This latest issue of the Privately Held Company is compliments of Gary Papay, CBI, M&AMI. Gary is president of CK Business Consultants, Inc. and is an active member of the M&A Source. Gary has been involved in the sale and acquisition of businesses for over 29 years, and is available to handle all of your merger, acquisition or divestiture needs.

P: 570-584-6488
F: 570-584-0199
gpapay@ckbc.net
www.ckbc.net


Creating value in the privately held company makes sense whether the owner is considering selling the business, plans on continuing to operate the business, or hopes to have the company remain in the family. (It is interesting to note that, of the businesses held within the family, only about 30 percent survive the second generation, 11 percent survive the third generation and only 3 percent survive the fourth generation and beyond.)
Building value in a company should focus on the following six components:
  the industry
  the management
  products or services
  customers
  competitors
  comparative benchmarks
The Industry – It is difficult, if not impossible, to build value if the business is in a stagnating industry. One advantage of privately held firms is their ability to shift gears and go into a different direction. One firm, for example, that made high-volume, low-end canoes shifted to low-volume, high-end lightweight canoes and kayaks to meet new market demands. This saved the company.
The Management – Building depth in management and creating a succession plan also builds value. Key employees should have employment contracts and sign non-compete agreements. In situations where there are partners, “buy-sell” agreements should be executed. These arrangements contribute to value.
Products or Services - A single product or service does not build value. However, if additional or companion products or services can be created, especially if they are non-competitive in price with the primary product or service – then value can be created.
Customers - A broad customer base that is national or international is the key to increasing value. Localized distribution focused on one or two customers will subtract from value.
Competitors – Being a market leader adds significantly to value, as does a lack of competition.
Comparative Benchmarks – Benchmarks can be used to measure a company against its peers. The better the results, the greater the value of the company.
Three keys to adding value to a company are: building a top management team coupled with a loyal work force; strategies that are flexible and therefore can be changed in mid-stream; and surrounding the owner/CEO with top advisors and professionals.
Much has been written about “fairness opinions” due to the financial manipulations among companies such as Enron, Tyco and others. The conflict in the use of fairness opinions was (and is) that an investment banking firm not only handled the sale of a company, but also got paid for doing a fairness opinion. For example, when the Bank of America decided to buy Boston’s Fleet bank, B of A paid the investment banking firm of Goldman Sachs $3 million as a retainer, $5 million for a fairness opinion, and was prepared to pay a success fee of $17 million if the deal actually was completed.
Keep in mind that a fairness opinion is prepared by one or more financial experts or by a firm to protect the shareholders; in other words, to assess whether or not the deal is fair to the real owners of the business. It also protects the officers and board of directors from shareholders who feel that their company is paying too much for the business being acquired. It is also apparent, from the example above, that the investment banking firm makes money, and a lot of money, through the entire purchase from beginning to end. They don’t have much of an incentive to really come in with a “fair” fairness opinion. However, regulators are looking at this obvious conflict of interest very seriously, and changes in the current regulations are almost sure to happen with full disclosure being only the first step.
So how does all of this impact the privately held company? It is vital that an owner of a privately held company who has minority or family shareholders should also seek a fairness opinion. It may not have to be done by an investment banking firm and probably shouldn’t be prepared by the owner’s accounting firm, for the same reasons outlined above. A third party evaluation should be done to insure that a minority owner doesn’t come out of the woodwork and claim that the business was sold for much less than it is worth – at least according to the dissident shareholder.
A professional intermediary can be an excellent resource in the preparation of a fairness opinion for the privately held company. They can provide several valuation professionals and/or firms and also assist in the gathering of the necessary financial records. Generally speaking a fairness opinion is prepared after the selling price is agreed upon. In the sale of a privately held company the price may fluctuate throughout the negotiations, but a third party valuation can set the bar. And, it’s very possible that using a business intermediary to market the business will bring a price above the valuation pleasing everyone.
• Private equity firms: A broad category. It includes venture capitalists and buyout specialists who raise money from limited partners and use it to help companies develop products and markets.
• Limited partners: Investors in venture capital or buyout funds. These are typically pension funds, foundations, university endowments, insurance companies, or wealthy individuals.
• Venture capital firms: Firms that use their investment funds to finance start-

ups, often in their early stages and typically in the technology, life sciences, or telecommunications fields.
• Buyout firms: They usually raise larger funds and invest them in more mature, later-stage companies of all kinds, often taking controlling interests and sometimes buying the companies outright. (The terms “private equity” and “buyouts” are often used interchangeably.)”

Source: Robert Weisman, in an article from The Boston Globe
This is just a partial list: Church’s Chicken, Uno Chicago Grill, Charlie Brown’s, Domino’s Pizza, Burger King, Cinnabon, Sizzler. The first response would be that they are all in the food business, and that’s correct. Now name the second thing that they all have in common? Give up – well, they (and many others) have been purchased by private equity firms. And, apparently, this is just the beginning. The huge Dunkin Donuts chain is being sought after by two or three private equity firms.
Why the interest in restaurants from groups that most people associate with high tech? Many firms got burned during the dot com and high tech meltdown. Now these same private equity firms are looking at businesses that are stable, with more predictable earnings, and that are also very familiar businesses, time-tested and still have a lot of growth ahead.
One industry expert said in Nation’s Restaurant News, “What’s really driving this is the success of these deals, the numbers that the private equity companies are getting when they sell…” For example, he noted, “Restaurant Associates bought Charlie Brown in 1975 for $3 million and sold it to Castle Harlan seven years later for $50 million. Castle Harlan got almost three times that price – an appreciation of $90 million with the sale to Trimaran.”
If private equity and similar firms are now buying restaurants, what businesses are next? If you are the owner of a small growing company or chain of businesses – is a private equity firm in your future? A professional intermediary may be able to answer that question for you and if you are considering selling – they can also help.
The first thing both sides have to decide on is who will represent them. Will they have their attorney, their intermediary or will they go it alone? Intermediaries are a good choice for a seller. They have done it before, are good advocates for their side and they understand the company and the seller.
Basically, there are three major negotiation methods.
Take it or leave it. A buyer makes an offer or a seller makes a counter-offer – both sides can let the “chips fall where they may.”
Split the difference. The buyer and seller, one or the other, or both, decide to split the difference between what the buyer is willing to offer and what the seller is willing to accept. A real oversimplification, but often used.
This for that. Both buyer and seller have to find out what is important to each. So many of these important areas are non-monetary and involve personal things such as allowing the owner’s son to continue employment with the firm. The buyer may want to move the business.

How do the parties get together in a win-win negotiation? The first step is for both sides to work with their advisors to settle on the price and deal structure positions. Both sides should be able to present their side of these issues. Which is more important – price or terms, or non-monetary items?

Information is vital to a buyer. Buyers should keep in mind that the seller knows more about the business than he or she does. Both buyer and seller need to anticipate what is important to the other and keep that in mind when discussing the deal. Buyer and seller should do due diligence on each other. Both buyer and seller must be able to walk away from a deal that is just not going to work.

Bob Woolf, the famous sports agent said in his book, Friendly Persuasion: My Life as a Negotiator, “I never think of negotiating against anyone. I work with people to come to an agreement. Deals are put together.”