Material Adverse Change Clauses
By Peter C. King, CEO of VR Business Sales/Mergers & Acquisitions
If your planned acquisition encounters turbulence because your target’s finances have suddenly taken a nosedive, you might want to consider one of a buyer’s last-ditch remedies - the material adverse change (MAC) clause. Buyers should never claim a MAC without careful consideration, and they must understand that it won’t guarantee an escape from a bad deal without penalties. But given current economic conditions, you should become familiar with the MAC option.
Nuts and Bolts
MAC clauses aren’t just for large deals: Most transactions can include one of these provisions. These clauses generally have two main elements:
1. A definition of what constitutes a MAC for the purposes of the deal.
Generally, these provisions describe a MAC as a relatively sudden event that quickly and negatively affects a business’s performance.
You may also want to try to include in your MAC definition a forward-looking component, such as requiring the provision to apply to any event that has a reasonable likelihood of causing a MAC in the future. MAC clauses typically cover the period of time between the signing of the acquisition agreement and the transaction’s completion, making it a type of emergency escape clause for buyers.
2. The circumstances that would permit a buyer to withdraw from the deal without incurring a penalty.
MAC clauses contain a list of carve-outs - exceptions and qualifications that shouldn’t be considered when determining if a target company has experienced a MAC. This list can include:
- General economic changes that affect the target company’s industry,
- Law changes that hurt the target’s business,
- Changes in the rules of Generally Accepted Accounting Principles, and
- Unpredictable events such as terrorism, war, or other catastrophes (usually referred to as “Acts of God”).
Market conditions usually dictate the number and breadth of exceptions included in the clause. In a seller’s market MAC clauses typically included a wide range of exceptions, making it difficult for buyers to invoke one.
|
|
Selling a Family Business Isn’t Business as Usual
By JoAnn Lombardi, President ofVR Business Sales/Mergers & Acquisitions
Family businesses may resemble their non-family counterparts in most ways, but there’s one crucial difference. Whenever close relatives work together, deep emotions invariably become involved - emotions that can further complicate the already difficult decision of whether to sell a family enterprise.
If you’re thinking about selling a family business, don’t overlook what your emotions are telling you about the potential sale. In some instances, of course, you’re better off listening to your head. But in this case, it’s just as important to consider what your heart is telling you too.
Why You Might Sell
Your decision to sell a family business may start with financial need. Maybe you’re looking ahead to retirement and want to feel more secure. Or maybe you see stiff challenges ahead for your company, with fewer growth prospects available or increased competition looming.
You might also look to sell a family business if you’re concerned that no one in the next generation has stepped up as an obvious management successor.
In addition, the stress of working together can be too much for some families to handle comfortably. Family strife is always unpleasant, but when family members who work together don’t get along and the tensions spill into the workplace, it can make for a destructive personal and professional environment.
Why You Might Not
Selling a family business can feel like selling a part of your family. If you sell, your decision will have a significant impact on the lives of people you care about - relatives, employees, and, especially if the business is in a close-knit community, local residents.
Your decision to sell may be especially stressful if you’re thinking of selling a business handed down to you over many years. You may wonder about what your forebears would do in your shoes.
With such factors to consider, you may decide to refuse an otherwise attractive offer and keep your business going - a decision that will allow you to maintain your independence, and pass on to future generations the same opportunities that you received.
Yet before you turn down an attractive offer, make sure you discuss your expectations with the members of the next generation. If your chosen successors aren’t interested or able to manage the business, you may be setting the stage for serious family conflict.
|
|
Costs of Capital for Privately Held Businesses
byShawn Hyde, CBA, CVA, CMEA, BCA, ECA, Canyon Valuations, LLC
|
|
"Cost of capital is the minimum rate of return or profit a company must earn before generating value. It’s calculated by a business’s accounting department to determine financial risk and whether an investment is justified. Company leaders use the cost of capital to gauge how much money new endeavors need to generate to offset upfront costs and achieve profit. They also use it to analyze the potential risk of future business decisions. The cost of capital is extremely important to investors and analysts. These groups use it to determine stock prices and potential returns from acquired shares. For example, if a company’s financial statements or cost of capital are volatile, cost of shares may plummet; as a result, investors may not provide financial backing."
When reading further on, the same source states the following about calculating the cost of capital: "To determine the cost of capital, business leaders, accounting departments, and investors must consider three factors: cost of debt, cost of equity, and the weighted average cost of capital (WACC)."
Appraisers of privately held businesses recognize the WACC as one of the various methods available to determine a Discount Rate (also known as a Rate of Return) to derive an indication of invested capital value for an ownership interest in a privately held business. I am using the phrases ‘Discount Rate’, ‘Cost of Capital’, and ‘Rate of Return’ to actually reference the same general thing. Per Gary Trugman in his book, Understanding Business Valuation, a discount rate is “based on risks associated with the benefit stream under consideration. ”Please note that he does not state that the benefit stream (or income) to be used in the valuation of a business HAS to be net cash flow. Just know that the income stream used in any valuation must match the risk rate that is used to derive an indication of value. For example, if one uses the WACC to derive a discount rate and applies it to a business’ Earnings Before Interest, Taxes, and Depreciation (EBITDA), that indication of value will be wrong.
The Harvard Business School article linked above goes on to discuss aspects of finance such as leverage, the Capital Asset Pricing Model (CAPM), the Dividend Capitalization Model, and the omnipresent Weighted Average Cost of Capital (WACC). These topics are all used by finance professionals in the public markets, BUT there are some material differences between the valuation of businesses in the privately held sector and the publicly traded one, which necessitates the use of different techniques or at least some fairly extreme modifications to those mentioned. The two main differences are discussed below:
|
|
6 Clauses to Negotiate in the Investment Banking Engagement Letter
The investment banking engagement letter is the official representation of your company’s relationship with your M&A advisor or investment bank, and as such should be carefully considered. The process of negotiating the letter can also provide helpful insight into a prospective bank’s priorities and operations, and reveal how well your interests are aligned. Even if your company’s legal counsel is handling negotiations, it’s important to understand the key points of the agreement and how they do (or do not) represent the interests of your business.
Here are six of the most important aspects of the investment banking engagement letter to keep in mind as you begin negotiations.
1. Scope of Services
What role is the investment banker serving, and what’s the end goal of the engagement? A financing transaction? A purchase? Both? Stating this in the engagement letter ensures that each side’s goals are aligned both with one another and with the proposed fee structure.
The investment bank will typically detail a list of included services in this section of the engagement letter. Some of these might be obvious and apply across almost every engagement (e.g., reviewing financials, soliciting financial partners and/or acquirers), while others will vary depending on the bank and the company’s needs (e.g., developing marketing materials, providing valuation services).
2. Exclusivity
It’s not uncommon for owners to balk at the exclusivity clauses in the investment banking engagement letter. Even if you do all the research in the world, it’s hard to commit to entrusting one advisory firm with your business. However, the truth is that it can be very hard to find a high-quality M&A advisor or investment banker without agreeing to exclusivity. From the advisor’s perspective, a retainer isn’t enough to justify the many hours of work they’ll spend preparing your business for a sale or financing. Consider, too, that managing multiple investment banks would be an onerous undertaking for you as the business owner, and could result in a lot of confusion and uncertainty.
|
|
Chemical Company with a Huge Profit Potential For Sale in Los Angeles, CA
A family-run chemical business established in 1965. It manufactures and sells premium quality cleaning chemicals for the food, transportation, and janitorial industries. For nearly sixty (60) years, the company has provided customers with the highest quality products at the absolute best prices.
It has achieved stable and consistent financial success for the shareholders.
After two generations of family ownership, owners are ready to retire and transition this business to a new owner who will enjoy a solid base of loyal customers to generate everlasting business year after year. To a visionary new owner, this is a once-in-a-lifetime opportunity to take this chemical business to a new level by improving branding, reducing cost, and increasing margin!
Through nearly 60 years of continuous improvement, the owners have developed and matured an operation that enables them to produce each batch of chemicals in a clean and orderly environment while adhering to quality control checks.
|
|
VR Office in Apollo Beach, FL Sold a Successful 35+ Year Old Audio/Video Integration Company for $524,000
This Audio/Video Integration company had been designing and installing High-End solutions for its discerning clientele since founded by its previous owner over 35 years ago. This North Central Florida location allows it to serve several regional markets & the company's state-of-the-art facilities were in a desirable area with immediate access to the Interstate. Exceptional showrooms provide a critical showcase of its capabilities & the product lines it sells. The company offered countless custom solutions ranging from Home Theaters to Board-Room video infrastructures. Its diverse client base covers high-end residential customers & all types of commercial accounts. With thousands of successful installations achieved to date, this company continues to be the preferred source for Audio/Video solutions in its market.
|
|
Thinking of selling your business or looking for an established
|
|
Switzerland Almost 95,000 SMEs With Succession Problems
ByBrian Watkins, CBA Cross Border Associates.
Here is an interesting insight into how succession problems affect a country like a relatively small Switzerland
Zurich, April 7, 2023 - According to an analysis by Dun & Bradstreet, 94,854 companies have a succession problem as of April 2023. This means that 15.1 percent of companies, and thus around half a million employees, are vulnerable.
The problem is not as pronounced in SMEs with 50 or more employees, where only 7.9 percent of firms face an open succession issue, according to a statement on Thursday. For companies with up to nine employees, the share is 15.1 percent, and for companies with between ten and 49 employees, the figure is as high as 15.8 percent.
?
The analysis by legal form shows that sole proprietorships are the most affected, writes the economic information service in its media release. Here, 21.8 percent are facing a succession - or even the closure of the business. Often, however, fewer employees are affected. Among public limited companies, 15.6 percent are affected and among limited liability companies, only 10.0 percent have to arrange their succession. This is also due to the boom of this legal form, which led to the fact that there are many young GmbHs.
|
|
CBA: Buyer Mandate for Technology-based Companies
European buyer seeks technology-based companies active in trade and manufacturing of industrial products and services in the US in well-defined product and market niches.
Ideal purchase price in the region of euro 10-50 million per acquisition. Revenue: between euro 10 million to euro 75 million per acquisition with strong management and own products.
|
|
VR is The Only Remaining Founding Firm of The International Business Brokers Association ("IBBA").
|
|
Have You Ever Considered Selling Businesses?
|
|
As a loyal subscriber of Today’s Business Owner electronic magazine, we invite you to click on this link follow us on LinkedIn.
Now you can be updated daily on business sales, valuation techniques, mergers and acquisitions, career opportunities with VR, and much more.
Be the first to find out about new businesses for sale, and what has just sold.
|
|
|
|
|
|
|