Green Merger News – May 2010

In this issue:
 

AnchorCommentary

This month, we take a look at how the phenomenon of social media is affecting the green industry and the merger & acquisition marketplace.  Paying attention to this trend may help to better position your business for the future.
We continue to see increased business sale activity in all subsectors of the green industry along with improvement in the availability of financing. When you are ready to consider a sale or acquisition, we would welcome the opportunity to discuss your plans with you.            
                                                                — Ron Edmonds

AnchorOur Take On Social Media and Why it is Relevant to Mergers & Acquisitions

Everywhere you  turn, you see another article about social media, Facebook, Twitter, LinkedIn, etc.  I thought I would add my two cents worth.

It is all about connecting.

Whether or not we describe it in terms of social media or not, we all know that we must connect with our customers and clients, as well as our vendors, employees, colleagues and friends.  Social media is all about developing ways to connect – and to be fund.  To be found, you have to be visible where people are  looking.

Not long ago, many people found the Yellow pages to be their most effective way to connect.  Oftentimes, the bigger the Yellow ages ad and the mnore books you were in, the more business you were likely to get.  Although the Yellow Pages are definitely still effective for some, my kids, who range in age from their teens to their thirties, hardly evn know what the Yellow Pages are.  Even my wife wants to recycle them as soon as they arrive!

I can’t predict what the future will bring, but I am sure the way we connect with our clients, colleagues and friends will continue to evolve over time.  Social media is just one step on the journey.

Why is this topic being addressed in a newsletter about business sales and acquisitions?

* The more successful a business in attracting and retaining clients and customers, the more valuable it will be as an acquisition target.  As we’ve discussed, social media can be one part of that process.
* Over time, it is likely that social media and similar technologies will play an increasing role in the process of buying and selling businesses.

More than once, when I have spoken with a client or potential client about their web strategy, they have told me that they will be selling their business in the next few years and they just don’t have any interest in getting involved with something like that.  It will be too much trouble with too little payback.  That is an unfortunate mindset.

When considering the sale of your business, the best strategy is almost always to keep running it aggressively, as if you were going to keep it forever, right up to the day you close on the sale.  It will continue to make your business more attractive as a target and position the business better in the event that, for any reason, a potential transaction is not completed.

A few words about how we use social media in our business.

We view the web and social media technologies to be a key part of our business strategy.  We go to a great deal of effort to make sure we have a presence where people may be looking to connect with an advisor to assist them in the sale or acquisition of a business, so, in addition to our primary website (www.PrincipiumGroup.com), we maintain a blog (www.SellMyGreenBusiness.com), and a Facebook page (www.facebook.com/principium).  Of course, we publish this email newsletter, Green Industry Merger & Acquisition News.  We maintain a presence on LinkedIn and each member of our team has a profile there, where you connect with them.  (My LinkedIn profile can be found at www.LinkedIn.com/in/ronedmonds)  We also use Twitter (@Principium).  We  do podcasts (principium.podbean.com, also available through iTunes.  We will soon have a presence on YouTube and be hosting webinars.  In addition, in specific client situations, we use such services as BizBuySell.com, BizQuest.com and several others.

In marketing professional services, we have found that so-called in-bound marketing makes a lot more sense than traditional outbound marketing, which includes cold-calling, direct mail and many forms of advertising.  We try to find potential clients and friends wherever they are looking and provide them the relevant information they are looking for.  It is our hope that when they are seeking help with business sales and acquisitions, they will remember us and give us a call or an email (or, I suppose, a Facebook or Twitter direct message – I am not really sure about that!)

Where can you go for help in developing your social media strategies?  The trade magazines are all covering the topic now.  Jeff Korhan (www.jeffkorhan.com) is an expert on the topic with a specific green industry perspective.

AnchorRecent Transactions

New Leaf Landscape maintenance of Southampton, New York, has acquired Lion Landscaping of Sag Harbour, New York.
Burhoe Landscaping and Lawn Service of Unionville, NY, has joined The Yard Group, based in Glastonbury, Connecticut.
Shemin, The Landscape Supply Company, of Danbury Connecticut, as acquired three former Skinner locations in Austin, Lewisville, and Houston, Texas.  Skinner’s locations in Orlando and Tampa reopened earlier this year as Medallion Nurseries.  At one point, Skinner was one of the largest landscape and nursery supply businesses in the United States with more than 20 locations.
Atlanta-based Arrow Exterminating has acquired Armand Pest Control of West Palm Beach, Florida.  Armand provides lawn and ornamental services in addition to pest control and termite services.

Anchor

Small Business for Sale Transactions Continue Slow But Sure Recovery

Economic data for the first quarter of 2010 from BizBuySell  suggest small business-for-sale transactions and valuations have continued to show signs of a slow but sure economic recovery.
According to the BizBuySell Insight Report data, the number of closed transactions reported to BizBuySell in First Quarter 2010 rose slightly, 0.3 percent, as compared with the same time period in 2009 — from 1,146 transactions to 1,149. Market improvement is more evident when comparing First Quarter 2010 data to the prior quarter, with BizBuySell.com reporting a healthy 6.3 percent increase in transaction volume. Closed transactions are reported to BizBuySell.com by business brokers nationwide.
“The business-for-sale market continues to move in a positive direction, with each quarter since the Second Quarter of 2009 showing improved performance versus the year-ago period,” says Mike Handelsman, General Manager of BizBuySell.com. “Motivated business sellers are increasingly able to get deals done at reasonable terms, and more business buyers are finding good value in the market at this time.”

Business Valuations Drop, Driving the Increase in Transactions

Driving the increase in completed deals, BizBuySell.com notes downward changes in the metrics that are used to value companies. Compared to the same quarter last year, revenue multiples and cash flow multiples have both declined, suggesting that business buyers may be able to buy business value at a discount, compared to prior years.

Revenue multiples on reported closed transactions in First Quarter 2010 fell from 0.69 to 0.64 compared against First Quarter 2009, representing a 7.4% decrease. Similarly, cash flow multiples dropped slightly from First Quarter 2009’s 2.69 to First Quarter 2010’s 2.51, representing a 6.5% decline. The revenue and cash flow multiples are calculated by dividing the selling price of the business by its reported annual revenue or cash flow.

The median sale price for closed business-for-sale transactions during First Quarter 2010 was $150,000, down from $165,500 in First Quarter 2009, suggesting that buyers may have the upper hand over sellers in the current business-for-sale market.
“There is no doubt that we are in a strong buyer’s market,” says Handelsman. “Many sellers trying to sell their companies have weaker financials due to the difficult economy. As a result, those sellers, and even some sellers of healthy businesses, have been dropping their prices in order to get a deal done.”

How Sellers Can Help Improve Their Business’s Value

While current market conditions are creating a buyer’s market, there are still ways for sellers to make their businesses more attractive to foster a successful business sale. BizBuySell.com suggests that sellers consider the following attributes of closed transactions that have helped those businesses reach a deal that works for both buyer and seller:

Be Realistic About What Your Business is Worth – Prices of small businesses have come down over the last 12 to 24 months, both in terms of average sale price, and multiples of company cash flow and revenue that businesses are selling for. This is the result of a few factors, but most notably a lack of confidence from buyers that the economy will improve quickly, and a lack of available capital. Overpriced businesses are having a hard time selling successfully, especially with many other businesses selling for lower prices.

Be Willing to Offer Seller Financing – Because small business lenders and the U.S. Small Business Administration are being more careful about whom they lend money to, and under what terms, capital is much more difficult to obtain than it was a few years ago. As a result, it is very rare today for a small business transaction to close without the seller providing some form of financing to the buyer. Usually, this takes the form of accepting 25-75% of the purchase price of your business as a 3-5 year loan to the buyer, rather than as cash up front. While this generally something that a seller does not want to deal with, it’s almost a necessity in today’s challenging credit market.

Give the Buyer a Roadmap to Success – Buyers are tentative, and the market is challenging. As a result, those sellers that can provide potential buyers with a plan for success will give themselves a better chance of making a sale happen. A list of potential revenue enhancement ideas, cost-cutting ideas, or just the ability for the seller to stay on in a consulting role for 6 to 12 months can all greatly enhance the potential buyers’ vision of success, which can help get them over the hump in making this difficult decision.

AnchorPepperdine Study:  Private Business Owners Prefer Risk to the Status Quo

 A large number of private business owners would take a business risk (91%) vs. maintaining the status quo (9%) and, at the same time, half (49%) said they rely on “gut feel” to make investment decisions according to a study from Pepperdine University’s Graziadio School of Business and Management. The study also shows that most private business owners expect at least a 20% return for investments within 1.5 to 3 years.

Most private business owners also report they fundraise through traditional bank loans though nearly half expect more difficulty getting loans. Private business owners said if they were to invest in a company identical to their own, they expect a 20% return for a 10-year investment. However, a large number said they would pay a premium to escape a personal guarantee on their loan. “Shrewdness, confidence and risk-taking are qualities that define a private business owner,” said the study’s author Dr. John Paglia, an associate professor of finance at Pepperdine University’s Graziadio School of Business and Management. “However, private business owners may be unrealistic in gauging investments and risks as well as sources of funding or return on investment. Generally, there may be an unhealthy expectation that the next big break is right around the corner and should take big risks to capitalize.”
Private Business Owners Say…

* Despite being generally optimistic about prospects for growth, many businesses are struggling – 30% indicate the probability of failure increased over the past six months, 46% report decreased access to capital, 34% report declines in the number of employees, 38% report declines in the size of industry, 50% report increases in competitive pressures, 36% report a decline in confidence of economic growth, 33% report declines in revenues, 22% report declines in pricing.

* When evaluating investments, businesses report using payback analysis (54.0%), market analysis (51.5%), “gut feel” (48.5%), internal rate of return (41.3%), and discounted cash flow analysis (34.9%). Larger companies (>$1M in revenues) rely more on payback (62%) and internal rate of return (48%). Smaller companies rely more on market analysis (55%), and payback (47%).

* A general investment in the business yields a 20% return expectation. They expect a 10% return from purchasing a new phone system, 20% for a new computer system, 25% for expanding a current market niche or entering a new one, and 30% for hiring a salesperson and acquiring a competitor.

* Businesses report payback thresholds of approximately 1.5 years for hiring a sales person, 2 years for a new computer or phone system, 2.5 years for expanding a current market niche, 2.8 for entering a new niche, and 3.2 for acquiring a competitor.

* Businesses report the most important factors when borrowing include interest rates, collateral requirements, loan size, and customer service. Companies are less concerned with location of lender, sophistication of bank, and length of loan term.

* Nearly 81% of respondents would be willing to pay a premium on their bank loan to escape a personal guarantee. The majority would pay between 1-3%, but the median response is 2%.

* Businesses expect a 20% annual return for a passive, minority equity 10-year investment in an identical business. They place a premium on time as they’d expect 12% for a one-year investment and 15% for a five-year. Businesses prefer to use external equity to acquire a competitor while siding with personal equity for general expansion of business.

* Most businesses would take a business risk to achieve financial independence as opposed to maintaining a current lifestyle. For increased expected returns, nearly 91% are willing to take a business risk vs. 9% who prefer the status quo.

* When faced with multiple investment opportunities, all with identical expected returns, nearly 75% of businesses are willing to take a significant business risk on a chance to earn greater returns despite lower odds.  This has been characterized as a “win the lottery” mentality.

* The majority of businesses are overly optimistic about their fundraising chances. Nearly 57% report an ability to obtain a bank loan, while 47% believe they can access private equity and 41% think VC is a source of funds for which they qualify. What makes this so startling is when 111 professionals in venture capital industry reported the number of investments in the last six months, most respondents ( 59.3%) indicate having made fewer than three investments, 27.5% reported making no investments, while 13.0% made one investment and another 18.8% made two. Looking ahead, nearly half (47.7%) of venture capital lenders believe venture capital investing over the next 12 months will be more restrictive.

The private business owner data is based on interviews with 304 business owners and is part of a larger study based on interviews with more than 700 professionals in the private capital industry. The Pepperdine study seeks to shed light on how private capital providers and others view their industry.

AnchorAn Interview with Chris Martin:  M&A Pro Shares His Own Experiences in Selling His Business

Chris Martin joined The Principium Group about a year ago.  He has brought a unique perspective to our firm.  Chris started and grew a lawn care company and then sold it prior to beginning his career in green industry business sales and acquisitions, first with another firm and now with Principium.  We asked Richard Helling,  another Principium professional, to interview Chris about his experiences regarding the process of selling his business.  We have packaged the interview as a podcast which can be found at principium.podbean.com or by searching for Principium in the iTunes store.

AnchorAbout The Principium Group 

The Principium Group provides mergers & acquisitions and business brokerage services to a variety of middle market and small businesses, with a focus on the green industry.  Put more simply:  We help people buy and sell green industry businesses.
Our professionals have assisted buyers and sellers in hundreds of transactions.
For buyers, Principium provides assistance and counsel in strategic planning, identifying potential acquisition targets, due diligence and planning for successful integration of acquisitions.
For sellers, Principium provides assistance and counsel in evaluating strategic alternatives, identifying and negotiating with potential acquirers and assisting with transactions from due diligence through the closing process.
We understand that the decision to buy or sell your business is a profound one, and we pledge to work with you in a professional and confidential manner while we help you navigate this often confusing process.
Whether you have immediate plans to buy or sell a business or may sometime in the future, we would welcome the opportunity to talk with you about your business.
 
 

Leaders in Green Industry Mergers & Acquisitions

 
If you are thinking about buying or selling a green industry business, we can help!
 
The information included in this newsletter is derived from publicly available sources.  Our intent is to give a perspective on the industry taken as a whole.   The inclusion of a transaction in this newsletter does not imply that The Principium Group acted as an advisor to either of the parties to the transaction.  It is the policy of The Principium Group always to maintain the confidentiality of its client relationships.  For those transactions in which The Principium Group did play a role, the information included herein is still limited to that available through public sources.
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