It’s a surprise to many, but now is a great time to sell a business. Premiums are being paid.

How can this be?

First, there’s a massive supply-demand imbalance – lots of buyers and not many sellers. Private equity groups and strategic buyers are as aggressive as ever and hunting for acquisitions, but many would-be sellers are waiting due to the false belief it’s “not a good time.”

Second, the cost of debt is at an 80-year low. Shockingly low. Business purchase transactions are funded primarily with debt. Lower interest rates mean higher prices can be justified without sacrificing return on equity. And yes, commercial banks are lending.

Deals are getting done. Transaction volumes for 2011 are well ahead of last year’s pace, according to Mergerstat.

Third, taxes rates will probably never be lower. Wait a few years to sell and Uncle Sam will likely take a much larger bite.

Valuations continue to be based on the proven profit-generating ability of the business, and although prices – or “multiples” – are higher across the board, a healthy spread remains between deals – depending on the characteristics of the business. In addition to consistent profits, buyers tend to value customer diversification; management teams that are proven, stable and willing to remain; growth; niche products and markets; strong brands and proprietary products; growing industries and size.

Yes, larger businesses – in terms of revenues and profits – go for higher multiples.

Businesses with annual profit under $1 million are generally being purchased by individual buyers who live in the geographic vicinity of the business. These buyers will almost always run the business they purchase, and they can be a little harder to locate as they swiftly enter and exit the market. They can also be a little more of a challenge to work with. Most are inexperienced at buying.

Businesses with higher profits will tend to sell to private equity groups or industry buyers. These buyers are easier to find because they tend to stay in the market for long periods and make efforts to make themselves known.

What’s the key to getting absolute maximum? Very simple: multiple buyers “worked” simultaneously, with urgency. Multiple bidders push values higher, and offer prices will align themselves along a bell curve. Only by having all the offers on the table at one time can the seller identify the one that’s “furthest out to the right,” and choose it.

Important as well, by dealing with all the buyer prospects simultaneously the process is significantly shortened, which is critical for confidentiality. Start the process and complete it quickly.

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If you don’t own 100 percent of your company, you should assess whether you have some shareholder-related issues that could hinder a sale.

First, if the parties choose to effect the sale by purchase of stock, any minority shareholder could hold up the deal if you don’t have agreements in place that force them to accept terms agreed to by the controlling shareholders. This is because buyers almost always want to buy 100 percent of the outstanding stock. They don’t want to become partners with someone they don’t know. They also want to own all the stock to maximize the money they can make with the investment.

If a minority shareholder refuses to accept sale terms negotiated by the controlling shareholders, many buyers will back away entirely. Getting the holdout(s) to agree to the deal quickly becomes YOUR problem. Enticing a minority shareholder to go along with you can become costly. It’s just too easy for him or her to hold out until you start offering to pay a premium. Any premium paid comes out of YOUR take.

How can you find out whether you have the legal right to “drag along” minority shareholders in a stock sale transaction? If the selling entity is a corporation, such a provision could reside in Articles of Incorporation, bylaws or a shareholders agreement if one exists. If the selling entity is an LLC, check out both the articles of organization and the operating agreement.

True, most private-company purchases are effected by asset purchase, but some are effected by stock purchase.

For example, in case of a C-corporation seller, the shareholders may attempt to dictate that the sale be completed by stock purchase to reduce the tax burden. Also, title transfer and contract assignment problems can often be alleviated by effecting the sale by stock purchase. Finally, public companies may at times prefer a stock purchase to minimize future depreciation expense (and maximize reported earnings).

What can you do if you’re the majority shareholder and you aren’t protected by “drag along” provisions? First:

1. Buy out your minority shareholders now.
2. Obtain, today, an option to buy the minority shares in the future at a price that’s economical for you and fair for them.
3. Get them to agree to “drag along” provisions (they may ask for “tag along” provisions in return, but that’s probably OK).
4. Remove any elements that dictate purchase/sale by stock.

Second, minority owners can hold up an asset sale if a so-called super-majority provision exists in your governing documents. In most states, a simple majority of the outstanding shares is all that is required for the shareholders of a company to approve a sale of all, or substantially all, of the assets, but that can be changed (usually only a higher approval percentage can be required) in the governing documents.

If your governing documents do not stipulate a higher threshold, you’re clear. But if yours stipulate, for example, that a 75 percent vote is necessary, then you could have a problem if the consenting shareholders own less than that.

Where can super-majority provisions exist? The same places as “drag along” provisions. If the selling entity is a corporation, look in the Articles of Incorporation, bylaws or any shareholders agreement. If the selling entity is an LLC, look in the articles of organization or the operating agreement.

The best time to avoid minority shareholder problems when selling your business is when you sell or issues shares in the first place or invest in and/or buy the company. This is when you have leverage. Options are often few when the deal is negotiated and you need the approval of minority shareholders. The power shifts to the minorities, and often the only thing that will loosen the logjam is money – your money.

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BAE Systems’ willingness to spend $352 million to buy Atlantic Marine testifies to the Navy’s plans to expand at Mayport Naval Station and could lead to more work at Atlantic’s sprawling local shipyards.

At the same time, the entrance into the Jacksonville market of the British company’s deep pockets could make life even tougher for the two other ship repair and maintenance companies in the area, particularly as they wait out a dip in the market.

“When the Navy makes the commitment to expanding a port, all sorts of work will come,” said Jim McAleese, a defense consultant who has closely tracked BAE’s operations.

Of particular interest to BAE could be the work that comes along with the nuclear-powered aircraft carrier the Navy has said it wants to homeport at Mayport.

BAE handles all nuclear submarine construction (as well as surface ship construction) for the Royal Navy, but does no nuclear work for the American fleet.

The company has been expanding what it does do for the U.S. Navy, including recently winning a five-year, $500 million contract to modernize 11 Arleigh Burke-class destroyers, a project it will do in Norfolk, Va.

Moving into Jacksonville a few years before a nuclear carrier does could enable BAE to get a toehold in the nuclear business, one that has much higher margins than non-nuclear repair.

BAE wouldn’t comment on the specific thinking that went into buying Atlantic Marine, saying only that it is consistent with the company’s plans to deal with market growth.

“It enhances BAE Systems’ ability to support Navy homeporting decisions,” said Stephanie Moncada, a spokeswoman for the company.

BAE is paying cash for the company, which was bought about four years ago by private equity firm J.F. Lehman & Co. in a deal said to be worth around $170 million.

At the time, the company included the Jacksonville-area operations as well as a facility in Mobile, Ala. Lehman later added an operation in Moss Point, Miss., which BAE bought, and shipyards in Boston and Philadelphia that were not part of the deal.

In addition to its headquarters in Norfolk, BAE’s ship repair division has facilities in San Diego, San Francisco and Hawaii, giving it operations in every major U.S. homeport.

At the same time the Navy’s plans create an opening at Mayport, BAE is dealing with market pressure at home and in the U.S.: British military spending is expected to shrink as the United Kingdom wraps up a Strategic Defense Review and the company has recently lost several land vehicle contracts for the Army.

“They’re dealing with dual contraction at the same time,” McAleese said. “You’re going to have to deploy the shareholder cash somewhere else. What better place than to put in the U.S. Navy in a service that’s growing by leaps and bounds.”

Or, to put it another way: “BAE has lots of capital and is very acquisitive,” said David Perkins of Acquisition Advisors, who sees the BAE deal as a harbinger of what the defense industry will do this year.

“Assuming the stock market doesn’t go crazy on us, buyers will be out in force, picking over the companies that have done well in the recession – and Atlantic Marine has done incredibly well,” he said.

That doesn’t mean the business at Mayport will be great in the short term, though.

In fact, “the next few years will border on the tragic,” said Ed Froehlich, executive director of the Jacksonville Area Ship Repair Association.

Over the next few years, the Navy plans to retire the frigates that make up the bulk of the fleet at Mayport – and the bulk of repair work done there. The arrival of a carrier and, later, new littoral combat ships will help, but first the companies have to survive the gap years.

Facing the most challenging time locally is Earl Industries, the smallest of the three shipyards and one whose business is very Navy focused. (The company also has a large yard in Portsmouth, Va., where it’s headquartered, and is active in related fields.)

North Florida Shipyards, meanwhile, basically splits its business between military and commercial shipping.

Neither Earl nor North Florida wanted to comment on the Atlantic Marine sale, and Atlantic referred calls to BAE.

One way the BAE-owned Atlantic Marine could survive those years could help expand the overall market for ship repair in the area: Attracting more foreigners.

“There’s been some sense that the European navies might want to use facilities in Jacksonville rather than the limited facilities in the Caribbean,” said retired Rear Adm. James Stevenson, who handles military issues for the Jacksonville Regional Chamber of Commerce.

That was another idea the company didn’t want to comment on, although the spokeswoman did say, “we bring a little more to table in terms of breadth of capability.”

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Some shareholders of Arena Resources Inc. are questioning the company’s $1.55 billion proposed sale to Oklahoma City-based SandRidge Energy Inc. despite a 17 percent premium on the stock price.

Law firms across the country are examining the deal, especially since Arena management said earlier this year that the Tulsa-based company was not for sale.

Various shareholders say they are wary because the proposed $40 per share acquisition price is 6 percent lower than the company’s stock price on March 1.

In a lawsuit filed Tuesday in Tulsa County District Court, a Texas shareholder claims that Arena’s management and directors failed its shareholders by not advertising that the company was for sale.

Five other law firms — in New York, Pennsylvania, California and Texas — say they have launched investigations into the proposed sale.

Arena Resources CEO Phil Terry was not available for comment Wednesday.

“Shareholders (of Arena) would receive only $40 for their shares,” shareholder Thomas Slater stated in his lawsuit. “In fact, (Arena Resources) was trading at $42.69 as recently as March 2010 and this fact, along with the company’s lack of debt, provides every indication that the company’s long-term potential growth is strong.”

The company’s stock was selling for $37.41 before the acquisition was announced. Based on the deal announced Sunday, Arena shareholders would receive 4.7771 shares of common stock in SandRidge, plus $2.50 cents cash, for every share of stock in Arena they own.

A lawyer for the plaintiff declined to comment on the case.

The acquisition needs approval by shareholders of both Arena and SandRidge.

The deal means that 30 positions at Arena’s headquarters in Tulsa would move to Oklahoma City. Sand- Ridge is offering jobs to 100 field workers in New Mexico and Texas.

Shareholder lawsuits are common after large mergers and acquisitions are forged, but there is room for concern among Arena investors, said David Perkins, managing director of Acquisition Advisors in Tulsa.

“I would be mad if I was a shareholder,” he said. “The stock sold well below its 52-week high. Shareholders just want to make sure they got the total amount their stock was worth.”

Perkins also said it was unusual for a company to claim it was not for sale in the months preceding a deal.

“I would think you would want to shout from the rooftops that you were up for sale,” he said. “You would hope that they would run it like an auction.”

Perkins said that pressure from a potential buyer to keep a deal secret is commonplace.

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Published in Urban Tulsa
APRIL 7, 2010
By David L. Perkins, Jr.

The president of Coca-Cola North America was in Tulsa on March 24. The visit was made possible by Oklahoma State University’s Spears School of Business. Now I’m a Sooner, but I regularly hand it to OSU for its successes and contributions, such as its long-standing and immensely successful “Tulsa Business Forums” speaker series.

After a one-of-a-kind introduction by Jack Allen, Jr. (full-time owner of commercial insurance brokerage firm “CFR” and part-time shock jock), Coke’s president J. Alexander M. (“Sandy”) Douglas, Jr., said some interesting things. One of note: “Gone is the day companies could ‘talk the talk but not walk the walk.’” He said that if a company fails to live up to its own image, consumers will quickly spot it, blog about it and call it out publicly.

“Used to be people just watched your commercials and accepted what you said about yourself,” he said. “Branding was easy then. Those days are gone.”

I can see this. People don’t seem as trusting as they used to be. They are more skeptical, maybe even smarter in some ways. They observe and evaluate.

Douglas said that with the advent of Web sites, blogs, Twitter, YouTube and Facebook, your true persona is easily disseminated. So what people think about a company today has as much — if not more — to do with how the company behaves as the image it portrays.

Coca-Cola executives are well aware of this, Douglas said. They also know that the rate at which people around the globe reach for a Coke is directly proportional to how much people admire what Coke is and like how it makes them feel.

Yes, people want to do business with corporations they admire and trust. Coke must conduct itself in a way that is not only admirable and trustworthy but lives up to the brand messages it puts forth, messages of friendship, care and good health.

Douglas said that if consumers don’t genuinely see Coke doing all that it can and should for the environment, fewer will reach for Coke products. And Coke makes it very clear that it intends to sell many more of its products around the world, not fewer.

Wow. I grew up in the ’70s and ’80s when consumers felt powerless against corporate behemoths. Moreover, conventional wisdom was that corporations could not be trusted — at least not to do anything other than exploitation.

Coca-Cola is a corporate behemoth, one of the largest and just maybe the most well-known corporation on the planet.

Large corporations are now powerless against the all-powerful consumer. Technology and social networking have turned the tables. Power has shifted from the corporation to the consumer.

Consumers want corporations they patronize to be honest, real and accountable for their actions. If a corporation fails to live up to consumers’ expectations or corporate messages, the business will fail and the executive stock option packages will become worthless.

Ding-dong, the wicked corporation is dead!

——-

David L. Perkins, Jr. is Managing Director of Tulsa-based Acquisition Advisors, a firm that consults on the purchase, sale and valuation of mid-size U.S. companies.

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Thursday, February 18, 2010

By DAVID L. PERKINS Jr. Business Viewpoint

If recent economic surveys are accurate, owners of small businesses are not experiencing an economic rebound. Not by a long shot.

They also have little confidence that better times are near. This is in contrast to both the stock market run-up that continues unabated and frequent media reports of improvements in global macroeconomic indicators.

“2009 did not end on an uplifting note,” reads the January Small Business Economic Trends report issued by the Federation of Independent Business.

The group’s recent survey of managers of smaller U.S. businesses — companies with a mean employee count of 13 — found the following:

• Profits continue to fall. Just 12 percent of the owners reported that fourth-quarter earnings increased from their companies’ third-quarter results — although the third quarter was terrible for earnings.
• Revenues fell in the past three months and did not increase in the ensuing three months. The percentage of business owners reporting lower sales for the quarter remained near the record low reported in March 2010, and 51 percent of the owners surveyed expect even lower revenue in the next three months.
• Capital spending remains at a record low. Just 44 percent of the companies made a capital expenditure in the past six months — the fewest since the survey began in 1979 — and a mere 18 percent plan to make one or more in the next three to six months. That’s just 2 points above the 35-year low.
• Owners continued to shed inventory and plan to shed more. The inventory index recorded its largest decline in the survey’s history. That’s shocking, given that small businesses have been shedding inventory since mid-2007. Moreover, more reductions can be expected as owners who plan to reduce their inventories outnumber those who plan to increase them.
• Owners became more pessimistic in December, and overall optimism remained at historic lows.

“Optimism has clearly stalled,” the federation’s report stated. The Index of Small Business Optimism fell in December to its second-lowest reading since 1980. The lowest was last March.

This report reflects what I see and feel and hear in my daily work advising company owners on merger-and-acquisition issues. And it’s pretty amazing, and scary, given:

• We are two years into this recession. One would expect that inventories would have been reduced to minimums long ago, and that profits would begin to rise because of prior cost reductions.
• Interest rates remain at historic lows (an economic stimulus).
• The U.S. government is spending like mad (an economic stimulus).
• Federal and state taxes remain below historic peaks (an economic stimulus of sorts).

When will the recovery arrive for owners of small and midsize companies? Your guess is as good as mine but, historically, recessions do end and it seems there can be nowhere but up from here. Of course, we’ve been saying this for months and, according to the survey, we continue to be proven wrong.

Finally, given that smaller private companies employ a majority of the U.S. labor force, a broad recovery will not begin before they start growing, spending, hiring and — once again — earning a profit.

David L. Perkins Jr. is the managing director of Acquisition Advisors, a merger and acquisitions advisory firm that specializes in midsize companies.

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Published by the Tulsa World 10/16/2009

David Perkins is managing director of Acquisition Advisors in Tulsa. He holds a bachelor’s degree in psychology from the University of Oklahoma and an MBA from the University of Notre Dame. He completed the Mergers and Acquisitions executive education course at the University of Pennsylvania’s Wharton School and is a Registered Investment Advisor.

1. What does Acquisition Advisors do?

   We help people put winning deals together — deals for the purchase, sale and recapitalization of midsize U.S. companies. Our focus is on deals that involve businesses with annual profits between $1 million and $25 million, which is deal sizes of $4 million to $150 million.

   Selling a business is complex, risky and immensely time-consuming. Ditto for buying a business. Get it right and everyone is well-served — the principals, employees, investors, bankers and the communities in which the business operates. Screw it up and value evaporates, possibly tearing apart the lives of real people like you and me.

2. Does merger and acquisition activity rise or fall during a recession? Why?

   It crashes. For an M&A transaction to occur, someone has to sell. During a recession, the price owners can obtain for their equity in the business falls. Their desire is not to “sell low,” of course, so they wait on the sidelines until the price they can obtain is more attractive.

   Why do business values fall during a recession? Four main reasons. First, business profits decline, which causes prices to fall. Second, buyers lose confidence in the future. They don’t want to buy and then own a business during a prolonged recession. Third, the amount of equity in the hands of buyers shrinks. With less equity available, fewer deals can get done. Last, debt financing becomes scarce. Yes, the price of debt typically declines during a recession, but not enough to overcome the drag caused by debt scarcity and onerous terms.

3. What is the state of the credit markets for buyers wanting to finance a deal?

   Debt financing remains available for business purchases, but lenders are just more cautious than they were a couple of years ago. Much more cautious.

   My firm has closed a few deals in this climate, but banks have been burned and they must operate conservatively to ensure they have enough capital to withstand any bad-debt losses they may suffer in the coming months and years.

   Bankers are also less willing to overlook risk factors in deals such as customer concentration, product concentration and earnings volatility.

   Nobody knows how soon the economy will improve, or to what degree, so the safest thing is to be conservative.

   The deals that are getting done today are reasonably priced (i.e. the price being paid for the business); have tangible assets that fully collateralize the debt; and include plenty of equity in the capital structure.

4. What’s the hardest part about helping people buy and sell businesses?

   Watching or hearing about business buyers and sellers who made mistakes that cost them substantial amounts of time, money and, often, credibility. Nothing good comes without proper preparation and hard work. Unfortunately, there’s a concept that great deals are completed by happenstance — luck. It’s, “Run your business and play some golf and answer your phone, and some day a motivated buyer with more money than sense will come along and cut you a fat check.”

5. What are the biggest mistakes buyers and sellers of businesses make?

   For buyers, its definitely overpayment. Buyers tend to get so excited and want to become an owner so badly that they become willing to accept unfavorable terms. They rationalize around the risk factors and even close out the voices of caution. Alternatively, they should keep in mind that their goal is to make money and succeed financially over the long term — not just “become a business owner.”

   They should heed the words of native Tulsan and legendary deal man Henry Kravis of KKR when he says, “Any fool can buy a business. Celebrate when you sell it for a profit.”

   For sellers, it’s failure to understand it’s a sales process that requires finding lots of high-quality buyers and working them all at the same time. To be sure, it’s neither a part-time nor do-it-yourself project.

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Published 9/6/2009 by the Tulsa World

Merger/ acquisition firms

Acquisition Advisors has named Stephanie Coit as marketing manager.

Coit was most recently director of online circulation for Hachette Filipacchi Media, publishers of Woman’s Day, Elle and Road & Track magazines, in New York City.

Her experience also includes marketing and circulation management positions with Lillian Vernon, SourceMedia and Value Line Publishing Inc.

Acquisition Advisors is the M&A firm of choice for buyers and sellers of mid-size U.S. companies. They can be reached at (877) 525-4321 or visit www.AcquisitionAdvisors.com for more information.

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Automated Mail Service (“AMS”) is a full service direct mail and commercial mail presort company that was founded in Tulsa, Oklahoma in 1979. AMS is located at 6915 East 38th Street in Tulsa, employs a team of 75 mail professionals and has approximately 40,000 square feet of office, fulfillment and warehouse space where it houses its direct mail and presort operations.

“AMS has a strong history in the mail business with deep Tulsa roots, and this is what attracted us to the business,” said Carla Covey. “I know that we will continue the tradition of outstanding customer service at AMS.”

Acquisition Advisors represented the Brooks in the transaction. Acquisition Advisors is a Tulsa based merger and acquisitions advisory firm that specializes in companies with annual profits between $1 million and $25 million. “As a native Tulsan, it’s always heart warming when the ownership of a Tulsa business remains in Tulsa,” said David Perkins, Acquisition Advisors’ managing director.

Published by the Journal Record on 9/28/2008

Quality Aircraft Accessories intends 50-percent growth in its facility and work force under its new ownership team, adding services for two new markets.

An investment group led by the Boston private equity firm Hastings Equity Partners has bought a majority stake in the Tulsa company for an undisclosed price.

“We bought this business because we see a business that’s been focused primarily on the piston engine market and we see an opportunity to move this into turboprop as well as the gas turbine markets,” said Brett Benton, a former Nordam executive who has taken the chief executive post at QAA.

Founded in 1999 by Justin and Lorie Hicks, Quality Aircraft Accessories (www.qualityaircraftaccessories.com) enjoyed rapid growth supplying general aviation accessory parts. It also repairs and refurbishes generators, magnetos, and other aircraft engine components, meeting Federal Aviation Administration and European Aviation Safety Agency standards.

“They are exceptional at quality parts overhaul/refurb,” said David L. Perkins Jr., managing director of Tulsa-based Acquisition Advisors, which advised the Hicks family on the recapitalization deal. “And they are fast.

“Planes are expensive,” said Perkins. “To get the most out of them – i.e. their cost – they need to be flying and making money all the time. So, when one is down for repairs, the owners want them done ASAP. QAA accommodates this with speed of service. Customers try them and then return. They also tell others, who try QAA.”

While Quality Aircraft recorded 15-percent revenue growth last year, Benton said that came primarily serving the piston engine market.

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