PRESENTED BY BLACK DIAMOND MERGERS & ACQUISITIONS
What’s Your Company Worth?
Black Diamond’s Managing Director, Christian Baldwin, explains how to determine the price
you can expect to receive from selling your business.
Hi Christian Baldwin here with Black Diamond Mergers and Acquisitions on the bank of the Boise River in Boise, Idaho this morning. I wanted to talk a little bit about “what’s your company worth”. We get that question all the time at Black Diamond because people want to know what they can expect to get if they sell their company for all the effort, hard work, and equity that they have invested over time. There are a couple different ways that you can go about valuing the business. One is more of the certified approach for trust or estate planning purposes. You might hire what is called a Certified Valuation Appraiser, otherwise known as a CVA. The CVA is a credential that some have in order to value businesses. This is an approach that you would use if you were going to need a bank appraisal, for example, on a business. A CVA will look at it and they will give you an idea of what the company’s worth; but it oftentimes does not take into account market conditions or “what are the most likely willing and able buyers in a given economic setting going to offer to purchase your company”. So, when some people say, “what’s my business worth?” if there’s not a bank reason for it or an estate planning purpose for it, most of the time they are really asking us “what do you think I can sell my business for?”. So, under that exercise we look at it three different ways. First of all, we are going to look at your balance sheet and look at the asset value of the company. The next thing we are going to do is called a Discount Cash Flow Analysis and these approaches are similar to what a CVA would do in their first two steps. The third thing that we do is the market analysis. It is important for a business owner to really understand what else is happening in their industry, what are other companies selling for that are a similar size and similar location, and other factors that may be similar to them. If you have a business that is in the healthcare sector, for example, or construction or whatever the case is – you want to know what the other businesses are selling for in those markets. That is where we spend a significant amount of the research, trying to figure out comparables that are similar in industry. Once you get your profitability, there is a whole mechanism and formula to do that and you can do it over the course of 12 months, 24 months, 36 months, last 12 months specifically instead of calendar year, or whatever the metrics are most suitable for that analysis, you take that and then you apply an industry multiple to that. They can range, of course, anywhere from three to ten or more depending on the size, industry, and scope of the of the business and what they do. Once you get those three metrics, again, that’s the asset value, the discount cash flow, and the transactional base, you can apply a blend or percentage to come to a range of expected valuation or expected offers from the buying market. Those are your main differences in terms of “what’s my business worth”. I wanted to just briefly recap those this morning. We hope you are doing well. If there is anything we can do for you at Black Diamond M & A, please let us know. Take care; see you next time!
Everything You Need to Know About Buying A Business
Everything You Need to Know About Buying A Business
During this recorded webinar you will learn valuable insights on the process of finding, financing, and acquiring a business.
Presented by Christian Baldwin, Managing Director.
Insurance - Important Part of the Deal Process
Hi, Christian Baldwin here again with Black Diamond Mergers and Acquisitions. Today I want to talk about insurance. Insurance, of course, is always important when we are working with a client to buy a business; but now it seems like it is even more important than it was before. We need more time on the deal process to make sure that the right insurance is acquired and for the best premium. It is because of Covid, unfortunately. Insurance carriers right now are having a hard time assessing potential future risk based on the environment that we are living in and it is impacting all different industries and all different kinds of insurance. For example, recently a transaction that we were working on required premium insurance (from the lender’s perspective) and that was not because of the specific deal we were working on necessarily. It was because more of a general question exists in the marketplace. That question is “What is the future default rate likely to be for American businesses moving forward if they were to fail based on, again, the Covid environment that we are now faced with?” I think this will hopefully be more of a short-term situation and once we find a vaccine and things level out over time it, in theory, would return back to normal. I know, supposedly, Congress is working on this with the insurance industry itself; but in the meantime, where does that leave you if you are going to buy a business? Well, you need to add an insurance expert to your deal team earlier on in the process than you might normally. So, this looks like probably at the start of due diligence an insurance person that you trust adding them to your team alongside your M & A advisor, your attorney, and your accountant to do first of all a thorough review of the existing policies. Those can be workers’ compensation, health care, general liability, property, and all the insurance policies that the business currently has. Depending on whether you are doing an asset or stock transaction there are some nuances when it comes to insurance but let’s say you’re doing an asset transaction. You are going to have to get new policies issued. There are some negotiations that are going to take place between your buying team and the insurance companies to make sure you have the right coverage. Previously, this was not that big of a deal because an existing business who had a good modifier, for example, on workers’ comp that was recognized. Now, the underwriting process with the carriers is going to take longer. You probably need four to six weeks to make sure that you can allow proper time to do this work and to make sure you are getting the right coverage for the right price. We have seen it in a number of deals recently and we are not insurance experts here at Black Diamond, but we do work with a number of them across the country. If you need a recommendation, we are happy to provide that. We hope everybody is well and safe out there. If there is anything we can do for you whether you’re looking to sell or buy a business, please reach out and let us know. Thanks, until next time!
“Benefits of Internships for Small Businesses”
Good morning! Christian Baldwin here with Black Diamond Mergers and Acquisitions. Today I want to talk to you about internships. It’s the first week of June and a couple of weeks ago most of our colleges had graduations. There are a lot of great students that just graduated but they have nowhere to go short-term because either they’re going to go to grad school in the fall or possibly they’re really seeking long-term employment but the problem is they haven’t been able to get a face-to-face interview given the pandemic; and most companies have been on somewhat of a hiring freeze short-term. So, this presents a challenge to them and also a great opportunity for small businesses across our country because there’s a great talent pool of individuals that either recently graduated or perhaps are between their junior and senior year and they’re going to be thinking about what are they going to do when they get out of school in 2021. Well, this is a good opportunity for you if you own a business to take advantage of some of this because you might find that you need some help in marketing or technology or finance, whatever the case may be, accounting even. There are some great students that would love to pitch in and help you out. We were fortunate to take advantage of this opportunity. We had a young man reach out to us through LinkedIn, actually, and request a summer internship. He’s going to go to law school in the fall and he said, “Look, I’ve got the summer on my hands. I would love to learn from you guys and be able to help out.” So, we actually set this up remotely. He doesn’t have to come into our office. A couple of things that you might take into consideration if you do decide to create an intern program. You can create an internship program for one. It doesn’t have to be a large-scale thing. You can just try it out and see how it goes. Make sure they report to one person and filter all the assignments through one person so he or she doesn’t get overwhelmed and they have somebody that they know they can go to with questions. Make sure it has a certain start and stop date because it’s not really fair one way or the other and it’s hard to hold someone accountable if they don’t know when the employment or the internship actually ends. Make sure that you’ve got everything set up correctly from the get-go. Now, if you use a remote situation and sometimes, right now with the social distancing rules and things like that you may have in your workplace, a remote situation could be best. That’s what we’re doing right now mainly because this gentleman lives out of state and it works for us; but you have to make sure that you don’t lose any skills or talent in translation. You want to make sure that you can provide the right rules for him to make sure that he’s not just giving the work output that you require but also that we’re giving him something that he’s going to be able to use for the rest of his career as he takes off on that launching pad. I wanted to just mention that because I think it’s a great opportunity for short-term productivity for companies that are out there that maybe aren’t sure if they want to hire for a specific position right now but they still need help getting work done. So, I would encourage you to look at either students that are still in school or recent college graduates that are sort of in limbo for the next few months. If there’s anything we can do for you, please let us know and I hope everybody is doing well!
“What to do with PPP Loans if You are about to Close a Deal?”
Managing Director, Christian Baldwin, discusses what business owners can do about their Paycheck Protection Program Loan if they are in the middle of selling their business. A topic new to mergers and acquisitions!
Hi Christian Baldwin here with Black Diamond Mergers and Acquisitions. Hope you guys are doing well out there today. I wanted to just touch briefly on something that has come up in three different deals recently and that’s something we’ve never seen before, so I wanted to give you some insight on it. It is the PPP loans that are out there and what to do with them if you’re in the middle of a transaction. Now all of a sudden, you’ve got a buyer that’s buying a company and the seller just received PPP funds. This is of course the Paycheck Protection Program that was issued by the federal government through the Treasury as a response to the Coronavirus. It’s a great opportunity for small businesses to receive this funding. The thought is that if you use it for payroll, rent, and utilities, all of it or most of it would be a forgivable loan. So, it’s a great avenue for a business owner to take advantage of. The question that we’re going to address right now: what do you do if you’re selling a company that now has a PPP Loan that you just got? Well here a couple of things to note. If it’s an asset transaction it probably won’t have any impact at all because the selling entity whether it’s an LLC or a corporation or whatever it is, they would have received the funds and the buyer in an asset transaction normally isn’t inheriting those liabilities, even if it’s short-term (unless you made some sort of exclusion in the deal for the buyer to acquire cash or some percentage of the cash on the balance sheet). If it’s an asset transaction, it’s probably not even going to come into play because the sellers receive the cash and they have the liability whether it’s forgiven or not – it still remains with them in an asset transaction. Now, let’s talk about a stock transaction: it’s a little bit different because let’s say that the seller just got a PPP loan and now their cash on their balance sheet has increased short-term for the eight-week period where you have to keep track of your expenses. That loan is currently a liability. It is not automatically forgiven the day that you receive the cash. So, if you’re closing a deal in between day one and at the end of the eight-week period you’ve got to think about this. For the sellers, the assets increased and there should be a liability on their balance sheet that matches it. If you transition the company in the middle of those two months and it’s a stock deal, then presumably the buyer would inherit both the cash and the liability. It would be their responsibility post-close to make sure, and the seller is probably going to have to help with this process, but to make sure that as much of that loan could be forgiven as possible. Once it’s forgiven then what you can do is take it off the balance sheet from a liabilities standpoint and convert it to miscellaneous income. It ends up being a wash when it’s forgiven but in the meantime it’s technically, in order for it to match on the balance sheet, you have to have the cash increase and the liabilities that match it. Something we’ve never seen before because it didn’t exist a few weeks ago but in the last few weeks we’ve seen it three times and everybody is asking “How do we handle this?”, “What do we do with it?” and that sort of thing. So hopefully there’s a few tips that can help you if that’s something that may come into play for a transaction. Hope you guys are staying well out there, and again, if there is anything, we can do for you let us know! Until next time.
“Impact of Coronavirus on M & A Activities”
Christian Baldwin, Managing Director, covers the impact of coronavirus on mergers & acquisitions activities and the opportunities available in the market.
Hope everybody’s doing well and staying safe today. Like many of you, I am working from home today. I was originally going to do this monthly video during our March Madness Watch Party last week which was going to be for friends and clients, and we were all excited about that. Then that got canceled. Then I was going to do this video on the ski slopes of Colorado but, as you can tell, I’m not there either. This week is actually spring break for our kids and that’s been canceled. The world’s a little bit different than it was a month ago but, nevertheless, we’re still moving forward and we’re working on the things that we were working on previously. I thought I would cover two things today just to let you guys know a little bit about the questions that I’m being asked. The first is what sort of impact has this Coronavirus had on deal flow that we see in the private sector; and then the second question that I’m getting a lot these days is what opportunities do I see because of the virus that are either current or, you know, short-term or long-term. I’ll cover both of those topics quickly. Our deal flow really has maintained its normal pace. However, deals that are either under contract, in due diligence, or ‘Letter of Intent’ phase all of those have been pushed two to four weeks right now because of two primary reasons. One, uncertainty in the market itself; but then secondly, some of the ancillary services that are required to get deals closed they just can’t travel. They have travel restrictions and things like that that have been in place for ten to fourteen days, that sort of thing. Those are a couple of reasons why things have slowed down but I still expect them all to get done. It’s just going to take a little bit more time than necessary or than normal, I guess. Secondly, what opportunities do I see? There are some really good short-term opportunities right now because good businesses need bridge loans or Mezzanine Loans to cover payroll and short-term obligations that they have. These are good businesses that have been impacted so their revenues are down short-term, but they will most certainly bounce back. These businesses are calling our office wanting to know if we can connect them and introduce them to private lenders. If you want to make a good return on a loan to a good business, they’re paying 10% to 15% interest on those types of loans. Please reach out to us. We can connect you with them and see if that’s something you might be interested in. Those good business owners are really the backbone of the United States economy. They’re weighing all their options. From the government options they’re trying to figure out to local banking options but private lenders, as well, is another thing they’re considering. That’s a short-term opportunity that’s out there for sure. Long-term I think there’s going to be some other opportunities in the next 90 days that come as a result of this. In general, sellers are going to be more motivated, buyers are going to be more cautious, but the smart buyers are going to take advantage of good opportunities. Right now, we’re seeing very industry specific things, such as hospitality, seeing a little bit of a decline in interest currently but technology is seeing a huge increase. Still a lot to learn as far as what’s going on economically. I do feel like things are going to bounce back rather quickly, honestly. Everything should get back on track, hopefully. Remember just focus on what you can control, keep your head down, and do the best you can. We will get through it like we always do. Let us know if we can help you in any way.
“Business Owners, Who Will buy Your Business"
Our Managing Director, Christian Baldwin, shares the different types of buyers available in the market today.
Hi, Christian Baldwin here with Black Diamond Mergers and Acquisitions. This week we’re actually on the road traveling to see a client and then going out to a mergers and acquisitions conference in Scottsdale. And really the majority of the attendees that are going to be at this conference are private equity groups. And it got me thinking: what types of buyers are in the market today for privately held companies? If you own a company in the United States, what does your buyer look like? If you begin to think about how you might exit one day and transition out of your business. Well, of course, you can go to an individual buyer and there are lots of those that are out there. You might even consider selling to an employee or a group of employees and that can be done with a private transaction or through an ESOP. Or you can go to the market and look at other types of buyers and break those down into two main categories: One, you might hear the term strategic buyer, which really is a fancy way of saying a larger company. So it could be a company that’s a competitor of yours or it can be somebody that you don’t really compete with, but maybe somebody that has an ancillary product or service that would really make a good target so that they can start to sell your product to their existing customer base. Those are some of the strategic buyers that you might find in the market. And then you have another group of buyers called financial buyers. Financial buyers can vary in different types and ranges and sizes, and we’ll talk about two of them here. One would be a family office or a group that’s managed by a team of sophisticated financial advisors to manage the money of a family or a group of families. That’s one group that might make a good investment and the other would be private equity groups. And since we’re going to meet with a bunch of them later this week just to get on their radar and vice versa to see what sort of deals that they want to look for and what deals we have to offer them. Private equity groups can be a good option for a company that wants to exit. And depending on the size and industry, they’ll typically want to hold that investment for five to seven years and then look to either add it onto an existing portfolio or platform of companies and then flip it out down the road. Or they might want to have a more of a long-term hold on it. What’s most important, usually, is the management of the company. And so, they might really want to retain you as the seller for an extended period of time, if not a manager that can really manage the company and help it grow post-close. So, when you consider all the different options that you have in the market, if you’re thinking about selling now or down the road, those are a few things to consider. If there’s anything we can do to help you as you consider your exit strategy and transition in how you take your company and hand it off to the next team or investor or whatever the case may be, please reach out to us. We’re happy to help and educate you any way we can.
“Bullets, Balloons, & Bear Hugs”
Managing Director, Christian Baldwin, covers some mergers and acquisitions terminology.
Christian Baldwin here with Black Diamond Mergers and Acquisitions. The other day I had this conversation with this guy, and it was kind of funny. I thought, you know what, sometimes in finance or mergers and acquisitions you need a translation to understand what’s actually being said. He says to me, “Hey, man, looks like you’ve got a really great “Big Ugly” on your hands. Do you have any offers on it?” I said, “Yes, actually we currently have four offers on it.” He said, “Well you can let the sellers know that I’m the “Big Daddy Godfather” here ready to give them a great big “Bear Hug”. All I need is a little more dry powder and maybe some seller financing. I’m thinking five annual bullets and a balloon. Then we can get the deal done.” So what is actually is he talking about? First of all he says, “Hey we’ve got a really nice “Big Ugly” on our hands.” What does that mean? Well, a “Big Ugly” is slang for a nice older company that has some value in it. That’s pretty easy. We have a nice older company that’s got a lot of value. Then he says that he is the “Big Daddy Godfather”. What does that mean? Well he’s basically kind of bragging and he’s saying that he is going to make an offer that is a really great one that the management team is going to absolutely love. He says that he wants to give him a great big “Bear Hug”. Well a great big “Bear Hug” in M & A is slang for offering more than the shares are worth. If the shares are worth $10 million, he’s going to come in at some amount higher than that because he loves this company and it’s got a lot of inherent value and he’s going to overpay for it essentially. He’s saying, “I’m going to get in an offer here that’s going to be better than anybody else’s, it’s going to have a lot of value in it and plus it’s going to be worth more than the actual value of the company.” Then he says, well, he just needs a little more “dry powder”. I always laugh when I hear that because basically what that means is “I don’t have any money – really”. So dry powder is a term that’s used for money or capital and it’s a really fancy way of saying money. Dry powder. If I need more “dry powder” I’m really telling you that I really don’t have any money. He’s saying that he wants to make this great offer on this great company, but he doesn’t have any money. Therefore, he’s going to ask the sellers to do a huge carry back on it and he wants five bullet payments with a balloon at the end. Just a hypothetical example here on that part of the conversation. If you had a principal loan of $5 million dollars, half a million dollar bullet payments at the end of every year, 5% annual rate, your bullet payments will be half a million a year and your leftover payment at the end of that five year term would be $2.5 million dollars. That’s your balloon. Your balloon is whatever is left at maturity. Your bullet payments are one time, usually annual payments, along the way before you get to maturity. Anyway, pretty funny conversation, I thought, here’s a guy that really wants to buy a great company but he has no money and he’s going to ask the sellers to carry back most of it not all of it. I hope you’re staying well. If there’s anything we can do to help you, please let us know!
“Capital for Growth”
Our Managing Director, Christian Baldwin, shares the different capital options available in the market today.
Today I’m in the office and I thought we’d talk about something that is a little bit basic to mergers and acquisitions, but it’s a question we get pretty often believe it or not. And it has to do with, if you own a company, what are some of your options for getting capital for growth before you want to exit? We’re going to talk about two of those options today. Let’s take an example of a company, we’re going to call it “ABC, LLC”, and inside of this company we have two owners. Okay, we’ve got an owner. We’ll call her Jane. Jane owns 60%, and she has a business partner, Bob. He owns 40%. So if their plan is to go get some money for a growth program so that they can increase the value of their company long-term, one of the things they can do is they can look at valuing their company today and then going and finding a third partner that will invest with them in their company. So just some terminology, our ownership or equity in our LLC here is really termed a “membership unit” or “membership units”. If we were dealing with a corporation then this would be equivalent to “shares” or “shareholders”. Let’s say that they want to go get $2 million for their growth program. Their need is going to be $2 million. They come together and say, “Okay, look, let’s each give 10% of our membership units to someone else.” Then someone else comes in and they bring the $2 million for the growth program. Then Jane would go from 60% to 50%. Bob, his ownership would drop to 30%. Then they’ve got a new person that will end up with the other 20%. So, for 20% I’m investing $2 million into this private LLC. Then they go through their plan. Hopefully the business grows and it’s worth more money. Then they can sell it at a higher valuation when they’re ready to exit, all three of them. That’s option one. The second option is a more traditional route. If Jane and Bob get together and they say, “Look, we really don’t want to give up 10% each because we think that the company can be worth a whole lot more down the road,” then our second option is going to be more of a pure debt instrument or, you know, really a loan. Of course, you can go to the commercial bank and if you have enough assets on your balance sheet and your cash flow is strong enough then a bank will give you a loan for that and you would work the traditional banking mechanism and you don’t give up any membership units for that. The second option compared to a commercial bank loan is going to be a Mezz Loan. A Mezz Loan can be a good tool for business owners short-term because even though you might pay a higher interest rate sometimes, we’ll see deals that are going to be anywhere in the 11% to 15% rate. It can be interest only for a short period of time. For interest only you can get this capital that you need to grow the company and then you can pay it off when you’ve met certain objectives and you’re not giving up any equity. The trade-off is a little bit higher interest rate, but you keep your ownership and then when you’re ready to exit you’ll have more of that share back in your own pocket. A couple of options there just to throw out. If there’s anything we can do for you, please reach out and let us know.