|
|
|
|
LEVERAGED CAPITAL NEWSLETTER Leveraged Capital, is a free monthly newsletter that presents growth and strategy issues effecting entrepreneurs and owners of small to medium size enterprises (SME's). Leveraged Capital is published and delivered electronically to subscribers. Your privacy is strictly respected and we do not share or sell subscriber email addresses to anyone outside of Graham Financial Corporation. If you enjoy what we present, please forward a copy of Leveraged Capital to clients and associates. They can subscribe to Leveraged Capital, by clicking on this link: http://www.GrahamFinancial.com/newsLetter.htm and filling out the quick form.
November 2002 is a good month. Graham Financial Corporation is celebrating our fifth year of being in business. I have taken some time this week with my wife to locate my putting stroke in Florida which I lost in Canada this summer and I am sure has migrated to warmer climes; markets ended up this week, and business is getting busy with far better optimism than we all experienced in the last quarter of 2001. Good time here to reflect on the things I have accomplished, things I would have liked to accomplished, and things I wish I had known to avoid when I started the company 5 years ago. As I also celebrate this month 40 years of living on this planet, I am struck by the appreciation I have for support from my family, recognizing my true friends, and the tremendous associations, partnerships, and business relationships formed over the past 5 years. The joys of owning a business far exceed the pains experienced along the way. I look forward to the next half decade and the next 40 years for that matter! Much (long-term)
success to you, DPG.
14 Years of Exceptional Service Contact Nikki Barnett (416) 367 - 1055
In This Months Issue: (Click on the Article Title To Go To The Full Story.)
Quote Of The Month: Investment Hindsight:
When my partner and I founded
FAR&WIDE Travel Corp. in 1997, our first step was to find and acquire a
diversity of tour operators around the globe, two each in Italy and Greece, a
smattering in Asia, and so on - 21 in all, so far. In doing so, one aspect of
that endeavor struck us as surprising. Going in, my partner and I
assumed that owners of such companies were in their fifties and sixties and
ready to cash out and retire. Turns out, however, that many were in their
forties and even thirties, with retirement being the last thing on their minds.
They wanted to continue to build the businesses they had founded, albeit in a
different way. Now, they would be building their businesses under the
FAR&WIDE Travel umbrella. This describes the business
model for the company we envisioned back in the mid 1990s, when we were both in
merchant banking and consulting, with me having spent the 1980s in the airline
industry. What we set out to do was take a huge $23 billion fragmented industry
- the business of packaging tours - and bring one segment of it together, the
$10 billion value-added segment. We are, in fact, travel people who happen to be
using consolidation to create our company, some say doing for travel what Office
Depot did for stationery and office supplies, what Toy 'R Us did for children's
playthings and what Wal-Mart, the granddaddy of them all, did for what used to
be called the "five-and-ten." A Combination Not a Mix. So, I guess you can call us
consolidators - a name we don't particularly like -- but with a difference - and
a big one. Instead of putting local companies out of business to make way for an
enormous entity that will provide the service cheaper and more efficiently, we
are all about empowering the people already in the business - those who know it
best because they've built it and are living it, day in and day out. We want
them to do the job for and with us. What's more, we are
consolidators with a focus. In creating a combination, we are not only keeping
the "them" but also making sure that the "them" and the
"we" work together, while each retaining our identity. In no way do we
want an inextricable mix of the two. Which gets back to those
tour-operator owners in their thirties and forties and, yes, some in their
fifties. Above all else, we need them. For at the very heart of our business
model is taking people who've been entrepreneurs and launching that particular
brand of energy to create a company that, in fact, will be bigger, better,
faster and more efficient. In the tour operating business,
which is an enormous $23 billion industry, we're wedged into the segment known
as the "value-added" provider, a $10 billion subset of the whole. The
larger arm is the mass marketers, packaging tours to predictable destinations
such as Las Vegas and Disney World and relying on volume in what is essentially
a lower margin business. In the value-added segment, by
contrast, what matters is providing the "experience" for a disparate
and discriminating consumer: the well-heeled senior in search of the right
escorted motor coach tour; the twenty-something looking for an
"adventure" - Botswana, anyone? - and most critically, the Baby
Boomer, who comprises the bulk of our market, in a perpetual search for what is
simultaneously customized and independent. Getting It Right. In this market, getting
it right is what it is all about, and that is where the people come in. This is
a service business - it's pure people. In buying a local tour operator, all we
acquire physically is a handful of computers and desks. What really matters is
that the people there are committed to turning those basics into what we dub in
our mission statement as "a lifetime of enriching travel experiences to
destinations throughout the world" for our customers. Some of our tours take years to
put together. Likewise, the packages can't just be marketed through the usual
network of travel agencies. The approach to selling needs to be as diverse as
the customers we serve and the places around the world to which we send them. And so, it was comforting that
the companies we actually acquired over the past five years came with owners who
not only wanted to be bought, but also were committed to helping all parties
win. Next on the agenda came our own approach to dealing with such a fortuitous
circumstance. Just as our model is unique in
the business of consolidating, our method needed to break from the prevailing
wisdom - and it did. Instead of buying companies rapidly in a bid to build our
own company fast enough to go public quickly, we downplayed the quest for the
IPO and instead focused on the search for the right independent operator. Having canvassed some 400
businesses to buy the 21 we now own, we did our share of kicking the tires and
walking away when the situation wasn't right. In fact, we've spent as much as a
year talking to the owners to make sure, before making an offer, that our
interests were precisely aligned. Holding Hands, Building Value. Once on board, the owners
became people who we, of necessity, needed to continue to massage. At one level
we did so through the proper level of compensation. Our benefits, such as travel
discounts and a comprehensive health plan, were for the most part better than
what owners and their staffs had previously enjoyed. Compensation for the owners came
in the form of a cash payout, usually the biggest part of the package, plus a
performance-based bonus to be earned over three years. Since the people would
still have control over their individual profit-and-loss statements, we were
building in a factor that would be sure to match their goals with ours. Finally,
of course, they received stock in FAR&WIDE Travel. Compensation aside, what matters
when it comes to building FAR&WIDE , the company, and eventually,
FAR&WIDE, the brand, is forging relationships with these entrepreneurial
owners that are solid enough to endure the inevitable valleys that occur in any
business. That has been a priority, starting with our top managers visiting
newly acquired companies to host a welcoming party or dinner and speak with
principals individually. Thereafter, while day-to-day interactions are minimal,
we know that we must continue to hold the reins - and we do. Tactics include the Friday
morning conference call for the heads of our business units, the mid-year review
for each, and the four-day annual retreat during the summer for unit leaders and
their spouses. We also mix people from different units on task forces and
feature profiles from staff at different companies. You get the picture - which is
not to say it works flawlessly all of the time. In four of the 21 businesses we
acquired, we eventually decided to replace the owners - even though they had
wanted to remain. Not all companies we approach want to come with us. Some don't
think they can adjust to being "owned," others want more money, and
still others don't believe in our model. Power to the People. But we believe in our
model, and no small wonder why. In the past five years, we've built FAR&WIDE's
revenue to close to $400 million, nearly four percent of our industry's $10
billion value-added segment - but nonetheless enough to make us the biggest
player in this arena. We've attracted considerable financing - $45 million in
institutional equity alone, in addition to the subordinated and senior debt
commitments, a far cry from the earlier days of $1.2 million from angel
investors and $1 million from my partner and myself - that will help us reach
our goal of being the leader by a wide margin and, eventually, surpassing $1
billion in annual revenue on our way to as much as $2 billion within five more
years or so, if the markets and the fates cooperate a little. Even more important than the
financial barometer is the measure that ultimately defines our model: the
people. Our business model hinges upon bringing on people who are
entrepreneurial and want to achieve a goal larger than building their own
businesses. We have measured up in that
critical category as well. Otherwise, why would people we expected to retire
want to stay with us? Our model recognizes and rewards those who have built
their own companies into leading tour operators in their areas. This article originally appeared Kauffman Foundation's Entreworld May 2002. Visit www.emkf.org and www.entreworld.org. The Kauffman Foundation works to accelerate entrepreneurial in America by reaching individuals of all ages through the delivery of education, development, and the promotion of an entrepreneurial environment.
During conversations with management at various companies, we often hear, "If I owned the business I would..." The purpose of this article is to help those who really do want to own a business to identify which businesses make good leveraged buyout (LBO) candidates, and to identify when a business is ripe for purchase. What Makes A Good Buyout Candidate? Not all of the following characteristics are necessary for the completion of a leveraged buyout. However, the greater the number of these characteristics that are present at a target company and the stronger any individual characteristic is, the more likely an LBO will be successful. Experienced Management Team. A strong management team
consisting of a highly qualified chief executive officer and chief financial
officer are key components to an LBO. In a leveraged situation, the company has
little room for trial and error. Because of this, lenders and investors will
insist on having a management team that has a long track record in the industry
and knows how to meet projections with few surprises. Lenders also like to see a
management team that has either been in a leveraged situation or who has had to
meet projections on a consistent basis. Strong and Secure Cash Flow. Cash flow must be sufficient enough to fund both the company's ongoing operations and to service the debt. Future cash flows based on strong and stable historical performance are most sellable to lenders. Projections that need little explanation and that replicate past performance can withstand the greatest scrutiny and will therefore produce the highest borrowing capacity. To the extent these projections are based on changes in the business, detailed assumptions with specific explanations should accompany the first set of numbers presented to lenders. Explaining ahead of time allows the lender to follow the flow from start to finish with little guess work. This type of presentation maximizes the lender's belief that the cash flows are strong and secure and leaves a strong first impression. In addition to supportable cash flow, cash flow with a significant depreciation component is also desirable, because the cash flow can be used to pay down acquisition debt and not to pay taxes. Healthy Asset Base. Because assets are used as collateral for financing, assets should have significant value relative to the purchase price of the company. Machinery and equipment that has multiple uses or that can be easily converted for alternative uses will derive a higher borrowing percentage than equipment that is highly customized. Customized equipment is difficult to sell in a downside situation, and therefore has a lower borrowing value. In addition, accounts receivable and inventory that can be collected quickly or has a high liquidation value are attractive to lenders. Finished inventory and raw materials generally have higher advance rates than work-in-progress. Generally, the more commodity-like the asset is, the higher the advance rates will be. Low Operating Risk. Because the financial risk of the business is very high under an LBO, the business can not afford to have a bad year. Therefore, those companies that have less operating risk are better LBO candidates. Companies with strong market positions can usually weather downturns in the economy and thus have less operating risk. Companies with a diversified product, customer base, or geographic market served have less operating risk because the company's cash flow is less dependent on any single source of revenue. These companies are better able to weather the obsolescence of a product, loss of a customer, or change in a region's economy. Companies that have long-term contracts with their customers or who have customers that would incur high changeover costs if they switched suppliers also have less operating risk. Timing. Timing is often the most important element in capitalizing on an LBO opportunity. Below are some examples of situations in which timing makes a business a good buyout candidate. Companies That Lack Strategic Fit with Parent. Often larger corporations that have multiple subsidiaries will have businesses that no longer fit with their strategic objectives. A common example of this is when a company decides to focus on the marketing end of a business and decides not to manufacture a product but rather to outsource it. This is a great opportunity for an LBO, because the buyer can usually negotiate a long-term supply agreement with the seller. This allows the buyer to purchase the business based only on the cash flows from the supply agreement, thus minimizing the purchase price. In addition, it creates the base of business necessary for the new company to grow and be competitive in the marketplace. There are many more reasons a parent corporation might decide to exit a business, all of which might be valid for that owner. However, just because the owner wants to exit the business based on its standards, does not mean it is a bad business to be in. Instead, it means that there may be an excellent opportunity for someone to attempt a leveraged buyout. Estate Planning and Retiring Owner Situations. One of the most common reasons for the sale of a business is that the owner wants to retire and there are no family members who want to take over the business. Confronted with the decision to sell to a competitor, the owner often turns to the management team to see if they have an interest in purchasing the business. Selling to the management team can provide a smooth transition for the owner and minimize the interruptions to the business. Another opportunity to buy a business is when a family faces some estate planning issues. If the owner dies, his/her estate will be responsible for estate taxes based on the value of the stock in the business. This tax might cause a liquidity problem for the estate and thus force the business to be sold quickly and at a substantial discount. If the owner's tax basis in the stock is low, selling to an employee stock ownership plan (ESOP) can provide substantial tax benefits as well as create liquidity to the seller's estate. By helping owners to plan ahead, the liquidity problem can be avoided for the owners and the company can be transferred to new owners smoothly. Companies That Must Be Sold Because of Regulators. With the continued consolidation going on in many industries, the Federal Trade Commission (FTC) is faced with the task of maintaining a competitive environment for the consumers. In many cases, the FTC has ordered companies to divest assets in particular markets where the divesting company has too much market share. Generally, the FTC will require the sale to a qualified buyer who will continue to run a competitive business and therefore foster competition in the marketplace. This type of situation is a very good time to attempt an LBO, because there is a seller who must sell the business and who also wants to sell to the least competitive buyer as possible. Selling to another big player in the industry is usually not the seller's first choice. Subsidiaries That Lack the Attention of the Parent Company. Often smaller divisions or units of larger corporations lack the attention necessary to maximize their potential. Therefore, these divisions or units appear to be much less valuable than they really are. This is an ideal time for an LBO to be structured. With parent company management at headquarters believing that they are selling a business with little potential, the buyer can negotiate a bargain purchase, raise the necessary capital to move the business in the right direction, and generate the cash flows necessary to pay off the transaction debt. Although the parent company is usually the initiator of the transaction, management should not hesitate to ask the parent company if it is willing to sell. Management teams are the natural buyers in these situations and can usually find an equity sponsor to back their ideas. Conclusion. Good
LBO candidates have experienced management teams, strong and secure cash flows,
a healthy asset base, and low operating risk. In addition, a business is a good
LBO candidate when the owner believes the business no longer fits its strategic
objectives; when the owner is considering retiring or estate planning; when
regulators are requiring the sale of the business; or when the business lacks
the attention of its parent. Combining the characteristics of a good buyout
candidate with proper timing will maximize the probability of a successful
transaction. This article was written by Dan Smith, a managing director of Willamette Capital, Inc., in the McLean, Virginia, office. Willamette Management Associates, founded in 1969, provides premier valuation consulting, economic analysis, and financial advisory services. Visit them on the web at www.willamette.com .
Most often, the path to an export contract leads through Request for Proposal (RFP) territory - that tricky, sometimes thorny land of complex buyer requirements and competitive challenges. It's not always easy to navigate, and many companies can get lost along the way. So how do you make sure your proposal is the best it can possibly be? We put that question to the Canadian Commercial Corporation's (CCC) contract specialists. Here's what they had to say. Every RFP tests your ability to deliver a product or
service, interpret what a customer is really asking for and market all the
strengths you have to offer. In more than 50 years of experience helping Canadian
companies bid on (and win) export contracts, CCC, Canada's export contracting
agency, has learned more than a few techniques to boost your chances of success. Nail down the basics. It's true that many RFPs ask for the same
kinds of information about your company like its products, services and
experience. And, for sure, it makes sense to have some ready-made answers
handy-'boilerplate' content, as it's called. However, no two RFPs are exactly alike. Review all of
your pre-fab proposal material to make sure it reflects the nuances of the
particular bid you are responding to. Sensitivity to details can make a big
difference. Think marketing. While RFPs describe what a buyer is
looking for, some solutions do not exactly fit the bill. If yours doesn't, don't
despair. The important thing is to explain where your proposal differs. Tell the
customer why your solution is every bit as good as what's been asked for-or
maybe even better. Sell yourself. Just remember to be honest about it. Some
companies may go too far and try to talk their way into a sale even though their
solution really doesn't fit. There's no advantage to doing so; either you won't
get the business, or else you will and be in way over your head. Stick to the specs. You may have an absolutely full-featured
product or service, but when it comes to winning a contract, more isn't
necessarily better. Look at the specifications carefully and do your research. CCC recalls a company that bid on a project in
Thailand, only to find its price-which seemed reasonable for what was
offered-30% too high. The company lost the bid. The supplier sent someone over
to Thailand to see what the winner eventually supplied: a truly bare-bones set
up, but the exact minimum of what the RFP had specified. The lesson? Stick to the specs. And if you really want
to promote your fuller solution, include it as an extra option. The buyer then
has a chance to see how you'll meet the basic requirements of the contract, and
also how you're capable of delivering far greater value. To access CCC bid or proposal
preparation advisory services or to find out more about how CCC can help you put
the power of Canada behind your export sales, visit www.ccc.ca
or call 1-800-748-8191.
If your corporate planning model resembles this illustration, change your management, change your board, or go paint in Paris because your company may not be around long.
In
The Beginning was
the plan.
To Advertise in Leveraged Capital: If you are interested in advertising in Leveraged Capital, email us at: ads@GrahamFinancial.com and we will contact you. Feel free to forward a copy of Leveraged Capital to clients and associates. It is free to subscribe by clicking on this link: Click Here For Your Free Subscription To Leveraged Capital.
To Unsubscribe from Leveraged Capital: If you wish to removed from our mailing list, send an email to us at: ezine@GrahamFinancial.com with the word "Unsubscribe" in the subject field. © 2002 Graham Financial Corporation, All Rights Reserved.
|
|
|
