Our team at High Rock Partners is constantly listening to clients and observing market trends.  In a short video, we captured our view of the quandary of emerging growth and middle market company leaders.  The need and case for focusing on value creation has never been more prominent than it is now …businesses must pursue strategies to become stronger …not just to lead, but to survive and thrive.  Here’s a link to view the video  http://vimeo.com/53096085 . The snippet ends by talking about our framework and tools to create value for shareholders; it is called Strategy Navigator™.

Also, here’s a link that talks about the Value Gap on Divestopedia.com

In 2012 we published our book on mergers and acquisitions ….it is called “Middle Market M&A: Handbook of Investment Banking & Business Consulting“.  One of the topics we address is financing acquisitions and various ways to thinking about getting deals done.  In the middle market, funding strategic deals is often a mix of senior debt coupled with mezzanine and some type of seller financing (i.e. seller note or earn-out).   If your company, as the buyer, is a lower middle market business itself; a key to being credible in the negotiating process is having evidence of financing before you enter discussions.  This essentially means building an acquisition strategy and plan, then obtaining buy-in from lenders and investors before going to market.  An advantage of this approach is having the experience and support of your financing sources early-on and in due-diligence.  Overall this helps improve the likelihood of a successful transaction.

Hiring the right team is always important, and no different when considering the purchase or sale of a company.  For owners in lower middle market businesses, it can be confusing when deciding on what type of advisor you need or who will really serve your interest.  Here’s a quick note on understanding the differences between business brokers, M&A advisors and investment bankers.

Business brokers typically work with smaller companies that will likely sell to an individual buyer (vs. a corporate or institutional buyer).  The process they use is very similar to that of listing a house for sale …and the terms they use are about the same.   In concept, business brokers sell companies that are income replacement for the owner/operator; and valuation is typically based on “sellers discretionary earnings”  (cash flow to the owner/operator).   Information is collected about the business and the company is advertised for sale on websites and marketed with an asking price.  The typical transaction is the sale of the company’s assets using template or standard forms.

M&A advisors and investment bankers are similar in their offerings, though there are some differences. To some degree, M&A advisors bridge the market gap between transactions that are clearly led by investment bankers (those where the deal size is greater than $150 million) and those led by business brokers (typically less than $2 million).  Investment bankers typically offer a broader range of services and work with larger companies …services like fairness opinions, public offerings, etc…  and those that might require formal licensing as a broker-dealer.  In practice, most lower middle market transactions do not require the advisor to be licensed under the securities laws, thus you find that most are not; however, this is a grey area and subject to specific facts and interpretation that will hopefully be addressed by the SEC and congress in the months to come.   In general, investment bankers are purely transaction driven and have minimum fee expectations (which tend to create a floor in the size clients that they serve).

M&A advisors tend to be somewhat consultative and might work with clients in the strategy and planning phases as they consider their exit or liquidity alternatives.  Both M&A advisors and investment bankers run a process to sell a company that is proactive and usually focused on creating a competitive and timed environment for the seller with the goal of optimizing the value and reaching the seller’s objectives.   Unlike the passive process used by business brokers, the actively managed process of M&A advisors and investment bankers tend to add value …and should pay for itself, not being a cost to the seller …rather an investment with an expected return.  M&A advisors and investment bankers typically buy and sell companies to/for other companies or institutional investors e.g. private equity funds.   The transactions involved at this size and stage of the market tend to be somewhat complex and require a level of sophistication and understanding in corporate finance not found at the lower-end of the spectrum.