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Staying Afloat in Tough Times - thestreet.com

Hedgerow Mergers & Acquisitions Featured At Lotusphere 2001

by David Luster

Hedgerow Mergers & Acquisitions was the featured merger and acquisitions speaker at Lotusphere 2001, the IBM/Lotus partner worldwide convention held in Orlando, Florida in January. Over 10,000 firms from around the world participated in the five day event. Hedgerow's M&A workshop, "Mergers & Acquisitions, A Blueprint for Success" was presented by Chris Talis, David Luster, and John Celentano and attended by business owners seeking professional advice on effective growth strategies for success in today's highly competitive business environment.

Now that the Initial Public Offering (IPO) window has essentially closed for most companies, and organic growth in itself is too slow for most firms to remain competitive in today's fast moving technology sector, mergers and acquisitions offer the best option for growth. Information technology (IT) business owners attending the workshop were keenly aware of this market situation and were focused on gaining knowledge that would provide them with a competitive advantage in an industry experiencing a flurry of partnerships and consolidation.

The workshop was specifically tailored to address the pressures and opportunities presented by a rapidly changing financial marketplace and how to effectively develop a winning strategy. The centerpiece of the seminar was a simulation involving a buyer and seller whereby each group chose company executives responsible for negotiating and completing a successful transaction.

A unique aspect of the workshop that sets it apart from other commercially available workshops is the emphasis on addressing organizational fit issues along with business issues. Hedgerow believes that a successful merger or sale is based on addressing both the "hard" business issues as well as the "soft" issues of integrating two corporate cultures. Facilitators from ARC Worldwide, professionals in addressing the issues of cultural integration, worked alongside Hedgerow facilitators to provide balanced information and solutions to workshop attendees.

Lotusphere workshop participants expressed their enthusiasm for the seminar's content and specifically for the experience gained through the buyer/seller simulation. Based on Lotusphere response, Hedgerow has expanded the workshop into a full day seminar for IBM/Lotus partner organizations, as well as the greater business community.

Mark Nagelvoort, Managing Director of Hedgerow, notes that "we are extremely pleased with our association with Lotus as we continue to provide the highest level of advisory services to all their business partners. Furthermore, as a result of Lotusphere 2001, we are working with a number of Lotus partners to assist in their growth or exit strategies."

David Luster is director of Corporate Business Development for Hedgerow Mergers & Acquisitions with offices in Teaneck, New Jersey and Wilton, Connecticut. The firm specializes in servicing the private business owner, firms with revenues between $5 to $100 million dollars, throughout the tri-state and metro New York region.

The Need Has Never Been Greater to Hire a Mergers & Acquisitions Specialist

Since the December 2000 COMMERCE article titled, "Why Hire an Investment Banker to Sell Your Company", several major events have occurred.

First and foremost, our great country has inaugurated its new president. Although the process was enduring and agonizing, the outcome may provide some needed relief for taxpayers with President Bush's proposed tax-cuts. Secondly, Federal Reserve Chairman Alan Greenspan finally began the much anticipated loosening of rates with a 50-basis-point cut in the Federal Funds rate to six percent on January 3rd and a 25-basis-point cut in the Discount Rate to 5.5 percent on January 4th. The next major event, hopefully by the time this article is published, is that banks will cut the prime rate. Finally, the stock market suffered the worst performance of all time, exclusive of a recession/depression and "Black Monday".

On the merger and acquisition front, major accounting changes resulted in the elimination of the "pooling of interest" accounting method for acquisitions. There is also the potential elimination of the amortization of acquisition goodwill tentatively decided by the Financial Accounting Standards Board (FASB).

All this is noted for the following reason: from an economic standpoint, it has become a most opportune time to acquire or divest a company. This is due to historically low interest rates, the abundance of money, and the enormous growth in capital of the financial buy-out funds, not to mention the proposed tax-cuts being finalized by the new administration.

In contrast, from an accounting standpoint, it has become an even more difficult time to be involved in an acquisition or merger without professional assistance. Chris Talis, CPA and senior partner of Hedgerow Mergers & Acquisitions, states, "FASB has instituted the elimination of pooling-of-interest accounting for mergers and acquisitions as of the end of fiscal year 2000, thereby allowing only the purchase method for effectuating the balance sheet and profit and loss statements for the new combined entity."

In summary, pooling-of-interest accounting for an acquisition provided the following:

The balance sheets of the two companies were consolidated without restatement to fair market value.
Operating results for the combined company were restated for periods prior to the acquisition.
The acquirer issued shares of voting common stock to the seller.
A stringent 12-point test required by GAAP had to be met.

In contrast, purchase accounting summary is as follows:

All assets and liabilities are restated to fair market value, and the purchase price is allocated to the write-up of the assets and liabilities of the seller.
The purchase price is attributed to identifiable intangible assets and, when possible, any excess over fair market value becomes goodwill.
If the written-up property values exceed the purchase price, then the property is reduced until equality is achieved.
The seller's equity is eliminated.

These are the basic differences between the two methodologies; unfortunately, the purchase method is significantly more complicated and in most cases will add to the need for professional guidance. In addition to this change, the amortization of goodwill will tentatively change as well. Up to now, FASB allowed the amortization period for goodwill in corporate mergers and acquisitions to be up to 40 years. Beginning with 2001, the FASB decided tentatively, a non-amortization approach is required to account for purchased goodwill. Under this approach goodwill would not be expensed annually. Instead it would be reviewed for impairment if and when recorded goodwill is more than its fair market value.

With these changes, the need for a merger and acquisition specialist has never been greater. Such experienced professionals can guide business owners and managements through the complexities of any merger or acquisition opportunities they may be contemplating.

Why Hire an Investment Banker to Sell Your Company?

Selling a business can be one of the most challenging decisions a business owner will ever make. Once the decision is made, the business owner must ask: "Is this something I can do myself?"

Important issues such as the timing of when to sell, determining fair market value and knowing how to reach and qualify potential buyers can easily make the task overwhelming for the average business owner. It is vital to recognize the huge amount of dedicated time and resources involved in orchestrating a successful sale.

Do you have time to focus, coordinate and prepare the firm for sale while you manage the business and your employees? Will one suffer because of the time needed to dedicate to the other? With this in mind, it's amazing that so many business owners will quickly hire accountants; lawyers and realtors yet hesitate when it comes to seeking out a qualified investment banker. Understanding that your company is probably the most significant asset and investment you will ever possess, why not seek out professional assistance to maximize that value?

What expertise can the investment banker provide?

One of the first steps your investment banker will take is to help you attain a realistic range of value, develop a strategic action plan and provide you with insight as to the optimum timing for marketing the firm.

Once the plan is set forth, the main objective will be to maximize the return while minimizing your taxes.

Acting as the main catalyst to drive the transaction, the investment banker works closely with you as the owner to create an in-depth selling memorandum describing in detail not only the primary facets of your business, but a compelling picture of your company's future potential. Detailed research will be undertaken to identify and confidentially approach potential buyers from both the strategic and financial marketplace.

Finally, the investment banker will pre-qualify interested acquirers and lead the transaction to closure. A professional team coordinates the entire process of the sale including assisting in negotiations on behalf of the seller.

Taking on the role of strategic advisor, your investment banker will help you to understand competitive factors as well as deal with any problems that arise in the process. Highly skilled senior executives will provide analytical expertise to evaluate complex issues and help you deal with potential employee issues that may arise.
By turning over the process to a respected firm, a business owner can expect a highly confidential, smooth and systematic course of action for divesting his/her business.

Obtaining a fair market price and providing for the fair treatment of employees and management after the sale will round out the package. It's important to realize that effectively packaging, marketing and ultimately selling a business requires expertise in a multitude of diverse areas. This usually is impossible to manage and coordinate alone.

The support of your attorney and accountant, though important, is not nearly enough to ensure you reach your goals...more reasons to seriously consider hiring an investment banker who specializes in small to middle market mergers, acquisitions and divestitures.

Due Diligence: What Does It Entail?

by David Luster

Due diligence is one of the most critical elements of the merger and acquisition process and should reveal the underlying truth, entirely changing the outcome of the deal if not executed properly.

Long before you are actually in a position of considering to acquire a business, or you are the seller who is thinking about identifying potential buyers of your firm, it is critical to understand the importance of effective due diligence.

The term "due diligence" comes from the Securities Act of 1933, which outlined the methods to achieve "full and fair disclosure" of all relevant material facts that are related to publicly held securities. Essentially, due diligence is the process of assessing the benefits and liabilities of a proposed acquisition by investigating all the relevant elements of a firm's past, present and predictable future. It is a process that requires the seller to provide the buyer with the information and documentation needed to fully evaluate the business, prior to consummation of the deal.

The buyer has a responsibility to its stockholders to ensure, to the best of its ability, that there are no surprises after the purchase. Concurrently, it is wise for the seller to be prepared for the due diligence process and to plan accordingly.

While each transaction is unique, typically due diligence can run from several weeks to several months, or even up to a year. To ensure that the process proceeds smoothly, the seller typically assigns the coordination of the project to an individual or individuals who will be held accountable as to the timelines of the responses and accuracy of the information.

In most cases the effort would be spearheaded by the seller's in-house legal department (in the event one exists) or with the organization's chief financial officer or controller. In addition, experts in the fields of environmental safety, law, finance, tax accounting, and engineering are typically utilized, along with internal key management during a later phase of the process.

All of the firm's primary salable assets must be appraised including, for example, machinery, real estate, marketable securities, and inventory. Key intangibles such as copyrights, trade names, patents, trademarks or service marks, whether registered or filed must also be appraised.

The buyer will need to review all corporate documents, including the articles of incorporation, bylaws as well as the corporate minutes. They will also want to know if there are any infringements on patents or trademarks, and will check for any liens, encumbrances, or judgments against the company or its assets.

The seller should create checklists to ensure that responses are provided to each of the buyer's requests for information. Additional points to consider include the extent of client complaints on products and service, hazardous waste issues, if any, insurance claims, and any "material" capital expenditures, such as those in excess of $50,000 to $100,000 dollars.

A buyer will need to know about any outstanding agreements between suppliers, customers, or management, as well as public and private lenders. Other contracts that must be available for review include building and equipment leases, licensing contracts and labor contracts, where applicable. Benefits documentation, such as pension, profit sharing and health insurance plans will also be examined.

All internal documents must be provided, such as financial statements, marketing studies, manufacturing know-how and other reports which are essential to assessing the value, benefits, and liabilities of the firm under consideration.

Once the decision to sell has been made, preparation for the due diligence process should begin without delay. An action plan should be developed identifying documents to be produced as well as tasks to be assigned, and who will be responsible for those tasks.

Planning in advance can save you significant time and money later on.

The buyer is relying upon timely production and accuracy of the requested data and information. Remember that although due diligence takes great deal of time and effort - in addition to the daily responsibilities of running a business - its effectiveness and outcome are primarily determined by the cooperation of the seller.

There is no other way to get a deal done successfully.

David Luster is director of Corporate Business Development for Hedgerow Mergers & Acquisitions with offices in Teaneck, New Jersey and Wilton, Connecticut. The firm specializes in servicing the private business owner, firms with revenues between $5 to $100 million dollars, throughout the tri-state and metro New York region.

The Benefits of Selling Your Business

by David Luster

Consider the facts...Interest rates remain relatively low, there is an over-abundance of cash on hand - thanks to Wall Street - and more than over 10,000 businesses were sold in the U.S. last year!

The past ten years have seen tremendous global economic developments: the U.S. economy has reached unparalleled levels; third world economies have elevated to second world status; and, thanks in part to the Internet, the concept of the "global village" has finally become a reality. This expanding global growth, combined with enormous technological advances, has had a dramatic effect on business operating efficiencies.

Domestically, these factors have enabled many first generation entrepreneurs to achieve the American dream of realizing wealth, independence and financial self-sufficiency.

Because of this acceleration in global growth, however, business owners are workinglonger and harder to remain competitive. Day-to-day operational responsibilities often prevent owners from creating long-term strategic goals. Forward-thinking business practice does not merely focus on an annual review of the firm's performance, but examines the more difficult issues of succession planning and available exit options when the appropriate time or need arises.

With unprecedented merger and industry consolidations, there has never been a better time to sell a business. In doing so, many entrepreneurs can hold onto that American dream and, in many cases, go on to start or acquire another business. In fact, a large percentage of private business owners sell while in their 40's and 50's rather than wait until later time in life.

This action is in part, a result of the enormous investment capital readily available today, combined with low interest rates. With the basic economic ingredients, the larger organizations are compelled to take advantage of the opportunity to enhance their client mix, buy market share, integrate technologies and ultimately improve operating efficiencies and margins with greater volume through acquisitions.

Moreover, while the economy is so strong, a business owner can often achieve a premium price for the firm once he or she has properly prepared an action plan to effectively market the company.

There are many benefits to selling your business, some of which include: diversifying your financial portfolio, the majority of which is often your business; increasing personal liquidity; spreading your risk; and reducing stress in your life by retiring. In some cases, the market conditions of a particular industry provide for an irresistible opportunity to sell, even though you might not have otherwise considered this option.
It may be a financial buyer, seeking to purchase the business by investing in the company and selling it in two to five years. Or it might be a strategic buyer looking to integrate your company into his. Either prospect is driven by the future potential of the firm's business and how the company intends to grow market share and profitability.

A potential buyer will be interested to learn the following:

What is the history of the business?
What is the economic outlook of the particular industry?
Does your firm have a broad market reach, spreading business risk appropriately?
How does your firm compare to competitors of equal size in the market place?
What is the earning capacity of the business?
What is the financial condition of the business?
What environmental issues must be considered, if any?

To maximize the selling price, the owner must not only provide a picture of the firm's performance to date, but, more importantly, the upside potential of the company in the years ahead. Maximize appeal - sell the future.

Once you have decided that it's the right time to sell, your game plan should commence. The preparation can take anywhere from 3 months to over a year. You must begin by maintaining accurate financial records, working hard to maximize profits, staying in control of receivables, disposing of non-productive assets and maintaining key management and employee mix, to name a few.

Create a business plan that projects your company in its optimum light and surround yourself with top M & A professionals who know how to effectively package, market and get top dollar for your most valuable asset.

David Luster is director of Corporate Business Development for Hedgerow Mergers & Acquisitions with offices in Teaneck, New Jersey and Wilton, Connecticut. The firm specializes in servicing the private business owner, firms with revenues between $5 to $100 million dollars, throughout the tri-state and metro New York region.

Staying Afloat in Tough Times - thestreet.com

http://www.thestreet.com/story/10431153/1/small-biz-stay-afloat-in-tough-times.html