Milwaukee Biz Blog

If you are even vaguely thinking about buying or selling a company in the next five years, you owe it to yourself to attend the “BizTimes M&A Forum: Buy? Sell? Hold?” at the Pfister Hotel, 424 E. Wisconsin Ave., Milwaukee, on Wednesday, May 19.

The seminar will be held from 7:30 to 11 a.m. For additional information, visit www.biztimes.com/site/m-a-forum.

The Great Recession took a significant toll on the mergers and acquisitions market. Many businesses that could have been sold for a significant gain during the frenzied M&A market of 2005 through early 2008 have since seen significant losses and decreased profits. Many private equity firms that had gone on shopping sprees earlier this decade saw their portfolio companies taking losses, making it difficult to re-sell them at a profit. And commercial banks, which helped fuel the buyout boom, significantly clamped down or even stopped new lending in light of their own losses and increased government scrutiny.

However, the marketplace has improved greatly since the beginning of the year.

The M&A Forum will include breakout sessions featuring experts from Reinhart Boerner Van Deuren Attorneys at Law and Northern Trust Bank.

The sessions will include:
Part 1 – Long-range planning from an estate planning perspective. The questions answered in this session will include: Defining goals for business succession and transferring wealth effectively - what will your legacy be? How to minimize estate taxes, safeguard your lifestyle and control your business for as long as necessary to achieve your goals. What are the planning strategies business owners can use to reduce income taxes on the business sale? What strategies can owners use to transfer their business to heirs?
Part 2 - Long-range planning - How to position the company for greater value. The topics covered will include: How is a business valued? What are the strategies business owners use to increase value? Management retention strategies. Building the management team. Intellectual property.
Part 3 - The deal itself. Topics covered will include: What is the role of the investment banker and how to engage one? What does it cost? What's an auction and is there more than on type?  What are the advantages and disadvantages of an auction? How do financial vs. strategic vs. synergistic buyers differ in approach? Should I sell to management? What are the current trends?   What do the other professionals do? Accountants; lawyers; other consultants. What if you're approached by a buyer, what do you do? The role of due diligence - how to enhance and retain value. Telling the business story - making the buyer eager to buy. What is a recapitalization?  Selling only part of the business.

The keynote speaker of the BizTimes M&A Forum will be Mark Herndon, president of Dallas-based Parkwood Advisors LLC, a financial services firm specializing in mergers and acquisitions, investment banking and private equity financing. I recently interviewed Herndon about the new M&A marketplace. The following are excerpts from that conversation.

BizTimes Milwaukee: Has the window re-opened for business owners that want to begin the sale process who may feel they missed out with the height of the market in 2007 and 2008?
Herndon: “Within the last 60 days, the general business conversation that I am hearing from business owners as well as intermediaries and service providers is that they have all experienced a noticeable uptick in both activity, interest in transactions and confidence. That is heavily qualified by the fact that the deal recovery and the ability to get the desirable valuations and the desirable deal structures will act somewhat like a jobless recovery. No one expects a fast bounce back in employment. And likewise, none of the deal market advisors expect a fast bounce back in terms of valuation or the widespread availability of credit like there was pre-crash. But there are very encouraging signs of progress.”

BizTimes: What is the first step that these business owners should take when they are beginning to craft an exit strategy?
Herndon: “A business owner that I met in September of 2008 told me that he had been contemplating the sale of the business but had not really crafted a viable exit strategy. As we watched the capital markets crater and the financial markets crater, the business owner said, ‘When I started thinking about selling my business, it was already too late.’ That’s a perspective I hear a lot. Owners who are serious about reaping the rewards of their lifetime of hard work need to start now. It’s never too soon to start planning an exit strategy. As we come out of this and get into the next 12 to 36 months, I think we’re going to see a lot of deal activity because of pent up demand and people anticipating the ability to make a transaction. You don’t want to miss out on those opportunities to find the ideal partner, so starting early is the key.”

BizTimes: What about valuation and pricing? How has the recession changed what business owners can expect to receive for their companies?
Herndon: “By and large, valuations have declined. (A valuation) number is a moving target that changes quarter to quarter and annualized and industry to industry, but at a big picture level, count on 1.5 to 2 times less in terms of your EBITDA multiple as of the end of 2009 from prior.”

BizTimes: Are deals being put together differently today than they were previously?
Herndon: “Not only are the valuations going down, but the structures of the deals have changed.
Buyers will need to be prepared to put more equity in deals and rely less on commercially available credit of any kind. Almost all small market and lower mid market, Main Street type businesses, have some type of seller financing included. It’s typically interest bearing debt, but it is typically subordinated to a variety of things – maybe even the performance of the business and not just other debt in the deal. Earn outs have been used for a long time and are fairly common in the lower end of the middle market. It basically says, ‘We know we’re not able to do a deal for the ultimate value of the enterprise based on the circumstances right now. But if you’ll stay in the saddle and help to grow the business, there will some additional earnings opportunities for you over a one to three year time frame.’”

BizTimes: In terms of financing, are banks willing to back buyouts in the same manner that they were in 2007 and 2008?
Herndon: “I would say that banks have acted just like private equity buyers and in some cases strategic buyers, in that there is a major flight to quality. At the Main Street level, at the lower mid market and particularly anywhere there is distress in a company or unstable earnings or a challenging balance sheet, I would say that the credit availability is still not there, except perhaps with regard to some of the alternative financing sources. Private equity buyers have stepped in to do more debt deals, mezzanine lending is back – so you’re going to end up paying a much higher rate probably with some warrants but using your sub debt or mezzanine level for a substitute for your senior lending and just relying on equity and your sub debt or mezzanine along with whatever seller’s note and earn-out will be involved in the structure. We’re still not at a position where I can confidently say that debt capital is widely available in the lower end of the market, yet.”

Eric Decker is a reporter at BizTimes Milwaukee.

Vice President Joe Biden and U.S. Treasury Secretary Timothy Geithner urged students at the University of Wisconsin-Milwaukee to support new and increased regulations on the financial services industry, including the stock market.
“I have a strong plea for my colleagues – to get on with the business of attending to the business of the American people,” Biden said at the White House’s Middle Class Task Force Town Hall Meeting today at UWM. “We all agree that things have gotten a bit out of control and that the status quo is unacceptable. It’s time to update the rules for the 21st century.”
Republicans in the U.S. Senate are now filibustering President Barack Obama’s financial reform plans.
Biden said new regulations on Wall Street are the most important piece of a financial industry overhaul. He said the new rules will: ensure that consumers are protected against unfair and predatory practices; make the derivatives market more transparent; require banks to hold more capital to cover their loans; and break up large banks if they fail.
“Never again should the government bail out a bank or watch the economy implode,” Biden said. “This is a big deal, at a time that matters that we get it right, that we get the shady credit default swaps under control and put things on the level again. What people are upset about is that they don’t think things are on the level.”
Geithner said the new regulations will not stifle Wall Street or the American economy, but will improve financial performance and the financial well-being of the nation’s middle class.
“Financial reform is about protecting the security of all Americans,” Geithner said. “It is about protecting customers from fraud and abuse. It is about providing a stable source of affordable credit and capital to businesses. It is about protecting the American taxpayer from having to bear the burden of mistakes on Wall Street. It is about making sure that when banks make mistakes, they take responsibility for those mistakes.”
Earlier today, officials from Goldman Sachs Group Inc. tried to defend themselves in hearings called by Senate Democrats. The Securities and Exchange Commission has filed a civil fraud complaint against Goldman and one executive, Fabrice Tourre, claiming they misled investors on collateralized debt obligations.
Sen. Carl Levin (D-Mich.), chairman of the Senate's Permanent Subcommittee on Investigations, said the firm's conduct of betting against mortgage-related securities that it sold to clients "brings into question the whole function” of Wall Street.
Levin focused on one internal e-mail in which a Goldman executive referred to a “sh-tty deal.”
“How much of that sh-tty deal did you sell to your clients?” Levin asked Daniel Sparks, former head of Goldman Sachs’ Mortgage Department. “You knew it was a sh-tty deal, and you didn’t tell your clients … Does that bother you at all?”
If the proposed financial regulations are passed, they will help rebuild the American economy, similar to new regulations passed in the wake of the Great Depression, Biden said.
“When you strip it all away … what you see is that this has gone on before,” Biden said. “What matters is that your grandparents’ generation set up rules that helped create the most powerful economy the world has ever seen. What we have to do is do it again. The underlying principles are the same.”
In the same breath, Biden said government will not rebuild the American economy.
“The free market is a really cool thing - there’s nothing like it,” Biden said. “They say that Wall Street reform will stifle innovation. Since when does telling the truth stifle innovation?”

Eric Decker is a reporter for BizTimes Milwaukee who covers the financial services industry.

In recent years, the partisan divide in Wisconsin has mirrored the divide in the country. Democrats and Republicans routinely point fingers at each other, complaining that if only the other party would concede, we would finally make some progress.

In reality, state legislators are discouraged by their parties for reaching out across the aisle for compromise.

In the past, such gestures have often been greeted by the parties as a sign of weakness, and the accused "conspirators" are removed from key committee assignments or worse - they are challenged in their party's primary by someone who is more extreme in their political views to the party's liking.

That historical context is what makes a press conference that happened last week in Milwaukee all the more remarkable.

At a moment when national politicians were divided strictly along party lines over the economic stimulus bill, legislators from both parties in southeastern Wisconsin gathered in the flow laboratory at Badger Meter Inc. to announce their support for a host of projects aimed at moving the region forward economically.

The list of projects receiving bipartisan support includes: the expansion of the University of Wisconsin-Milwaukee's Great Lakes Water Institute (and purchase of a new $15 million research vessel); UWM's plans to construct a new engineering campus near the Milwaukee County Research Park in Wauwatosa; the continuation of state tax incentives for angel investing; continuing the development of wind power generation in the state; and ensuring that transportation projects such as the Interstate 94 north-and-south and Zoo Interchange projects are completed.

The group of legislators finding common ground on the economic issues includes: Rep. Jeff Stone (R-Greendale); Rep. Jason Fields (D-Milwaukee); Rep. Mark Honadel (R-South Milwaukee); Rep. Jim Ott (R-Mequon); Sen. Ted Kanavas (R-Brookfield); Sen. Jim Sullivan (D-Wauwatosa); Sen. Alberta Darling (R-Menomonee Falls); Sen. Jeff Plale (D-South Milwaukee); Rep. Mark Gottlieb (R-Port Washington); Rep. Jon Richards (D-Milwaukee); and Rep. Christine Sinicki (D-Milwaukee).

"Our goal is to rev up the economy of greater Milwaukee and southeastern Wisconsin and the state as a whole," said Stone, who helped form the bipartisan coalition. "We want to create a regional economic vision to move the area forward."

The newly approved federal economic stimulus package will present many opportunities to accelerate projects that might otherwise would take years in the making, and the group wants to ensure southeastern Wisconsin is ready to act.

"This is a unique opportunity - a lot of money is going to get spent in the next couple of years," Stone said. "We need to be sure that we will create opportunities to build our economy in the future."

The UWM projects are particularly important, according to Richards, Sullivan and Darling, because they will help create new companies in an industry poised for future expansion.

"There is a great need to invest in high-end jobs and people with the technical expertise for industry leaders like Badger Meter," Sullivan said.

Investing in UWM's new engineering campus could create a technology transfer pipeline between the school, the nearby Medical College of Wisconsin, the research park and other companies.

"We're learning to take our knowledge economy and turn it into jobs and entrepreneurism," Darling said. "We're spending half of our state budget on education, and we need a real-world alignment of education and work."

The members of the bipartisan group have pledged their support for the projects they have coalesced around, significantly improving the odds of those projects and ideas becoming reality.

And if they keep their word and these projects move forward, it might be a form of change we can all believe in.

Eric Decker is a reporter for BizTimes Milwaukee.

Wisconsin has more than 158,000 women-owned businesses, but less than 3 percent of them have more than $1 million in annual revenues.

The Make Mine a $Million Business program aims to connect eight Wisconsin businesses with resources to help their companies generate $1 million in annual revenues by 2010.

The business plan contest will connect winners with mentoring, money, marketing and technology resources to help them grow their companies.

Make Mine a $Million Business is a national program. Last year's program recognized 39 women across the country.

The Wisconsin program, to be held May 21 in Madison, will recognize eight women-owned startup businesses in the state.

Currently, 41 women entrepreneurs have applied to the Wisconsin program. Only eight of those applicants are from metropolitan Milwaukee.

Officials from the program want more than 100 applicants. Applications are due by April 24 and are available at www.makemineamillion.org.

To qualify for the Make Mine a $Million Business program, applicants must be Wisconsin-based, women-owned businesses, open for at least two years. The business must also be able to prove its scalability to $1 million in annual revenues.

Before the event, applicants will be narrowed to a field of 15, which will compete that day. Finalists will present "elevator pitches" to judges before a live audience.

The competition will be held May 21, at the Madison Concourse Hotel, 1 W. Dayton St., Madison.

The program also will include seminars and programs for female entrepreneurs, experts in finance, insurance and technology, and networking opportunities. For more information, visit www.makemineamillion.org.

Eric Decker is a reporter with Small Business Times, covering banking and finance, mergers and acquisitions, private equity investment, manufacturing and related fields. He can be reached at eric.decker@biztimes.com.