this stage, the investor is very focused on issues such as product reliability and perceived customer benefits.  Typical discounts rates applied at this stage range from 40% – 60%.1

 E.  Repeat Orders (Series – B Financing)

One might argue that Repeat Orders really belongs in the Production Stage, however; I believe that when a customer, especially a well recognized and respected industry player, places a follow-on order it represents substantial validation of both the product benefits and the economics.  After receiving several repeat orders from well-respected customers, product/technology efficacy begins to fade into the background.  The focus changes from “Does the product work?” to “Does the company work?”   Can the management of the company scale its operations while retaining its competitive advantage, servicing the customer needs, retaining its employees and maintain the critical operations required to be successful in the long run? Discount rates for Series – B financings typically range between 30% – 50%.1 

In an effort to add some persective to the discount rate guidance, investors or buyers of mature “nano-cap” (<$50M revenue) privately held companies with solid historical performance typically seek a return on their equity in the range of 20% – 25%, depending upon such factors as the current risk-free rate of return (typically measured by the 20-year treasury bill), industry risk and perceived company specific risk.

 

Final Words of Advice

As I compose this article, a few years after the crash of 2008, the idiom “cash is king” has rarely ever carried more weight.  There are a plethora of bargains out there if you’re the king.  With cash being so valuable, the competition vying for their share of the green, is tougher than ever.  So how is a startup going to get a piece of the action?  The onus is on the entrepreneur to drill down and focus on the validity of the idea, the timing of the raise and the required amount of capital.  Presentations that lack credibility, products which lack efficacy and companies which seem to require excess capital will be immediately rejected.

Some tips to consider

Think about what motivates the investor.  Lower his risk (derisk the offering) and raise his perceived return.   Consider creating a checklist that includes the most important capital raise criteria. The following may be included on your list:

    1. Large total available market
    2. High barriers to entry
    3. Growing market
    4. Razor – Razor blade (i.e. annuity component)
    5. Exceptional documentation and testing controls
    6. Substantial proof of  prduct and technology efficacy
    7. Well defined milestones
    8. Tranched capital raises
    9. Credible business plan

 

A Side Note

The other night, I happened to catch a movie based on the life of Robert Kearns, the professor turned inventor who masterminded the intermittent windshield wiper.  I squirmed in my chair as his invention was blatantly stolen out from under him.  Although his story had a somewhat satisfying ending, the point that stayed with me was that from the very beginning, he did not have the proper support structure in place to safeguard his interests.  Understanding how to maximize ownership of your ideas throughout the process of raising capital will ensure that as your invention gains traction and your company grows, so will your bank account.

 

 

  1. Sahlman, William A.,  A Method for Valuing High-Risk, Long-Term Investments, Harvard Business School, August 12, 2003
01 Nov
lockebridge sagacity inc
Private Company Recapitalization
lockebridge sagacity inc

Business owners can have the opportunity to sell a portion of their company
while still maintaining a significant, or even a majority, ownership stake.

A recapitalization is the process of exchanging one form of financing for another. For business owners wishing to take something off the table a recapitalization represents an alternative to the complete sale of a company. A recapitalization can provide the necessary capital for growth, achieve personal liquidity and diversify risk for owners wishing to sell less than 100% of their business.  It gives a business owner the opportunity to sell a portion of their company while still maintaining a significant, or even a majority, ownership stake. In essence the owner is able to create liquidity and diversify risk today, while setting the stage for a second “payday” down the road. These transactions enable our clients to partially cash out of their investment in the business and capitalize on the enormous amount of sweat equity they have put into their business over the years.

The original owner can continue as a partner and/or manager of the company, while the new partner and capital provider shares the business owner’s culture and vision for the future. Unlike some strategic acquirers who purchase with a view towards eliminating overhead redundancies, private equity firms prefer a more passive or board level involvement and a collaborative relationship with the existing owner and management. As partners, private equity firms are often able to introduce opportunities to the company that were not previously available and can provide significant experience in order to assist the company in growing to its next level.

For owners wishing to partially cashout the actual mechanics could be that the company issues stock to buy back debt, which had previously been provided by the owner for funding. In its simplest form the company may merely sell stock to a third-party investor.

Less common and understood is a leveraged recapitalization. If the owner desires to pass the business on to his/her children a leveraged recapitalization can be a very effective strategy to enable the owner to both take cash out of the business while at the same time making it affordable for children to obtain ownership. With a leveraged recapitalization, instead of issuing stock, the company may take on additional debt. The amount of debt available to the company depends upon both the assets available to collateralize the loan as well as the cash flow available to service it.

ADVANTAGES

Conventional Recapitalization

  • Can provide the capital for growth and achieve personal liquidity and risk diversification for the shareholders through a partial sale of the company’s equity to a passive institutional investor, while simultaneously refinancing (or “recapitalizing”) the company’s capital structure.
  • Represents an alternative to a complete sale, thereby enabling the shareholders to capitalize on future growth potential while utilizing third party investment capital.

 

 Leveraged Recapitalization

  • Enables retention of 100 percent of the company ownership.
  • Financing source is typically a conventional commercial bank which can act faster than a third-party equity investor.
  • Risk of a breach of confidentiality is much lower.

DISADVANTAGES

Conventional Recapitalization

  • There can be adverse tax consequences if preferred stocks are distributed through recapitalization. The company’s cash might get drained by preferred stock dividends.
  • If a business has been classified as an S corporation, it becomes difficult to do a recapitalization because such corporations cannot have more than one class of stock.

 

Leveraged Recapitalization

  • Personal guarantees will likely be required by the bank as security for the additional debt obtained. So, even though the business owner has taken cash out of the business, risk still remains with the personal guarantees.
  • There will be increased financial reporting required by mezzanine and senior debt providers.
  • Additional debt on a business will increase the stress on cash flows, since lenders will require sufficient cash to cover the debt servicing requirements. This can affect a company’s ability to grow.

 

IDEAL CANDIDATES

  • Privately owned companies which have solid management teams, healthy margins and stable cash flows, strong market and competitive positions, and attractive growth opportunities.
  • Owners willing to remain as the operating partner until executing a secondary sale of the owner’s remaining equity (typical 2 – 3 years, coterminous with employment agreement) to the financial partner or a sale, along with the financial partner, to a third-party purchaser.

“In essence the owner is able to create liquidity and risk diversification today,

while setting the stage for a second “payday” down the road.”

SUMMARY – MORE THAN SIMPLY SELLING YOUR BUSINESS

Liquidity
Business owners can realize significant personal and family liquidity by selling part of the business to a financial partner and extracting 70% – 80% or more of their company’s current value.

Diversification
Avoids the risks of having personal and family wealth tied to a single business enterprise and allows for prudent wealth diversification .

Upside
Entrepreneurs can participate in a “second bite of the apple” in 3 to 5 years by maintaining a meaningful ownership stake and aggressively growing the business, using the capital from the financial partner, thereby creating an opportunity for  significant additional wealth.

Management
Owners and existing management maintain operational control of the business. With new financial partners owners can focus on accelerating growth without exposing themselves to additional financial risk.

Partner
A well-capitalized partner with deep pockets and extensive business connections sets the stage for strong growth organically and/or through acquisitions.

* Note:
LockeBridge advises its clients on all exit options. Recapitalizations is just one of numerous potenial exit strategies.  It is critically important that the business owner(s) meet with the banker to discuss options which compliment their each shareholder’s personal objectives.

13 Sep
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