Middle Market Deals and how to buy, sell and raise capital from $5 to $500 million

Thanks to Matt Blumburg for pointing us to Verne Harnish's "Nine tricks buyers use to 'steal' your company."

This is a great rant about the problems often encountered in M&A deals.  My sense, having stood between buyers and sellers, is that each side perceives everything the other does as being somehow malicious.  The fact is, malice is rare in the deals I see.  Stuff happens.  Stuff like Verne describes--just with less malice.

Verne's advice to sellers is right on, including:

• Identify several strategic buyers and keep them all engaged in due diligence initially.
• Don't make a single decision differently until the check is cashed.
• Keep your best customers extremely happy -- they are your best defense.
• Focus on company performance during due diligence. 
• Make it count.

What's your advice?

One of the most frequently asked questions I receive from people buying or selling a business or raising money is: how do I value the business?

Building a thoughtful valuation for a business requires access to data that is not public.  And it isn't cheap or free.  Professionals use data sources, like Venture One and Mergerstat, but don't stop there.   We typically add public data, carefully culled from SEC filings, to gauge values for public companies.

We don't just grab the data, but analyze its relevance for each use, taking into account differences in company size, the age of the data and other variables that can impact significantly the data we're reviewing.

Professionals also like to use a discounted cash flow analysis, which incorporates forecasts of future cash flows, discounted to their present value.  That said, I find the exercise more valuable as a means of confirming other data than of actually valuing a business.  Market data is much more meaningful.

George Parker over at AdHurl got me thinking today about the valuation of the iVillage (Nasdaq: IVIL) acquisition by GE (NYSE: GE) unit NBC Universal for $600 million.  The deal implies a multiple of almost 8 times revenue and 300 times trailing earnings.

That said, given the average analyst estimates for 2007 earnings, the price reflects more reasonable forward earnings multiple of about 26. 

The deal price of $8.50 per share is just below the high price of the stock in 2004, suggesting that a shareholder has had the money parked for the last two years.

There are two groups of people reading this post; I apologize to both of you because I'll try to take the time to write this post so as to be relevant to both groups.  One group knows what a reverse merger is and wonders why I suggest that you run away from it.  The other group wants to know what a reverse merger is and why I suggest that you run away from it.

For group two, a reverse merger is a merger between a private company, typically with a small but promising business, and a public company that has discontinued its operations, leaving only a "shell" with publicly traded shares.  The transaction is usually structured with the public company acquiring the private one and subsequently changing the name of the public company to the name of the private company.  Because the public company had no operations, it likely had no officers.  The private company officers become the officers and directors of the public company.  Voila, the private company is public without a public offering.  Oftentimes, a third party or parties, will contribute equity capital to the newly combined company to provide needed capital.

It sounds easy enough, so you ask, what's wrong with that?

In a political context, we talk about liberal and conservative, Democrat and Republican, Bush and Clinton.

In accounting, we talk about aggressive and conservative.  The traditional notion was that accounting entries that resulted in understating actual earnings were “conservative” and entries that led to overstating earnings were “aggressive.”  The question for entrepreneurs and executives might be, “which is best for maximizing the value of my business?”

The SEC and FASB (the folks who define Generally Accepted Accounting Principles or GAAP) view it as their primary objective to end this discussion in favor of being “simply right.”