Learning in the 21st Century - Acquisitions in e-learning

The U.S. e-learning industry is recovering from lackluster growth during the economic downturn. However, as the industry stabilizes, growth is anticipated to occur across multiple market segments, which include K-12, and post-secondary education. According to Ambient Insight, U.S. demand for self-paced e-learning products and services is growing by a five-year compound annual growth rate of 7.4%, with revenues projected to reach $23.8 billion by 2014.

Corporate buyers were early adopters of e-learning products and services, and a substantial portion of revenue is still concentrated in this segment. This is a market segment where real growth is likely, because companies have taken to web-based training, which is more cost-effective than conventional classroom training. This is especially important for companies with offshore facilities, for example. New employees can learn the processes and techniques of a particular company through company sponsored e-learning programs, and more importantly, this enables the employer to effectively assimilate new employees more quickly and lower cost. Small businesses benefit as well, because they too now have access to high-level insight that was previously only available to companies with voluminous budgets. Corporations in the near-term to medium-term will continue to focus on their core operations to decrease costs, and as such, integrate e-learning into their training programs.

Broad-based growth in the K-12 education market is due almost exclusively to the move from traditional formats to online content formats, and an increasing array of available products and services. Moreover, e-learning is becoming more prevalent in the K-12 education market, as it already has a strong presence in the corporate market. Industry projections indicate that earnings will continue to increase for companies in the K-12 e-learning education market, as the current administration aims to substantially increase funding for education over the next several years. Furthermore, Department of Education funding has increased nearly five-times in the 30 years since its creation. Most importantly, there are 58 million public, private, and home-schooled students, according to the national Center for Education Statistics, which provides a basis for meaningful long-term growth projections.

The post-secondary e-learning education market has also benefited from the migration to online content formats, and we have seen, in that market, the success and proliferation of for-profit online schools. E-learning has traditionally been associated with for-profit career colleges, although that is changing somewhat, as historically not-for-profit universities have incorporated e-learning into their host of curriculum offerings to meet the demand for greater flexibility, and to respond to the changing demographics of their students. As post-secondary enrollment continues to increase, online degree programs have become popular alternatives to the traditional brick and mortar education.

The e-learning industry is fragmented, and consolidation is expected to occur in the near to medium-term. Additionally, companies that have an appealing product niche, or have a blue chip distribution and customer base, are especially attractive to investors. Companies with some of these characteristics are highly sought after across all buyer segments.

Below is a sample of some recent transactions in the e-learning industry:

• K12, Inc., a provider of proprietary curriculum and online school programs for K-12 students, acquired KC Distance Learning, Inc., a provider of distance learning programs for middle and high school students


• A consortium of private equity firms, Berkshire Partners, Advent International, and Bain Capital, acquired SkillSoft, a provider of e-learning and performance support solutions for global enterprises, government, education, and small to medium sized businesses


• Eleutian Technology, a provider of online English language instruction to K-12 public and private school students, and business executives in South Korea, Japan, and China, received growth equity financing from Cheyenne Capital, a private equity firm


• Thomas Bravo, LLC, a private equity firm, acquired PLATO Learning, Inc., a provider of computer-based and e-learning instruction for kindergarten through adult learners


• The Riverside Company, a private equity firm, acquired ProSchools, Inc., an online real estate training school


• Reed Hastings, an education philanthropist and Chief Executive Officer of Netflix, Inc., partnered with the Charter Fund, a non-profit venture capital firm, to acquire DreamBox Learning, a web-based provider of individually-based, learning programs


• International Education Corporation, a provider of practitioner focused post-secondary career education in the U.S., acquired MCed Career College, and accredited online post-secondary institution, which offers career-focused programs in the areas of healthcare, business, legal, and information technology.

The overall environment is ripe for sellers in the e-learning industry, for the following reasons:

• Today, the average individual in the U.S. is expected to participate in three to four different industries, with three to four different career educational requirements, and the likelihood for new career paths means the likely need for new career training


• As manufacturing shrinks in the U.S., service businesses, such as online educational providers, become more attractive, and viable, to the wealth of equity firms in the marketplace


• Private equity firms are infused with cash, and they are in need of finding investment opportunities, because of expiring time horizons


• In the next few years, as "baby boomers" seek to retire from their businesses, the number of companies for sale is expected to rise exponentially, and especially over the next five years, this change will shift the current "seller's market" to an environment far more advantageous to buyers


• Globalization and increasing technological innovation heightens public perception of, and the need for, increasing levels of education to successfully compete in the global economy

Our firm is enthused and excited about the e-learning industry, and we are in constant contact with excellent buyers in this segment.

Scott Sims, M&A Analyst
DouglasGroup.net

Douglas Group has authored:
"Ripe: Harvesting the Value of Your Business"
"Cashing In! Selling Your Company for Maximum Price"

Protecting Your Critical Assets - Acquistions within Security

Broad-based growth in the security industry will be a function of, and primarily driven by, elevated risks of crime, terrorism, and improving economy, and technological innovation. With that said, some markets will grow disproportionately. These markets include electronic security systems, private security services, and information security.

According to a study by The Freedonia Group, U.S. demand for electronic security systems will advance 8% annually through 2012. Access controls, including biometrics, will experience the greatest gains spurred by innovative developments, which decrease costs, while improving overall implementation and execution. Our research indicates that within this market, other segments will stand to benefit as well. These market segments include burglar and fire alarms, automotive security, closed-circuit television, and electronic article surveillance. All of these segments will benefit as the economy rebounds.

U.S. demand for private security services, according to Security Solutions, is expected to rise 5% annually through 2012. This is based in part on perceived risks of crime, and the fact that many local and state governments are facing budget shortfalls, which lowers expectations of public safety services. Security consulting, integrated systems, and guarding are expected to be among the fastest growing segments.

Interestingly, a number of security guard companies have improved their earnings over the course of the economic recession, as customers expanded their security detail to contend with the increase in crime during demanding economic times. Furthermore, as is the case with other types of outsourced services, commercial customers looking to focus on their core strengths, as well as decreased costs, are eliminating in-house security guards and instead seeking to contract security guard service companies to fill the void. There are a number of reputable private equity groups with investments in the security guard segment. This list includes the Audax Group, The Blackstone Group, Pegasus Capital Advisors, and Windpoint Partners.

A study by Research and Markets entitled, "Federal Information Security Market Forecast", projects demand for vendor-furnished information security products and services by the U.S. federal government to reach $10 billion by 2013. Well-funded cyber criminals, including cyber terrorists, data protection requirements, and Congressional scrutiny over the lack of secure systems will drive profitability. However, our understanding is that earnings will increase for not only government service providers, but across the information security market as a whole.

Below is a sample of some recent transactions in the security industry:

• Kratos Defense & Security Solutions, Inc., a National Defense, Information Technology, Assurance, and Security Solutions provider, acquired Gichner Holdings, Inc. a design, engineering, manufacturer, and integrator of tactical and other shelters, products, solutions, modular containers, subsystems, and support equipment for the U.S. military, its allies, and leading defense prime contractors.


• McAfee, Inc., a security technology company, acquired Trust Digital, a provider of mobile management and security software


• Trustwave, a provider of on-demand data security and payment card industry compliance management solutions, acquired Breach Security, a Web application firewall vendor


• GTCR, a private equity group, acquired Protection One, a provider of monitored security services


• Sentry Security, a provider of security solutions for homeowners and businesses, acquired Schaumburg Security services, a full-service alarm company


• ASG Security, an electronic security company, acquired Encompass, a provider of loss prevention, integrated, and convergent security solutions


• Universal Protection Service, a division of Universal Services of America and a provider of security services in the U.S., acquired ProGuard Security Services, Inc., a provider of security guard services.


• Symantec, a software company, acquired VeriSign, Inc., a provider of Internet infrastructure services

2010 may be a strong time for business owners in the security industry to contemplate sale. The industry is fragmented, and consolidation is expected to occur in the near to medium-term. Additionally, companies that have an appealing produce niche, or have a blue chip distribution and customer base, are attractive to investors. Companies with these characteristics are perceived as somewhat recession-resistant, and as such, are highly sought after.

The overall environment may be particularly ripe for sellers in the security industry, for the following reasons:

• Increased terrorism on a global scale heightens public perception of the importance of, and need for, security maintenance, which tends to be a relatively high priority, even in times of a weak economy.


• Currently, private equity funds are infused with cash, and they are in need of finding investment opportunities, because of expiring time horizons


• The capital gains rate is expected to increase at the start of 2011, eventually reaching around 24%, and sellers may benefit substantially by "beating" this rise in cost


• In the next few years, as "baby boomers" seek to retire from their businesses, the number of companies for sale is expected to rise exponentially, and especially over the next five years, this change will shift the current "seller's market" to an environment far more advantageous to buyers


• Finally, strategic buyers are actively acquiring smaller firms as part of their strategy for growth, which is especially pertinent in an economy that offers little prospect for organic expansion

Our firm is enthused and excited about the security industry, and we are in constant contact with excellent buyers in this segment.

Scott Sims, M&A Analyst
DouglasGroup.net

Douglas Group has authored:
"Ripe: Harvesting The Value of Your Business"
"Cashing In! Selling Your Company for Maximum Price"

The Power of Pets - Industry Acquisition Trends

There are few industries that expand regardless of economic cycles, but one such industry in current times seems to be the pet industry. In fact, total U.S. pet industry expenditures increased by 60% from 2001-2009. This was during a period when volatility was prevalent across many industries. Most analysts will hail the pet industry as either recession proof, or recession resistant. Regardless of your preferred definition, the fact remains that the pet industry is strong, and will continue to be so.

The pet industry is a notable segment of the U.S. economy. According to the 2009-2010 National Pet Owners Survey, 62% of U.S. households own a pet. The percentage of households with pets is expected to increase, as "baby-boomers" replace children with pets. The high rate of pet ownership, coupled with the growing trend towards pet humanization, which generally results in indulgent spending, almost assures steady industry-wide earnings growth well into the future.

Food is the highest grossing segment in the pet industry. The pet food recalls overshadowed the industry in 2007. This in turn compelled the Food and Drug Administration to create a Reportable Food Registry, which requires pet food companies to report occasions in which food has been tainted. There were a number of other recalls during the last two years as well, although these were on a relatively smaller scale.

As a result, product safety will be of the utmost importance to consumers for years to come. Interestingly, the term "natural" conjures up thoughts of safe and pure. As pet owners become more health conscious in order to improve their own quality of life, they are expected to become more inclined to closely monitor their pet's well being. According to Packaged Facts, the organic pet food segment's double-digit sales gains are expected to continue.

Although the economy is improving, business owners should still expect consumers in the short-term to be cognizant of the economy, and, as a result, look for value when purchasing pet products. It will be incumbent on companies to market products that are perceived as value enhancing.

Our research indicates that interest on the part of financial sponsors and strategic investors across all pet segments is elevated, especially now that confidence about the economy seems to be headed toward restoration. Recent acquisition activity provides a basis for this thesis. In addition to the deals listed below, we are aware of many private equity funds that are actively searching for acquisition opportunities across all pet segments, some of which include natural pet treats, holistic pet food, thermal pet products, branded pet products, and non-food pet products.

Below are some recent transactions:

• Procter & Gamble Company acquired Natura Pet Products, Inc., a Davis, CA private pet food business


• A subsidiary of Imperial Capital Group Ltd., a Canadian private equity fund, acquired Petra Pet, Inc. and Petra Vet, LLC, (also know as Beefeaters) a North Bergen, NJ developer, marketer, and distributor of dog treats and supplements


• Earthwhile Endeavors, a San Francisco, CA manufacturer of grooming products, acquired the SheaPet line of skin and coat care products from Scout Enterprises of Santa Cruz, CA


• Zuke's, a Durango, CO manufacturer of all natural pet treats, received an investment from Encore Consumer Capital, a San Francisco, CA private equity fund


• VCA Antech, a Los Angeles, CA operator of veterinary hospitals and veterinary clinical laboratories, and marketer and distributor of premium and therapeutic pet foods, signed a merger agreement with Pet DRx, a Brentwood, TN operator of animal hospitals

With the economy showing signs of life, now may be the time that business owners in the pet industry contemplate sale. Companies that have appealing product niche, or have a blue chip distribution and customer base, are attractive to investors. Companies with these characteristics, alongside earnings growth, are highly sought after.

The overall environment is ripe with opportunity for sellers, primarily for three reasons. First, private equity funds are infused with cash, and they are in need of finding investment opportunities because of expiring time horizons. Second, the capital gains tax is expected to increase at the start of 2011, eventually reaching around 25%. Lastly, at this point the number of investors looking for opportunities exceeds that of available companies for sale. However, this phenomenon is expected to exhibit signs of reversal in the next few years, as "baby boomers" are expected to crowd the market, and the number of companies for sale will exceed the number of investors looking for opportunities, which may ultimately have an adverse effect on value.

Scott Sims, M&A Analyst
DouglasGroup.net

Douglas Group has authored:
"Ripe: Harvesting The Value of Your Business"
"Cashing In! Selling Your Company for Maximum Price"

Sources:
http://www.americanpetproducts.org/press_industrytrends.asp
http://www.petfoodindustry.com/Columns/Market_Report/4163.html

Acquisitions: The Art of Buying Well

2010 may be an especially opportune time to solidify market position and really become a kingpin in your niche, by combining with the opposition. Combination with a significant competitor may be a bold and sometimes scary move, but it also is one of the fastest ways to build market share quickly, and can be an excellent mechanism to obtain special industry talent or capabilities.

Our firm is currently working with several outstanding middle market companies, which have thought about sale, but would like another year or two of recovery from the recent slump in the economy, before they make their move. Several of these strong performing mid-sized players have watched their competition grown thin and weaker over the past year. Their entrepreneurial sense of opportunity tingles with interest. Maybe, with the right moves today, they could soon be contemplating sale of an entity twice as big!

It is a prudent thought, in that by increasing focus through competitor acquisition, or, alternatively, solidifying your business foundation by disposing of unrelated business segments, you do, almost inevitably, enhance value.

In spite of the growing numbers of prospective buyers in today's business market, only a small percentage will actually succeed in buying, and buying well. Buying well means never having to say you're sorry. The object of the game is to look back on the acquisition 3-5 years later, with the ability to think, "Thank goodness we made that move".

The following short list highlights some of the most important elements to successful acquisition.

1. FOCUS YOUR SEARCH

Focus your search for acquisition candidates on the specific segments most appropriate to and most tailored to fit with the long term direction you seek.

It is frighteningly easy, in the secretive world of mergers and acquisitions today, to become aware of only a few opportunities -- which may be ill "fits" for your company. When you've decided to use acquisitions as a mechanism for growth, it's easy to find yourself with only a short list of possible targets. This is especially true for those who are inexperienced in the search process.

Plan to spend time and money to really research the prospects possible in your segment, who may consider sale. In reality, this is not a small thing. You may dedicate one top manager for the better part of a year, or you may spend $5-10k per month for 6 months or more to have qualified M&A professionals search the market for you. However, this is a small cost in total for making a truly great acquisition.

Also, if you find yourself with a choice between the ideal candidate at a slightly "too high" price, and a bargain-priced alternative that fits less well, do yourself the favor of leaning toward the perfect fit, even at a higher price. You will fare better in the long run, almost certainly. The successful acquisition is the one you look back on five years from now, and are pleased with. To achieve that, FOCUS your shopping efforts toward the ideal fit with your own long term growth strategies.

2. SEEK SYNERGY

The ideal acquisition candidate allows the combined resources of the two now merged companies to do better than either one could have done alone. That may mean capitalizing on the things you do really well, to expand and strengthen the acquired company to all new heights. That may mean shoring up your existing operation by acquiring new strengths that you know you need.

We recently sold a company which made an outstanding pet deodorizer product. Their roots were clearly in the pet market, and yet their product had the potential to fare well in every household product market in the US. We sold them to an organization which had a much broader distribution reach. The company is doing wonderfully with the new owner group, and the management team is valued and beloved. It's truly a 1+1=3 fit for the buyer.

3. MOVE QUICKLY AND QUIETLY

Sellers value confidentiality. They are skittish and very guarded about consideration of sale, and they do NOT tolerate slips of the tongue well. Rightfully, sellers have great concern about their key management staff becoming fearful of acquisition, or of key customers who might seek alternative or "back-up" supply sources.

The buyer who respects these concerns and who behaves accordingly, limiting access and information to only a small handful of management level staff, will have a much higher chance of consummating the transaction successfully.

Also, speed counts. Every seller worth acquiring has alternatives. If you move slowly or indecisively, you only encourage that seller to spend time and effort in developing those alternatives.

4. LISTEN TO THE SELLER

Every seller has unique concerns, personal and tailored to his own situation, which impact his view of alternative prospective buyers. One may be distraught about your future intentions regarding his key management staff. Another may be very tense about his personal future role in the company (either wanting ongoing involvement for a few years, or, alternatively, wanting freedom as quickly as possible post close.)

The more you listen to and HEAR such seller worries, and try to adapt your approach to allay those fears, the more likely it is that you will successfully close.

Our firm sells middle market companies. We have closed in excess of 100 transactions in the $10-200 million dollar size range. More than half of those transactions closed with a buyer who was NOT the highest bidder. In every case, they were close enough to the top to be competitive, but often the seller picks the buyer for reasons broader than only top dollar. Every seller wants a buyer who will keep his company strong, and who will be good to his valued people. Sellers also want to work forward with a suitor who they think they will actually FINISH with. (They don't want a false start, and they don't want to find themselves starting over on sale two months from now.)

Listening well to the seller's concerns and tailoring your proposal to make a good faith effort to address those concerns may well make the difference between winning the acquisition or not.

In contemplating acquisitions, timing is critical. Today can be a wonderful time to grow through acquisitions. Stressed competitors may sense potential for great relief by combining forces. Also, in these less than certain economic times, the strength added through effective business combinations can make a tremendous difference in your long-term viability and "staying power". Talented management additions can quickly shore up any weak spots, and reduce vulnerability.

Regardless of the reason for your acquisition desires, or your position as you search, the acquisition business is one with great dangers and great rewards. The best of the best will do it well, and will look back with a smile on 2010.


Deborah Douglas, Managing Director and Author
DouglasGroup.net

'Ripe: Harvesting The Value of Your Business'
'Cashing In! Selling Your Company for Maximum Price'

How To Build Your Company's Maximum Market Value

Business owners always want to know what makes a company sell-well and sell-quickly. It is a wise inquiry. When building an asset as significant as a privately-owned business, it’s prudent to have a basic understanding of what drives value throughout it’s development so market value, at any time, is maximized.

When we sit down with business owners, and coach them on sale-ability, we begin with the basics of wealth building for the privately held company. We share the key indicators, which set a company up for maximum value, and we guide them in areas where a redirection of focus may prove highly profitable.

The process begins with value-building, ahead of the time for sale.

• We often tell business owners we wish we could meet them 6 – 24 months before they are ready to sell so we can guide them through some basic strategies, which position them for top sale price when the time comes to sell. We conduct sale-ability analyses for these companies to outline the strengths, weaknesses, opportunities and threats that exist when going to market. With enough time, and awareness, many concerns are easily resolved while strengths and opportunities are developed and maximized. By the time the company approaches suitors they are highly attractive and substantially more valuable.


• It begins with understanding premium sale-ability and enhancing marketability. A business should be highly focused and ideally, a leader in its niche. Our firm once sold a company that manufactured both plastic components for snowmobiles while also producing anti-static packaging. Each individual core business was highly desirable and brought strong pricing offers but together the company was not as valuable as it might have been in either of the more focused segments. The seller could not easily separate the two companies. The result was a company worth less ‘together’ than two apart.


• An outside investor wants to see a second-tier management team in place that can effectively run the company, independent of ownership. The more dependent the company is on the owner, the less confidence a buyer has in the sustainability of success after the owner has left.


• Companies should evaluate customer dependency and work to ensure that no one customer holds a large share of total revenues or profits. Ideally, we recommend that companies target the building of a broad enough base of customers to ensure that no more than 20-25% of total revenues are held by a single customer.


• Roadblocks are often unintentionally created within a company making its sale difficult. Simply identifying and correcting these barriers prior to sale can significantly increase not only sale price but also the probability of the sale actually closing. Financial statements often need to be scrubbed and reorganized. Additionally, any intangible assets should be identified, assessed, and protected.


• In a family business, the role and value of working relatives needs to be assessed. A buyer wonders if these employees are critical to the company’s success or if they are easily replaced and, if so, at what cost. Relatives earning more than fair market value for their services, if they are expendable or replaceable, may actually mean that a buyer can make more after their replacement. Excessive compensation is justifiably added back to income, for valuation considerations. The roles and compensation structures, particularly as related to family in the business, need to be evaluated and considered.


• A unified owner objective is critical to quick and successful sale. An ownership team that is split on the desire to sell will spook buyers. Minority stockholder issues can also complicate purchases. Troubled partnerships will stir up indemnification concerns. Finally, complex family issues risk bogging down the process, sometimes rendering an otherwise valuable business worthless. By identifying these variables and working toward solutions, sale can move more quickly and result in a higher price.

Owners next take careful steps to attempt to quantify and evaluate the value they have created.

• Business value is a complex formula dependent upon many variables, often within the same industry. A buyer looks at more than total revenues or profitability to determine his valuation. In addition to sales and income, balance sheet is considered, overall market-demand, synergies within other business ventures, strength of the existing management team, stability of earnings, percentage of earnings on total revenues, short- and long-term growth opportunities, and overall level of additional capital investments required to meet growth goals. Sellers who have arbitrarily picked a selling price without fully understanding each of these variables almost always have unrealistic expectations of value.


• Additionally, buyers will evaluate purchase feasibility. They must understand cash flow adequacy, payback period, and their individual return-on-investment. In today’s economy, lending is another variable affecting the ease and speed of sale. Companies with strong, stable profits coupled with robust asset values and strong balance sheets most easily win financing.


• It’s also important to understand how industry-specific acquisition activity affects value. We tap into marketplace buzz and listen to what is being bought, by whom, why, and for how much. A well-positioned seller uses this information to strengthen its go-to-market approach and maximize selling terms.


• Sale price is not set by the seller but, if structured correctly, offered by the buyers. Additionally, it’s the existence of real competition, which drives up price: a simple outcome of the law of supply and demand.

As owners come closer to consideration of sale, they also need to really get some fundamental understanding of the selling process.

• It is extremely important to really understand the reasons behind selling. Many non-business owners wonder why anyone would ever consider selling a profitable and stable company. However, sellers have often created their success on the back of many personal sacrifices. Lost time with family, sleepless nights, long hours working, and limited social lives take their toll. There comes a time to cash-in on the hard work and enjoy the fruits of their dedication and investment. Sale is a means of protecting retirement security, reducing risk, and solidifying a family inheritance.


• One thing most business owners probably haven’t yet completely grasped is that market timing is extremely critical in determining when to sell. Often owners have never even considered selling value, until something occurs to force the idea upon them. Instead, they wait for their own pre-determined time to exit, like retirement at a specific expected age, before considering. However, these variables almost always miss market opportunity and can often result in a value that is 50% less, simply because ownership neglected to react when value was at its highest.


• Competition is the most important variable in achieving a top sale price. If the buyer doesn’t feel like he might all together lose the opportunity to buy, he will not have the motivation to push his price up to its highest point. As an example, several years ago we worked with a systems company in Kentucky who received a purchase offer of $10 million. They asked us to help increase the price but confided that, in the end, they wanted to sell to this original buyer. They agreed to let us court other buyers, nonetheless, and through the addition of raw buyer competition we increased the purchase price 4-fold. That original buyer paid $25 million cash at close and an additional $15 million in earn-out.


• It is critical that business owners considering sale understand the importance of a strong team to guide the process, which is complex, foreign, risky and even emotional. Although we highly recommend confidentiality from customers, vendors and employees whenever sale is considered, the CFO usually needs to be included in the internal efforts toward sale. A strong and experienced merger and acquisition advisory team, using an “investment banker”, will identify qualified buyers and build critical competition. Additionally, they’ll minimize risk, keep buyers interested and moving forward, and guide the entire process while coordinating details and other necessary professionals, such as attorneys and accountants.


• It’s not inexpensive to hire good seller representation but it almost always results in higher proceeds after sale. On an average sell-side engagement our firm spends at least 200-300 hours in the first month alone. A business owner will find it difficult, if not impossible, to emulate such dedication to the process. He must simultaneously run the company, and focus on keeping it strong and growing. Selling a company is never a “spare time” endeavor.

Business owners who grasp these basic understandings and refocus internal efforts, as needed, will profit handsomely when the time comes to take their company to market.

Danette Kohrs, Founding Partner / Principal Advisor
Trinity <^ Strategic Growth Solutions

Professional Profile

The Perfect Storm for Entrepreneurs on the Brink of Selling Off

The past year has been a splash of cold water for business owners and advisors forced to consider the maximization of their aggregate net wealth. Value preservation concerns are understandably high, especially for the massive swath of Baby Boomer Entrepreneurs who are nearing an age when divestiture is a pasture looking much greener than it did ten years ago.

“To pull…or not to pull…the trigger?”

Owners who may have described themselves as “fairly close” to consideration of exiting their business a few years ago, must now start worrying that if they don’t act sooner, they’ll have to wait far longer than they intended. Numerous sellers who were close to sale one to two years ago have waited primarily because a) their earnings were dropping – and they know you can’t sell a business for maximum price when earnings are off, b) they’re worried about lack of velocity of corporate buyers, due to lagging performance and thus greater need for caution to keep shareholders comfortable, and.or c) they heard about lack of credit, and worried about the impact that such tightening might have on buyers in the M&A marketplace.

All of these were legitimate concerns and good reasons for delay, then. However, as the market begins to open up a bit with perked up earnings streams and new credit alternatives, the extreme slow-down of the past two years probably will cause a burst of seller availability, and a far less seller-advantaged supply-and-demand mix in the marketplace than any we have experienced in the past 20 years. In short, the time to begin the process of selling, and beating the stampede to the marketplace, is right now.

The writing is on the wall ... right next to all those numbers

John Lewonetti, managing director of Pinnacle Equity Solutions, told the Boomer Market Advisor two years ago that the number of retiring business owners is expected to grow from 50,000 to 750,000 by 2009. That’s a 15 fold increase stemming from raw demographic numbers of Boomers that are likely to retire. Neil Shroff, managing Director for Orion Capital Group, conducted a survey in November of 2008 that validated this analysis with the finding that nearly half of business owners 55 years and older stated that they wanted to sell their businesses within the next three years. Additionally, the Exit Planning Institute says that over the next 15 years, eight million business owners are expected to exit their companies. All of this points to an enormous surge in business sale activity to come, and likely, new market dynamics that may have impact on owners wishing to sell over the next decade.

With a substantive surge in available sellers on the market, buyers can and will be more selective; probably buying at lower price points. Therefore, owners who are toying with the idea of selling within the next 5 years may find a significant advantage to moving earlier instead of later.

Granted, in some cases this is simply not an alternative due to depressed earnings. Higher profitability means higher multiples. Such higher multiples are then applied to the new higher base “cash flow” level, pricing may be substantially more. On the other hand, capital gains taxes are likely to increase over the coming years, so some loss from selling at a weaker moment, might be recouped by lower taxation for those who move now. Also, an earlier momentum has a greater probability of taking advantage of the lingering high demand, above existing supply of ready sellers.

For those owners operating profitably today, acceleration of potential timeframes for sale could mean enormous benefit. Great competition creates great selling prices, and professional seller representatives, poised to move quickly and with manpower and intensity of effort, can mean tremendous success within as little as a 6 month window for finding and reaching the “right” buyers.

What is needed is courage and honest evaluation. Here are a few key points that may help an entrepreneur and prospective seller assess his potential to make “fast moves” for company sale:

Earnings Sheet
Good earnings histories mean good multiples likely upon sale. Companies generating cash flows in the double digits, as a percentage of revenues, are hot stuff. Last year, companies with even 5% cash flow as a percentage of sales looked quite good. For the manufacturing company, strong pricing might range between 4.5 and 6 x cash flow. For the service company, pricing would typically be a little less – maybe averaging 3.5 to 5 times earnings. Larger companies generally command larger multiples, and smaller ones it more modest multiples. However, for any company, if the competition is tapped effectively, and the company is desirable, all such rules of thumb for pricing may fall quickly by the wayside, in favor of pure market-driven competitive pricing.

Asset Base
Companies with both a decent earning history, and a reasonably strong asset base, are today far more easily financed by prospective buyers. In recent times of financial caution, the “belt and suspenders” security of both cash flow capability and the back-up of solid asset base can make a tremendous difference in ready marketability and value.

Staff Beyond Principals
Businesses that have developed second tier staff that is able to run the company without intense owner oversight are far more valuable in the marketplace. Owners can begin to identify these attributes by honestly answering a few simple questions: Can the main executives (owner included) manage to take multiple week vacation trips while leaving the company under staff supervision? Are there only a handful of highly paid executives, without any other significant leadership roles in the company? Lack of critical owner dependency is a major sign of strong value, and conversely, a red flag for weaker value.

Business owners often wonder how they can identify the ideal time for their company to be truly ripe for sale. If they miss it, they miss the once-in-a-lifetime opportunity to create the consummate finale to decades of grueling hard work. Most owners have one chance—only one chance—to optimally cash in on that ripe moment. Perhaps the time to start honestly considering it is now, when owners have the option to sell on their own terms, instead of later, when decline forces their terms off the table.


Deborah Douglas, Managing Director and Author
DouglasGroup.net

'Ripe: Harvesting the Value of Your Business'
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Merger & Acquisition Hot Spots of Tomorrow

Our firm is in the business of selling businesses. We see, literally everyday, dozens of requests from would-be buyers, stipulating what it is they target for acquisition. The world of business marketability is changing, and the grand-slam home runs in the sale of businesses tomorrow will involve different segments, with different focal points, than the businesses sold 10 or 20 years ago.

We often are asked to predict "hot spots" in the marketplace of the future. We have chosen 10 of our favorites, which we highlight here as the businesses to develop and nurture, for optimum sale in the future.

#1. Health products and services- With the aging demographics around the world and the constantly evolving technical capabilities within healthcare, there will be an insatiable appetite for newer and better healthcare products and services, for years to come.

#2. Wellness-related products- Again, aging demographics play a part. Couple that with the worldwide trend toward natural health enhancement, and there is a very clear path to growth.

#3. Infrastructure maintenance and enhancement- The world population continues to rise, and for every developed nation the once satisfactory systems for water, power, sewer and roads are trending toward under maintenance and over use. The need for infrastructure enhancement will increase steadily over the coming decade.

#4. Public Safety- In an increasingly tumultuous worldwide environment, with terrorism on the climb, and natural disasters multiplying (global warming?), the perception of need for and value of innovative safety enhancements is steadily on the rise. For products ranging from airport security to emergency communications to computer virus combatance, to Iris-scanning devices -- safety related and emergency response mechanisms are perceived as critical and fundamental services needed.

#5. Alternative energy- Every nation in the world today is beginning to consider a very primal need to ensure availability and sustainability of energy for the future. Products to come will include products related to harvesting such energy, but will also go far beyond that - to innovations of every sort which will allow utilization of the newest sources in every power device in modern culture.

#6. Experiential marketing- With the explosion of information in today's world, it becomes even harder to capture the attention of consumers to sway them to consider a possible new direction. Marketing techniques must also evolve, to find new and more powerful mechanisms to reach and convince consumers to consider new products or services.

#7. Educational products, services, and training- As the world climbs to new heights in international competitive participation, with ever more distant providers intruding competitively on once "local" or "domestic" products, the importance of up to date and relevant educational opportunity takes on an ever more critical role for future work forces.

#8. Outdoor recreational and fitness products- The Gen-X generation in the US and in many developing nations has a far more self-oriented perspective on how time and resources should optimally be utilized. The shift toward value of personal time, combined with the trend toward valuing "natural" products and places, makes long-term likelihood of continued growth good for products and services that relate to enjoyment of nature and preservation of physical wellness.

#9. Outsourced services- As governmental regulations continue to increase in complexity, the potential to outsource certain services becomes increasingly desirable. From services ranging from basic employee outsourcing to records maintenance, logistics management, claims processing, retail POS systems, and more, outsourcing skilled expertise is increasingly economical and viable.

#10. Elder products, services, and facilities- As the baby-boomer generations age, life expectancies lengthen and birth rates decline, the mix of populations around the world lean toward aging. Such aging populations require eldercare facilities, new and enhanced service capabilities, and products designed to suit different needs. The number of catalogue products geared to "over 50" has multiplied by ten fold in the past 5 years. This demographic shift is expected to continue for at least the next 20 years, and will nurture providers accordingly.

All of these segments described above are areas we see acquisition targets increasingly growing toward. Though certainly not a comprehensive or all-encompassing list, the preceding are the "top ten" that we see growing in velocity of interest by buyers. Owners of businesses in these segments will inevitably see intense marketplace interest in potential acquisition of their businesses, for years to come, and will build an almost certain path to financial security for tomorrow.


Deborah Douglas, Managing Director and Author
DouglasGroup.net

'Ripe: Harvesting The Value of Your Business'
'Cashing In! Selling Your Company for Maximum Price'