Review from the Summit: Should You Acquire or Be Acquired? (Part 3)

Now I am going to continue to summarize Hobson Hogan's presentation on whether you should consider being acquired or whether you should acquire another company from Day 1 of the Summit. If you have not read part 1 or part 2 please do so first.

The next topic discussed was the value drivers that affect the outcome of an acquisition (which we also call the "6P Framework"). These include:

• Personnel
• Product
• Process
• Profit
• Pricing of Debt/Equity
• Projections

This is a two-sided framework and the top three elements are on the company side (qualitative) and the bottom three elements are on the numbers side (quantitative). The company side contains qualitative attributes that will bias a value up or down, while the numbers side contains a quantitative measure of the culmination of company attributes and its relationship in its market.

The market outlook was then presented and while Mr. Hogan stated that the market should recover, it will likely not approach 2007 peak levels within the next five years. The recovery will be asymmetric with certain geographies recovering more quickly than others.

He wrapped up his presentation by discussing the financial market factors that affect value. These include:

• Bank lending standards significantly tightened
• Use of debt in transactions significantly curtailed
• Equity out refinancing and home equity loans greatly curtailed

To learn more on how FMI can help you acquire a company or sell your business you can contact Hobson Hogan at hhogan@fminet.com.

Review from the Summit: Should You Acquire or Be Acquired? (Part 2)

Now I am going to continue to summarize Hobson Hogan's presentation on whether you should consider being acquired or whether you should acquire another company from Day 1 of the Summit. If you have not read part 1 please do so first.

Let's pick it up with your selling/liquidity options:

• Majority/controlling interest sale: To competitor or investment firm/private buyer
• Internal sales/transfers to next generation of management: Multi-year S-Corporation/LLC sale programs, management buyouts
• ESOP (Employee Stock Ownership Plan)
• Selling significant minority stakes with eventual control sale: Can solve difficult situations where buy-sell agreement undervalues firm, gives owner a ready buyer in cases of illness or death, transaction(s) completed at a discount

Next he discussed the key points to consider before making a corporate acquisition:

• All starts with strong business plan and big dose of humility
• Be honest about risks – most are related to executive hubris not quantitative failures of the CFO
• Plan early and implement slowly
• Maintain a strong balance sheet
• Manage assumed liabilities
• Manage risk as well as return
• Keep your hand in project selection/pricing
• Manage personal guarantees
• Just because you can borrow money does not mean you should
• Acquisitions should enhance or implement new strategy
  
• Acquisitions for acquisition sake will only distract management from its most important activities
  
• Acquisitions should support your marketing plan, enhance strengths, mitigate weaknesses, reduce threats
  

Before you jump into the acquisition plan you need to work on the business plan - and this entails:

• SWOT analysis
  
• Market strategies
  
• Product/service strategies
  
• Operational plans
  
• Management succession plans
  
• Financial projections
  
• Operating budget
  
• Projected earnings
  
• Cash flow and CAPEX budget

In the next posting I will finish the summary of Hobson Hogan's presentation.

Review from the Summit: Should You Acquire or Be Acquired?

Day 1 of the Summit continued with Hobson Hogan who is a member of FMI’s investment banking practice. He specializes in building products manufacturers and distributors, as well as other construction industry firms, focusing on mergers and acquisitions, ownership transfer issues and strategy development. He has an extensive background in finance, strategic planning, consulting and engineering. His experience provides him with an understanding of difficult organizational, operational and strategic issues facing the building and construction industry.

Due to the nature of the economy the topic of whether you should acquire another company or be acquired is highly relevant and a summary of what Mr. Hogan covered included:

• Can your company be sold? If, so do you have competent management and are they a potential buyer?
• The decision to sell is typically driven by outside forces: Health and/or personal issues, desire to retire, desire to focus on another business or poor financial performance.
• Everyone is a seller at some point: You may not be alive to see it, but it will happen. The question is where are you in your personal journey – closer to the beginning or end.
• Evaluate the opportunity to buy: At attractive valuations
• Acquisitions should fit within overall strategic plan: Is it strategically driven or ego driven? Are you properly capitalized?
• Strategy should drive acquisitions and your overall personal balance sheet should drive whether you are a seller
• Investment in your company should be seen as part of personal balance sheet: Are you properly diversified? Is your risk appropriate for your age? Can you live off the proceeds of a sale? Are you truly ready to retire and pursue other interests?
• Take a rational view of the business as part of your portfolio: Do not ignore the personal impact a sale would have on your finances, lifestyle and standing in the community.
• Your business is likely one of the more risky investments you have
• As you move closer to retirement you should ensure that you remove risk from your balance sheet: The unexpected can happen and typically does.
• Valuations are down significantly: Not likely to return to where they were in the near future. PV of selling in 5 years is $33.7MM or simply put, for the risk of operating your business you would be indifferent between getting $91 MM in 5 years vs. $33.7 MM today.
• Recovery is likely to be slow
• Taxes are rising
• Waiting for a better pricing environment may not yield the results you think: If you sold today and invested in a basket of less risky assets growing at 8%, you have $80.8MM in 5 years – around $10MM less than selling in 5 years, but at a much lower risk threshold.

In the next posting I will review the second part of Mr. Hogan's presentation.