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2020 Mid-Year U.S. Economic Outlook

The COVID-19 global pandemic is having a significant impact on economies across the world and business owners are understandably concerned. In these times of uncertainty, many are asking what can be expected in both the short and long term for the United States economy.

Looking Back at Q1 and Q2

After several years of economic expansion, the U.S. gross domestic product (GDP) dropped 5% in the first quarter of 2020, and plummeted 52.8% in the second quarter. The National Bureau of Economic Research (NBER) declared that the U.S. economy officially entered recession in February. 

  • Consumer spending was down 13.6% in April, slightly rebounding in May, up 8.2%.
  • In May, U.S. employers added 2.5 million workers back to payrolls and housing rebounded moderately.
  • The Federal Reserve cut interest rates and rolled out a $2.3 trillion effort to help local governments and small- to mid-sized businesses, and the U.S. government approved nearly $3 trillion in aid.
  • 8 million jobs were added in June, while more than 19 million Americans were still receiving unemployment insurance benefits.
  • June retail sales jumped 7.5%.

 

Ready to explore your exit and growth options?

 

Forecasting Q3 and Q4

Goldman Sachs forecasts U.S. GDP growth of 25% in the third quarter, down from a previous forecast of 33%. The NBER Conference Board expects a 20% rebound in quarter three, with growth slowing to 1% in quarter four.

The manufacturing and construction sectors continue to recover, with predictions of 8% growth in the fourth quarter. Additionally, existing home sales have rebounded at a record pace.

Consumer confidence is going to depend on how rapidly the virus is brought under control. In July, coronavirus cases spiked in many areas of the country, causing some state and local governments to step back on reopening plans. The recent resurgence in cases has slowed expected consumer spending, as many Americans are unable to visit certain places due to state restrictions. Markets will likely remain erratic until there are solid indicators for increased confidence. The economy will recover, it is just a matter of when, keeping in mind that recoveries tend to be longer and stronger than downturns, and returns are usually highest after the market bottoms out. As of late July, September is a hopeful target for a bounce-back in spending.

Even once restrictions are lifted and businesses are able to operate as normal, the recovery will hinge on how willing Americans may be to participate. Consumer demand is expected to remain sluggish through the latter half of the year, but there are positive long-term investment opportunities that arise out of such an environment, especially for companies that have shown that they can adapt under dire circumstances.

New developments in COVID-19 clinical trials indicate that a vaccine could be available by 2021. A vaccine or treatment will be critical to boosting consumer confidence and economic growth.

Finding Opportunities Within a Crisis

While the virus has had devastating impacts across several sectors—especially travel and hospitality—it has also created opportunities for certain industries. Types of businesses that have seen strong growth during the pandemic include telemedicine, online retail, food and grocery delivery services, home improvement, educational services, gaming, cleaning products, RVs, and even puzzle makers.

With people working and schooling from home, people’s lives are now more digital than ever. Demand for cloud-based services has skyrocketed. Streaming services and mobile payment services are increasingly popular, and reliable broadband is a must-have. During mandatory lockdowns, consumers became more likely to try things for the first time, such as grocery or alcohol delivery, and may opt to continue to use them following the COVID-19 pandemic. These types of outcomes could translate into even healthier e-commerce growth potential in the future, not just in the U.S, but also globally.

There will also be possibilities for partnerships through mergers and acquisitions. Prior to the crisis, private equity was sitting on an estimated upwards of $1 trillion in dry powder and will likely play a key part in the revival of the economy. M&A opportunities are expected to be in the most resilient sectors post-pandemic, and bidders are predicted to become aggressive in seeking out company valuation bargains in the hardest hit industries such as the transportation, hospitality, and energy sectors. Additionally, in the more stable sectors, deals could be driven by the need to vertically integrate and address supply chain issues to get back on track. There is also the possibility for stock deals to become more appealing as equity prices fall.  

Schedule a Virtual Valuation

Contact the M&A advisors at Benchmark International to discuss the possibilities for the future of your business. We are here for you, even throughout the pandemic, getting deals done and making great things happen in the most trying of times. You can even schedule a Virtual Valuation in order to practice social distancing while gaining an understanding of the current value of your company.

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What is COVID-19 Doing to the M&A Markets Now?

What’s the latest effect (as of late-July) COVID is having on lower middle-market M&A in the US? 

Some deals have fallen out resulting in some new buyer requests emerging. As with stock in the publicly traded markets, we are seeing what you might call a “sector-rotation.” Any time you have a change in the macro-environment, whether favorable or unfavorable to the economy overall, you see buyer preferences shift.

Is activity shrinking?

Demand has moved and it takes time for supply to catch up. Also, it takes upwards of three months to close an M&A deal, even in the smoothest of times. So, replacing those deals that fell out that were in the middle or even their end phases will require some time. But the buyers still keep calling. We aren’t seeing a deeper trend, which would be concerning, about money being pulled out of private equity. So, the ship has taken a roll but there is no sign it's taking on any water.

Why haven’t buyers dried up?

Institutions and wealthy individuals invest in private equity and turn into the lower middle-markets because they need a place to set their money to work for them. 

Globally, governments have slashed interest rates in response to the pandemic. That made every other class of investment less attractive. Coming into 2020, we were concerned that rising interest rates would make those other asset classes more attractive, and we would see the historic record inflows to private equity dry up. But that has now been deferred for another year or so. Once governments recognize the need to pay off these massive bills they’ve just created, probably at the end of the next budget and tax cycle, we will see interest rates rise, perhaps even faster than we had expected as governments raise taxes and attempt to inflate away their debt.

 

Ready to explore your exit and growth options?

 

That’s fine for financial buyers but what about strategic buyers? 

Yes, some have headed for the sidelines for the time being. But operating companies, as always, need to grow their revenue and the healthiest businesses will continue to look for growth opportunities. In the present scenario, we also have companies that weren’t as healthy or as growth-oriented that now need to replace some revenues and that need to, in a way, reinvent themselves or find alternate routes to market. We also are seeing trade buyers entering the market because they have lost key suppliers or are worried about losing key suppliers, and they are looking to integrate upstream. Fortunately, larger companies went into this situation with overall corporate debt at record lows. That means there are companies out there that have the room to borrow even if their operations are not going gangbusters at the moment.

But are banks lending? 

Debt is tightening at the moment. Lenders don’t like uncertainty. This is part of the reason that deals that were negotiated pre-COVID are falling out. Buyers use as much debt as possible and if interest rates go up (which they did for M&A debt even though no-risk and low-risk interest rates were brought down), then the math of the deal gets reshuffled and someone backs out. But banks adapt and as the risk-free rate hovers near zero, they find ways to get comfortable with handing out M&A debt. Seeing senior debt on deals now brings them around 6% and mezzanine debt 12-14%, is helping them adapt faster at the moment. We are seeing deals carry a little less debt over the last few months, but bankable deals are still getting debt. Unfortunately, though, lenders are a little more investigative and slower than normal, so we are seeing this add perhaps a month to many deals.

What effect does this have on the price? 

So far buyers are being creative, and those that are not are losing their deals. The good buyers are coming back and tinkering with the deal structure to keep the overall multiple up rather than lose the deal. We are seeing them ask for more seller debt and more rollover. Deals that used to have a 20% rollover component now might have 30 or 40%, leaving the sellers a bigger second bite at the apple while still satisfying their need or desire for a transaction. 

So, is it still a good time to enter the market? 

The best time to enter the market if you are selling ice is the summertime. But the amount of time it takes to get a company to market is longer than the range of our visibility at present into where the market will be when the company is truly at the step of “entering the market”. So that question carries a bit of a false pretext. The real question is: “Is it time to start the process?” 

The answer to that question is: “It’s always time to be ready to sell.” And because of today’s added volatility, to the extent, an owner is trying to time a window they are going to have a better shot at it if they get started, get their marketing materials made, learn the process, and stand ready to enter.

Is it really all about market timing? 

No. You can sell ice in the winter, and you can sell it for the same price as in the summer if you know what you’re doing. You just have to work harder and maybe be a bit more patient, creative, or flexible. You need a solid process, broad market outreach, and a good M&A team around you. I’ve known too many owners that waited for the right wave and by the time they realized it had come, it was past. At least those that were sitting on their board out in the surf could try to chase that wave or ride the back of it, as opposed to those waiting on the beach. You can certainly sit out a solid tough spell but getting the right deal is not about hitting the market at just the right time. Buyers come and buyers go. There is always a quality buyer out there that needs the business and will pay top dollar if handled properly.

Final thoughts on the current situation?

Selling a business is too important of a decision to let any single factor decide for you. The business is usually the owner’s life’s work and therefore the considerations are infinite. Never will all of them fall into a perfect line. In other words, there are always reasons to not sell. Fortunately, starting the process and deciding to sell is not the same thing. Starting the process simply requires the reasons to sell being slightly greater than the reasons not to sell. Then, six months or a year later when the contract is on the table and the pen is in your hand, the relative importance of the pros and cons shifts. Our clients pass up offers all the time. Just because they pass on an offer does not mean that they should not have started or entered the market when they did. As long as they retain absolute discretion to sell or not to sell throughout the process, being worried about where the market is or where it might be going should not be a major concern.

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Why You Should Consider Expanding Into New Markets

If your business is successful in your geographical region, it could be time to look at moving into new markets. Expanding your company into new markets can be a powerful solution for creating growth for several reasons. If your business is based in the United States, just stop and consider the fact that 96 percent of the world’s consumers reside outside of America’s borders. Globalization is becoming more and more common for brands, and it is here to stay.

Gain New Customers and Boost Revenue

When a business is performing well, it is not uncommon for its growth opportunities to become exhausted within its home market. By turning to expansion strategies, new markets open up significant potential to reach a broader customer base, in turn increasing sales and revenue. In fact, reports show that 45 percent of middle market companies make more than half of their revenue overseas.

Diversify

By taking your company into new markets, you have the opportunity to diversify, making revenue more stable. Say your domestic market is slowing. By being in a more global market, you gain the advantage of having it as a protective measure during slower economic times at home.

Enhance Your Reputation

When you provide your product or service to customers in new markets, it bolsters your reputation both abroad and at home. A favorable reputation inherently attracts new customers. Expansion also builds name brand recognition and gives your business more credibility on a larger scale.

 

Ready to explore your exit and growth options?

 

Get a Competitive Edge

This one is simple. Get into new markets before your competitors do. This is especially important if you are operating in a saturated market. If you get there first, you get the customers first and can take measures to retain them. This is much easier than being the second or third in the new market and trying to lure customers to switch to your business for similar products or services. This is why it’s no surprise that nearly 60 percent of middle market companies include international expansion into their growth strategies.

Access More Talent

More geographical reach means a bigger talent pool. It also means adding valuable advantages such as language skills and varied educational backgrounds. It also allows you to employ local talent that has the expertise to effortlessly serve and communicate with your customers in the same time zone. This can be a key strategy if your company is older and has decades of experience operating in your home market.

Save Money

Believe it or not, expanding can actually lower your company’s operational costs and save you money, especially if your business involves manufacturing. In other markets, you may find lower costs of labor and more affordable talent. Also, advancements in e-commerce and logistics have lowered the cost of doing business overseas. And lets not forget about taxes. Several countries around the world offer tax incentives to companies looking to expand internationally because it brings new business opportunities to their homeland.

Contact Us

If you are a business owner looking for ways to grow your company, talk to our M&A experts at Benchmark International. We have extensive experience, a massive network of global connections, and plenty of great ideas. You can take comfort in knowing that everything we do is predicated upon doing the right thing for you and your business.

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10 Important Post-merger Integration Tips

Having a solid integration plan in place for your company merger is critical to the future success of your business. These tips can help prepare you for the process.  

  1. Begin planning from the earliest possible point in time. Outline all of your goals and objectives, employ best practices, and identify any gaps in your plan. Make sure all the key parties involved in the merger are in agreement on the integration plan. You should start implementing the integration process before announcing the deal. This enables you to begin integration immediately versus rushing to make important decisions at the last minute.
  2. Create an integration team and clearly communicate the strategy for moving ahead with all necessary parties involved. Assess your key areas of value and designate the teams or persons responsible for these areas, making sure they understand the exit criteria they will need to meet.
  3. Make sure leadership roles are clearly defined during and after the merger. You may even want to consider bringing in leadership from outside both companies to benefit from a neutral perspective. Insist that leadership is committed to both the big picture for the company and the details of getting integration done right.
  4. Synergy is important in all aspects of the business, but especially in its culture. Commit to one culture and take measures to ensure that it will be preserved.

 

Ready to explore your exit and growth options?

 

  1. You are going to want your staff to be positive and excited about the merger, rather than nervous and/or cynical. This means you are going to have to sell the deal to them, ensuring they understand why the move will be good for them. Craft an internal communication plan that makes sure that no one is left in the dark at any point along the way. You will want to make sure you keep the overall messaging consistent to manage expectations properly.
  2. Have a solid plan for all things IT. This is a critical component of any business. How the technology will be integrated must be completely planned out to avoid any communication breakdowns or loss of important data. Implement a structure to track progress and identify potential risks so that they can be addressed in a timely manner.
  3. Understand what type of deal you are making and how it will dictate the days ahead. For example, a scale deal is an expansion in the same or overlapping business. A scope deal is an expansion into a new market, product or channel. All of your integration decisions will be based on this.
  4. All sorts of things can crop up and slow down or sidetrack an M&A transaction. Do your best to stick to the timetable you outlined while ensuring that you make smart decisions rather than just following the process for the process’s sake.
  5. Just like easing the minds of your employees, you will need to do the same for your customers. Make every effort to ensure minimal disruption for all of your customers and clearly communicate your plans with them to address any concerns.
  6. Remember you are still running a business. Avoid becoming so distracted by the transaction that you neglect business priorities such as your customers’ needs. You must keep the company on track and running smoothly if you expect the deal to be a success.

Finally, be sure to celebrate your successes. After an arduous process, employees should feel that their work is appreciated and everyone should share in keeping the momentum going moving forward.

Contact Us

At Benchmark International, our highly esteemed M&A experts are eager to roll up our sleeves and get you a stellar deal for your company. Reach out to us at your convenience.

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How Biden's Proposed Tax Plan Could Impact Your Company's Exit Strategy

Tax implications could be drastically different 18-24 months from now and M&A markets are preparing to react to increased liquidity events in 2021 and beyond. The implementation of the proposed Biden Plan would have negative tax consequences which would cause a significant impact on net proceeds from any potential M&A transaction. Taxes on capital gains could rise to 40 percent for proceeds of a business sale over $1M. Individuals can expect a reversal of at least half of Trump’s signature tax cuts to pay for the plan.

For business owners generating over $1M in the sale of the business, expect to have earnings (“capital gains”) taxed as ordinary income under the Biden plan. Today, capital gains are taxed as income. A capital gain is a profit from the sale of a capital asset, such as a stock or home, from the time that asset is acquired until the time it is sold. Taxpayers pay the difference on the purchase price of the asset (“basis”) less the sales price.

Three Major Components Of The Plan

The plan has three major components: raising the corporate income tax rate to 28 percent, revoking the TCJA’s income tax cuts for taxpayers with taxable income above $400,000, and imposing a “donut hole” payroll tax on earnings in excess of $400,000.

The Biden Plan has considerable impact to business owners; careful consideration to the timing of an exit and liquidity strategy needs to be at the mind’s forefront as the 2020 election quickly approaches. If endorsed, the plan impacts owners directly through the implementation of new tax obligations or the elimination of tax benefits. This includes a 19.6 percent increase on the tax rate of material long-term capital gains for those with adjusted gross income (AGI) exceeding $1M, and a 7 percent increase in the overall corporate income tax rate as noted in the table below.

Example: Assume a $2.0M EBITDA business receives a valuation multiple of 10x for a total transaction value (taxable gain) of $20.0M. Under the Biden Plan, the seller would lose $3.92M in the sale. To receive the same net proceeds, a multiple of 13.2x would need to be secured.

Independent of the 2020 election, taxes are being reevaluated at the state level. This includes increased tax burden on transaction proceeds. The adoption of the proposed graduated income tax rates proposed in states such as Colorado, Illinois, and Michigan would result in a higher state tax burden for high earners. California has already adopted this measure and has a 13.3 percent top marginal tax rate for individuals with income above $1.0M.

 

Ready to explore your exit and growth options?

 

What If I Want To Transfer My Wealth?

The step-up in basis for inherited capital assets may cease under the plan. This elimination translates to more taxes on wealth passed to heirs and ending favorable tax rates on capital gains for anyone making over $1M.

How Are My Stocks Affected?

The 2017 tax reform law dropped the corporate income rate to current 21 percent level. The proposed plan increases the corporate tax rate from 21 to 28 percent.

For people that earn $300,000 a year, you more than likely own shares in publicly traded companies. Under the plan publicly traded companies will be paying higher taxes which means less cash available for dividends to stockholders. Biden is suggesting a 15 percent minimum tax on large corporations. Goldman Sachs has projected that Biden’s tax plan would lead it to reduce its 2021 earnings estimate by 12 percent.

The tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms will double from 10.5 percent to 21 percent.

How Is The Overall Economy Affected?

Experts suggest this plan would shrink the size of the economy by 1.51 percent due to higher marginal tax rates on capital and labor. A decrease of 3.23 percent in capital stock and reduction of 0.98 percent to the overall wage rate would lead to 585,000 fewer full-time equivalent jobs according to the Tax Foundation’s General Equilibrium Model.

Over the course of the next 12 to 24 months sellers and buyers alike will be keeping a pulse on the results of the 2020 presidential election and the possibility of a significant tax overhaul. It is important to note the reality of the Biden Plan coming to fruition can be driven by not just a Biden election; other drivers can include Democrat control over the U.S. House of Representatives or a change in control in the U.S. Senate from Republican to Democrat.

With the 2020 election on the horizon, it is crucial that business owners contemplate the potential tax consequences and consider crafting an exit strategy now to be ahead of the tax changes.

The recipient should consult their own tax, legal, and accounting advisors before engaging in any transaction. This document has been prepared for informational purposes only and is not intended to provide, and should not be relied on, for tax, legal, or accounting advice.

Sources: Tax Foundation, Kipingler, Houlihan Lokey and Yahoo Finance

 

Author
Emily Cogley
Director
Benchmark International

T: +1 813 898 2350
E: Cogley@BenchmarkIntl.com

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The 2020 U.S. Election And M&A

Past presidential elections in the United States have coincided with macroeconomic circumstances that affect markets. For example, in 2000, the dot-com bubble burst. In 2008, America was in the midst of the Great Recession. And now in 2020, we are in the middle of a global pandemic, dealing with the impacts of the COVID-19 virus, coupled with sweeping protests regarding racial injustice and the repercussions that forced closures have on businesses. In the wake of all of this, four months remain until the November election. Unfortunately, we cannot predict the future, but we can take a look at how the M&A market has been impacted in the past.

M&A activity is cyclical in nature, subject to underlying circumstances that include changing technology, electoral politics, and regulatory changes. As the current M&A cycle winds down, it is worth noting that the dealmaking wave that ceased during the financial crisis actually got started during a slowdown in 2003. Leading up to the 2008 election, M&A activity in the U.S. was strong and it did not bottom out until later when the worst of the recession had passed. Two major relief packages, the Emergency Economic Stabilization Act of 2008 enacted by the outgoing administration, and the American Recovery and Reinvestment Act of 2009, enacted during the first year of the new administration, boosted recovery in capital markets and helped companies adapt to adverse macro conditions in the near term, and eventually paved the way for a new M&A cycle because the cost of capital was reduced to historic lows, injecting liquidity into equity and bond markets.

The level of dealmaking activity in the multiquarter period leading up to the 2012 election compares favorably to the financial crisis period that coincided with the 2008 election at $802.6 billion in 6,087 deals, topping activity for the same period the year before. In the first three quarters of 2012, M&A activity saw a combined $837.5 billion in 6,864 completed deals. The JOBS Act was enacted in 2012, designed to encourage small businesses to become public companies. As a result, the SEC made the filing process easier to manage.

 

Ready to explore your exit and growth options?

 

M&A activity peaked in Q4 ahead of a decline in 2013 Q2 that bottomed out at $241.3 billion in 2,049 transactions. In mid-2013, M&A activity accelerated and the cycle expanded, partially stimulated by strategic buyers contending with financial sponsors armed with record levels of dry powder. Private equity has kept that cycle going from 2013 to 2019. Volume met or exceeded 900 completed transactions and at least $70 billion in value over the same timespan.

Certain conditions that were a result of the financial crisis spurred expansion of the M&A cycle and have proven favorable for private equity and venture capital dealmaking, such as enterprise restructuring around developing regions, expansion of business portfolios, and optimization for tax benefits and accessing cash outside the U.S.  

During 2014, completed transactions grew 26% year-over-year, while deal value increased by an additional $500 billion. This cycle of completed transactions peaked in 2015 at 12,523 deals of $1.9 trillion in value. Annual volume remained above 11,000 transactions with deal value at around $2 trillion for each of the past five years.

Leading up to the 2016 election, M&A activity was pushed to its highest levels per quarter in a decade. In the first three quarters of 2016, 8,825 transactions worth a combined $1.6 trillion closed. Activity dropped in Q4, but rebounded in 2017. Since 2018 began, M&A has steadily declined and Q4 2019 posted the lowest total since Q2 2013. 2019 saw levels return to those last seen in 2013. On June 8, 2020, the National Bureau of Economic Research announced that the U.S. entered into a recession in February of 2020.

While the global pandemic has undoubtedly been costly and detrimental to many businesses, it has also opened up opportunities for growth for some companies as consumer behaviors adapt to a changed world. Global supply chains were massively disrupted, hampering global trade, all of which has a negative impact on dealmaking. How it will play out in the later half of 2020 and into 2021 will depend partly on if there is a second wave of the virus and the availability of a vaccine. Technology remains a continuously evolving area of opportunity and the pandemic has changed the ways that we work and collaborate. Environment, social and corporate governance practices will continue to designate the convergence of technology and regulation. How the election will impact M&A markets remains unknown, but history has shown that emerging out of a recession tends to spawn accelerated M&A activity well into the future. Every M&A cycle develops in response to different conditions, yet all have emerged during periods of economic recovery combined with improvements in capital markets after consecutive quarters of underperformance.

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5 Tips For Preparing Your Company For Sale

When the time comes to sell your company, you obviously want to get the most value and the highest possible price. There are several steps you can take before going to market to increase the likelihood of you cashing out for more in a merger or acquisition.

  1. Focus on Profits and Growth

You will want to increase your net revenues and profits, keeping in mind that buyers will focus on EBITDA (earnings before interest, taxes, depreciation and amortization) for valuation. This is the number you want to boost because the higher your EBITDA, the higher your sale price will be. Your company’s growth potential will also be important to acquirers so you should put extra effort into growing your sales, even if it means hiring more sales talent (as long as it justifies the costs—adding salaries and benefits need to be worth the results).

  1. Get Your House in Order.

The M&A process will certainly include a comprehensive audit of your financial records and any other business concerns. It is key to get all of your documentation in order before embarking on a sale. The more complete and orderly your record keeping is, the more confidence it will instill in potential buyers. This also means you should address any unsavory topics, conflicts or legal issues. Getting any discrepancies resolved will prepare you to honestly answer difficult questions and demonstrate your commitment to getting a transaction done. Buyers do not want to be faced with surprises during the due diligence process.

 

Ready to explore your exit and growth options?

 

  1. Do a SWOT Analysis. 

Take the time to assess your Strengths, Weaknesses, Opportunities and Threats. You need to understand where your company stands in the current market, how it stacks up to competition, and how to maximize its strengths. If you have a complete understanding of your SWOT profile, you can take the necessary measures to position your company to buyers in the best light possible by uncovering growth opportunities and being proactive against any impending risks.

  1. Trim the Fat. 

Think about any areas of your business operations that could be tidied up, such as redundancies or costs that do not add any value to the company. Can you justify everyone that is on your payroll? Would outsourcing be more cost effective? Can you spend smarter when it comes to equipment? Are you carrying outdated inventory? Is there property that you are paying taxes on that you really do not need? What can you do to avoid adding new expenses? This doesn’t mean you should cheap out on anything that affects your core competencies. But sometimes simply reallocating resources can help you optimize the financial health of your company.

  1. Get an M&A Advisor. 

M&A advisors handle a significant amount of the complicated work that goes into the lengthy deal process. Their exclusive connections will get you access to quality potential buyers. They will help you prepare and market your business effectively, finding ways to make it more enticing to buyers. Another benefit of an M&A partner: not only will buyers know that you are serious about selling, but you will also know that they are serious about buying. They will also help you organize your due diligence documentation and present your financials, coordinate meetings, help with exit or succession planning, and ensure that you have peace of mind through such a momentous time in your life.

If you are ready to sell your company, please contact our M&A advisory experts at Benchmark International to get you on the path to a deal that meets all of your aspirations.

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3 Ways To Grow Your Company

  1. Through a Merger

A merger unites two independent, similarly sized companies as one new entity, typically with a new name. This strategy adds value to both companies by growing into new market segments, gaining market share, or expanding geographic reach. A merger enables the new venture to benefit from the best that each company brings to the table as far as expertise, talent, technology, products, services, assets, and market penetration. In total, it offers a powerful competitive edge. A merger can also be less time consuming than other strategies, such as relying on organic growth.

  1. Through an Acquisition

In an acquisition, a company purchases a 51 to 100 percent stake in another company, taking control of it and all of its assets. Acquiring a business means acquiring its already established customer base, talent, geographic diversification, portfolio of services, and other immediate growth opportunities that would take years to create under organic growth.

Both mergers and acquisitions offer several advantages for a company looking to generate growth and value.

  • Expansion: M&A can easily extend the reach of a business in terms of geography, products and services, and market coverage. This translates into more customers gained without having to hire more salespeople or increase marketing expenditures.
  • Consolidation: M&A can unite two competitors to bolster market domination. It can also increase efficiencies by cutting surplus capacity or by sharing resources. Plus, M&A can increase production efficiency and bargaining power with suppliers, coercing them into lowering their prices. It can also allow a business with weak financials to combine with a stronger one and pay off debt.
  • More Capabilities: M&A can boost a company’s capabilities by quickly adding new talent and new technologies rather than taking the time and energy to develop each from scratch.
  • Lower Costs: By merging with or acquiring another business, you can lower costs and increase efficiency and output.
  • Speed: M&A empowers a business to grow more quickly, altering the landscape of the sector more rapidly than competition can adapt and respond.
  • Tax Perks: Profits or tax losses may be transferable within a combined business, benefiting from varied tax laws within certain sectors or regions.
  • Unbundling: Sometimes a company’s underlying assets are worth more than the price of the business as a whole. In this case, a company can acquire another and quickly sell off different business units to other buyers at a substantially higher price.

 

Ready to explore your exit and growth options?

 

  1. Through a Strategic Alliance

Mergers and acquisitions adjoin companies through total change in ownership. But there are ways that businesses can share resources and activities for a common goal without sharing ownership, known as strategic alliances. Strategic alliances enable a business to quickly grow its strategic advantage, but with less commitment. There are several ways a strategic alliance can be accomplished.

  • Equity Alliance: The creation of a new entity that’s owned separately by the two partners involved, such as a joint venture. Both companies remain independent but form a new company jointly owned by the parent companies.
  • Consortium Alliance: This is the same as a joint venture but can be formed with several partners.
  • Non-equity Alliances: These do not involve the commitment implied by ownership and are often based on contracts, such as franchising or licensing. Under this contractual alliance, one company gives the other the right to sell its products or services or to use intellectual property in return for a fee.
  • Scale Alliance: When businesses combine to achieve necessary economies of scale in the production of products or services or by lowering purchasing costs of materials or services.
  • Access Alliance: This occurs when a company needs to access the capabilities of another company needed in order to produce or sell its own products and services. An example of this is when an international company needs access to a local company to be able to product or sell the product.
  • Complementary Alliance: When companies of similar value combine their unique but complementary resources so both have any gaps filled or weaknesses strengthened.
  • Collusive Alliances: This involves companies colluding in secret to bolster their market strength, reduce competition, and demand higher prices from customers or lower prices from suppliers. Regulators usually discourage such behavior.

Mergers, acquisitions, and alliances can provide many benefits for a business that is seeking growth far above and beyond what is possible through organic growth. Each can enable:

  • Faster access to new products or markets
  • Instant market share
  • Economies of scale
  • Better distribution channels
  • Increased control of supplies
  • Lessened competition
  • Adding of intangible assets
  • Removal of entry barriers to new markets
  • Deregulation in an industry or market

Let’s Talk

If you are considering a merger or acquisition strategy to grow your business, we can make it happen. Our world-class team of experts at Benchmark International is a true game changer for accelerating your business growth in the smartest ways possible. Contact us today and look forward to a brighter tomorrow.

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Using Growth Capital To Grow Your Business

Every business owner wants to grow their company, but having access to capital to make it happen can make all the difference in the world. Growth capital is money that you borrow to help grow your business’s operations and, ideally, its profitability. There are many different forms of growth capital. It may be structured as a short- or long-term loan or as a line of credit. Long-term financing is the most common because it is easier to repay.

There are several reasons that growth capital can be secured by a business.

  • To purchase commercial real estate
  • To buy equipment to increase production
  • To increase workforce
  • To expand into new markets
  • To increase advertising and marketing efforts
  • To purchase another company

Growth capital is different from working capital because it is debt financing to create growth, while working capital is used for financing the daily operations of the business and keep it running. It is also different from equity capital, which requires relinquishing partial ownership and entering into a strategic partnership in exchange for investor funding. Growth capital does not require giving up any ownership.

 

Ready to explore your exit and growth options?

 

Types of Growth Capital Loans

There are several financing options for small to mid-size businesses seeking paths to growth.

  • Conventional growth capital from bank lenders. This method typically offers the lowest rates and fees, and longest terms. The average conventional business lender approves between 20 to 50 percent of all growth capital loans.
  • SBA financing with an enhancement guarantee by the Small Business Administration to cover your losses if you fail to repay. This financing is used for startups, acquisitions, expansion, construction, revolving funds, and working capital.
  • Asset-based growth capital that shows lenders collateral and substantial cash flow for approval. If you do not have adequate cash flow to get approved, you can use assets such as real estate, equipment, or inventory as collateral. These lending rates are often higher than that of banks, and the terms are shorter.
  • Alternative growth capital from private lenders, non-bank lenders, marketplace lenders and mid-prime alternative lenders have shorter terms but can be amortized over up to five years.
  • Cash advance capital is a short-term advance that involves selling a part of your business’s future receivables for a lump sum. This form of financing is usually more expensive, so the ability to increase revenue needs to justify the cost.

Applying for Growth Capital

When you apply for growth capital, lenders will assess the profitability of your company. They will want to ensure that your business model is proven, cash flow is adequate, and operations are efficient. After all, they want to feel confident that the loan can be repaid.

As defined by the National Venture Capital Association, growth equity investments feature the following attributes.

  • The business’s revenues are growing rapidly.
  • The company is cash flow positive, profitable, or approaching profitability.
  • The business is founder-owned and has no prior institutional investment.
  • The investor is agnostic about control and purchases minority ownership positions more often than not.
  • The industry investment mix is comparable to that of venture capital investors.
  • The capital is used for company needs or shareholder liquidity and additional financing rounds aren’t expected until exit.
  • The investments use zero or light leverage at purchase.
  • The returns are mainly a function of growth, not leverage.

How Can We Help?

At Benchmark International, we have an award-winning team of M&A advisors ready to help you take your business to the next level, whether it’s through a growth strategy, an exit plan, a merger, or an acquisition.   

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What Is An ESOP?

An ESOP is an Employee Stock Ownership Plan under which staff members acquire interest in the company through a particular benefit plan. This type of plan is designed to incentivize employees to act in the best interest of business and stay focused on company performance since they themselves are shareholders and will want the stock to do well. A study by Rutgers found that companies grow 2.3% to 2.4% faster after setting up an ESOP. 

ESOPs are established as trust funds and can be funded when companies:

  • Put newly issued shares into them
  • Put in cash to purchase existing company shares
  • Borrow money through the entity to buy shares

If the plan borrows money, the business contributes to the plan to facilitate repayment of the loan. Contributions are tax-deductible and employees pay no tax on them until they leave or retire. If an ESOP owns 30% or more of company stock and that company is a C corporation, owners of a private company selling to an ESOP can defer taxation on gains by reinvesting in securities of other businesses. S corporations can also have ESOPs and the earnings attributable to the ESOP's ownership are not taxable.

 

Ready to explore your exit and growth options?

 

Companies of all sizes use ESOPs, from small family-owned businesses to large publicly traded corporations. Company leadership usually offers employees stock ownership with no upfront costs. It is common for distributions from the plan to be linked to vesting, which is the proportion of shares earned per each year of service. The shares may be held in a trust for safety and growth until the employee resigns or retires—they cannot take the shares with them. If an employee is fired, they usually only qualify for the amount they have vested in the plan. Once fully vested, the business buys back the vested shares from the departing employee and the money goes to that employee in the form of either one lump sum or periodic payments. After the business buys back the shares and pays the employee, the shares are either redistributed or voided.

ESOPs offer several benefits for the ownership, the company, and its employees. Owners gain liquidity and asset diversification, they can defer capital gains taxes on proceeds, and they maintain upside potential and leadership in the company. Companies get tax deductions on sale amounts, can become income tax-free entities, and have a tool to retain and attract talent. Employees secure retirement benefits and enjoy having a real stake in the company they work for.

It should be noted that employee ownership does not mean that employees are more involved in operations or running the business. They are not entitled to receive financial or strategic information. They are given a summary plan description and annual statements for their account. In some cases, employees may be granted certain voting rights.

ESOPs and Exit Planning

ESOPs are often used in succession planning as a strategy for liquidity and transition. Around two-thirds of ESOPs provide a market for the shares of a departing owner of a profitable business. Others are used as a supplemental employee benefit plan or as a way to borrow money in a tax-favored manner. Because ESOP transactions are flexible, they enable ownership to either withdraw slowly over time or all at once. Owners may sell anywhere from one to 100% of their stock to the ESOP, allowing them to stay active in the company even after selling all or most of it.

Additionally, ESOP transactions provide more confidentiality than third-party sales. Because confidential information does not need to be shared with prospective buyers, it eliminates risk of detriment to the business. An ESOP transaction is also known to offer a greater certainty of closing versus sale to a third party, and terms of the transaction are arranged to be fair to the ESOP and its members. It is also considered to be more conducive to maintaining healthy company culture because it aligns the interests of ownership, management, and employees.

Other Types of Employee Ownership

In addition to ESOPs, companies can offer employees the following options:

  • Direct-purchase programs that allow employees to buy shares of the company with their personal after-tax money.
  • Stock options that offer employees the chance to purchase shares at a fixed price for a set period of time.
  • Restricted stock, which gives employees the rights to acquire shares as a gift or purchase after reaching certain benchmarks.
  • Phantom stock, which provides employees with cash bonuses equal to the value of certain shares based on performance.  
  • Stock appreciation rights that allow employees to raise the value of an assigned number of shares, which are usually paid in cash.

Let’s Talk About Your Future

If you’re ready to make a move with your company, we’re ready to make the most of the process for you. Contact one of our esteemed M&A advisors at Benchmark International and we can begin writing the next chapter of your success story.

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Benchmark International Volunteers At The Central Texas Food Bank

Benchmark International continuously thinks of ways to give back and support its local communities, especially during this time of safe social distancing. The Benchmark International Austin office showed their support to the community this week by volunteering at the Central Texas Food Bank.

The Central Texas Food Bank is the largest hunger-relief charity in Central Texas. They help about 46,000 people per week, with one-third of them being children, get the nutritious food they need and otherwise wouldn't be able to afford. The food bank serves 21 counties in Central Texas through partnerships and smaller pantries.

Our team, along with others from the community, boxed 4,360lbs of food, which will serve 3,625 meals. This effort was completed while maintaining social distancing guidelines.

Benchmark International was honored to volunteer and contribute to the Central Texas community. Learn more about how you can support the Central Texas Food Bank - https://www.centraltexasfoodbank.org

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How Will The COVID-19 Effect On My Financials Impact My Deal Value?

The impact of the various lock-downs necessitated by the pandemic has directly affected the financial performance of the vast majority of businesses across the globe, both small and large.

Whilst certain M&A deals have continued on their charted timelines, others have seen an acceleration whilst some re-negotiation, and even stoppages, as a consequence of the impact in both buyer and seller positions. Funded deals feeling the most impact as they have in some instances experienced delays as bankers and financiers attend to more pressing matters in the moment.

The question foremost in most seller’s minds is that of value and how, in cases of a drop in performance, this might impact the value of their transactions.

In the same way that a company producing hand sanitiser cannot expect to achieve a valuation based on a short-term explosion of results, companies impacted negatively will not be unduly penalised if the effects are short term.

Normalisations are a fundamental element of negotiation in any M&A transaction where the objective is to determine maintainable earnings by ringfencing non-recurring income and expenses that might otherwise not reflect in the income statement under new ownership.

It would be naïve to suggest that these non-recurring expenses or even losses directly attributable to the effects of the COVID pandemic can simply be written out, but negotiations are bound to include provisions for such abnormalities. One can expect deal structures to include deferred compensation - or earn out provisions - that will be triggered when the business demonstrates a return to prior performance and a resilience to the COVID impacts.

At Benchmark International, we have gone as far as to suggest to some clients they create a COVID-19 income statement line item in which to capture the additional expenses/ losses that will arise due to this once-off event, a list of examples is below;

  • Lost Productivity
  • New IT infrastructure
  • Bad debts
  • Increased provisions imposed by auditors
  • Underprovided items now expensed (i.e. leave)
  • Divisional shutdowns
  • Impairments
  • Bridge financing
  • Retrenchments
  • Fixed costs (like rent which is possibly redundant for a period) to be made to be variable
  • Additional safety and hygiene costs
  • Forex losses or gains

With proper records of these types of expenses, it is possible to defend the adding back of expenses to earnings for the purpose of acquirer valuation in the future.

 

Author
Anthony Monne
Transaction Senior Associate
Benchmark International

T: +27 (0) 21 300 2055
E: monne
@benchmarkintl.com

 

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Benchmark International Donates 400 Pizzas to Local Tampa Hospital to Feed Frontline Heroes

There is great need all around us. During COVID-19 and this time of social distancing, many local businesses are considering ways of how to give back and do their part to support their local communities and businesses.

Benchmark International founders Steven Keane and Gregory Jackson showed their support to the community by purchasing 400 pizza pies over a two-day span from their favorite pizza place - Grimaldi’s Pizzeria in Tampa, FL to be able to feed the healthcare professionals at Tampa General Hospital (TGH).

Steven Keane and Greg Jackson hand-delivered the pizzas this past Tuesday and Wednesday to provide food to the frontline healthcare workers who are selflessly working each day to provide help and comfort to thousands of in-need patients.

As a team, Benchmark International and Grimaldi’s Pizzeria was able to set a few new Grimaldis records.

The records consisted of the following:
• The most pizzas to be in the oven at any one time
• The largest single order – 200 pizzas in one order
• The largest single order two days in a row – Totaling 400 pizzas

Benchmark International was honored to be able to provide this contribution to their local community and also the healthcare workers at Tampa General Hospital (TGH) and would like to thank Jeff, Rick and the Grimaldi’s team who work so hard to help make this happen.

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So, You’ve Decided To Sell Your Company. Now What?

After you have poured your life into your business, there comes a time when you start pondering retirement and planning an exit strategy. Whether you want to assume a smaller role in the company, transition it to a family member, or sell outright to an investor, it is not a process to be taken lightly. Readying a business for sale is a daunting task and an emotional journey. Which is why the first thing you will want to do is partner with an experienced M&A advisory team that is going to understand your goals and your needs, and have empathy throughout the process.

Ultimately, you have two high-level goals for selling your company: for the process to run smoothly, and to get the most value possible. There are many stages that go into making these two goals attainable, and at Benchmark International, we have perfected this process down to both an art and a science. This includes selling at the right time, which is why getting started as soon as possible can be critical to the results.

Our mergers and acquisitions advisors will take a deep dive into learning everything there is to know about your company. (Chances are, we already are very knowledgeable on your industry.) We will be straightforward with you regarding our assessment and what you can do to make your business more valuable and appealing to a prospective buyer. This includes third-party research that vets your company’s reputation in the public space and how to address any concerns.

We will also use our proprietary technologies and global resources to identify the types of buyers that are right for your business, and then create a plan to effectively market your company to these buyers. This gives you a huge advantage as a seller. There are many steps that go into these processes that we can later detail for you to a greater extent should you decide to sell. And don’t worry—everything is handled with the utmost confidentiality and you can rest assured that any buyer is going to be closely vetted. We will never ask you to meet with a potential acquirer that is not suitable and that we don’t believe is in your best interest.

Another important undertaking that our experts at Benchmark International will handle is the due diligence for buyers. Obviously, they are going to want to know a great deal about your company. Buyers also expect to see scrupulous recordkeeping regarding financials, legal issues, and items such as contracts. Our team is here to help you compile the proper documentation, and we can even create a Virtual Data Room to store it securely and conveniently. This includes ensuring the protection of your intellectual property such as trademarks, copyrights, trade secrets, and the like.

We will coordinate all meetings and discussions between you and a buyer, always protecting confidentiality. When a buyer makes an offer for your company, we will present it with honesty as to whether we feel the offer is appropriately valued. We are committed to ensuring that you get everything that you deserve.

When you decide to move forward with an offer, your dedicated deal team will handle all of the negotiations following your instructions at all times. This includes structuring the sale clearly so that all parties involved know their roles moving ahead with the transition of the business. We handle all contracts with full compliance and proper documentation. Not a single piece of paper or communication will go to a buyer without you seeing it first. You can also expect regular contact at all times until an acquisition is complete.

Selling a company is a complicated endeavor and needs to be handled with expertise in order to achieve the right results. Having the right team in place can make all the difference in the success of your exit.

So, the answer to the question, “Now what?” is quite simple: contact us.

Our award-winning M&A analysts are waiting for your call to talk about how Benchmark International can help you sell your company for its maximum value. Reach out to us today and we can embark on this exciting journey together.

 

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Growing Your Business Is Not As Difficult As You Think

As a business owner, you already know that running a company is not a simple task. But growing that business does not have to seem quite as hard as you might think. There are many steps you can take to drive growth without making yourself crazy.

Acquire Other Companies
A quick way to create growth is to identify competitors or businesses in other industries that are complementary to yours and purchase them. An experienced M&A advisory firm can help you easily identify potential opportunities to look at that are worth your time and money.

Know the Competition
Take a close look at who your competition is and what they are doing. Are they doing anything differently? Is it working? What message are they putting out there? What are their weaknesses and how can you take advantage of them? How can you stand out better than them? There are online platforms that can help you uncover the digital advertising strategy of any company. You should also sign up to receive their mass emails and follow them on social media. If you find something that is clearly working for your competitor, it should work for you, too. This strategy does not mean copying whatever they do, just gaining inspiration for your own strategies and being fully aware of what you are up against.

Focus on the Customer
You can use a customer management system (CMS) to track your business’s interaction with existing and potential customers and in turn improve relationships overall. There are many types of CMS software that you can choose from to manage multiple channels. This includes creating an email database to stay directly in touch with customers. Having a CMS can also help you create a customer loyalty program to increase sales. It is far easier and cheaper to retain existing customers than it is to obtain new ones. Offering a clear incentive to choose your company can be a significant method of boosting your sales.

 

Ready to explore your exit and growth options?

Go Global
Consider expanding your business internationally as a way to generate growth. By moving into new geographic markets, you can take your existing offerings and scale them to other countries if it makes sense for your type of business. Initially, it can seem costly do to so, but it can also pay off in a major way. If this type of expansion is not physically or logistically possible, you can employ digital global B2B platforms to expand your borders without having to actually go to another country.

Consider Franchising
If you are looking to quickly grow a well-managed and thriving business, a franchise model is a way to accomplish this. Yes, franchise costs can be pricey, and the process can be rather complicated. But if you have the marketing savvy and your company qualifies for franchising, you can drive growth quite rapidly.

Look Into Licensing
If it’s applicable to your type of business, licensing is one of the fastest and most effortless methods of growing a company. By licensing intellectual property such as patents, trademarks, or copyrights to others, you can immediately draw on the existing systems built by other companies and get a percentage of the profits sold under your license, which can add up rather quickly.

Expand Your Offerings
What other types of services or products can your business provide? In what other ways can you create value for your clients or customers? Do you have the right team members in place to maximize these opportunities? It can be very helpful to take a step back and look at your business in a different light. Just make sure that you can focus on any new venture without distracting from your core competencies or spreading you or your staff too thin.

Create a Strategic Alliance
Merging with another company is a solid way to reach more customers in a shorter timeframe. You just have to make sure that the partnership makes sense, so you will need to identify businesses that either complement or are similar to your own. Working with an M&A expert can help you recognize the right opportunities and take the proper steps to ensuring the merger is a success.

Let’s Discuss Your Business
Reach out to our M&A aficionados at Benchmark International to talk about how we can help you grow or sell your company. Our unique perspectives can give you a serious advantage in the low to middle markets and help you craft a highly prosperous future.

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Businesses Are Just Like Classic Cars

Anyone who owns or has owned a classic car will attest that it’s a very special relationship and one not dissimilar to owning a business.

Classic cars and businesses are assets that relatively few have the privilege of owning, they take time to build or acquire, have personality, and generally represent a sizeable investment and very personal commitment for anyone.

At the outset of these relationships, our perceptions of what the experience will be like is dominated by excitement, passion and it is often a journey we have spent many years planning and saving for. The risks have been calculated and monetised yet despite knowing that as physical or metaphorical assets they do break, and cost money, we have an ingrained belief we’ll get through it and that value that will accumulate with time.

It is inevitable, unless one is fortunate enough to be able to pay a premium price for a pristine model, that the early stages of these ownership journeys are characterised by a series of unfortunate discoveries - usually requiring us to roll up our sleeves and invest both time and money to rectify. It’s something we readily do as this beast is now a part of us and with ownership comes responsibility.

Like classic cars, business ownership takes us on a rollercoaster ride of emotions that range from pride and joy to anger and despair. One faces a multitude of risks from accident to theft and even the collapse of a market for it. The sacrifices can be significant, yet from the outside others often perceive us as merely lucky and in viewing the finished product, do not have insight or appreciation for the all-consuming toil, sunk and personal cost that it has taken to get to this point.
 
 
Ready to explore your exit and growth options?
 
Driving the old stag was not possible without being approached by somebody wanting to acquire the car and whilst they’d all expressed an interest to buy, it was once the door to such a discussion was opened that they divert the negotiation from their motive and start to approach the transaction from a purely clinical perspective. It is at this point buyers begin quoting market-related metrics seeking to mitigate the risk of what will be their investment. Simply put, such an approach is common in business too as a seller the future value potential and emotional attachment can often outweigh the immediate cash consideration but yet we also fail to see the other side and balance the risk to a buyer. It is for this reason that the intangible benefits of a deal are often larger considerations than the price attributed.

Selling a classic car is a difficult decision. It marks the end of a very personal relationship and what has been an emotional journey - for some, it can be a process as difficult as picking a spouse for one of our kids might be. Price becomes important as it measures the worth we attribute to it, and the reward for the investment or sacrifices made. Equally, however in finding the right person who we can trust to nurture, protect, improve and care for our treasure, we’re achieving a value beyond compensation.

Central to the decision to sell a classic car is always the consideration of “what next”. If the transaction facilitates the acquisition of a more prized possession or the freedom to pursue a long-sought ambition, the decision becomes more palatable. The similarity in selling a business is that it is vital to plan for what comes next. For example, in the case of retirement, it’s key to have something to retire to, as opposed to from.

It is a commonly expressed view that anything is for sale at a price, but committing to the prospect of a sale is a fundamentally different process to being available to be bought. Knowing your asset, the buyer’s next best alternative, and the adventure you’d pursue next are all key to a successful outcome. Whilst experience, financial, analytical, and other corporate finance skills are minimum requirements for an advisor, someone who’s been there, done it, and who intimately understands the internal conflicts only a business owner experiences can certainly add value in navigating this journey.
 

Author
Andre Bresler
Managing Partner
Benchmark International

T: +27 (0) 21 300 2055
E: bresler@benchmarkintl.com

 

 

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Force Majeure is Coming and if You’re Selling Your Business That is Bad

Force ma·jeure /ˌfôrs mäˈZHər/ (1) "superior force", (2) unforeseeable circumstances that prevent someone from fulfilling a contract.

Airlines are suspending flights and changing rules for refunding tickets. Cruise ships companies are in tailspins. Cargo ports are operating with reduced staff and reduced hours. Entire cities are being quarantined. The Coronavirus may or may not become a major global health issue. But the probability that the disease will have an impact on global business is far higher, if not approaching a certainty. This is safe to say not because there is a high probability that the virus will impact your company’s travel or suppliers or daily operations but rather because of the dreaded force majeure provision lurking in so many of your company’s contracts. These clauses are known as the “canary in the coal mine” when it comes to large-scale black-swan type macroeconomic downturns as parties typically rush to invoke them well in advance of any actual calamity striking. One of the unfortunate lessons from 9-11 was that lawyers are not shy about advising their clients to invoke the clause to escape performance obligations on unfavorable contracts. Of course, any contract that is unfavorable to them (whoever “them” is) is probably favorable to your business.

As a reminder, here is an example of a simple force majeure clause:

For this Agreement, an “Event of Force Majeure” means any circumstance not within the reasonable control of the Party affected, but only if and to the extent that (i) such circumstance, despite the exercise of reasonable diligence and the observance of Good Industry Practice, cannot be, or be caused to be, prevented, avoided or removed by such Party, and (ii) such circumstance materially and adversely affects the ability of the Party to perform its obligations under this Agreement, and such Party has taken all reasonable precautions, due care, and reasonable alternative measures to avoid the effect of such event on the Party’s ability to perform its obligations under this Agreement and to mitigate the consequences thereof.

The definitions commonly provide examples of the types of circumstances that qualify earthquakes, war, acts of God, change in laws, civil disorder, and even labor strikes. One aspect of the clause that allows it to be used well in advance of any actual natural event such as the arrival of an epidemic is that the definition commonly includes political acts as well as natural acts. As a result, the declaration of an area as one warranting extreme caution might qualify a government order to reduce the number of flights to an area or the number of visas it grants to people going or coming from an affected area (or quarantining travelers) might qualify.

Furthermore, it seems everyone has a global supply chain. So, any of these events happening “over there” might seem remote from your business. However, for anyone with a contract that wants to avoid the Butterfly Effect can be a siren song.

* * *

At this point, you are probably asking, “But surely people don’t write this term into their contract in a way that allows them to be abused, right?” Well, this clause is kind of an atom bomb. As one does when dealing with atom bombs, contracts are designed to prevent their use and mitigate their effects. The overarching check on the amazing power of the force majeure provision is that it only relieves the party’s performance while the circumstances remain in effect. It’s temporary. Parties won’t abuse it because it just gives them a short-term benefit and then they have to face the music.

So, in the ordinary course of your business, you have to deal with the fact that force majeure clauses may face lean times even when your local environment is perfectly normal. Parts may not be provided on time. Your call center might go dark. Your IT support may not be available. And anyone of your suppliers or customers may have the same problem. As an example, a company that collects fees for collecting, cleaning, and reissuing linens to other local businesses and uses an in-house local manufacturing facility in area with no odd circumstances occurring. Let’s say Miami at present (if there is such a company) may suddenly be hit with the clause because they service cruise ships and hotels or because their raw materials come from Egypt or parts of their detergent is manufactured in Germany from elements mined in the Philippines.

Businesses can survive a three-month or six-month calamity such as this in the ordinary course of their lifespan, so people don’t usually think twice about the wording of a force majeure clause. But your business is going up for sale. And when you go up for sale, everyone looks at your last 12 months' financial performance. The ­last thing you want is a hole that has to be explained. Even if your broker can come up with addbacks to create pro forma financials to show what “would have” happened absent the event of force majeure and how rosy that alternative reality would have been, it is better to not have to do this. More importantly, it points out weaknesses in your business. Buyer favorites include you are beholden to a single source of supply, you have too much customer concentration, your business lacks redundancies, your perfect line of decades of growth and healthy margins now appears more vulnerable than it did before. Whether they believe it or not buyers latch on to these things to justify their valuations and their lenders latch on to them to constrain the debt available to get the deal done (and thus impact purchase price).

We still find buyers asking to see clients’ financials from 2007-2010. Looking back more than five years is (or should I say “was”) unprecedented in M&A, much less looking back over a decade. But it is common at this point and we see little signs that that is ending. But that was the last force majeure type event most of our clients suffered and buyers want to see how the businesses weathered it…And they aren’t asking in hopes of finding some reason to raise the value of their offers.

All the better to have the next event of force majeure occur after your sale rather than before.

Author
Clinton Johnston
Managing Partner
Benchmark International

T: +1 813 898 2350
E: Johnston@benchmarkintl.com

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Effects Of Coronavirus On Business Owners And The Economy

As the coronavirus known as COVID-19 spreads to more regions around the world, it is making a major impact on world and local economies. The virus, which originated in Wuhan, China, has already disrupted global travel and supply chains and affected businesses of all sizes in both China and abroad.

The true impacts of the virus for companies will depend upon how far and wide the outbreak spreads and its duration. If the spread is limited and relatively short-lived, the damage to many businesses could be somewhat minor and recoverable. The types of businesses that analysts warn will feel the worst impacts are hospitality chains, airlines, transportation groups, retailers and makers of luxury goods, as people postpone travel plans and avoid shopping centers. Hospitality businesses such as restaurants and hotels will also face the largest challenge at making up losses later in the year.

Supply Chain Impacts
How long factories in China remain closed is also another important aspect of the situation because of how it is affecting global supply chains, as a great deal of the world’s products are made in Chinese factories. Some industries could begin to run out of parts and miss their revenue targets, such as auto manufacturers and smartphone makers. Smaller businesses that import products from China, such as Amazon third-party sellers, could also face a shortage if factories do not begin to reopen.

Business owners should be proactively assessing their supply chains and mapping out strategies to maintain resources and address vulnerabilities. Do you have a backup plan? Is it possible to source materials locally? Getting ahead of the problem can be worthwhile if it is feasible. Once the virus is no longer an issue, factories are expected to recover and offset lost production. What that ultimately means for business owners depends on their type of business and how much of their inventory has been impacted. Companies that plan for strategic, operational and financial agility in response to future global risks will be more likely to react and recover.

On a somewhat positive note, the number of new cases of COVID-19 in China now appears to be declining, signaling hope that circumstances may be able to improve. Chinese scientists believe that the outbreak will be under control by the end of April.

 

Ready to explore your exit and growth options?

In the United States
The virus has stoked fears on Wall Street has caused markets to fall at near-record levels. Outlooks for revenue growth in 2020 are down. According to a survey by the American Chamber of Commerce in the country of China, nearly half of U.S. businesses based there are expected to lose revenues if the effects of the coronavirus outbreak persist after April 30th. The U.S. House and Senate are working on funding to respond to the virus. Part of this funding may include interest-free loans to small businesses hurt by an outbreak.

There is no expert consensus as to whether COVID-19 could cause the U.S. economy to fall into a recession. Any optimism is partially due to the strength of the economy, the role of the Federal Reserve Board to provide support, and the ability to contain the virus. Meanwhile, the virus’s trajectory remains unpredictable. The Centers for Disease Control issued containment guidance to businesses. And the major stock market indexes continue to react and enter correction territory as investors try to sort out what it could all mean for business owners in the long run.

Around the World
As for the rest of the world, the impacts remain contingent upon how much the virus spreads and how effectively it can be contained. It has reached more than 40 nations so far. Currently in Europe and Asia, many companies are asking employees to work from home or take leave and are assessing their emergency plans to prevent or limit an outbreak. Hospitality companies face the biggest obstacle in this sense because the vast majority of their employees cannot do their jobs from home. In Italy, entire towns are on lockdown and tens of thousands of people are quarantined. In Japan, all schools nationwide are being asked to close for one month to help contain the spread of the virus. In South Korea, confirmed cases are rising. In Iran, cases have also risen and many schools, public offices and businesses have closed. And Saudi Arabia is closing holy Islamic sites to foreigners.

M&A Deals
The impacts on M&A activity remain unclear. If the virus causes a decline in profits for businesses, it could affect M&A. Buyers may lower offers in reaction to market changes, while sellers are likely to expect their original prices. This disparity could reduce transaction volume. For now, it remains a matter of wait and see.

Contact Us
If you are ready to make a move with your company, please reach out to our M&A experts at Benchmark International to discuss how we can help you achieve your goals.

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