I often have found small business owners unaware of the myriad ways to sell all or a part of their business. In advising business owners, it is important to explore these options in order to create the best opportunities. Here are eight structures for sellers to consider when contemplating a sale of their business. There are more, but these are the most common ways for lower middle market companies to “exit”.
1. Sell to Strategic Buyer
Strategic buyers are companies already in your industry. The goals of a strategic buyer in acquiring your company can vary. For example, a strategic buyer may be able to institute cost cutting measures and consolidation to achieve greater EBITDA. A strategic buyer may be looking to expand geographically, add a product line, eliminate a competitor, add talent or “roll up” its industry. A strategic buyer usually, but always, pays the highest price, but most likely will restructure your company.
2. Sell to a Financial Buyer
Financial buyers can be individual investors or a firm with experience and capital, like a private equity firm, looking to buy a company, grow it and sell at a substantial profit. Financial buyers look for opportunities to acquire companies in which they can generate a substantial IRR before selling, usually in the 5-7 year timeframe. Here, typically debt is used in the financing of the deal and, often in smaller deals, the buyer is expected to take back a note to support the deal and assist in the financing.
3. Management Buyout (MBO)
An MBO is where a current manager (or a group of managers) of a business raise capital and arrange debt to acquire all or part of your company. Challenges include the ability of the group to raise the equity level required by the banks and the right mix of managers to acquire the firm.
4. Sell A Product Line or Division
This method and structure is often overlooked by business owners. Rather than sell your entire business, it may make sense to “peel off” a product line or division and sell it first. Owners may contemplate this approach when market conditions do not support a favorable sale of their entire business but growth capital is needed and debt is not available.
5. Recapitalization
In a “recap”, the company raises money (via debt or equity) and buys back shares from the owners of those shares. This method can be used to buy off a disgruntled (or troublesome) shareholder. Of course, the ability to use debt to effectuate a recap depends on strong EBITDA and the company’s ability to borrow additional funds from lending institutions.
6. License With An Option
Entering into license agreements with larger companies often can be a fruitful way to generate growth and an ultimate exit. This is a hybrid approach consisting of providing a larger company with (1) a license of your technology and (2) an option to purchase your company down the road. This approach is gaining in popularity, especially in the life sciences sector given the large risks associated with drug development and the like.
7. Private Placement of Equity for Family Owned Businesses
There are investment firms in the US which specialize in buying significant stakes in successful private or family owned firms. These firms link IRR to the achievement of financial goals and work in concert with you to grow the company with an eye toward selling the business within 3-7 years.
8. Initial Public Offering or Self-Registration
There are a few alternatives available in the public markets for middle-market firms to go public, including self-registration, reverse merger and, occasionally, initial public offerings. The benefit of these structures is increased liquidity for the remaining shares and cash for the shares sold. Business owners are wise to evaluate these alternatives carefully, making sure the future performance and growth of the company is projected to be strong and that the market can support the stock.

John Hallal is a Adjunct Lecturer at Babson Business School where he teaches Mergers & Acquisitions for Entrepreneurs, a business attorney and advisor to lower middle market business owners. http://www.accelerationlaw.com

By John Hallal
Partner, Accelerated Law Group

American business made steady advances after World War II. Even into the 1960s, many of the companies and oligopolies formed in the first two waves of mergers enjoyed household brand status. Moreover, mergers of retail companies, hotels, and even newspapers forged new strengths that led the new organizations to strong profits.

Although mergers continued throughout the 20th century, the period known as the third wave of mergers began about 1965 and lasted for about four years. One of the most interesting things about the third wave of mergers lies in the fact that in most cases, smaller firms targeted large companies during this time. Antitrust laws added difficulty for larger companies to snap up smaller ones, but these same laws allowed minor entities to use equity financing to expand their businesses.

During this period, companies began to venture into business lines completely unrelated to their own. In some cases, firms chose to acquire organizations deemed lucrative or emerging to diversify their assets and to smooth out bubbles or gaps in the industries’ profitability.

Many people remember the fourth wave of mergers because the event occurred globally and eliminated a number of well-known brands. Deregulation of a number of industries, combined with emergence from the U.S. economic recession of the late 1970s, resulted in mergers and acquisitions that included takeovers of underperforming business models, especially in such industries as airlines, pharmaceuticals, banking, and oil and gas.

The companies that emerged as dominant in the fourth wave operated under more successful models or in more profitable markets than their competitors. This wave ended in the early 1990s when the U.S. government enacted reforms for financial institutions and antitakeover laws.

The fifth wave of mergers occurred as a result of a stock market boom from 1992 to 2000, as well as globalization sparked in part by communications and deregulation of new industries. Most of these mergers took place in the telecommunications and banking industries and were financed by equity. When the “tech bubble” burst in 2000 and stock prices became uncertain, this wave ended.

Today, new funding mechanisms, as well as historical understanding of mergers and acquisitions, enable companies grounded in smart financial and operational modeling to access funding from banks, venture capital, and angel investor organizations. While the government requires banks to make loans based on proven financials and assets, these new funding mechanisms recognize the special requirements and potential of organizations that promise new solutions and improved delivery of existing products.

About the Author: An accomplished attorney with significant experience in mergers and acquisitions, John Hallal practices law in Boston as a Partner in Acceleration Law Group.

By John Hallal

While some people call for doom and gloom during an economic downturn, we can take some solace in the fact that the U.S. economy has always experienced cyclical changes. In many cases, a downturn has enforced adjustments due to particular industries or business models. Some of these modifications triggered mergers and acquisitions that paved the way for companies to expand their footprints or product lines and for others to gain access to capital to fund growth in their core markets.

The first wave of mergers as we know them today occurred between 1897 and 1904. During this span, monumental horizontal mergers solidified companies that held major market shares in such industries as telephone service, oil, railroads, and mining. By affirming brand recognition and creating a major network of consumers and suppliers, these companies effectively pushed their challengers out of business or allowed them to snap up rival firms. Companies formed in the first wave of mergers include AT&T, DuPont, and U.S. Steel, but more than 1,800 small companies united to form organizations capable of developing infrastructure that would allow emerging technologies and production to meet consumer demand.

A later economic slowdown reduced the efficiency of mergers. By the time of the Panic of 1904, which was spurred by concerns about the nation’s banking system, banks struggled and the public felt wary of what the media touted as “big business.” Companies simply lacked the financing to continue merging. Moreover, a 1904 antitrust decision by the U.S. Supreme Court permitted the prevention of anticompetitive mergers under the Sherman Act.

While building monopolies may have motivated the first wave of mergers, the second wave related to creating oligopolies. This movement, which occurred from approximately 1916 to 1929, featured companies in such industries as foods, petroleum, transportation, chemicals, and metals banding together to create economies of scale aimed at increasing production and exports. The federal government approved these mergers because of the businesses’ impact on the American cause in World War I and because of economic benefits.

The 1929 stock market crash ended the second wave of mergers. By the 1940s, government tax relief and economic improvement prompted new interest in mergers similar to those of the second wave.

About the Author: John Hallal enjoys a reputation as an expert in mergers and acquisitions. In addition to his work as a Partner in the Acceleration Law Group and as a Managing Partner at Network Blue, Inc., Mr. Hallal serves as an Adjunct Professor at Babson College, where he teaches a course in mergers and acquisitions.


Little League World Series

January 21, 2011

A baseball enthusiast, John Hallal currently serves as a Coach with the Andover Little League, in Massachusetts. Little League teams participate in competitions across the United States with the hope of reaching the championship tournament, called the Little League World Series. Before the start of the tournament in August, Little Leagues across the globe form All-Star teams to represent the league in a district tournament. Winning teams advance through divisional and regional rounds until each state crowns a champion. Due to their size and geographical diversity, large states, such as California and Texas, send two teams to the next qualifying round. State champions then compete in additional regional tournaments to determine which eight teams will compete in the Little League World Series, which is held in Williamsport, Pennsylvania.

The tournament itself contains 16 participants: 8 teams from the United States and 8 from other countries around the world. The competitors are split into the United States Bracket and the International Bracket. Both brackets contain two groups of four teams, which compete in a round robin format to determine a group winner and a runner-up. The first-place team from one pool plays the second-place finisher from the other pool in a bracket semi-final that precedes either the United States or International Final. The winners of these semi-final matches play each other to determine the best in each bracket, and then the International champion and the United States champion play in the Little League World Series Championship Game.

The all-time series between American and international teams is currently square at 32 victories apiece. California leads all states with six championships, followed closely by Connecticut, New Jersey, and Pennsylvania, which each have four. The Republic of China, also known as Taiwan, has experienced the most success out of all the international teams, capturing 17 total championships. A number of famous athletes have participated in the Little League World Series, including NFL quarterback Matt Cassell, MLB star Gary Sheffield, and 2004 MLB National League Rookie of the Year Jason Bay.