Dr. John H. Binkley Jr.

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Generational Group in 2020 – A Year of Diligence

December 7, 2020 By John Binkley

As we approach the end of 2020, it is fair to say this is a year that will live long in our memories.

The last 12 months have presented more than their fair share of challenges and hardships, not least due to the seismic impact of the COVID-19 pandemic. Yet, through this dark cloud were many rays of light in how people responded to the hurdles of 2020 – organizations adapted, innovated and evolved with the times, allowing them to thrive in unprecedented circumstances.

This has been especially true in the world of M&A, and for us at Generational Group. Like many companies, we had to shift to quickly learn how to close deals via Zoom! But despite the disruption, both our team and our industry bounced back and found success, leaving many optimistic about deal making prospects for 2021. In fact, we anticipate that when 2020 closes, our firm will have set another record for deals closing.

For me, this reaction to the rapidly altered landscape is underpinned by a key quality – diligence.

It is one of our core values at Generational Group, emphasizing the persistence, commitment and dedication of our associates to achieve the very best results for our clients in spite of the circumstances. Never has that been more apparent than during 2020.

As has become a tradition in recent years, I’d like to share with you a recap of what’s been happening with Generational Group in the last 12 months, and why I believe our response to this year’s events has placed us with a strong, positive outlook for the future.

Achieving in M&A

We’ve witnessed this first-hand at Generational Group: 3Q 2020 was our strongest quarter ever for number of deals closed, and with our NDA (non-disclosure agreement) requests up 44% this year (so far), we anticipate buyer demand to stay high for many months to come.

Following a temporary lull in activity in the immediate aftermath of the COVID-19 pandemic, the speed and strength of the M&A industry’s comeback was highly encouraging. Indeed, deal making activity in the second-half of 2020 has been at a record pace, and is expected to persist into the new year.

Back in April of this year, we reached a major M&A milestone when we closed our 900th transaction as an organization. And with the pace of activity in the latter half of 2020, we are already knocking on the door of 1,000 completed deals – an amazing landmark in middle market M&A.

This meant a great deal to me, although not for the number itself, but for what the number represents – over 900 business owners who we have helped to secure their financial legacy and make the most of life beyond their business.

The events of 2020 also fill me with confidence that we can and will build on our Refinitiv/Thomson M&A Rankings announced at the beginning of the year, where we were positioned #1 for transactions valued up to $25m, and #2 for transactions worth up to $100m.

With all signs pointing up for our team and the deal making landscape overall as we approach 2021, I look forward to seeing what more we can achieve in the coming months, and how we as a company can continue to go the extra mile for our clients.

Pursuing growth

In a similar vein, the challenges posed by this year’s events have not hindered our ambitions as a company to continue to expand, so we can realize our aspirations and provide the most comprehensive support for our clients.

With this in mind, we added another arm to the Generational Group in 2020 – Generational Consulting Group. Consisting of former CEOs, C-suite executives and seasoned management consultants with experience across all industries, GCG creates proven strategies and tactics to enhance the growth and performance of middle market companies, with the ultimate goal of building value in each business.

This step was fundamental in us being able to deliver a fully rounded experience for our clients – maximizing the capabilities of their businesses on the journey to eventually achieving an optimal exit.

As part of this, we were excited to announce in November that we had acquired Decker Transformation Advisors, with the goal of gaining from their expertise to further enhance the offering of GCG. Prior to joining us, DTA was dedicated to transforming middle market companies by developing data-driven strategic growth plans, building high performing teams, and propelling execution to dramatically increase value.

With the addition of the highly-experienced T.D. Decker on board as the President of GCG going forward, I see incredible potential in this branch of the Generational family tree.

The expansion does not stop there however, as earlier in the year Generational Group also introduced two new offices in Charlotte, NC and Kansas City, MO, led by Jack Sluiter and Andrew Byrd respectively.

Again, this demonstrates our unending ambition to better engage with business owners across the United States by establishing locations in prominent locations across the country.

Supporting success

As an enthusiastic golfer, it’s no surprise that one of my favorite developments from 2020 was Generational Group forging a sponsorship agreement with Harry Higgs, one of the most exciting up-and-coming names on the PGA Tour.

A Dallas resident and graduate of Southern Methodist University, like my son Ryan, Higgs has already attracted a big fan following in just his second year on the Tour.

In 2020 alone, Higgs became one of only 4 PGA Tour rookies to qualify for the BMW Championship, finishing 55th overall in the FedEx Cup standings. His run towards that event was highlighted by a second-place finish in The Bermuda Championship.

Higgs’ 2020-21 season has continued to highlight his potential. Another second-place finish at The Safeway Open was capped off by a walk-off Albatross, something only a handful of golfers can boast.

With many years on tour to look forward to, the whole team at Generational is excited to see what Higgs accomplishes this season and are rooting for him the whole way!

Giving back

One of the most fulfilling aspects of our work at Generational Group is how we can continue to support our community and incredible charities, no matter the obstacles the year throws our way.

In 2020, Generational was proud to be the title sponsor of multiple fundraising golf tournaments. This included a pair of Golf Galas in the final months of the year aimed at raising funds for Here’s Life Africa, and the work they do that impacts the lives of thousands of people in Africa every single year.

In November, we once again sponsored the annual Salute to the Troops tournament, celebrating our brave service men and women, and raising money for three outstanding Veterans foundations: Feherty’s Troops First Foundation, Defenders of Freedom, and Northern Texas PGA Hope.

Finally, adapting to the current landscape, The Dallas Jingle Bell Run returned in a virtual form for 2020. As the existing environment makes it impossible to celebrate the festive season together, this alternative approach still encourages everyone to get fit and raise money for two amazing organizations: Trinity Strand Trail and The Mavs Foundation.

The Jingle Bell Run will be running until December 17, so if you’d like to sign up or donate, visit the website: https://runsignup.com/Race/TX/Dallas/DallasJingleBellRun

Looking forward

I hope you enjoyed this trip down memory lane for myself and the team at Generational Group. 2020 has carried its share of struggles, but it has also inspired many stories of hope, perseverance and accomplishment.

I am immensely proud of what our team at Generational has been able to achieve this year amid a challenging landscape, and I would like to thank the exceptional commitment shown by each and every one of our associates. Without them, the high points of this year would never have been possible.

To conclude, I wish you a wonderful holiday season, with the best of health for you and your loved ones. Together, let’s look forward to more reasons to be optimistic in 2021.

Filed Under: John Binkley Tagged With: Generational Equity, Generational Group

You Must View Your Business as an Investment: Here’s Why…

November 10, 2020 By John Binkley

Business as an investment

I wanted to start this post off with a quick question: How many times have you heard someone refer to their business as “their baby”? Perhaps this is even something you do yourself.

Having supported many business owners on their exit journeys, I understand that a company is more than just the walls of a building, the people working for them or the products and services that power them. Businesses are built from countless hours of hard work, tons of sacrifices and an endless series of triumphs and set-backs. The emotions they inspire in their owners, workforces and customers are very real – particularly when the time comes to exit.

Of course, the strength of the emotions will depend on what people get out of their business. For some it’s a hobby. For others it’s a job. Some set out to change the world. Others want to secure their financial future. Many see their company as a reflection of themselves, or view it as a member of their family.

But, fundamentally, it’s important to view your company as an investment. And it’s important that you recognize it this way if you want to achieve an optimal return when you’re ready to exit…

The importance of your company as an investment

Unfortunately, far too many business owners in my experience don’t do the analysis that they need to view their company as an investment, and this can prove very problematic when they feel the time is right to sell.

Let’s say you look at your business as a job. This means you are likely looking at things from payroll to payroll and reacting to changes when necessary. As a result, you probably don’t have the time or inclination to consider strategy or plan for the long-term – which can prevent you from growing beyond this current dimension.

Alternatively, what if you view your business as a hobby? While it’s great to enjoy the work you do, if you don’t see it as any more than a getaway or pastime, you again probably won’t be paying too much attention to the future. You’ll be enjoying the here and now – something that can have negative consequences as the future draws closer and closer.

Finally, let’s consider someone who treats their business as an extension of themselves. They are probably more intently looking towards the future than the previous examples and making their business as strong and successful as possible. But they can’t imagine ever parting with their company one day.

They build their business around them. Everything goes through them, and the business could not function without them. But the fact remains that, one way or another, they will eventually part way with their company. And by making the organization wholly dependent on their presence, the owner has limited their chances of selling for the maximum value, as covered in this Generational Equity article on reducing owner dependency for business exits.

As so much of their time is tied into running and growing their business, they lose sight of the fact that they should be working towards getting a return for all the blood, sweat and tears they pour into this process.

When you buy shares on the stock market, your aim is to witness these grow in value and turn a profit on the other side, right? You should see your business in a similar way – you are guiding its growth in a bid to one day secure an offer that ensures your family’s long-term financial security and enables you to enjoy your next chapter.

Another essential reason you need to start seeing your business as an investment is because that is how buyers look at businesses, which is ultimately why business sellers should think like business buyers. A key factor in why M&A activity has picked up dramatically in the second half of 2020 following the initial shock surrounding COVID-19 is because buyers and investors always look at a company’s long-term future.

This is particularly true of private equity firms and family offices. They have persisted in making acquisitions because the length of times they intend to hold companies is very long. Most PE firms will hold an investment for 5-7 years before selling it on; family offices may intend to hold on to them forever.

Viewing your company as an investment is critical to getting inside the minds of business buyers. By keeping a close eye on your financials and how to positively influence these, by introducing growth strategies and tactics to minimize owner dependence, by having a clear strategy in place for the transition of ownership, you are removing the biggest obstacle in any buyer’s mind before making any investment – RISK.

How to achieve an investor’s mindset

Investor mindset

So, now you understand why it’s essential to ditch the “my business is my baby” mentality for one that clarifies it as an investment (and one of the biggest investments you can make), what can you do to reinforce this in how you approach running your company?

Here are four pieces of advice I can offer to help you maintain this mentality and demonstrate to prospective buyers that you are treating your business as the investment they see it as…

1. Take steps to protect and grow the wealth in your business

Consider the following questions for a moment:

  • What is the current value of my business?
  • Are there any major risk factors in my company that I haven’t yet addressed?
  • How does my business perform compared to our competitors?
  • Am I satisfied with the current performance of my company?
  • Is my business proceeding towards achieving my goals?

If you are unclear about the answers to these questions, it indicates that you could be doing more to defend and enhance the value of your company.

By addressing these areas, ideally with the help of professional strategic growth advisors, you will be taking strides to protect the wealth that you have accrued in your organization, and accelerating it to make your “investment” even more attractive to potential buyers and secure an optimal offer.

2. Focus on strengthening your management team

As noted earlier, thinking of your business as your baby or an extension of your own identity can be a slippery slope towards making it too dependent on you as the owner.

Not only does this put pressure on you to be everywhere in your company, but it waves a big red flag in front of prospective buyers – if the business’ success is largely due to your efforts, then they won’t be confident of it continuing to succeed when you depart.

Instead, focus on delegating responsibility to others in your management team, sharing responsibility and easing the burden on you. This will give buyers reassurance that your business will continue to thrive beyond your ownership, due to the performance of your team.

3. Foster your intangible assets

Imagine two companies – both working in the same industry, both based in the same city, both with comparable financials and growth projections. However, one is attracting premium offers, while the other is struggling to find a buyer. What is the reason?

The answer lies in their intangible assets, these are the elements that have a big bearing on company value, while not appearing on balance sheets. Part of treating your company as an investment is making sure these are evident to buyers, and how they set you apart from other targets in your industry.

Work closely with a professional M&A firm to determine exactly what intangible assets you hold, and what value they would offer particular buyers. From your systems and operations to your staff and intellectual property, having a strong grasp on these assets and how to make them stand out is essential to securing a premium offer.

4. Cement your exit strategy

Finally, ensure you have a documented exit strategy in place. This represents the goal of your investment, your roadmap for your transition to life after your business.

It is amazing how even to this day many business owners fail to fulfill this crucial step. Starting to plan your exit doesn’t mean you must exit right away. In fact, since the process is a journey, not an event, you are in no rush to close a deal.

A strategy is the difference between a business owner that HAS to sell, putting the power of the deal in the hands of the buyer, and a business owner that PLANs to sell, with a clear idea about what offer they need to provide for their future and how they intend on receiving it.

Getting help on your journey to exit

Exit journey advice

An important realization on your journey to a successful exit is that your business is, first and foremost, an investment. It may also be your passion, your job, your reason for getting out of bed in the morning – but above all else it is your vehicle towards total financial security, and you should never lose sight of that.

I hope this article has helped reinforce that point and introduced some food for thought on how you can always maintain this “investment-first” mentality.

To support you with this, I would highly recommend speaking to our folks at Generational Equity. Our experienced M&A associates are there at every step on your path to exit, from helping you create a comprehensive exit strategy and enhancing your business value, to guiding you through negotiations and managing emotions through this life-changing process.

Don’t just take my word for it, listen to what our clients say about the importance of exit planning:

  • The Importance of Developing a Planned Exit Strategy
  • The Importance of an Exit Strategy
  • Selling Your Business – Choosing a Trusted Partner

If you’d like to know more, contact our M&A professionals today.

Filed Under: John Binkley

Why Now is the Time to Focus on Your Succession Plan

August 10, 2020 By John Binkley

If 2020 has demonstrated one thing above all else, it is that we can never take things for granted.

Life can be unpredictable, and this means circumstances beyond our control – be it a personal matter like a death or divorce, or a worldwide incident like the COVID-19 outbreak – can dictate the future for individuals, families and businesses.

While it is impossible to predict the future, it is possible to prepare for it, which is where effective succession planning can reap rewards for business owners. In turbulent times such as this, the value of having a structured plan for life can help cut away the chaos and offer an advantageous layer of security.

Yet, research conducted by Wilmington Trust in 2017 revealed that 58% of business owners did not have a specified succession plan for their organization.

I hope that recent events have resulted in this percentage declining, but it demonstrates that many are risking the continued legacy of their business and the value of their exit by not preparing for the inevitability that they won’t be in charge forever.

With this in mind, I’d like to use this article to discuss the importance of succession planning, outline the unhelpful assumptions that some make regarding the future of their company, and what a well-thought-out plan should incorporate.

What is succession planning?

At its most fundamental level, succession planning outlines the necessary actions to ensure a business will continue when the owner is no longer involved in the day-to-day operations. But, in addition, it also can play a key role in protecting the equity owners have built into their business, and consequently maximize the return they receive for their years of hard work and investment in the organization.

It is a roadmap for your business beyond your guidance. As the team and I at Generational Equity have noted time and again, owner dependence can be a major red flag for prospective buyers or investors – the closer you are tied to the success of your business, the more concerned buyers will be about its prospects without you at the helm:

  • Are you primarily responsible for your relationships with clients or suppliers?
  • Have you dedicated time to building and training your management team?
  • Do you delegate key decisions?
  • Are your business processes documented and shared, or locked in your mind?

Among the core components of any successful succession plan are factors such as:

  • Hiring and developing an effective middle management team
  • Building decision-making processes that extend beyond the owner
  • Creating a client relations team
  • Constructing a long-term strategic plan for the business

These are among the core steps that you can take while still at the reins of your company to best prepare it for when you let go. Not only will this support long-term business continuity, but it will also indicate to potential buyers that your company is sustainable and can still thrive in your absence.

Where do people often go wrong with succession planning?

When I consider the issues that many business owners have surrounding succession planning, one word always comes to mind: assumptions. More precisely, it is owners assuming that one of these two scenarios will take place:

  1. The business will be taken over by their son, their daughter or another family member
  2. The business will be acquired by one of their employees

While I am not suggesting that in certain circumstances these aren’t appropriate or workable, making the assumption without some serious conversations or considerations can have disastrous consequences.

First, let’s consider passing on the business to your offspring. Rather than making the bold assumption that they would like to run the business when you’re ready to depart, have a conversation with them about this idea.

They may have aspirations in another business or industry altogether, and if they don’t have the desire to run your company, or only do so out of obligation rather than choice, this can put the future prospects of the business you’ve spent years developing in jeopardy.

Furthermore, you have to consider objectively if any of your family members have the necessary attributes to run a company. It’s one thing to take on a middle management position in the business to gain experience – actually managing an organization is an entirely different animal.

Not to mention the insult that key employees could feel if you hand the company over to your child, particularly if they had no connection to the business beforehand.

And what about financing the transaction? Most likely you will be required to provide a long term note on the business, requiring your offspring to reach key financial metrics, post-acquisition in order to buy you out over 3-5 years (or more). Do your kids have the ability to meet these financial requirements and do you have the faith that they can?

So, what about the prospect of selling to your employees? On the surface, this appears preferable – if you have trained a strong middle management team that understands your company inside-and-out, assigning one of them as your successor can support a seamless transition within the company.

However, this benefit can be outweighed by the financial burden this imposes on the departing owner. Most key employees won’t have the same buying power as a professional buyer or a private equity firm has available.

This means that you will either be selling your company for less than what it’s worth, which shouldn’t be considered based on the blood, sweat and tears you’ve poured into the company, or you will have to carry paper financing the deal over a 3-5-year period (or longer). This is risky because, if the business falters outside of your management, does this affect the value of your buyout?

Of course this is the same issue you face if you sell the business to family members: Is the capital available to cash you out or will you be on the hook for a long term loan where you have no control over the success of the business?

What should a well-executed succession plan include?

So, what steps should you take to develop a successful succession plan?

Most importantly, determine your personal financial needs going forward. You need to meet with your wealth management team and determine how much you need for the next phase of your life. If you are financially able to provide financing to your family members/key employees for a 3-5 year time frame, then great, closely examine those two options.

However, if you are not, then the best plan is to look for buyers outside of your family and internal team. As tough as that may be to face, we have found that in most situations, a professional external buyer, with the resources to both cash you out AND provide for the ongoing growth of the company (and your legacy) is really a far better option for you and your company, family, and associates.

Start now to secure your financial legacy

Hopefully this has given you a launching pad to think about the importance of succession planning with your business. As 2020 has demonstrated all too clearly, your company is too meaningful and valuable to leave its future up to chance, or at the mercy of circumstances beyond your control.

The key now is to start planning if you haven’t already – the earlier you can begin cementing the facets of your eventual departure and what comes next, whether you plan to exit next year or in the next decade, the more you will benefit in the long-run.

This is why I recommend that business owners who have no exit plans in place, attend a Generational growth and exit planning conference. We have designed these to provide valuable information to business owners about the key components of a successful exit and how to do so in a way that maximizes the return to you.

Until next time, I wish you nothing but the best for the months ahead as we continue to contend with these challenging times.

Filed Under: John Binkley Tagged With: Succession Planning

A New Dawn for Deal Making?

June 5, 2020 By John Binkley

Back in April, I was delighted to learn that our team at Generational Group had closed our 900th transaction in company history. At any time this would be considered a fantastic milestone to pass, and I am of course incredibly grateful to the continued hard work of our associates and the wonderful support of our clients.

For us, every one of these 900 (and counting) transactions represents a business owner that we have helped secure their financial legacy, so that they can reap the rewards of their investment into their company and enjoy life beyond business.

Yet, considering the life-altering circumstances of the last few months, this achievement has a whole different meaning to me. It demonstrated that, even in these times of hardship, where families, communities and businesses have been changed forever, the resilience and commitment of entrepreneurs continues to hold firm.

Of course, the COVID-19 pandemic has changed deal making at least temporarily, which I will explore in this article. But, it is the perseverance of the entrepreneurial spirit, particularly within the middle market, that gives me a great deal of confidence for life beyond this crisis.

Optimism for the Future of Middle Market M&A

In my previous article, I highlighted several reasons why I remain confident in the foundations of our economy and the bullishness of buyers in the face of this unprecedented challenge. And I’m happy to report that a couple of months later, nothing has dampened this feeling. If anything, it’s grown even stronger!

The robustness of our banking system continues to be a source of comfort in these hard times for individuals, families and businesses, with central banks offering reassurance that they will be introducing measures to stimulate economic growth and protect incomes.

But beyond that, I’m encouraged by the attitudes of middle market entrepreneurs and their prospects for M&A activity after this pandemic. A survey of SME owners conducted by Permanent Equity recently revealed some reassuring statistics, including:

  • 32% of owners surveyed said their companies’ revenue had remained stable or even expanded during the pandemic
  • 40% expect their revenue will be back to 2019 levels within 6 months of life returning to some form of normality
  • 76% believe their business will emerge from the COVID-19 crisis stronger than before

These are great signs for the resilience of the middle market, and indicates that these companies are not statically waiting for this all to blow over – they’re adapting to the “new normal” with changes like remote working and investments in technology, which will then benefit them once we have overcome this challenge.

That’s an attitude we’ve also taken at Generational, changing our practices to protect the health and wellbeing of our associates across the country while continuing to meet the needs of our clients in these unique circumstances. 

Because, particularly in the lower middle market, transactions are still moving forward. While the press will often focus on the decline in billion-dollar deals due to the uncertainty COVID-19 has caused, the timeline to deliver ROI for smaller deals is significantly longer, meaning there’s less risk associated. 

But how has deal making changed in the face of this new landscape? How could this affect a business owner’s approach to planning their exit?

Exit Planning in the COVID-19 Era

When discussing how COVID-19 has adjusted the deal making process, I think it’s vital to start with how we should determine a company’s value.

Regular readers of Generational Equity’s insights will likely be familiar with recasting. That is when a professional M&A firm will examine your financials to account for any one-time expenses that would not impact on its new owners. These can include:

  • Losses due to fire
  • Losses due to employee embezzlement
  • Other business disruptions beyond your control (floods, earthquakes, tsunamis)
  • Any of your compensation that was above fair market value
  • Travel and vacations for you and your family that the company expensed

This is a widely-accepted process and helps provide a more accurate picture of your company’s worth for a prospective owner. However, moving forward there will be another important element to include on this list: the loss of revenue or income as a result of COVID-19.

As Northern Trust reiterates in a recent article:

Moving forward, we expect the due diligence process to include questions that help buyers better understand the specific impact of COVID-19 on the business, and its general level of preparedness for a global pandemic.

By accounting for this unprecedented disruption when recasting your company, you can offset any concerns or doubts of buyers, and also increase the likelihood that you will maximize the value of your business sale. 

Furthermore, if you are able to adapt your financial forecasts to demonstrate why your business won’t be greatly impacted by COVID-19, this can give you a significant competitive edge among potential buyers. Remember, private equity firms are still sitting on upwards of $2 trillion in dry powder – this still needs to be invested, and means a well-prepared company can still secure a premium on their business.

This recognition of COVID-19’s impact on business operations has led to the expansion of EBITDA to EBITDAC:

  • Earnings
  • Before
  • Interest
  • Taxes
  • Depreciation
  • Amortization
  • Coronavirus

No, this isn’t a bad joke – it is a reflection of the sizable effect that COVID-19 has left on many businesses across numerous industries.

As well as the transformation COVID-19 has had on determining business valuations, it’s important to consider how deals will be structured. We’ve spoken at length in the past about earn-outs and their prevalence in deal making, but in this new environment, they are likely to become even more sought-after.

Again, Northern Trust emphasizes this point, saying:

We also expect to see buyers paying a greater portion of the purchase price in the form of an “earn-out.” We believe sellers who adjust their mindset, show a willingness to be more flexible on deal terms, and who recognize that the transaction process is going to take longer in this new environment are likely to be at a competitive advantage.

This reinforces the need to be supported during your exit planning by a professional M&A firm, because this will help prevent any earn-out from being too heavily weighted in favor of the buyer: the deal structure also needs to benefit you (the seller). 

The advice of an experienced M&A advisor will also give you a clearer picture of what deal structures are more beneficial than others. This could allow you to establish an earn-out structure that is actually more financially advantageous in the long-term than a more cut-and-dry transaction

Fundamentally, we are in challenging times when it comes to deal making and exit planning. Information seems to change every hour, and it is important that, as a seller, you are working with a true professional that has experience in closing deals no matter what the economic cycle and understands how to secure an optimal deal structure.

Maintaining Your Journey to Exit

I hope this has given you a greater understanding of how M&A activity is continuing to take place, and how deal making is evolving in order to meet the challenge. 

Even in these difficult circumstances, dealmakers across the U.S. are striving to help push deals over the line, including our diligent associates at Generational, and I believe this should reassure business owners about their prospects of exiting both now and when COVID-19 has passed us by.

Above all else, I hope you take away from this the value of being supported through your exit plans by an experienced firm that has managed clients through all kinds of economic cycles. In trying times such as these, it is that experience and expertise that will keep your exit plans on track and keep you on course to an effective, satisfying exit.

If you want to keep up with the latest trends and news related to the economy and its impact on your approach to exit planning, I’d recommend subscribing to Generational’s regularly updated insights.

Until next time, I’d like to wish you, your family and your business nothing but the best as we continue to manage and overcome this challenge.

Filed Under: John Binkley

COVID-19 & Focusing on the Future for Middle Market M&A

April 17, 2020 By John Binkley

COVID-19 Middle Market M&A

In a matter of weeks, COVID-19 has changed the world as we know it in unprecedented ways. From restrictions on travel and mobility, to employees globally working remotely to bypass the pandemic, life feels like it has been flipped upside-down.

The M&A industry has not been immune to this impact. COVID-19 has been at the heart of current economic uncertainty, and subsequently this has caused deal making activity to slow in the short-term. Fortunately, at Generational Group we have continued to safely press ahead with transactions even at this tumultuous time.

As a recent roundtable meeting hosted by Axial highlighted, many deals at the Letter of Intent (LOI) stage are either pushing forward with urgency, or left on ice for the time being. While right now it is impossible to predict how long these existing conditions will remain, I am optimistic that it is a challenge we as an industry will overcome, and return to a state of ‘business as usual’ in due course.

Here, I explore my reasons for staying positive in the face of this crisis, and why I expect the M&A landscape to return to its once-thriving state when we can put these circumstances behind us.

Our economic foundations remain strong

Firstly, while COVID-19 has unfortunately resulted in numerous businesses shuttering short-term and a steep rise in unemployment, the underlying fundamentals of our economy remain strong in the face of this extraordinary challenge.

This is different from the banking/financial crisis we endured in 2008. Corporate balance sheets remain strong, interest rates are staying low and there is capital available to support business growth and acquisitions. But perhaps most importantly of all, our banking system is stable and its reserves are well above Federal guidelines.

As a result, we can be confident that our economy will hold firm against this temporary pressure, and will over time return to a positive landscape for M&A acquisitions.

In addition, the launch of the $2 trillion CARES Act stimulus package has bolstered the prospects for businesses looking to retain and take care of their employees. By providing quick funds and relief for SMEs during this time of uncertainty, this will be critical in keeping companies operational and supporting their preparations for the recovery period.

Private equity is still sitting on a mountain of dry powder

As noted, there is undoubted turbulence in the M&A market right now, and this should be expected for a little while. However, we are still seeing substantial buyer interest in spite of these challenges, which is reinforced by the capital available to these groups.

Private equity firms are a prime example of a buyer group prepared for when the market stabilizes. As Bloomberg reports, they are sitting on a $2 trillion war-chest of dry powder, all of which can exclusively be devoted to M&A acquisitions and investments. This puts them in a strong position to actively pursue opportunities as we start to recover.

Furthermore, Bloomberg’s article also notes how companies in a variety of industries will likely prove extremely attractive prospects for business buyers on the other side of the COVID-19 crisis, due to these being largely unaffected from an economic growth standpoint.

Buyers are bullish about future acquisitions

Meanwhile, Pitchbook revealed that a recent survey conducted by Ernst & Young suggested that around 56% of executives actively plan to pursue acquisitions in the next 12 months, which, remarkably, is an increase from October’s figure of 52%.

This is excellent news for business owners considering their exit plans in this uncertain state of affairs, as this demonstrates that when the world starts returning to normal, we can expect a major uptick in deal activity. Companies who have managed these circumstances and dedicated time to planning their exit strategy stand to benefit the most from this.

Plus, this is especially true for lower middle market businesses, because as Pitchbook states:

“For now, many dealmakers are forgoing transformational mega-deals in favor of smaller, discounted acquisitions.”

While the short-term vision for M&A remains a difficult prospect as buyers and sellers seek out firmer footing, these findings fill me with confidence that there will be a flurry of activity and opportunities when there is greater clarity about this entire situation.

Use this time to perfect your exit strategy

Hopefully, this has helped you join me in believing that COVID-19 will present short-term challenges for M&A activity, but will not completely compromise the optimism both buyers and sellers entered 2020 with. 

While I recognize this can be difficult to visualize considering the present environment, there are reasons to be upbeat about the future of the industry – and with it, your prospects of achieving an optimal exit.

Right now, my advice to business owners is to dedicate time to exit planning, especially if this is something you’ve not commenced with already. This anticipated slowdown of deal activity in the short-term gives you the opportunity to consider your next steps and build a buyer-ready business to coincide with when the world starts its recovery.

Remember, it will take 90-120 days to complete the critical first step in your exit journey – an initial business evaluation. Starting early with your exit strategy puts you in a strong position to effectively market to buyers preparing for normalcy to resume, and will help you secure an offer that accurately reflects the value of your company.

Our team at Generational Group can support you throughout this journey, even during these challenging times. Our associates continue to operate at their typically high standards, working remotely to ensure their safety while we continue to communicate with clients digitally. These include virtual versions of our informative exit planning meetings, where our experienced advisors break down the steps to maximizing the sale of a company.

I’d urge anyone to get in touch with our team to get a head start on their exit plans while activity is on a temporary slowdown – I’ve never met someone who regretted beginning this process earlier than they needed to. 
Also, for more up-to-date information on how COVID-19 is affecting the M&A landscape – and what this means for prospective sellers – make sure you’re subscribed to Generational’s insights. With news fluctuating all the time on this topic, staying informed has never been more crucial.

Filed Under: John Binkley Tagged With: COVID-19, M&A

Managing the Difficulties of Due Diligence in M&A

February 10, 2020 By John Binkley

There’s no doubting that 2019 was a strong year for M&A activity.

Our team at Generational Group benefited from the strength of the current seller’s market, once again ranking #1 for deals closed worth up to $25 million, and #2 for deals up to $100 million. And more insights into this active year have been spotlighted in Deloitte’s U.S. M&A Trends 2020 report.

Taking insight from 1,000 executives across the U.S., Deloitte’s report presented several important points about the current M&A landscape and what we can expect moving forward, including:

  • 63% of respondents believe transaction activity will rise in 2020
  • Dealmakers are shifting their attention primarily to the domestic market due to concerns over trade instability
  • Corporations and private equity firms have access to record-setting capital reserves
  • Focus is changing from large (mega) deals and is more interested in deals within the middle market

All of these factors should give business owners contemplating their exit plans confidence that they can secure an optimal offer for their company in 2020. At the same time, it reminds us that this market won’t last forever, so it pays dividends to start planning while the market is still in favor of sellers.

Due Diligence Delays?

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But, the area of Deloitte’s report I’d like to focus on in this article is the insight they offered into due diligence. Their findings revealed that 47% of executives believe the due diligence process is now longer compared to five years ago.

According to Deloitte:

“Gartner says the average time to close an M&A deal has risen more than 30 percent in the past decade.” This development may be related to the greater complexity of deals, or it may be rooted in where we are, well into a long M&A cycle, which makes it harder to find good deals. Regulatory and policy uncertainties, along with information security concerns, may also play roles in extending the due diligence phase.

If you’ve never been through M&A due diligence before, in some ways I envy you. This is the 2-3 month period where prospective buyers meticulously assess a company that they’re interested in, to reassure them that:

  1. The information the seller presented to them in their Offering Memorandum was correct; and
  2. There is no great risk involved in acquiring/investing into the company in question.

Risk is a word buyers want to avoid in all circumstances. Due diligence is there to uncover and evaluate any areas where this is present. And, naturally, this means this is the period of the exit journey where negotiations are most likely to collapse for a variety of reasons.

The seller may become fatigued about the unceasing questions and discussions with the potential buyers. Or a buyer could find inconsistencies in their findings from the documentation they were provided by the seller, leading to a break down in trust.

In Deloitte’s report, they have highlighted that the increased complexity of deals and trying to juggle multiple buyers at once have caused the speed of this process to falter in recent years. But why exactly is due diligence such a marathon to contend with?

The Due Diligence Checklist

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When discussing due diligence, I’m always reminded of a long-established turn of phrase:

A deal isn’t really a deal until it falls apart at least twice!

At Generational Equity, navigating the potentially treacherous waters of due diligence is something we’ve become adept to over the years. While no two M&A transactions are alike, this experience is invaluable to anticipating what issues a prospective buyer may have and how to respond to these to keep a deal on track.

Still, without a clear understanding of where the typical 200-300 due diligence questions will come from, exiting business owners can easily find themselves at loggerheads with buyers.

Areas that will be interrogated during due diligence include:

  • General Company Information – what is your company all about?
  • Financial Matters – how healthy is your business financially?
  • Products & Services – what is your company’s offering?
  • Property – what property does your organization own or lease?
  • Customers & Revenue Streams – how diverse and wide is your customer base?
  • Technology & Intellectual Property – what tangible and intangible assets do you have rights to?
  • Strategic & Cultural Fits – are your strategies in line with the buyer?
  • Employee Information – what are the skills and overall quality of your existing team?
  • Material Contracts – what contracts and other commitments do your company hold?
  • Tax Matters – is your company at risk of litigation or liabilities related to tax?
  • Insurance Coverage – how protected is your company through its insurance?
  • Antitrust & Regulatory Issues – has your company been under investigation for any antitrust problems in the past?
  • Cybersecurity – does your business have robust IT defenses and support?
  • Environmental Factors – is your company’s impact on the environment positive or negative?

This is just an overview of what you can anticipate from due diligence, which makes it no wonder that this already exhaustive process has gotten longer and longer over the years. So, when you want to ensure your exit is as smooth and streamlined as possible, what steps can you take to minimize the time it takes to complete this task?

Ways to Streamline the Due Diligence Process

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Don’t mislead buyers in your documentation

First and foremost, be honest and accurate in the documentation you present your potential buyers.

While it is encouraged to recast your financials to provide a true reflection of your potential to buyers, flat out lying or subverting details is a real deal-breaker – buyers will find the discrepancies and call you out. This may lead to a loss in trust, resulting in a reduced offer from the buyer, or negotiations coming to a halt altogether.

Stay organized with documents and checklists

Collating and updating your core information in your Offering Memorandum is a painstaking process, but it saves a lot of time and headaches during due diligence.

If information is incomplete or missing, buyers won’t simply shrug and move on – they’ll do what they must to get a clear picture of your company. So starting early in collecting this data will likely reduce the time a buyer takes to understand your proposition.

Be prepared to answer and address risks

No matter how thoroughly and organized you have been in the build-up to this part of the exit process, due diligence will raise questions that you will need to answer about your company.

Preparation is everything at this stage of exiting a company – undergo internal checks to get a clearer idea of what queries your company might inspire, and identify any areas of risk so they can be addressed and remedied before potential buyers bring them to the table.

Work with a professional M&A firm

Finally and arguably most importantly, don’t go into the due diligence process alone. Our team at Generational Equity have estimated it can take at least 1,000 hours of your time to go from marketing your company to closing a transaction – much of it spent in due diligence.

Working with an M&A firm will mean you’re backed by people experienced in navigating this process, so you avoid any pitfalls, are kept focused during testing periods, and ensure any areas of risk are dealt with prior to buyers conducting their checks. It’s a tough road, but it’s easier to walk with someone alongside you.

In addition, the first phase in the Generational process is a thorough and complete evaluation of your business – a “mini” due diligence. This step is critical because we ferret out many issues that need to be addressed long before due diligence is started. This is one reason why we are one of the leading middle market M&A firms; buyers have confidence that when we bring them deals that we have done our own due diligence.

Approach Due Diligence with Confidence

As the due diligence process becomes more in-depth and comprehensive, knowing what to expect and having an experienced team by your side is crucial to making this difficult portion of the exit process as efficient and well-managed as possible.

Hopefully this has provided a deeper understanding so you can approach your exit with more assurance. If you’d like to learn more about what’s involved in due diligence, there are numerous articles on this topic in Generational Equity’s regularly updated insights.

Filed Under: John Binkley Tagged With: M&A

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