By Bassem A. Mansour

Co-Chief Executive Officer, Resilience Capital Partners

Article for Smart Business Dealmakers

Negotiated deals – where an owner sells a business without going through an auction – have an undeserved reputation for generating lower prices. Superficially, it makes sense that sellers would get better value if there are multiple prospective buyers. Yet, negotiated or proprietary deals often can be a far more effective and efficient way of selling a company without sacrificing net returns.

Here are five reasons why a negotiated deal can make sense for companies looking to sell themselves.

• When time is of the essence, negotiated deals close faster. The streamlined process of negotiated deals means they can close much faster than those sold through auction, avoiding extensive duplicative due diligence by prospective bidders. Negotiated deals by definition involve buyers and sellers who are on the same page from the beginning, making the transaction process much smoother.

• Underperforming or distressed companies can find more flexible buyers through negotiated deals. While auctions may make sense for companies with superior profiles, underperforming companies or those that have business challenges (temporary or systemic) might benefit from selling to a buyer who is willing to work through those issues. Proprietary buyers tend to be more flexible in negotiations than auction buyers who prefer to buy problem-free properties.

• Sellers usually obtain similar prices whether through auctions or proprietary deals. It’s typically not true that proprietary buyers will low-ball sellers. In a world in which information about companies, their markets and their business prospects is readily available, valuations increasingly are transparent and efficient. Accordingly, buyers and sellers alike have a realistic understanding of what a company is worth. In many cases buyers are incented to pay a fair price to avoid the competitive process. Even in a negotiated transaction, most sellers will retain an investment banker to help streamline the process and keep buyers honest through the threat of an auction.

• Buyers of proprietary deals usually know exactly what they want. These deals result in less wasted time and expense and a greater likelihood of success. Acquirers in such transactions typically have predetermined boundaries in everything from the type of industry to potential deal-breakers to financial metrics such as revenue or EBITDA, meaning that fishing expeditions are rare and only serious deals are pursued.

• The proprietary deal process is less disruptive. An auction process can be highly unsettling. For one thing, it entails releasing large volumes of financial and operational information. Depending on the type of process, confidentiality clauses notwithstanding, sellers may need to be concerned with competitive elements as well as distractions to employees, customers and business partners. All of which may introduce significant uncertainty about the company’s future. This isn’t the case with all sale processes, but all risks should be considered.

If negotiated deals make so much sense, then why are they comparatively rare? Put simply, excessive seller expectations. Owners of companies frequently have an outsized view of their value. Proprietary buyers are usually the first in the door, and they are the ones who deliver the news about a company’s value. If the price is too low, the owner may pursue an auction. Often enough, they realize that the original offer was close to the mark, especially when all risks and costs are factored into the price.

By that point, however, the time and expense associated with launching into an auction process are so great that they may continue down that path rather than restarting the alternative. They would have done much better to approach a sale with more realistic expectations to begin with, realizing that – in today’s markets – no one is able to steal a company, and that a negotiated or proprietary deal may well be the best approach for them.

 

 

By Bassem A. Mansour

Co-Chief Executive Officer, Resilience Capital Partners

I will be speaking at the Center for Free Enterprise at the Cleveland Racquet Club at 7:30 AM on November 16, talking about private equity investing, discussing the industry’s outlook, prospects for investing and giving my views on what we at Resilience Capital Partners see coming down the road. If you’d like to join us, see the overview and link to RSVP below.

About the Event: 

The Center For Free Enterprise hosted another sold-out event to kick off a new season of programming last month. Our second event of the season will be November 16th, featuring Bassem Mansour of Resilience Capital Partners.

Earlier this year, Resilience Capital Partners was named Private Equity Firm of the Year at the 12th Annual Turnaround Awards. Now managing more than $650M in capital and investments in 16 portfolio companies, Bassem Mansour will talk to us about the industry, prospects for investing and his firm.

This complimentary event includes breakfast, Q&A, and networking opportunities. It begins at 7:30am on Friday, November 16th and ends at 8:50 am.

For more information and to RSVP click here.

By Bassem A. Mansour

Co-Chief Executive Officer, Resilience Capital Partners

Economists rightly celebrate the “creative destruction” of capitalism, the powers that result in the birth of new industries, new companies and even new ways of doing business. However, value isn’t generated just by creative destruction: Sometimes it can be generated through preservation, too – helping companies recover from special situations, adapt to paradigmatic changes or simply survive downturns in business or economic cycles.

I was reminded of this recently when I served on the “Turnaround Tools” panel at the 30^th annual meeting of the Turnaround Management Association, a professional community that works to save distressed businesses, help management survive existential crises and assist healthy companies in avoiding such situations. We were asked to talk about the tools of the turnaround trade, everything from cash flow, appraisal, and historical financial tools to liquidation and wind-down tools.

I and my fellow panelists – William Snyder of CR3 Partners, Brian Maloney of AlixPartners and Natasha Labovitz of Debevoise & Plimpton – each work in different aspects of private investing, and each of us brings very different perspectives to our work. William has participated in the restructuring of hundreds of companies over the past 40 years, Brian specializes in underperforming companies in corporate recovery situations and Natasha has represented debtors and creditors in and out of bankruptcy and in cross-border insolvencies.

Despite our different backgrounds, we all agreed that turning companies around creates real value – for business owners and shareholders, employees, customers and other stakeholders. But turnarounds won’t succeed without the right approach, and that means selecting the right toolbox of analytics, strategies and solutions.

When I and my colleagues at Resilience Capital Partners invest in distressed companies, we use sophisticated analytics to identify the needed changes in three key areas: Personnel; governance; and cash flow and finances. Without the right people, the right structure and the right financials, no distressed company can survive adversity, and even the strongest company can find itself in dire straits.

From identification of potential investments, to the due diligence phases, to pre-closing analyses to the post-closing, those seeking to help companies turn around their prospects need to be clear-eyed about their prospects and realistic about the likelihood of success. Sometimes, sadly, companies can’t survive, at least not in their present form. But there is nothing like helping people in a company that has encountered rough times meet the challenges they face and emerge even stronger than before. That’s the most satisfying aspect of our business.

By Bassem A. Mansour

Co-Chief Executive Officer, Resilience Capital Partners

Article for Smart Business Dealmakers

You’ve built your business for decades and are ready to retire. Maybe you’ve struck gold unexpectedly and want to cash in. Or, you’re the head of a family company, but your children aren’t interested in taking over. Whatever your reason, you’re considering selling or merging your company as a way to exit. What are the top seven questions you should ask yourself before making the decision?

1. Is my company in good order?

Inadequate management practices can make a company unattractive. Premium buyers do not want to pay for the privilege of cleaning up someone else’s mess. Uncollected accounts receivable, inaccurate inventory and poor financial recordkeeping also make it harder to value and market a company.

2.Who is my target — a buyer or a merger partner?

Are you open to merging with a strategic acquirer or a competitor; or selling to a private equity firm? Each of these affects the structure of the transaction, the company’s valuation, the associated risks and the approach to the deal. Identifying the target and your flexibility early on narrows the decision tree and makes the whole process easier.

3. Do I know what my company is really worth?

Emotional attachments, lack of market knowledge and other factors can skew your perspective on your company’s value. A business valuation specialist can help determine the right merger terms, which can maximize your return while also ensuring a faster transaction.

4. Am I willing to leave money on the table?

A fatal flaw of many entrepreneurs is trying to time the market. Market timing is for Wall Street traders, not middle-market business owners. Companies generate higher M&A multiples when the other side believes more growth is possible. It’s better to be willing to close the deal, even if you have not made the last nickel out of a company.

5. Can I be flexible on financing?

Increasingly, merger partners as well as buyers are asking for assistance with financing, including help with arranging loans, alternative types of collateral and seller financing for part or all of the price. If you can afford it and put in safeguards, seller financing can attract buyers who otherwise might be shut out. In a low-interest rate environment, seller financing can be attractive to a seller if the appropriate protections are afforded, when compared with the alternative market rates of return for cash proceeds.

6. Who will market my company?

Building a company and merging it are two different animals, if only because emotional attachments can make it difficult to maintain perspective. It’s often better to bring in professional advisers to market a company. Besides, investment bankers not only can find buyers, they also can generate better terms.

7. Am I willing to work for the buyer?

Many people become entrepreneurs because they want to work for themselves. It can be hard for them to work for someone else at a business they once owned by themselves — especially if it is a forced deal or a merger with a competitor. Yet a willingness to work during the transition can make the difference. Some private equity managers, for instance, won’t consider a company if the owner plans to walk out the door after the transaction.

By Bassem A. Mansour
Co-Chief Executive Officer, Resilience Capital Partners

Family-owned companies, especially those that have been in existence for decades and have engaged multiple generations of the family, often find that their growth has plateaued. This recognition can create opportunities – for them, and for prospective investors in the company, especially private equity firms and other institutions with resources, expertise and experience. New investors can help generate genuinely new value, and spark substantial growth.

There is tremendous potential in this distinctive sector of closely held companies, since many longtime family-owned companies are highly appealing. They frequently are well entrenched in their markets, have decades of success even during difficult times and have cycled through markets, always – by definition – surviving.

However, many of them have not really tried to address the kinds of opportunities new investment can bring to the table, such as operational excellence, meaningful acquisitions, new market entry or other ways to drive the business forward.

In some cases, the family does not have, or is not willing to invest, the capital required to take advantage of these opportunities. Sometimes, the owners simply are unwilling to re-risk the capital originally used to build the business in the first place.

New investors, such as private equity firms, have a different mentality of ownership and different perspectives on value creation than do such family-owned companies. For instance, many family companies look primarily, or even exclusively, at cash flow as their north star. Profitability is fundamental, cash is their measure of success and, if they have more cash on hand at the end of the year than at the beginning, it was a successful year.

Private equity firms care less about cash in the short term. Their main concern is growth in enterprise value. They are prepared to take a near-term hit on cash flow in order to maintain a strategic perspective, invest in the business, make acquisitions and take other measures to have a positive impact on a company’s medium- or long-term enterprise value.

The shift in mentality that new investment or institutional ownership can bring to legacy family companies can be seismic when it comes to value creation.

Of course, not all family companies are suitable for such a change. Some companies are what are called “lifestyle businesses.” Frequently located in the lower middle-market, they often have only a handful of customers, lack a unique or proprietary product or distinctive brand name and do not have a dominant position in their market. Often in the business of providing services, they generate cash to support their owners’ lifestyles, are resistant to change and are highly vulnerable to new market entrants, changes in consumer tastes or economic fluctuations.

Family-owned companies that have good potential for benefitting from new investment are not only the opposite by these standards but also have other distinctive qualities. Their business processes are sustainable and repeatable, they have a measure of underlying discipline and they already possess some enterprise value. In some cases, they may just have lost their way, with fatigued management, lack of access to investment capital, too much debt or a decline in discipline and accountability.

Such companies can benefit from new investment on a number of counts. The shift in focus away from cash flow can enable the company to make investments that increase enterprise value. It can put metrics in place to measure against, adopt operationally excellent practices, implement a forward-looking capital structure, become more transaction-oriented and bring in experienced outside talent, both to complement the management team and to bring new perspectives to the board.

These changes can immediately be accretive to performance, further professionalizing management, bringing a strategic approach and imposing operational discipline while opening the capital structure to expansion.

Family companies that previously did not have sufficient access to capital, or had an aversion to re-risking what assets they do possess, now might have the capacity to pursue growth opportunities such as acquisition opportunities. Moreover, private equity or other institutional ownership could benefit some family companies. Competitors that might have been averse to selling off units to a family-owned firm in the same space are more willing to deal with institutional owners, whom they see as less threatening.

Finally, family companies that have new investment are more able to avail themselves of organic growth opportunities. They are able to scale management in order to pursue growth in a way that is impossible in a more limited family company. The access to capital also is vital, enabling them to invest in themselves, make capital expenditures to build new facilities, invest in new product development or R&D, and hire the new staff they need for growth.

No matter what the experts say, nothing ever is truly guaranteed in business. However, one thing that comes close to a guarantee is the potential that new institutional investment can bring to a family-owned company. New resources, new perspectives and new ambitions can rejuvenate even the oldest of family companies, benefitting both the family and the new investors.

By Bassem Mansour

Private equity firms once were said to “buy ’em, strip ’em and flip ’em”: Acquire companies, drain their value and quickly sell off the remains. This was rarely ever the case, and today’s top private equity managers approach their investments with patience, financial support and a commitment to making changes that improve how their portfolio companies operate. This approach has benefits not only for fund managers and investors but also for companies, workers and communities. It’s the future of private equity, and it’s here now. Here are six rules that private equity managers are following to make a difference today.

1. Be Patient Investors

Private equity managers used to hold their investments for just a few years. That began to change during the financial crisis, when the average holding period for private equity investments rose from 3.3 years in 2008 to 6.1 years in 2014. Some, but not all, of that increased holding period came from funds’ inability to exit profitably from their investments: By 2016, despite an improving economy, holding periods still were 5.2 years.

For my firm, such patience has always been the rule: Our average holding period since 2001 has been about five years. Increasingly, it will be the rule for other managers. Operating in a low-yield, low-growth world, fund managers cannot expect economic growth alone to generate the type of enhanced value needed to make their portfolio companies attractive to buyers. Instead, they must proactively add that value, and that will take time and patience.

2. Add Structure

Privately held companies, especially those operated by founding entrepreneurs, often run up against the limits of the experience and intuition that brought their early success. Private equity managers can add value at such companies by putting in place robust structures. These include systematic processes and controls that can generate crucial insights that otherwise are not available.

Among the very first things we do in an investment is to implement meticulously designed reporting systems, with rigorously defined metrics and key performance indicators that can help a portfolio company’s leadership understand what really makes the business tick. In good times, such systems help identify ways to drive profitability. In bad times, they can provide an early warning system.

3. Provide Access to the Balance Sheet

Another way fund managers build their portfolio companies is by bringing critical strategic resources to the table, starting with access to financial capital. This means access to the balance sheet – capital for innovation, funding for research and development and money for market-shaping improvements such as entrée to new geographies, new talent, new equipment and new logistics.

Institutionalizing access to the balance sheet can provide a jump-start that portfolio companies desperately need, so we determine how much funding is needed, what the sources should be and how to deploy it to best advantage.

4. Add Human Capital

Private equity ownership can provide not only financial capital but also human capital. Private equity firms typically bring in directors and advisors from outside the company to improve operations. Some of these are specialists in turnaround situations. Others are longtime executives looking for a new challenge. In all cases, they bring expertise, experience and perspectives that otherwise might not be available. Outside directors and advisors with broad experience in diverse industries can make a real difference in guiding a company.

5. Use the Power of Scale

No matter how sound they are, smaller portfolio companies usually lack qualities such as size, scale and geographic and sectoral reach. In a world in which sheer size can trump other qualities, this limits their prospects.

When fund managers evaluate a potential acquisition, they search for other companies that can create scale, build depth and produce genuine synergies, whether by expanding a product line, increasing management and sales depth or providing access to new markets or customers.

This can be highly effective: A recent Boston Consulting Group/HHL Leipzig Graduate School of Management study found that “buy and build” deals generated an average IRR of 31.6% compared to an IRR of 23.1% for standalone private equity transactions. In our case, about half of our investments are in add-on acquisitions that complement platform companies.

6. “Rescue” Stranded Assets

Not all companies acquired by private equity funds are small private businesses. Many corporations have stranded assets that generate little value for their owners but that, in other hands, can be highly profitable. Private equity firms can take disparate assets from one or more owners and build a company around them.

This approach can be especially effective for non-core business units that do not receive the attention or investment they need to succeed. In many instances, these are not bad businesses: Sometimes they are the result of earlier acquisitions, or were the pet projects of long-departed senior managers. Regardless of their origin, they just are not good strategic fits for their parents. Yet, with support from a fund manager, they can thrive.

About a quarter of the companies we have acquired were divestitures or other corporate carve-outs, and we already have exited some successfully, selling them to acquirers who now find them attractive.

In the end, private equity funds really create value for investors when they exit an investment. The best private equity managers observe a certain discipline in this process. They are judicious about investments, and are careful about entering at the right time and paying the right amount. They also are careful to sell at the right time, not being greedy and avoiding the risk of trying to time the market. Doing this, and following these six rules, private equity managers can create win-win situations that benefit all stakeholders – sellers, buyers, a company’s workers and, of course, the fund’s investors.