Monthly Update – October 2019

October 2019

Featured Clients this issue:
**Details of each client below article

– Recreational Facility Construction Contractor #319
– Sports Pub with Real Estate #1318
– Steel Fabrication #419

It is a bit cooler and the leaves are turning, indicating that Fall has arrived.  Even without those telltale signs, the increased level of acquisition activity at our office would let us know that we have changed seasons, as we are seeing multiple buyers submitting proposals to acquire our clients.

On a somewhat different note, last week, I attended a three hour presentation from an economist, who despite the current political environment, is very bullish on the US economy for the next two to three years and remains particularly bullish on Colorado.  As somewhat of a segway, The UCCS Forum takes place on Thursday, October 10th and is great source of economic data.  There is a registration link near the back of this newsletter, if you are interested in attending.

This month’s featured article is the last of our series on M & A Terms.  A thanks again to our team member, Scott Densmore, for putting this together.

The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.   

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Ronald V. Chernak

Inspiring business relationships since 1982!

Glossary of M&A Terms
Sixth and Final Installment
If you are trying to buy or sell a business, then you know that the terminology can get quite confusing. The FBB Group, Ltd. has compiled a list of terms and their respective definitions to try and clear up any questions you might have on how to buy a business or sell a business. As this list is quite extensive, we will be dividing it up into multiple parts, published in multiple eNewsletters.

  • SBA loan: A loan that qualifies for a guarantee from the U.S. Small Business Administration.
  • Seller’s Discretionary Earnings (SDE): A term used to denote a business’s cash flow or the amount of pretax money a buyer can expect to earn in first-year operations.
  • Seller Financing: A method of financing a business acquisition in which the seller carries a note for a portion of the purchase price. Also called Seller Carryback or Seller Note.
  • Search Fund: An individual or group of individuals seeking to identify an acquisition candidate that the individual or group can acquire and subsequently manage. Typically, search funds do not have dedicated capital to acquire a business but, rather, have informal pledges from potential investors. Related uses or terms – fund-less sponsor
  • Seller Note: A note payable or loan to the shareholder(s) or owner(s) of a business provided in the sale or transition of a company by the buyer. Seller financing is typically used to bridge a valuation gap either where other forms of financing are not available or where a buyer desires to preserve the borrowing ability of the selling company for secured financing. Seller financing is typically unsecured and subordinated below all other debt.
  • Special Interest Purchasers: Acquirers who believe they can enjoy post-acquisition economies of scale, synergy, or strategic advantages by combining the acquired business interest with their own.
  • Standard of Value: The identification of the type of value being utilized in a specific engagement; e.g. fair market value, fair value, investment value.
  • Stock Sale: The buyer purchases the stock in a corporation so the corporation is acquired in whole and the buyer obtains all assets and liabilities.
  • Structure (Transaction Type): The method in which the target and the buyer exchange value. The target sells either assets or stock, and the buyer provides consideration primarily in the form of either cash or stock. The parties could also merge by exchanging stock.
  • Subordination: The act of making an encumbrance secondary or junior to another lien.
  • Success Fee: Money or other valuable consideration given to broker by principal for services rendered; amount is by agreement.
  • Survival Period: The length of time (in months) after the closing date during which the representations and warranties must be true and the seller is responsible for indemnifying the buyer (e.g., claims by the buyer must be made on or before that date).
  • Sustaining Capital Reinvestment: The periodic capital outlay required to maintain operations at existing levels, net of the tax shield available from such outlays.
  • Systematic Risk: The risk that is common to all risky securities and cannot be eliminated through diversification. When using the capital asset pricing model, systematic risk is measured by beta.
  • Teaser:  An anonymous document circulated to potential buyers of a specific business is for sale. The document, often prepared by an advisor, details information that is designed to entice potential buyers
  • Transaction Value: The total of all consideration passed at any time between the Buyer and Seller for an ownership interest in a business enterprise and may include, but not limited to, all remuneration for tangible and intangible assets such as furniture, equipment, supplies, inventory, working capital, noncompetition agreements, employment and/or consultation agreements, licenses, customer lists, franchise fees, assumed liabilities, stock options, stock or stock redemptions, real estate, leases, royalties, earn-outs and future considerations.
  • Unlevered Beta: The beta reflecting a capital structure without debt.
  • Valuation: The act or process of determining the value of a business, business ownership interest, security, or intangible asset.
  • Valuation Approach: A general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more valuation methods (There are three approaches generally used to value a business: Asset Approach, Income Approach, and Market Approach.)
    • Asset Approach: Determines the business value based on the value of its assets less its liabilities (The commonly used valuation methods under this approach are: asset accumulation method and capitalized excess earnings method.)
    • Income Approach: The value of a business based on its ability to generate desired economic benefit for the owners (The key objective of the income based methods is to determine the business value as a function of the economic benefit. The economic benefit such as the seller’s discretionary cash flow or net cash flow is capitalized, discounted or multiplied to perform the valuation. The well-known methods under the income approach are: Discounted cash flow method; Capitalization of earnings method; Multiple of discretionary earnings method.)
    • Market (Market-Based) Approach: Establishes the business value in comparison to historic sales involving similar businesses (The business valuation methods under the market approach that are typically used in professional business appraisals include the Comparative transaction method and the Guideline publicly traded company method.)
  • Valuation Date: The specific point in time as of which the valuator’s opinion of value applies (also referred to as “Effective Date” or “Appraisal Date”).
  • Valuation Method: Within valuation approaches, a specific way to determine value.
  • Valuation Procedure: The act, manner, and technique of performing the steps of an appraisal method.
  • Valuation Ratio: A fraction in which a value or price serves as the numerator and financial, operating, or physical data serve as the denominator.
  • Weighted Average Cost of Capital (WACC): The cost of capital (discount rate) determined by the weighted average at market value of the cost of all financing sources in the business enterprise’s capital structure
  • Working Capital: Working capital is a measure of both a company’s efficiency and its short-term financial health. Working capital is calculated as: Working Capital = Current Assets – Current Liabilities. The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.  Also known as Net Working Capital.
  • Warranty: An expressed or implied statement that a situation or thing is as it appears to be or is represented to be.
  • UNIFORM COMMERCIAL CODE (U.C.C.): State laws which regulate the transfer of personal property. Article Nine of the U.C.C. deals with transactions which are intended to create a security interest in personal property.
  • U.C.C. SEARCH: A UCC search is a review of the appropriate county and State records in regard to any liens against personal property, tax liens and judgments.

This Glossary of Terms was compiled using multiple sources, to include: representatives of the American Institute of CPAs, the American Society of Appraisers, the Canadian Institute of Business Valuers, the Institute of Business Appraisers, the National Association of Certified Valuation Analysts, Private Equity Firms, Barron’s, Investopedia, Divestopedia, PitchBook, IBBA, M&A Source and merger & acquisition advisors.

Recreational Facility Construction Contractor #319

Adjusted EBITDA for 2018 is over $1,400,000 for this elite recreational facility contractor, which serves a specialized high-end niche of the construction industry. It has a backlog of $10,000,000. The company has very limited competition. It primarily serves the Colorado Front Range, but works throughout the state on major projects that have solid profit margins. The company has long-term client relationships, having been in business for over 30 years. The clients are mainly general contractors, engineering firms and architects. An experienced, well-trained workforce is in place. This business would be appealing to an individual experienced in construction or a construction-related firm looking to expand. The real estate is available for purchase. The business will qualify for a long-term SBA guaranteed loan with a relatively low down payment and provide the purchaser a cash on cash return on investment of about 90%. Working capital of $500,000 Accounts Receivable and $125,000 Inventory is included in the transaction.

  • Purchase Price (Business)…$3,950,000
  • Down Payment (Business)…$660,000
  • Purchase Price (Real Estate)…$450,000
  • Gross Sales…$6,206,958
  • Adjusted EBITDA…$1,441,534