The Transition Companies

The Transition Companies News

Business owners, like most people, are in tune with the business news and the current economic situation. Many people gather news and form their views based on reports from major news sources like CNBC and the like. On an overall basis or a “global”, top line basis, the news is the news; that’s it.

It’s important to recognize that one cannot learn the nuances of a market from a 2 minute television segment. Markets are segmented and stratified and cannot be typified correctly with a broad stroke of the proverbial brush. For example, the real estate crisis and melt down that is reported has occurred to a much greater degree in Florida than in Texas. The Florida real estate market is in chaos while Texas is stable.

What does this mean to the owner of a privately-held company? News reports on the credit crisis and the steep decline in the merger and acquisition market are entirely correct- for the larger high end deals. The middle-markets and lower middle-markets, while affected, are still vibrant with profitable companies being sold at healthy values.

The reasons are multi-fold but usually center around the fact that larger transactions are more institutional in nature and lending at the high-end institutional level is slow. Lower middle-market transactions tend to be more private from a funding standpoint and buyers are willing to inject more equity, borrow less and be more creative from a deal structure standpoint.

What’s happening in the lower middle markets now?

Private Equity Groups (“PEG’s”) are still actively seeking acquisition opportunities; especially those with private sponsors or family trusts. PEG’s that depend on leverage through borrowing are less active but…

The current amount of PEG overhang- the difference between funds raised that need to be invested and actual investments/acquisitions is $400 billion. Private money is still looking for opportunities.

Stock for stock transactions have increased 9% for the trailing 3 months of May 2009 over 2008. This method of payment helps the buyer reserve cash and mitigates taxes for the seller.

Payment methods have also migrated driven by market conditions to include more owner financing and transaction structure. This provides for higher transaction value while permitting buyers to keep some cash reserves.

The breakout of different types of buyers active in this market has changed with private buyers (38% of activity L3M 5-31-09 compared with 21% L3M 5-31-08) more active than public buyers (35% similar time frame compared with 42%). Private money is seeking private opportunities rather than stomach the volatility of the stock market.

Interest rates remain low, for the moment, allowing buyers to grow by acquisition which is easier and more cost effective especially in a very competitive market.

Based on empirical data as of June 30, 2009 values of privately-held companies, based on offers for those companies in market, have not changed materially, if at all, in this market.

In summary, every situation is different. The key to remember is that the middle and lower middle markets are driven to a large degree by different factors. Buyers are seeking well performing privately-held companies while money is tending to come from more private sources than institutions. Selling a privately-held company is a process unlike the sale of shares in a publicly-traded company which is an event. Keep informed, plan and execute.

Note:

When’s the right time? You can always decline an offer but one may take 3 to 18 months to get. Remember the market often reacts regardless of personal timing. Preparing a privately-held company for market during the Summer months provides for a Fall launch. Owner’s can close a transaction in late 2009 or early 2010 and keep more of the sale proceeds prior to a Capital Gains tax increase which most experts believe is coming.