Acquisitions, Restructuring, Corporate Finance and Turnarounds

ClearRidge Capital Blog has moved

2011-03-29T13:38:00.000-05:00

Our blog has moved to:
journalrecord.com/category/corporate-finance/

We were invited to write a weekly column for The Journal Record, Oklahoma's Statewide daily business newspaper.

You can read each blog at the link above, or take a look at our website, for links to other articles and information:
http://www.clearridgecapital.com

Thank you for checking in.

Bank Lending Troubles – Continued Uncertainty

2010-07-01T09:56:00.000-05:00

According to a recent article in CFO magazine, the Bank for International Settlements, “the bank for central banks,” issued its annual report published Monday. The article “Banks Not Out of the Woods“ highlighted several points about the state of banks in the US:

1) Concerns over the impact of new regulations on the health of banks

2) Writing down losses – balance sheets are generally weaker than reported, as banks have not been forced to write down the real value of many assets.

3) Commercial real estate portfolios: In the US, more than 100 community and retail banks have a ratio of commercial real estate to total loans of more than 50%. Delinquency rates on these loans rose to more than 8% in the U.S. last year, double the rate a year ago. Congress is even considering inserting a provision in the financial reform bill that gives 7,800 banks permission to spread their losses on real estate loans over a 6-to-10-year period.

4) The BIS is doubtful that banks will be able to refinance their huge funding needs, given that funding maturities for banks are at their shortest in 30 years. In the United States, hundreds of small banks have yet to repay Troubled Asset Relief Program funds, and some have also failed to make required dividend payments to the government.

5) The Spread between the interest rates that banks can borrow at and the rates that banks are actually charging consumers for mortgages represents one of the largest profit margins banks have had for a long time. However, this may be providing false support as it cannot continue forever.

Oklahoma perspective

As we have written before, we are fortunate in this state that most of our banks have had more conservative lending practices and have therefore been less susceptible to the scope and scale of banking problems elsewhere. However, the entire banking system is linked together, so we need to keep our eye on the big picture.

Business Bank Lending Declines

Current state of Bank Lending – Business Lending

US Bank lending (Commercial & Industrial Lending) as reported by the Federal Reserve Bank continues to decline and was down 18% in May year-over-year. This 18% decline is twice as severe as the previous worst decline in history of 9.3% in 1949. And the monthly declines show little signs of slowing. See chart in this story, which shows percentage year-over-year declines in lending.

Current state of Bank Lending – Real Estate Lending

The picture is even worse for real estate lending at US banks. For the first time on record, we are seeing annual declines in real estate lending, down 4.6% over the same period last year. Until 2009, there had never been a year-over-year decline in real estate lending in the US and this may continue to worsen.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010. About ClearRidge Capital ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms. ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada. Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values. For further information, visit www.clearridgecapital.com.

Critical Business Improvement. Restructure in 2010.

2010-05-19T11:37:00.000-05:00

If you’re a business owner, chances are you may feel that the term “Restructuring” does not apply to your business. That may be because you associate the word with a business that is struggling, nearing bankruptcy or already in bankruptcy. The fact of the matter is that many of the best run companies in the world restructure their business on a regular basis. When your company is healthy and strong is the best time to consider a restructuring process. In fact, if a business is in or nearing bankruptcy, it may already be too late for restructuring to be effective.

There are typically three different types of restructuring that a company can undertake: financial, operational and strategic. A combination of these is commonly referred to as Corporate Restructuring. For healthy companies, they can be conducted separately, but for those under stress, it may make sense to engage in all three types of restructuring concurrently in order to have the most significant impact in the shortest period of time. In this article we will explain the three types of restructurings and how they can help your business.

Financial Restructuring

Financial restructuring is the process of reorganizing a company’s existing financial structure to match its’ short-term to long-term capital needs. A business, by its very nature, is in a constant state of flux and as a result, its financing needs are continually changing. The art of restructuring is determining a capital structure that is most appropriate for a business’ changing capital needs.

A critical aspect of financial restructuring is ensuring that the existing capital structure (debt and equity) is appropriate for the company’s current income, forecasted income and revenue growth plans. As a business owner, you need to keep a close eye on your current financing agreements and understand how specific changes in market conditions, revenue, costs and profitability can affect your ability to meet existing loan covenants.

Lenders like a clear picture on which to base their financing decision. You need to proactively develop and maintain a current business plan that allows for a range of scenarios of the future financial performance. Pro-active planning should give your lender a clear picture and increase your chances of renegotiating debt.

Financial restructuring also includes the implementation of processes to track the flow of cash in and out of your company by creating a weekly cash flow forecast, typically looking forward 13 weeks. This allows you to identify any gaps you may have on the horizon and provide plenty of time to address those capital requirements.

Another component of financial restructuring is to identify your key vendors and customers and negotiate better terms with them. Your aim should be to reduce the cash conversion cycle, i.e. extend payment terms with vendors and shorten payment terms with customers. We would recommend, however, that you carefully plan and rehearse these negotiations, so as not to appear in distress. You should have a clear and credible message about the future of your company.

Operational Restructuring

Operational restructuring refers to the process of analyzing and improving the core and non-core operations of your business. This can be anything from lean techniques, implementing better operational systems and processes to analyzing capacity utilization and improving efficiencies. In certain circumstances, it may lead to elimination of product lines, services or entire divisions that are a drag on the overall performance of the business.

Benefits of operational restructuring include improving profitability and better leveraging the existing resources of your company. It may involve implementing new systems, processes and tools to better track, monitor and adjust the operations of the business.

Strategic Restructuring

As market conditions change over time, it is important to adjust your business strategy to stay ahead of the competition. Strategic Restructuring is the process of evaluating and adjusting your strategy given current and anticipated market conditions. It also considers the different opportunities that exist to pursue revenue growth.

Subtle shifts in the market are often overlooked. These shifts often develop into major trends. Unless you are on the lookout, it is easy to miss the early signs of change and suddenly find your business struggling where others are picking up market share. Management need to recognize changing conditions, make appropriate and actionable plans and continually adjust their strategy accordingly.

Conclusion

The corporate restructuring process is for all companies, not just those in trouble. It is critical for market leaders as well as market laggers. And what you will find is that the mere process of evaluating a restructuring of your company will yield significant dividends, not only in performance and the ability to make better decisions, but may also uncover data, information and trends about your business.

And please don’t be nervous about talking to a restructuring professional, advisor, or whatever else you may want to call us. We know that we are not an expert in your business. Whether or not we have worked in your industry for years, we will never know it as well as you. Lack of specific industry knowledge, however, doesn’t affect our ability to make a real difference to your business. Whether it is guiding you to implement better systems and processes, streamline your business, identify new cost saving techniques or new revenue opportunities, there is nearly always a benefit from a trained set of eyes guiding you through a restructuring process.

In the end, we help you make better decisions. We give you the tools and structure to better analyze your business and deliver critical business improvement.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010. About ClearRidge Capital ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms. ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada. Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values. For further information, visit www.clearridgecapital.com.

The Business Sale Process: Private Auction vs. Negotiated Sale

2010-04-23T14:20:00.000-05:00

When selling your business, there are several different methods to choose from; a broad auction, a private auction and a negotiated sale. In most cases, the owner of a privately held company wants the highest degree of confidentiality. They want to minimize disruption to customer, supplier and employee relationships. Owners also want to mitigate the risk of competitors discovering their intent to sell and using it as a tool to try and gain market share from them.

For those reasons, we are not going to discuss the public auction process, which is most often used for publicly held companies and is the least confidential. Instead, we will focus on the two methods for selling your business that provide a higher degree of confidentiality and that occur most frequently in the middle market.

Private Auction (Controlled Auction)

First, we need to dispel the myth that a private auction works in the same way that you would see at an auto auction. To start with, there is no auction room. The term private auction simply describes the process through which you encourage competing buyers to pay a higher price and better terms for your business.
Controlled auctions may include on average five to fifteen interested buyers, which we’ll refer to as “buyer prospects.” After extensive planning and analysis, your M&A advisor will prepare a confidential memorandum, which describes the company’s stock or assets to be sold, as well as the business opportunity for the acquirer. Other information in the memorandum may include the history of your company, products and services, explanation of processes, business model, customers, industry reviews, geographic coverage, strategy for growth, ownership, legal structure, facilities, people, competitors, competitive advantage, assets and capital expenditures.

Next, potential buyers need to be identified and contacted. Your advisor will go through all their existing contacts and relationships, as well as conduct a fresh search of all likely buyer candidates. After receiving an executed nondisclosure agreement from interested prospects, your advisor will request your approval to send them the memorandum, which includes a timetable for the auction process.

After follow-up conference calls and additional information requests, your advisor will request a preliminary indication of interest from each prospect. You will then choose the most qualified and most likely buyer prospects who will be granted access to additional information in a secure data room and possibly a conference call or meeting with you.

At this point, buyer prospects are requested to submit an indication of interest with a range of offer prices based on different variables. The concept is to keep moving forward and reducing the number of prospects until you are left with the most serious buyers who are most willing and able to pay the highest price at the most favorable terms.

The next step is to rank the buyer prospects into a list of buyer candidates in order of priority.

With your consent, the advisor will then request submission of a LOI (Letter of Intent) from the lead buyer, which is a non-binding commitment to purchase the company.

A more detailed description of the sale process can be found on ClearRidge’s website:
http://www.clearridgecapital.com/saleprocess.htm

Advantages of a private auction

A private auction is typically appropriate when you are able to identify multiple potential buyers. The process is designed to increase competition between potential buyers, thereby increasing your negotiation power and maximizing the bidder’s price and improving their offer terms. As the seller, you have better negotiating strength and a better chance of closing the deal with one of your preferred buyers.

Disadvantages of a private auction

A private auction is typically a more complicated and costly process than a negotiated sale. Even though all dissemination is private and to a pre-screened group, it does make the sale more widely known and increases the potential risk of other people finding out. Additionally, certain companies might not want to participate in an auction process. This could be because it’s unfamiliar, or maybe because it is more complicated and with a pressured timeline.

Importantly, it should be known that in both the private auction process and a negotiated sale, there is no “listing” of the business for sale, nor is there any kind of public announcement. It is a targeted, confidential and specific outreach to possible buyers.

Negotiated Sale

In contrast to a private auction, a negotiated sale involves only one to maybe a handful of interested parties. In situations where you have a clearly identified potential buyer and want a speedy and confidential process, a negotiated sale will likely be more appropriate than a private auction process. A strategic buyer typically expects to benefit from synergies between the companies and therefore may be willing to pay a fair price without the added pressure of a private auction.

In contrast to a private auction process, garnering a high price in a negotiated sale may not be an easy task as the lack of multiple alternative buyers diminishes your negotiating power.

A negotiated sale tends to be less disruptive to the continuing operation of your business, as you are not so tied to the particular deadlines and time requirements of a private auction. However, extensive due diligence is common in a negotiated sale, which can divert management’s attention away from daily operations. One possible solution, which is often overlooked, is to conduct the majority of the due diligence assignments in
advance of the sale process in your own time at your own pace, so that any information to be requested by the buyer is already available and just needs refreshing and updating as the sale process moves along.

Conclusion

It is important to note, however, that these two types of sale process do not have to be entirely distinct from one another. For example, it may make sense in a business sale to take the early steps of the auction process, including narrowing down a full spectrum of potential buyers, then pre-screening them for industry, products, services, capabilities, size and profitability. Then take the most qualified buyers from this list and discreetly determine the value range they would offer for a company with the same profile as your company. You could use these buyer prospects to validate the best offer from your preferred buyer.

Whichever process you choose, it should take less time and run more smoothly overall if you do most of the work up front. Buyers prefer, and will often pay a higher price for a company whose sale process is organized, efficient and time-effective. It is a good reflection of the efficiency of operations and overall management of the business.

In choosing the right process for your unique business and situation, it is a good idea to discuss your thoughts with an advisor and consider the market environment in which you are trying to sell, your objectives, concerns and also the likely number and type of potential buyers. An experienced M&A advisor will also help to manage the process and ensure that you are able to realize your goals from the sale.

KEY PLANNING REQUIRED to Successfully Integrate an Acquisition

2010-03-17T14:35:00.000-05:00

Even though most mergers or acquisitions start out with the best of intentions, numerous studies have shown that the majority fail to increase enterprise value.

This is highlighted by the following statistics from The Wall Street Journal, Forbes, Fortune and CFO.com:

70% of M&A deals fail to achieve the anticipated synergie

50% report a drop-off in productivity in the first 6 months post closing

47% of acquired company executives leave in the first year, and 75% of executives leave within the first 3 years

Management grade the financial performance of their acquisition as a
C minus on average.

Create an Integration Plan

So, how can you make sure your business is on the right side of these statistics?

Owners and managers need to put substantial time and effort into an M&A integration plan. Closing the deal is just the beginning. Before closing, you should have clearly defined your deal drivers and put them in measurable and quantifiable terms. Integration efforts should focus on delivering these goals and give you the framework to identify the critical action plan to achieve these goals.

Additionally, you need to determine the key success factors from the newly acquired company, which you may want to adopt in the existing company. Ideally, you will have two companies which learn and adopt best practices from each other to add value to the company as a whole.

Early on, you need to determine the degree to which the new entity should be integrated with the existing entity. Do you want it to remain largely independent, share the same corporate culture, processes and technologies, or maybe somewhere in between?

In making that decision, you need to look deep inside both companies and consider how they may or may not fit together. And don't make that decision from the sanctity of your office. You need to go down to the shop floor, talk to your managers, employees, live and breathe the heart of the two companies.

Based on this understanding, you should try and customize your integration structure and approach, then develop a plan for the first 100 days post closing. And then constantly refer to that plan so as not to lose sight of important items during the frenetic first few months.

Don't be afraid to adjust the plan based upon new findings after closing. This should also allow you to increase input from both sets of employees as they see the ongoing implementation and impact of the integration plan.
Leadership

Key people should be identified to manage the integration process. They need to quarterback the process while you retain the coach's role. Clear leadership roles are critical to minimize uncertainty, assign accountability and define authority.

Make sure that you have leaders on your team who are trustworthy, communicate well in both organizations, and can handle the inevitable uncertainties and morale issues with care. Leaders should be able to respond to changing conditions while keeping the strategic vision of the deal in mind and need to act according to the culture that you want to instill in the entity.

Communication

According to Watson Wyatt Worldwide, 90% of acquirers agree that communication is important but only 43% deem that communication was effective and successful in their integration. Communication success depends on paying attention to all groups involved with adequate attention focused on senior management, while at the same time providing clear and consistent messages to all employees from day one. Unfortunately, many integration leaders fail to communicate early and often.

Delay = Uncertainty = More Disruption = Decrease in Morale
= Loss in Productivity and Increased costs

Culture

The set of norms, values and assumptions governing daily actions and interactions are another critical issue that many acquisition integrations overlook. Most often an acquirer hopes to maintain its own culture and hopes that the new entity's culture merges into its own. But that doesn't really make sense.

Before you closed the deal, you likely placed a high value on the people in the target company. If you don't observe, understand and respect their culture, you will not only erode their productivity, but will also lose many of their key people. You need to carefully consider how their culture works and carefully design and implement incentives, compensation and benefits to reward behaviors that you believe are critical to the success of the integration and work within their culture.

Speed of Integration

Despite the fact that many managers like to take their time in integrating firms post closing, a 2008 study by PricewaterhouseCoopers suggests that waiting is a mistake. According to PwC, people are most open to changes in work culture and processes during the first 100 days.

A timely integration leads to improved employee commitment, lower employee turnover, improved focus on customers and improved adoption of new technology.

Conversely, prolonged transitions slow growth, decrease profits, erode morale and reduce profitability.

If you take too long getting to work on the integration, your company could lose market share and miss the best opportunities to deliver the anticipated synergies of the acquisition.

Conclusion

Companies that adequately plan and deliver on M&A integration issues should significantly increase the likelihood that their acquisition works out as everyone had hoped. So, remember the following three steps:

Gain knowledge about both businesses

Apply knowledge with a clear plan of action and constantly refer back to the plan and intended goals

Deliver the integration plan in the first 100 days. Track, monitor and adjust to deliver integration goals.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.

ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.

Selling Your Company in 2010? More Analysis Is Required

2010-03-17T14:33:00.000-05:00

More Analysis Required
If you're going to sell your company in 2010, you need to think differently. Yes, there are buyers lined up with cash right now, but most are either looking for a high growth company that has been bucking the negative economic trend, or they're looking for a stressed balance sheet and shaky capital structure to pick up a "good deal."

For companies that are somewhere in the middle, you need to be better prepared than ever before. Buyers are going to be more critical and more likely to submit a low purchase offer unless they have a real understanding of your business. To submit a fair value purchase offer, they need to be convinced of the opportunity.

You need to have clear data and analysis of your business, systems and processes before you talk to any prospective buyers. This is in addition, to the more obvious steps of highlighting competitive strengths, weaknesses, business outlook, opportunities and benchmarking. Clear means well documented and easily understandable to an independent person who has no prior knowledge of your business.
Why is this data and analysis so important? Because when a buyer makes an offer to invest in your business, they should be well informed and understand the business with an insider's knowledge. If that happens, they feel less uncertainty. Less uncertainty = less perceived risk = higher purchase price.

To illustrate this point, it is useful to consider some of the differences between the equity valuation of a public company and a private company.

Public

Private

Information
Publicly Available
Audited Financials
Daily Pricing Information (Stock Price)
Daily Analysis by thousands of analysts
Highly Regulated

Equity Liquidity
Highly Liquid
Instant trading of minority interest (stock market)
Industry of brokers, agents and market makers
All sources of capital available
High competition for lending and investment
Public Auction Process to Sell Majority Interest

Valuation Multiple
Relatively HIGH

Information
Little Pricing/Valuation Information
Rarely Audited Financials
Non-GAAP Accounting
Data available, but little or no analysis
Slight or No Regulation

Equity Liquidity
Low liquidity
Few ownership/equity transfers
Majority enterprise interest
Fewer sources of capital available
Less competition for lending
Negotiated Sale or Private Auction Process

Valuation Multiple
Relatively LOW

Investors in public companies have easier access to more reliable and timely information, data and analysis than investors in closely held private companies. Why is this data and analysis so important? Because when a buyer invests in a public company, they are informed with research from thousands of analysts from many different perspectives. As a result, there is less uncertainty risk. At the time of writing this article, the average PE ratio for the S&P 500 was 20 compared to an average 5.2 adjusted EBITDA multiple for middle market private companies, according to a recent AM&AA report.

Yes, there are other factors to consider when comparing public to private valuation, such as stability and liquidity, but the bottom line is that investors will pay a significant premium for "ABC Manufacturing" public company than the comparable "XYZ Manufacturing" closely held private company. The price premium can be double, triple or more. Therefore, unless the buyer of XYZ Manufacturing has a deep insight into the business before they make an offer, they're going to price in their uncertainty with a lower multiple.

Let's be realistic. A private company is rarely ever going to sell for a public company multiple, but just bridging some of this information gap and shifting 10 or 20 percentage points towards a higher multiple can mean millions of dollars to you.

So, what can be done to bridge this gap? If you look at the typical closing process when you buy a closely held company, there is a boilerplate due diligence list. And due diligence nearly always begins after the sale price has been negotiated and the letter of intent has been executed.

If you're the seller, this is counterintuitive. If you want a buyer to stretch and pay maximum price for your business, they need to be fully informed when making an offer. After signing a letter of intent, they only have two real options. They either buy your business for somewhere close to the negotiated sale price or walk away. Yes, a buyer will often use due diligence to try and negotiate lower, but the majority of negotiations are already complete by that point.

It has been proven to us time and again that it is better to lose a buyer earlier in the process than have them make an uninformed low ball purchase offer.

You should spend time preparing insightful analysis of your company before negotiating with a buyer. It is natural to want to get a feel for the market value of your business before spending too much time, but by moving forward too quickly, you will lose negotiating strength and are unlikely to ever find out what the market could really pay.

So, what analysis do you need to perform? Well, we can't give away our proprietary process, but it comes from the experience of the buyer's perspective and seller's perspective from countless acquisitions. It also depends on the size, type and complexity of the business. One thing is for sure, however. When a ClearRidge client brings a company to market, prospective buyers will have access to relevant, concise and convincing analysis, so their offer is going to be based on a much clearer understanding of the business. You will lose some buyers in the process, but you'll also sort through to find motivated prospects who are more likely to meet your price expectations.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.

ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.

Cost of Debt and Equity Capital in 2010

2010-01-19T11:39:00.001-06:00

Source: Pepperdine University Private Cost of Capital Survey

Pepperdine University, along with research contributor Robert Slee, conducted the first ever private cost of capital survey (PCOC), which was the first survey of its kind to provide information on the capital markets for small to midsized US companies.

They surveyed senior lenders (typically banks), asset-based lenders (ABLs), mezzanine capital, private equity and venture capital as they relate to midsized private companies.

This survey may be useful for your business, as the results highlight the benchmarks that must be met to qualify for capital, along with the required investment returns for the capital providers.

Armed with this information, you should be better able to plan your budget, your ideal capital structure and determine the likely cost of capital in 2010.

We are going to summarize what we think are some of the most important points, but would also encourage you to download the full 67-page survey.

At the end of this email, we provide a link to go to Pepperdine University's website to download the complete survey.

BANKS (Cash-Flow Lending)

Interest Rates

According to Pepperdine's survey, over half of banks responded that their current all-in interest rate (including spreads over prime and LIBOR) is between 6% and 6.5%, with the remainder lending at rates between 6.5% and 7.5%.

44% of loans were refinancing existing debt as opposed to loans for working capital, acquisitions, new equipment and other purposes. While they didn't expect lending rates to increase significantly, most banks expect lending to become more restrictive through the middle of 2010.

ClearRidge: Please take action early in preparation to refinance debt. A major concern is the number of business owners that are going to be surprised by higher loan costs and tighter credit requirements when it comes time to replace debt. That, coupled with declining bank lending levels throughout 2010 will likely lead to liquidity problems for thousands of US businesses.

Fixed or Variable Rates - 38% use fixed rate and 62% use variable rates, of which most are pegged to prime.

Median Credit Ratios

Fixed-Charge Coverage (Min): 1.2

Funded Debt to EBITDA (Max) 3.0

Debt Service (Max) 1.25

Debt to Net Worth (Max) 3.0

Covenant Thresholds

Max Debt/ Total Assets 3x

Min Cash Flow Percentage 125%

Min Fixed-Charge Coverage 1.2x

Max Debt/EBITDA 2.75x

You will notice that these ratios and thresholds are more restrictive than in recent years when many businesses last refinanced debt.

ASSET-BASED LENDING (includes some banks)

Asset-Based Lending focuses mainly on collateral and liquidity; whereas a traditional bank loan focuses mainly on cash flow. An ABL is a loan secured against the assets of a company - mainly inventory and accounts receivable, but sometimes also machinery and equipment, intellectual property or trademarks.

[Banks also operate within this category and sometimes offer a blend of cash flow and asset-based loan.]

Asset-based loans are typically categorized into three tiers depending on loan dollar amount:

Tier 1 loans : >$10M; Tier 2 loans: $3-$10M; Tier 3: <$3M

Interest Rates

According to Pepperdine's survey, variable interest rates in 2009 and 2010 are ranging from prime plus 0.5% to prime plus 16%. For larger loans typically pegged to LIBOR, rates range from LIBOR plus 3.5% to LIBOR plus 6%.

Other fees

ABLs may also have closing fees ranging from 0.5% to 4% of the loan amount; modification fees from 0.1% to 3%; commitment fees from 0.5% to 1.5%' collateral monitoring fees from 0.1% to 12%; unused-line fees from 0.25% to 1%, as well as audit fees, attorneys' fees, insurance, annual and due diligence fees.

ClearRidge: In other words, it's important to look beyond the headline rate and determine the all-in cost of an ABL, which will likely cost you north of 10% and can be as high as 35%.

Over half of Asset-Based Lenders expect prime rate to increase, LIBOR to increase and credit spreads to widen through mid 2010.

Median Credit Ratios

Fixed-Charge Coverage (min): 1.0

Funded Debt to EBITDA (max) 4.25

(compared to bank lending max at 3.0)

Debt Service Ratio (min) 1.2

Lending Advance Rates

Accounts Receivable: 85.0%

Inventory - Low quality: 22.5%

Inventory - Intermediate quality 35.0%

Inventory - High quality 55.0%

Equipment 67.5%

Real Estate 65.0%

Land 50.0%

Firm's Cash Flow 65.0%

Marketable Securities 80.0%

Refinancing accounted for over half of ABLs, followed by acquisition and growth financing. In spite of rising costs, almost every asset-based lender expects demand for ABLs to increase through 2010.

ClearRidge: When traditional bank lending becomes too restrictive or is unavailable, many businesses will turn to ABLs to refinance their debt.

MEZZANINE CAPITAL

According to Pepperdine's survey, all-in interest rates for mezzanine loans are currently running at around 18%.

Mezzanine is most often used to fund a management buyout, growth or acquisition financing, with only about a third for refinancing.

Most mezzanine capital loans would be made to firms with more than $10M in annual sales and for loan amounts between $1M and $10M. One in three mezzanine loans are straight interest, with two thirds comprising interest plus stock warrants.

Pre-funding Median Ratios

Total Debt to EBITDA (max) 3.75

Senior Debt to EBITDA (max) 2.5

Fixed-Charge Coverage (min) 1.2

Median Financial Ratios

Maximum Multiple of Recast EBITDA 4.0

Maximum Multiple of Operating Cash Flow 4.0

Maximum Total Debt to EBITDA 4.0

Maximum Senior Debt to EBITDA 2.5

Minimum Fixed-Charge Coverage 1.2

PRIVATE EQUITY

According to Pepperdine's survey, Private Equity in today's market has an expected annual rate of return of between 20% and 30% on new investments.

Only 7.5% of private equity funds will consider an equity investment of $1M or less, but around 40% will consider an investment smaller than $5 million. Two-thirds are control investments and one third are non-control.

The median targeted equity ratio as a percentage of invested capital in each deal is 41%, with a range between 20% and 50%.

ClearRidge: This equity ratio is in contrast to the easier credit days in 2007 and 2008 when private equity would rarely need to contribute much more than 20% equity to the capital structure.

VENTURE CAPITAL

According to Pepperdine's survey, VCs currently have an expected rate of return on investment of 40% to 43% for each investment they make. However, the average rate of return for realized investments in prior funds is between 24% and 29%.

Below is the Pepperdine Survey's summary of VC investment stages:

Stage 1: 22.5% of VC investments fall into this category.

No product revenues to date and limited expense history, typically an incomplete management team with an idea, plan, and possibly some initial product development. Expected exit by VC in 6.2 years.

Stage 2: 17.0% of VC investments.

Still no product revenue but substantive expense history, as product development is underway and challenges are thought to be understood. Expected exit by VC in 5.8 years.

Stage 3: 17.8% of VC investments.

Significant progress in product development; key development milestones met and development is near completion, but generally no product revenue. Expected exit by VC in 5.1 years.

Stage 4: 28.3% of VC investments.

Additional key development milestones met and some product revenue, but still operating at a loss. Expected exit by VC in 4.8 years.

Stage 5: 10.9% of VC investments.

Product revenue and operating profitability or breakeven/positive cash flows. Expected exit by VC in 4.0 years.

Stage 6: 3.5% of VC investments.

Established financial history of profitable operations or generation of positive cash flows. Expected exit by VC in 3.5 years.

Summary of Capital for Business in 2010

To reiterate what we said in 2009, we would urge you to be thoroughly prepared when it comes time to refinance or recapitalize debt. The credit markets and equity markets are open for business, but it will take better preparation than in the past to get through the loan committee and get your loan approved.

If you need to look at alternatives, raise some capital or replace debt, please give ClearRidge a call and we would be happy to talk through your options with you.

Tax Credits

If you would like to learn about business incentives and tax credits that may be available for your business, you may find the following useful:

www.clearridgecapital.com/taxcreditsoklahoma.htm

Pepperdine Survey

Download a PDF of the full Private Capital Markets report from Pepperdine's website:

http://bschool.pepperdine.edu/research/pcmsurvey/form/

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.

ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.

Management Buyouts and Buyins

2009-12-16T11:32:00.006-06:00

Are you thinking whether or not you should raise capital or sell your company or in 2010?

ClearRidge Management Buyouts
Tulsa Oklahoma

Now, more than ever, you need to consider all your options. Most business owners typically see two options when it comes time to raise new equity or sell their company: 1) strategic buyer or 2) financial buyer. In reality, you have many more options open to you.

In fact, an outright sale rarely yields the highest price, so consider these 9 alternatives before making up your mind:
i) sell to employees;
ii) take the company public
iii) sell to family members;
iv) sell to co-owners;
v) sell through a charitable trust;
vi) sell majority interest and immediately exit the business;
vii) sell minority interest to new investors and use their capital to grow the business;
viii) enter a joint venture to test the water with a possible acquirer;
ix) merge your business with another company.

The important point here is that there are many options available and it makes sense to work through the merits, advantages, challenges and tax implications of each one before starting down the road.

How about a Deal with Management?

Today, we are going to discuss one of the more favorable options in this climate: Management Buyouts (MBOs) and Management Buyins (MBIs). Over the last few months, MBOs and MBIs have become increasingly popular for a variety of reasons.

The first thing to do is assess the likely value that the transfer could bring. In a climate where the majority of midsized companies have seen revenues and earnings fall in the last 18 months, a transfer to management can be the best way to sell for the highest price and realize the most value.

Transfer Ownership to Managers

Management transfers (buyouts and buyins) typically occur when: i) the owner of a privately-held company decides to sell; or ii) a larger company sells off a division; or iii) a bankruptcy forces liquidation of a failed business.

Differences between an MBO and MBI

Management buyouts occur when existing management of a company acquire majority ownership from the owners. Management buyins take place when external financial investors back an outside manager/operator with key industry knowledge and experience to lead and grow the company.

Will an MBO or MBI work for your company?

Below is an outline of the characteristics that would typically favor a MBO or MBI.

Industries

Management deals often occur in mature industries that require low levels of capital investment. Ideally the company would have a loyal customer base. Non-cyclical businesses with reasonable to high margins are favored.

Management Team

Management experience, track record and credibility are paramount. Time and again it is proven that investors back a management team above most everything else. Management needs to have some skin in the game and should be able to raise their own funds or pledge assets. To avoid future headaches, you should only involve managers who are critical to the success of the business. The fewer the better.

Company

The Company should have predictable and stable cash flows with profit margins above industry averages. Financial reporting should be process driven, clear and efficient. Proprietary or defensible products and services are preferred.

Investor and Deal Structures

MBOs and MBIs are often backed by private equity investors and are typically structured either as an Equity sponsored buyout or a Leveraged buyout:

1) Equity-sponsored buyout (ESB). In the current climate, equity-sponsored buyouts typically consist of 2%-10% management equity, 40%-50% private equity capital and 40%-60% bank or asset-based lending. So, in effect, majority equity ownership is taken up by the private equity sponsor, with debt funding about half of the proceeds to the Seller. It is possible that equity sponsors may also require up to 10% in a Seller note.

Management may contribute a token investment of equity and earn additional equity interest based on company performance, as well as the right to acquire further equity pari-passu to the equity sponsor's contribution.

2) Leveraged buyout (LBO). In the free-wheeling, easy credit days (pre-2008), many management buyouts were structured through a leveraged buyout. A LBO would typically consist of 5%-15% management equity, 10%-25% seller note, 5%-20% mezzanine capital and 40%-60% bank or asset-based lending. So, in effect, it would be seller debt, mezzanine debt and bank debt that funds the acquisition.

In the near term, it is unlikely that a LBO will be used to fund a management buyout. Not only is there a higher failure rate than with an ESB, but it would also be difficult to secure the financing with so much leverage.

Advantages of an MBO for Seller:

An MBO will likely have a more efficient and cooperative due diligence process. Management knows the business intimately and may even know more about the business than the Seller.

Management's desire to have skin in the game shows their confidence in the Company's future, which in turn increases investor confidence in the deal. Higher confidence and less perceived risk may allow a higher sale price.

Difficulties to overcome for Seller:

There is an inherent conflict of interest in a MBO. Management is in a position to reduce the sale price or block competitive offers leading up to the sale. Management may also not agree to stay if a competing offer is accepted.

The Seller may have less information about the business and less leverage in negotiations because of the management's role in the business.

Timing is critical. At the closing table, there could be management, private equity, a bank, mezzanine lender and the seller all having to sign off on the deal at the same time. Each group has their own agenda and is represented by different counsel. It is a real challenge to accommodate each party's needs in a timely and professional manner. From the outset, a MBO should be a well planned and carefully orchestrated effort to get the deal closed and each party needs to enter the process with a willing attitude to make some compromises to get the deal done.

Hiring advisors from a specialist M&A firm who have extensive MBO experience will increase the odds of getting a deal done, as well as help to satisfy the needs of all parties and smooth negotiations. Our team at ClearRidge would welcome the opportunity to represent you in your management buyout.

Difficulties to overcome for Management:

Time view of investors vs. managers: 5 years for equity sponsors vs. possibly 10 to 15 years for managers. Management and equity sponsors need to resolve these differences early in the process.

Investors want the company to be run to maximize returns within a short time-frame. Managers may have alternative ideas about long-term appreciation of the Company. There needs to be a common agreement and clear plan agreed between managers and equity sponsors before entering an agreement.

Managers need to understand the implications of the new capital structure and be comfortable that they will support the transaction. Management need to determine if the new capital structure will allow sufficient runway for the newly acquired company to succeed.

This brief overview of management buyouts only scratches the surface of everything you are likely to encounter. If you would like to dig deeper, you can call our team at ClearRidge to arrange a no-cost consultation to discuss how a management buyout could work for your Company.

This is our last newsletter before the holidays and we would like to wish you and your family a Merry Christmas and a Peaceful and Prosperous New Year.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge Management Buyouts
Tulsa Oklahoma

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.

Acquisitions Should Compliment, Not Substitute, Good Corporate Growth Strategy

2009-11-19T15:57:00.002-06:00

If you own or manage a business and intend to use the current softness in your industry as a springboard to pick up market share in 2010 and 2011, you need to carefully consider your growth strategy.

Organic Growth
To what extent can you fund and develop growth internally? What are your risks and returns on any capital investment you make? What access do you have to different types of capital and what are the overall costs? And, perhaps most importantly, how will your growth strategy affect future cash flows?

Growth through Acquisition
Will 2010 and 2011 provide some exceptional acquisition opportunities for your business? More than likely, yes. But the most successful business owners will only use mergers and acquisitions as one tool in their overall growth strategy. Acquisitions should be used to gain access to new markets, products or intellectual property where organic growth would be a less effective alternative, but only if it also complements a company's strategic plan.

Challenge your assumptions
As you are considering an acquisition, you need to challenge every assumption you have about the market and the opportunity before proceeding. In times like this, there is a rebalancing of the market. The days of easy credit and pure financial engineering will likely be replaced with one where organic growth, operational strength, smart planning and business acumen are more important.

Acquisitions are often rationalized as a faster and more cost effective way of growing, but that typically doesn't take into account the planning, time, disruption, financial and organizational resources that are required to successfully integrate companies after an acquisition. Synergies on paper are not realized without a thorough integration plan with detailed and realistic profitability targets. We'll talk more about that in the coming weeks.

Does it add value?
An important rule to remember is accretion and dilution. After integrating the two companies, will the acquisition add incremental value to the combined companies? Will it increase the overall value of the group (accretion) or dilute the value of the combined companies? Accretion is good. Dilution is bad.

Go for Growth
A little over 2000 years ago, Virgil told our ancestors that
Fortune Favors the Bold.

However, if Virgil were a business owner today, maybe he would a few caveats to that statement:

Fortune Favors the Bold ... so long as you have scrubbed the numbers, appropriately analyzed the risk, developed the most cost effective capital structure and are confident that your growth and profitability strategy will add value to your company.

There are going to be some great acquisition opportunities next year and we are already seeing buyers setting up for the start of 2010. Our message today, however, is to make sure that any acquisition fits your overall growth strategy. Now is the time to plan that strategy and then find the acquisition opportunities before anyone else does.

This is the first in our series of Secrets to Successful Mergers & Acquisitions.

Next post - Transferring Business Ownership (Part I)
Following post - Business Growth through Acquisition (Part II)

Call ClearRidge for impartial and expert advice on your corporate growth strategy: (918) 392-2900.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.

Signs Point to Tight Business Lending in 2010

2009-11-19T15:51:00.003-06:00

October is when many companies are preparing budgets and business plans for the following year, so it seems a good time to consider the credit environment for 2010.

While there is no crystal ball, we do have 100 years of historical data from the Federal Reserve to give us clues to business lending levels and business failures coming out of a recession.

The good news is that there are some clear patterns that have occurred after every recession.

To apply historical data to the future, we need to know when this recession ended, and industrial production has proved to be a consistent marker. More accurately, a reduction in year-over-year declines in industrial production defines the end of a recession.

So, unless there is a "double dip" in the coming months, the recession likely ended in July.

Before we consider future business lending levels, we need to understand the current business lending landscape. In the last 30 years, even at the fastest pace of growth, it has typically taken 10 or more years to double commercial and industrial lending levels. However, it took less than half that time for C&I lending to double from May 2004 to a peak in November 2008, according to the Federal Reserve Bank of St. Louis.

C&I lending has been declining since December, and history suggests it will continue to decline - year-over-year - for up to three years after the end of this recession.

And not only is business lending declining, but the pace of the decline is increasing. Typically, the pace of declines has increased for up to 18 months after the end of a recession, so it is likely that this time we are going to break the 1949 record of a 9.3 percent year-over-year decline.

If C&I lending follows the historical pattern, lending levels could drop from $1.64 trillion in October 2008 to less than $1.3 trillion at some time in 2011. Assuming no change in supply and demand for loans, that would be a shortfall of approximately $350 billion.

The demand for new and replacement debt will likely increase in the next two years. Many stronger companies that previously carried little or no debt will start to take on new debt. Banks are competing for this business.

This will be combined with medium- and higher-risk business loans that were made to what appeared to be strong companies at competitive rates a year or so ago, when less stringent credit was available. At a minimum, these weaker companies are going to need to renew or replace their existing debt and there are not as many banks competing for this business.

The supply of new and replacement debt will likely fall over the next two years. As a result, there will be a widening gap between supply and demand, and it will be the weaker companies that will suffer when they are unexpectedly unable to replace or renew their debt.

This could trigger three things: a) Lenders will increase interest rates and fees to compensate for the additional risk of these medium to high risk loans, thus putting further pressure on companies' already weak balance sheets; b) some businesses will have to switch to more costly forms of debt; or c) a shortfall in supply will lead to an increase in defaults on C&I loans, which leads us to review historical business failures after a recession.

According to the American Bankruptcy Institute, U.S. Business bankruptcy filings have now risen every quarter for 13 straight quarters since the bankruptcy rules changed in 2005. To compound this trend, business bankruptcy filings have kept increasing for between two years to five years after the end of each previous recession.

Below is the data from the American Bankruptcy Institute.

Quarterly Business Filings by Year (1994-2009)

Our intention is not to spread doom and gloom, but to raise awareness that the economic battle is not yet over. As a CEO or CFO, you may want to consider professional advice, assistance or even a confidential sounding board to renew, raise or replace debt next year.

If you would like a confidential sounding board to discuss your debt and budget plans for 2010, we are happy to sit down and discuss any options. You don't have to hire us as your advisor, we just want to provide a structure and framework to shape your thinking. If you want us to advise you on restructuring or corporate finance, that's an engagement and we can talk about hiring ClearRidge. (918) 392-2900

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.

ClearRidge was quoted on likely trends in 2010 for bank lending and business bankruptcy filings.

2009-10-06T11:47:00.002-05:00

Matthew Bristow, Managing Director was quoted on bank lending and business bankruptcy filings after a recession in Oklahoma's Statewide newspaper, Journal Record. VIEW FULL NEWSPAPER ARTICLE

Has recession turned into recovery?

October 2, 2009

TULSA – Oklahoma State University economist Russell Evans believes the national recession could bottom out late this year.

BOK Financial Chief Investment Officer Jim Huntzinger is far more optimistic.

“I think it ended at the end of June this year,” said the 27-year veteran of Oklahoma’s largest bank.

Although some national observers agree with Huntzinger, Bob Dauffenbach doesn’t buy it. While he’s seen some indications of improvement, the University of Oklahoma economist expects lingering problems to keep the U.S. recession in a sustained flat bottom well into 2010.

“There’s just a wide, wide variance of opinion about where things are headed,” said Dauffenbach, director of the OU Price College of Business Center for Economic and Management Research.

“You may be having the blue-chip economists forecasting a big rebound, but they didn’t predict the downturn, so why should we trust them?

“It’s just an upside-down world and I fear it’s going to remain so for a while,” he said in a phone interview Thursday. “It’s going to stabilize, but I don’t think that’s the end of the story. My sort of best-guess as to what we’re going to look at for the next two years is periods of positives and periods of negatives. We’re going to kind of oscillate a lot around the lower edge.”

All agree on one thing: When it comes, the U.S. will endure a mild, restrained recovery, with Oklahoma continuing to perform above national standards despite today’s still-low natural gas prices and slowly recovering oil prices.

“Knock on wood, we’ve made it through this recession in pretty good shape,” said Huntzinger.

But several potential time bombs could derail both trains. While rising unemployment brings immediate concern, with Huntzinger and others anticipating national levels could reach 10 percent,many wounded retailers fear the worst from shaken consumers heading into the key holiday sales season.

Looming over those issues are worries concerning the nation’s $700 billion-plus mortgage-backed securities nightmare, rising bank failures and bankruptcies, revenue-stressed state and municipal governments, mounting war debt and military reinvestment costs, health care reform questions and the looming bill for President Barack Obama’s multitrillion-dollar economic stimulus package.

“This has been a very different set of circumstances that have set up this problem in our economy,” said Matthew Bristow, managing director of ClearRidge Capital of Tulsa. “So this could be a very different outcome.”

Those many governmental issues spiking the federal deficit raise what is, to some, the supreme chill of increased taxes – a budget-freezing point for executives even in Oklahoma.

“Clearly taxes have got to go higher,” Huntzinger said in an office interview Thursday. “The medicine we took to help get us through the recession and the economic meltdown one year ago came at a very high cost.

“But higher taxes would be problematic for the economy, as weakened as it is,” he continued. “We’ve got to find some ways around that.”

While BOKF’s executive vice president agrees the national economy’s not out of danger, Huntzinger takes his recovery position from several months of improving data topped by the Conference Board’s leading indicator index.

“They have been up five months in a row now,” Huntzinger said of the 12-element index. “And not just slightly, but rather significantly higher.” While indicators charted by the OU Price College of Business mirror some of that, Dauffenbach attributed some key spikes to Obama’s temporary stimulus, including the Cash for Clunkers program. He fears those improvements may not sustain themselves, as Thursday’s report of declining national auto sales suggest.

“Calling the recession at an end just because you bounced off the bottom is kind of an incomplete picture in my view,” he said. “There’s a lot of cheerleading going on to keep the consumer spending, to keep the consumer borrowing.”

Both Dauffenbach and Huntzinger noted positive movement in both consumer saving and spending trends, although the OU economist said the improvement needs to be stronger. Huntzinger said some of the negative data that continues to churn concerns in the press, such as rising unemployment, reflect lagging results that always trail real economic activity. He suggested national unemployment stats might show continued volatility through next year even as they slowly improve.

As for the number of troubled real estate loans and securities, which some analysts chart at more than $1 trillion, Huntzinger said falling property values have adjusted for many of those problems.

“We’re not out of the woods yet,” he said. “However, I think the market has priced itself appropriately for the magnitude of the problem.”

The lingering credit crunch remains a concern for Bristow, who like Huntzinger feels the economy bottomed out this summer. But his studies of past recessions indicate the nation’s banking system may face a $350 billion shortfall in capital needed for commercial and industrial loans vital to any recovery.

Huntzinger doubted that, although like Dauffenbach, he foresees a muted turnaround on the horizon.

A normal expansion following a recession of this magnitude might lift the nation’s gross domestic product by 6 to 8 percent, he said. Huntzinger expects this recovery to chart at just a third or fourth of that.

That paralleled Dauffenbach’s expectations, as well as an outlook of a midyear economic update issued last month by Evans and Kyle Dean at the OSU Spears School of Business Center for Applied Economic Research.

“The consumer is still overleveraged,” said Huntzinger. “He needs to pay down debt and is already doing so. He has taken the proper steps.”

Bristow’s studies indicate business bankruptcy filings, already up 64 percent in the second quarter from a year ago, could continue to increase two for five years after the recognized end of the recession, dampening any recovery efforts. Dauffenbach fears this may prove true.

Like unemployment statistics, Huntzinger suggested bankruptcies could represent trailing data to economic activity, not withstanding the key recovery role bankruptcies play in recycling capital and resources.

But he understood how the negative public perceptions brewed by that activity hampers consumer and business confidence, which Huntzinger sees as one of two key foundations for a sustained recovery.

All that led Dauffenbach to question the method of defining how or when a recession turns its corner.

“There’s all these different kinds of ways of measuring it,” he said. “One of the ways you can look at it is how long it takes you to return to the prior level of employment you had in the economy at the time when the recession began. From the year 2001 recession, that took 47 months. It took an extended time from the ‘91 recession to return to your previous end of employment.”

Under that standard, with unemployment levels increasing, today’s proposed turnaround could mark a false bottom, or no turnaround at all. Or historians may glance back and consider it a retooling period, when employment standards revised themselves.

Huntzinger expects a sustained recovery to hinge on two factors: improved consumer and business confidence, and how the federal government works through its building funding crises.

“It’s clear that we’ve got to have a plan as well thought-out as it can possibly be to take the economy out of the government’s hands and put it back in the hands of private business,” he said, expecting that to evolve over the next three to five years.

While everything from health care reform to Social Security to military infrastructure will play into how Congress and the president untangle the growing deficit, Huntzinger focused on the still burgeoning stimulus package as a prime foundation for his recovery views.

“In many cases I think it was appropriate for the government to do some of what we did, because we are clearly in better shape today than we were in September 2008,” he said. “So far, so good.

“It was the worst period of extended market conditions that I’ve seen in my life,” he said. “Much of the corporate infrastructure had ceased to operate. That’s how serious it was.”

As one who questioned several of the stimulus policies, Dauffenbach fears these approaches point to more short-term solutions. To the OU economist, the real issue reflects America’s standard of living and economic role in a growingly global economy.

“I think the cure is America waking up to the opportunities of the future, to begin saving again and investing again, making things, drilling the earth for energy and growing the economy,” he said.

“There’s this thing we call the real standard of living that we enjoy in this increasingly global economy. That’s increasingly under debt when you’re the top dog.

“It’s competitiveness, and in the long term, how do we remain competitive in a world economy?” he said. “Those are ultimately the issues we have to examine. Our standard of living is based on the real stuff we consume. That’s the malaise I see. I see us remaining on top, but on a relative sense less so in comparison with the rest of the world. I don’t know what you do about it, except you do what those countries do, which is save more.”

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.

Making Sense of the Letter of Intent

2009-09-16T10:48:00.002-05:00

Making Sense of the Letter of Intent

We first explain what can be included in an LOI, then go into the standard requirements and suggested best practices further down the page.

An Letter of Intent is often misunderstood in the sale process of a company.

The purpose of an LOI is to establish a general framework for the price and key terms of a potential transaction.

An LOI would often be executed following a verbal offer of price and terms from a buyer prospect and would be executed before due diligence starts.

While an LOI resembles a written contract, they are typically non-binding on the parties in their entirety. You could think of it as a letter of understanding to continue the process.

It is important to make sure that a potential buyer submits
an LOI before allowing them to start the due diligence process. The main reason is to ensure that you have a general understanding and agreement with the terms of their offer.

There is no sense in stalling the sale process for 90 days and giving exclusivity to negotiate contract terms with only one buyer if their terms are not going to be acceptable to you.

Why you should request an LOI

The act of submitting an LOI requires higher level approval and signature, which indicates that it is a serious offer and that the buyer representative has the appropriate authority. At the same time, the buyer is not committed to deliver those terms and is not committed to complete the transaction.

When both sides are acting in good faith, an LOI sets up the outline of an offer and allows you to contemplate whether you want to open up your company to an exclusive period of due diligence where the buyer prospect would gain complete access to your company's financials and operations.

When sellers don't request an LOI

In an informal sales process where both parties know each other well, some sellers feel that they can gauge both the motivation and indicative terms without requesting an LOI from the buyer. We believe these situations make it even more important to require an LOI.

LOI Content

The basic provisions of an LOI typically include details of the deal structure, its terms and conditions, exclusivity and obligations of the parties. The financial terms comprise the price and terms of the deal, which may include cash, stock, earn out, warrants, options, minority or majority ownership. It should also include an overview of financing sources and leverage for the deal.

It will often also set out a general timeline of when the agreement and contract would be finalized if due diligence is completed to the buyer prospect's satisfaction.

Nonbinding Nature

Even though LOIs are considered serious agreements, many of the most important parts of the agreement are not binding. Often the only binding provision is the non-disclosure or "no-shop" provision.

Exclusivity Agreements

In consideration for the time, effort and money spent by the potential buyer during the due diligence process, exclusivity agreements are standard. The seller agrees not to market the business to other interested parties which as a consequence provides the buyer with some sort of security against competing offers. Different terms essentially all mean the same: "no-shop", "stand-still" etc.

Unfortunately for the seller, if the deal falls through after the due diligence stage, it inevitably means a loss of momentum in the sale process. This is why it is so important to have a clear understanding of a buyer's track record, financial means and motivation to complete the deal in a timely manner, as well as have some other buyer prospects in reserve if the current buyer falls through. Without that assurance, many sellers tie themselves into "no-shop" agreements with buyer prospects that talk a good game, but are unlikely to ever get to the finish line.

Reliable Financial Data

Even though an LOI is a significant step towards the sale of your business, it is just the first step in negotiations. As price and terms of the LOI are not binding, this is when the work really begins to provide accurate and reliable data in a timely manner. If you have an acceptable buyer prospect, you need to increase their confidence in your company by pre-empting their due diligence requests with thorough preparation and a secure data room available to them with information they are likely to request.

And a final note. If a buyer requires you to disclose sales forecasts before the LOI is signed, make sure that they are reasonable. If you are too optimistic, the buyer will often use your non-achievement of the forecasts as leverage to renegotiate the purchase price, worsen the terms or both.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com

Anja Ritchie joins ClearRidge Capital’s Team from Frankfurt, Germany

2009-09-03T14:20:00.002-05:00

Anja Ritchie joins ClearRidge Capital’s Team from Frankfurt, Germany.

TULSA, OK – September 3, 2009 – ClearRidge Capital, a leading provider of restructuring, merger and acquisition and corporate finance services for midsize companies, has expanded its mergers and acquisitions team with the addition of Anja Ritchie, a professional with industry experience from PricewaterhouseCoopers and Commerzbank in Germany.

Anja was born and raised in Berlin, Germany. She graduated with an MSc from one of the top 3 German business schools, HHL-Leipzig Graduate School of Management, majoring in Corporate Finance and Business Strategy. She earned her Bachelor’s degree in International Business Administration from the European University Viadrina in Germany and the Ecole Superieure de Commerce in Montpellier, France.

Anja worked in the valuation advisory division at PricewaterhouseCoopers in Frankfurt, Germany, where she contributed to a wide range of European MandA deals. Prior to this, she also worked in corporate restructuring and financial modeling at Commerzbank, headquartered in Frankfurt.

Anja met her husband, who is originally from Pryor, Oklahoma while they were traveling in Turkey. After living in Europe for several years, they decided to move back to the US and settle in Tulsa.

According to Matthew Bristow, Managing Director, “Anja adds to the international experience of our team, who between us have lived and worked in over 15 countries around the world. Our clients benefit from a breadth of industry experience and geographic relationships that are unavailable to most Midwest companies. Anja adds to the strength and diversity of the ClearRidge team, as well as bringing new lender, investor and business relationships from Central Europe.

At ClearRidge, Anja’s main focus is research, analysis and financial modeling.

According to Bruce Jones, Managing Director, “The addition of Anja to our team will further strengthen our firm enabling us to expand our services to the growing Midwest market for corporate financial and strategic advice.”

Before Anja embarked upon her investment banking career, she was a professional volleyball player, winning the Berlin Championship title numerous times with her team and placing 2nd in a German national championship. Anja still enjoys playing beach volleyball today, but she now spends more time perfecting her Salsa dancing.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.

2009-09-02T11:28:00.002-05:00

Critical Pre-Sale Due Diligence - Maximize Business Sale Price and Terms

Due Diligence preparation is often overlooked, yet is critical to maximizing sale price and ensuring a smooth transaction. Now more than ever.

Credit markets are tight and despite a recent rebound, Mergers and Acquisitions activity is still down.

Buyers are targeting acquisitions - but now with a heightened degree of scrutiny.

Even if a buyer has plentiful cash available, they are still likely to leverage the acquisition to increase their percentage returns.

Leverage brings lenders to the table. Even if lenders are familiar with the deal, they need to provide detailed support for their loan.

With the tighter credit environment, tougher reporting requirements and more stringent data and due diligence requirements, you need to do more today to ensure a smooth sale process.

A report on your company's financial results from your accountant or even an independent auditor is not sufficient.

Your best option is to conduct in-depth analysis of your Company by an independent due diligence expert to identify areas that will have a direct impact on the sale price.

Firstly, a buyer needs a thorough review of your financial accounts and reported financials with supporting detail, consolidated data as well as data by location, product categories and other relevant categories for historical and forecasted periods.

They also need in depth analysis and a report on the quality of earnings, accounting systems, methodologies and compliance with or departures from GAAP. They need to see normalized sales, gross margin, and operating expenses, as well as feedback regarding compliance with debt instruments. They need analysis on AR, Inventory, CAPEX, working capital, debt and coverage, and profitability.

Buyers will also require due diligence on liabilities, operations, tax compliance, legal issues, reputation, industry analysis and forecasts, competition, customers, suppliers, people, PP&E, integration risks, environmental, health, internal controls, lease, zoning and permits, in addition to other business issues.

CLICK HERE for ClearRidge Capital's website section with expanded information on due diligence requirements.

This is not something that is easy to compile and typically requires strong financial modeling skills, trained analytical skills and specific acquisition due diligence and corporate finance experience.

Whether it is a midsized privately held company or a single division of a large public company, it is rare that this data is tracked routinely by the lean accounting staff that is focused on daily operations and normal reporting needs.

Take Action to Better Position your Company

This doesn't need to be an obstacle to a successful sale, but it does take planning and clear forethought. Most sellers proceed too quickly at the start of the process and skip critical steps, only to suffer later on while attempting to close the deal.

Unfortunately for many sellers, starting later in the sale process can reduce the sale price or cause the deal to fall apart.

Your best solution is to prepare a thorough due-diligence report before talking to buyers. Proactively offering answers to their likely information requests not only speeds up the process, but also inspires confidence in the acquisition opportunity.

If you want to secure the highest price and the best terms, you are going to need at least two buyers competing in a confidential auction process.

By providing a due diligence report in advance, you are saving time and also providing potential buyers and their lenders with sufficient information for them to submit an LOI (purchase offer) and close the deal in a timely manner.

Professional preparation also enhances the image of your company.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

Maximizing Enterprise Value as a business, financial and strategic advisor to midsized US companies.

ClearRidge’s Directors have completed over 200 M and A transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies.

Restructuring includes financial, operational and strategic restructuring.

Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

We provide top tier advice and relationships with Middle America values.

New Mergers and Acuisitions Data: Fresh Wave of Equity Capital

2009-08-19T09:34:00.003-05:00

Fresh Wave of Private Equity Capital Available
New Data from Preqin, Dow Jones, PwC and IFS

We bring you the latest industrial manufacturing M and A data from PwC further down the page, but we start today with breaking news and data from the Private Equity arena.

The last couple of months have seen private equity firms stepping up their marketing efforts to source new investment opportunities.

In response to the growing number of calls and emails we have been receiving from private equity firms, we thought we would dig into the numbers to see if the latest industry data confirmed our observations.

Dry Powder = Fresh Capital

According to Preqin, a London-based research firm, the global private equity industry's dry powder (uncommitted and available cash to invest) currently exceeds $1 trillion, or $1,000 billion.

So, the next time that someone tells you there is little money available to invest in companies, you can let them know that there is over $1,008,000,000,000 fresh cash currently looking for a new home.

Where has the money come from?

The principal investors (known as limited partners) are pension funds, university endowments, foundations, hedge funds and other investors who have continued to invest in new funds.

First Half 2009 Investment Levels

A report published on Monday by International Financial Services in London, estimates that only $189 billion of private equity was invested in 2008, down by 40% from 2007 (we picked this up from today's Financial Times blog: ft.com/alphaville).

Investment in the first half of 2009 was estimated to be down 80%, representing a 12-year low.

The chart below speaks volumes.

Look at the huge dollar difference between funds raised and funds invested.

US Private Equity has largest share of cash

According to Prequin, the US accounts for $609 billion of the $1,080 billion in dry powder, with the rest of the world sharing the remaining $471 billion. Of the $1,080 billion, $507 billion is specifically for acquisition targets, $194 billion for real estate and $153 billion for venture funds.

Returns for Private Equity

Returns for Private equity as an asset class are down 27.6% year-over-year, which reflects the impact of poor performance of the broader economy, bailouts, bankruptcies, credit tightness and company collapses.

It is important to note, however, that short-term performance has not dampened investor confidence in the sector. Most Private Equity investments will ride through the storm with a longer time horizon than other investments (typically 5 to 7 years).

New fundraising levels

According to a recent Dow Jones study, during the first 6 months of 2009, 179 private equity funds raised "only" $55 billion, 64% less than the $153 billion raised by 261 funds during the first half of 2008. The additional $55 billion joins the mounting pile of fresh cash.

Impact of Tight Credit Markets

Average debt levels in buyouts fell to 42% in 2008 from 47% in 2007 (the lowest level since 1994).

Banks have been more reluctant to fund leveraged buyouts with higher debt leverage and are also reluctant to offload distressed assets unless absolutely necessary.

Although banks continue to be the largest lenders to private equity firms, $500 billion in loans are due to be refinanced in the next few years, so other participants will be able to pick up some of that debt.

Best time to invest + Wave of fresh capital

Historically, private equity has made the highest returns from buyouts made through the down cycle.

Most firms are anxiously looking for healthy acquisition opportunities to deploy their cash and there is significant competition for investment opportunities in attractive middle market companies.

ClearRidge recommends that you consider planning the sale of your company if it has performed comparatively well through this down cycle. There are myriad creative ways to structure a deal to ensure you get a fair sale price for your company today and also benefit from upside over the coming years.

Sources: Dow Jones, Preqin, International Financial Services, Financial Times blog (ft.com/alphaville)

Industrial Manufacturing M and A Activity - PwC Update

Getting down to more industry specific data, PricewaterhouseCoopers released their latest "Assembling Value" quarterly report this week on Mergers and Acquisitions in the Industrial Manufacturing industry.

Relevant highlights are below:

Decrease in number of deals as well as their value

Overall number of US deals declined from 27 in 1H2008 to 7 in 1H2009 for deals worth $50 million or more.
Overall value of US deals worth $50 million or more has declined from $8 billion in 1H2008 to $1 billion in 1H2009, representing a decline of 88%.
Average deal value during 1H2009 was $129 million versus $268 million in 1H2008, representing a 52% decline.

Decreasing Financial Investor Activity

US-based private equity firms raised $55 billion in 173 funds in 1H2009, representing a 64% decline compared to $153 billion raised by 261 funds in 1H2008

US as a Proportion of Global Activity

Deal Activity is still largely driven by North America, which accounted for 27% of all first half 2009 worldwide deals with a transaction value of $50 million or more.

Click the link below to download the full 24-page report:
PWC Report

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

Maximizing Enterprise Value as a business, financial and strategic advisor to midsized US companies.

ClearRidge’s Directors have completed over 200 M and A transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies.

Restructuring includes financial, operational and strategic restructuring.

Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

We provide top tier advice and relationships with Middle America values.

BOA Business Capital Provides $55 Million to ClearRidge Capital Client

2009-07-31T07:32:00.001-05:00

Bank of America Business Capital provided a $55 million senior secured credit facility to ClearRidge Capital’s client, a lumber and manufactured wood distributor. The asset-based loan is being used to refinance existing debt. ClearRidge Capital acted as advisor for the transaction.

"Bank of America Business Capital structured an asset-based loan that will help us reduce operating expenses given the state of the residential construction industry,” said Cedar Creek’s D. Wayne Trousdale. “We now have financing with fewer, less restrictive covenants and greater financial flexibility.”

“Because of its knowledge of the industry, experienced ownership and strong management team, Cedar Creek has a long-standing record of profitability.” said Bank of America Business Capital West Division Executive John Mostofi. “We were able to structure an asset-based loan that reflected the client’s financial strength and refinance their credit facility with more favorable terms.”

Headquartered in Tulsa, OK, Cedar Creek, Inc., is the seventh largest lumber and manufactured wood distributor in the United States. Cedar Creek has provided premium wood products to building material dealers in 15 states for more than 30 years.

ClearRidge Capital maximizes enterprise value as a business, financial and strategic advisor. ClearRidge’s Directors have completed over 200 M&A transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the United States and Canada. ClearRidge provides Restructuring, Mergers & Acquisitions and Corporate Finance services to middle market U.S. companies.

Bank of America Business Capital

Bank of America Business Capital is one of the world’s largest asset-based lenders, with more than 20 offices serving the United States, Canada and Europe.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.

Mergers & Aquisitions includes buying, selling, merging and valuing midsize companies.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.

We have directly owned, operated and managed midsize companies. We know the business from your perspective.

7 Challenges of Selling a Privately-Owned Business

2009-07-28T11:47:00.001-05:00

If you are considering selling your business in the next few years, you may want to take a few minutes to read through some of the most common challenges and decisions you are likely to face.

1) Leave or Stay

Let's put it another way: Sell 100% or Recapitalize your Company by Selling a Minority or Majority Stake.

You need to consider whether you want to leave the company entirely or whether you want to remain for some time after the sale. And if you leave, how quickly do you want to transition out of the business: 3 months or 3 years?

If you stay to work for someone else and retain a minority stake, you may see your company change direction and the new owners may make decisions you don't agree with.

On the plus side, if you stay and retain a minority stake, there is a strong chance that you can sell the company for a higher price than selling 100% today. Buyers reward your confidence and pay a higher price, because among other things, they have less risk. You also get to enjoy seeing your company grow and then earn a significant second pay day in a few years.

But, you have to ask yourself if you can handle someone else steering your ship in the meantime. Consider how their decisions could put your remaining investment at risk?

2) Protecting Your Employees

Over the years, your employees have relied upon you to do the right thing and consider not only their lives, but also the lives of their families who also depend on you.

Many of your employees have become part of your business family and you want to treat them with the care and respect they deserve. You want to reward them for their loyalty and hard work.

In some cases, you may be able to negotiate employee protection clauses that will calm your employees' fears during the transition. At a minimum, you can make sure that you not only get a great price when it's time to sell, but that the new owners are going to do the right thing for the future of your Company and all those who have a stake in its success.

3) Letting Others Take a Look at Your Books

In many cases, this could be the first time you have opened up your books to anyone who is not in your inner circle. When you sell your company, you have to go beyond your attorneys, accountants, managers and financial advisors. If you want to get the best deal, you are going to need to open up your books to a number of prospective buyers.

Not only are they going to look deep into your financials to determine and validate their purchase offer price. They also need to gain a deeper insight into the way you have run your company, look at how you have made your decisions and how those decisions may affect the future, as well as determine the financial strength and stability of your company.

Before anyone looks at your books, however, you need to have an independent expert go through them thoroughly to identify any issues or problems that a buyer may be concerned with.

There is often plenty of time to resolve the problems before anyone sees your financials. It also makes sense to better organize your financial information and make some adjustments for non-recurring and discretionary expenditures, which may distort the true cash generation capability of your company to a new owner.

4) Determining a Fair Price for Your Business

It makes sense before you get too far down the road to get a reasonable indication of what your company could sell for. You should probably hire an independent firm to appraise and value your business.

Not only will give this you a better idea of what to expect, but it will also help in planning for your future. The valuation will be contingent on the terms that you insist upon in the sale, as well as prevailing industry and market conditions, but a valuation expert should be able to make adjustments and produce a range of valuations for those variables.

5) Structuring the Sale

How will the purchase price be paid to you: in cash, stock, earn out, warrants, options, or a combination of all? Deciding on the right deal for you has advantages and disadvantages that an expert should help you understand in advance. An expert can also explain how your decisions could affect your net proceeds from the sale.

Anything is possible and you will be in control of all negotiations. It is a good idea, however, to have a clear plan of your ideal exit before you start the sale process.

6) Maximizing Sale Price

There are many books and thousands of pages written on all the steps you should go through to maximize the sale price of your Company. A common theme throughout is to start early, prepare very thoroughly before going to market and keep your cards close to your chest. You should only discuss progress, updates and strategy with your advisors in the sale. You have a valuable and unique asset in high demand. Hard work and the right sale strategy will deliver a higher and broader range of purchase offers for you to choose from.

7) Choosing the Right Team to Represent You

You are the expert at running your business. No one has more experience and nobody is better informed. You have been through the highs and lows of multiple business cycles and you understand the challenges of your business better than anyone.

So, it makes sense that when it comes time to sell your business to look for the same qualities in a firm to represent you in the sale. You need to find a team who has experience in your industry, who is well informed with extensive buyer relationships and who will work hardest to bring you the best deal possible. Let them do their job.

Experience in marketing your Company and structuring a sale is critical to bringing you the highest price. An Merger and Acquisition intermediary will also work closely with your legal and tax experts to minimize your liabilities post-acquisition and maximize the after-tax proceeds to you and your family.

When it comes time to engage a firm, you need to do your homework. Interview all the team members who will be working on your project, check references and view examples of their previous work. As a final check, you should also call their former clients to see how they performed in the past.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Restructuring, Corporate Finance, Merger and Acquisition and Turnaround services for midsize companies.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.

Mergers and Aquisitions includes buying, selling, merging and valuing midsize companies.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.

We have directly owned, operated and managed midsize companies. We know the business from your perspective.

2009-06-24T16:13:00.001-05:00

FOR AND AGAINST RECAPITALIZATION

Recapitalization is the financial reorganization of a company's debt and equity mix. The aim is to improve a firm's capital structure. Essentially, the process involves the exchange of one form of debt or equity for another.

FOR RECAPITALIZATION

Stabilizing the Corporate Capital Structure

In distressed situations, a recapitalization can stabilize your firm's capital structure and cash position. This can be achieved by renegotiating terms with lenders by trading existing debt for new debt with lower interest rates or longer maturity; or by simply exchanging debt for common stock.

Providing Liquidity

By raising debt or equity a company consequently increases its liquidity that may be needed to finance further investments, or even an owner's partial or full exit.

Partial Sale of Your Company

A recapitalization gives you the possibility of taking cash out of the business, by selling a minority or majority stake in your company. In particular, owners may consider this option a few years ahead of retirement.

You can earn a pay day today, along with another pay day in a few years time after new investors have hopefully grown the company and increased the value of your retained equity stake. As an owner, you get to take cash off the table, reduce your risk and diversify your investments. An owner would typically be tied to a management position in the company for a period of time.

Bringing in a Capable Partner

In an equity recapitalization, you benefit from the strength of a new owner. It is important to take time to identify the right investor to partner with. You should investigate their previous experience, track record, credibility, motivation and financial stability.

If both parties share the same vision for the future growth of your company, you can benefit from the new equity investors' broad range of operational and strategic experience, as well as their investment dollars.

Increasing Management Discipline

Increasing your company's debt leverage often has a disciplining effect on management as a result of the financial and operational restrictions involved. This discipline can trigger more thorough financial analysis before major decisions.

AGAINST RECAPITALIZATION

Operational and Financial Restrictions

If you choose to raise debt rather than equity, it will bind your company to financial covenants in the credit agreement and place restrictions on investments and distributions to owners imposed by the lenders. Furthermore, costs increase as lenders charge monitoring and maintenance fees on the loan.

Loss of Control

New equity investors (even minority investors) are going to be involved in important strategic and financial decisions. Owners can become frustrated with the direction of new investors. As part of your due diligence, you may even want to talk to other entrepreneurs who have partnered with your new investors or sold companies to them in the past.

Loss of Strategic Focus

In some cases, new equity investors will focus almost entirely on the financial performance of the business. Often, they have limited partners in their equity fund, who expect a minimum rate of return on their investment. On the plus side, their focus on financial rewards should lead to a great second pay day in a few years. On the downside, you may feel that you are abandoning the way you have successfully run your business over many years.

In summary

Recapitalizations are a great tool and often provide the dream exit for a business owner. However, it is a lengthy and time-consuming process, so you may be well served by seeking advice from professionals who have been through the recapitalization process countless times before.

ClearRidge has a strong track record in recapitalizations. Our team works together on every project and we can all pool our ideas to help you determine if a recapitalization is the right tool for you and your stakeholders.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.

Mergers & Aquisitions includes buying, selling, merging and valuing midsize companies.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.

We have directly owned, operated and managed midsize companies. We know the business from your perspective.

2009-06-11T11:08:00.001-05:00

Poor M&A Environment and Credit Defaults - 2009 Review & Predictions

Two reports this week.

The first is the ACG and Thomson Reuters' Survey that was released last week.

The second is an extract from Carlyle Group's recently published 2008 Annual Report.

These reports give an insight into the state of Mergers & Acquisitions activity and the performance of Private Equity companies.

As always, we add our ClearRidge summary, review and interpretation.

FIRST UP - ACG Reuters Report

ACG and Reuters announced last week their latest report on the state of middle market Mergers & Acquisitions.

The survey comprised 703 middle market investment bankers, private equity professionals, lawyers, accountants, corporate development officers and business consultants.

Poor M&A Environment

88% responded that the current M&A environment is Fair or Poor. This is worse than the 86% who responded fair or poor in December last year.

Covenant default on credit agreements

14% responded that 25% to 50% of portfolio companies are in covenant default on credit agreements with their lenders.

3% responded that more than half of their portfolio companies are in covenant default.

Turnaround Professionals

40% of private equity firms have retained chief restructuring officers, turnaround consultants, or operating partners to help their portfolio companies, with 16% of private equity firms hiring all three.

In the next 6 months

* 52% predict M&A Activity will increase moderately, 34% predict activity will remain the same, while 10% expect a further decline.

* Half of those surveyed predict that 26% to 50% of M&A deals will be distressed sales. 14% predict over half of M&A deals will be distressed sales. Manufacturing and Distribution: 22% predict that manufacturing and distribution will experience more M&A activity than any other sector and 36% predict manufacturing and distribution will present best opportunities for buyouts.

In the next two years

* Consolidation in private equity firms: 72% predict "Significant Consolidation" in the number of private equity firms.

Private Equity Insight from The Carlyle Group 2008 Report

The following is an extract from Carlyle Group's recently published report. The Carlyle Group is a global private equity investment firm, based in Washington, D.C., with more than $91.5 billion of equity capital under management. While this is not necessarily a reflection of all US Private Equity firms or our views at ClearRidge, these three paragraphs certainly make interesting reading.

"In 2008, the financial landscape changed-and it will remain changed for the foreseeable future. Operating conditions for our portfolio companies will remain challenging. Transactions will be fewer and smaller. More equity will be required and debt terms will be less favorable. And hold periods will increase while returns will decrease. To be sure, these are extraordinary times."

"On its face, the private equity industry doesn't appear to have altered much. But look closer and the changes begin to appear: deal flow has slackened; exits are fewer; investors are hesitant to commit fresh capital; stock prices are down; and debt and equity valuations have been hard hit. Some portfolio companies have restructured, sought bankruptcy protection and even liquidated."

"We continue to believe that within every challenge lies opportunities. Our mission is clear: we must deploy our resources to protect the investments we have already made while seeking ways to profit from the extraordinary opportunities that exist in the new environment. This we pledge to do, all while maintaining the discipline and diligence that are hallmarks of this firm."

The Carlyle Group operates four fund families, focusing on leveraged buyouts, growth capital, real estate and leveraged finance investments. The firm employs more than 575 investment professionals in 21 countries with several offices in the Americas, Europe, Asia and Australia; its portfolio companies employ more than 415,000 people worldwide. Carlyle has over 1200 investors in 68 countries. Source: Carlyle Group website.

ClearRidge View on M&A and Business Valuations

Distressed Mergers & Acquisitions

The reality is that there are many distressed deals on the street right now.

Buyers are seeing many opportunities. It is a real challenge to determine, which "cheap" deals represent good value investments.

Historically, acquisitions made in a downturn result in the highest returns for acquirers, but thorough business due diligence is more important than ever to make sure a deal makes sense.

You need to be confident there is a viable core business.

Acquiring a company for a great price is not a good enough reason for an acquisition.

Middle Market Company Valuations

Surprisingly, valuations of healthy companies remain strong, but as we have discussed before, there is a difference between a sale price multiple of a company's EBITDA and the sale price.
If EBITDA was $5 million last year and the valuation multiple was 6x EBITDA, then in the most simple terms, you could anticipate a sale price of $30 million.

However, if your revenues have dropped 30% in 2009 and your projected EBITDA for 2009 is down 50% to $2.5 million, then the same 6x EBITDA valuation multiple will give a sale price of $15 million. Are you going to sell a $30 million company for $15 million? Unlikely. Unless you have to.

In which case, fewer healthy companies with a short-term dip in EBITDA are going to sell in 2009. Most will wait to see what the world looks like in Spring 2010 when sales and profits are hopefully growing again. Sell the company in Spring 2010 on full-year 2010 projections and you could get close to $30 million again.

So, most companies that are selling in 2009 now are those that have to - those that are in distress.

If you want to sell a healthy company in 2009, you need to be more creative. Instead of requiring cash payment at closing, you need to consider a combination of cash, seller financing, stock and warrants.

Where possible, try to further increase price (cash, stock, warrants) for special consideration and intangibles, which could include significant market share, customer relationships, brand name recognition, or other intangible that sets your company apart from the rest.

Getting your deal done is an art not a science. Every company is different, every situation is different and every deal is different.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.

Mergers & Aquisitions includes buying, selling, merging and valuing midsize companies.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.

We have directly owned, operated and managed midsize companies. We know the business from your perspective.

Resizing a Business in a Downturn

2009-05-12T14:39:00.007-05:00

Resizing a Business in a Downturn

Taking Positive Action to Add Stakeholder Value

We are all looking for some good news right now and the subject of this letter suggests the theme is negative.

Opposite.

This is a wake up to take positive action and encourage others to do the same.

"In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing."

- Theodore Roosevelt

The most successful businesses are those that anticipate early and react to changes quickly.

In good times, that may mean investment in hiring, expansion, new product lines and new geographies.

In tough times, that may mean resizing the business, slimming down operations and focusing on cost controls, debt and creditor relationships.

There is no way to tell if the economy has bottomed out, but we do know that eventually it will bounce back. When it will happen, how it will happen and what the new economy will look like is the million dollar question.

Even without that information, you should be taking positive steps to ensure that your business survives and thrives.

In this article, we will consider 9 Success Factors to downsize your business, look at socially responsible ways to increase loyalty and performance and look at Restructuring and Reconditioning.

Please keep emailing us your questions and suggestions for articles you would like us to cover. Please also follow this link to sign up friends or colleagues who you think would like to receive ClearRidge emails.

10 Success Factors to Downsizing your Business

To start with, we need to remember critical lessons from previous downturns: trust, reputation and communication. The community, customers and employees will judge your business on its behavior during these tough times.

1) Redesign the Organization to Create Value, Not just to cut costs
Revenue growth covers the flaws in an organization's structure and business model. If a company is failing, because of poor strategy, firing employees doesn't fix the problem. You'll lower payroll costs, but still have the same problems.

2) Consider Tactical Improvements
Hiring and pay freezes, reduce travel, re-evaluate all departmental budgets, reduce discretionary spending, reduce other identified SG&A costs and make incremental process improvements.

3) Get more value from your employees
Identify areas to improve efficiencies in the business operations. Create standard operating procedures. Create Key Performance Indicators. Incentivize each employee to create new ways to improve their department's efficiency.

4) Improve openness and communication during downsizing
Now is the time to be clear, open and honest about your intentions and reasons for the changes. If you withhold information from your stakeholders which include your employees, misinformation will prevail. More often than not, the rumor mill will be worse than the real story.

5) Involve mid-level and lower-level managers
If they participate in the downsizing process, they are more likely buy into the process and more likely to communicate a positive story and effectively implement the new plan. They are on the front line and have valuable knowledge on the workings of the operations. Encourage them to challenge your plans, but mandate they provide an alternative solution.

6) Think carefully about which employees to let go.
A percentage cut across the board does not fix the problem. Carefully select those to go and create increased responsibility, increased opportunities and increased efficiency for those who remain. Everyone needs to feel like a team to pull through the tough times together.

7) Give advanced notice or severance pay
This may cost more in the short-term, but those still working for you need to understand that you will look after them if the worst happens. Again, make your employees feel as safe as possible about what the future may hold.

8) Tell employees in person
Losing a job is humiliating and hurts an employee's confidence and pride. Be considerate in how you communicate layoffs. Your employees will judge you on how you treat their former co-workers. Moreover, at some stage in the future, talent may be scarce again and you need to be the employer of choice to attract ex-employees and new hires.

9) Consider alternatives to layoffs
Reduction of hours, redeployment to another employer, job redesign, or partially paid sabbaticals with benefits and contributions.

10) Time to be a responsible leader
If the time has come that you and other stakeholders would be able to make better choices with the assistance of experts, it is time to make the call. Consider the value of being able to brainstorm with experts who have been through troubled business situations many times before. Consider how much value they can bring from lessons they have learned. It takes confidence and strength of character to ask for help, but sometimes it is the smartest, most responsible and valuable course of action.

Being Socially Responsible Increases Loyalty and Performance

Few companies will avoid the need to reorganize, restructure, downsize, acquire, divest, outsource or enter into joint ventures. For most industries and most companies, if the recession has not already caused a significant decline in demand, it almost certainly will at some point. For some companies, the worst may be yet to come.

If you need to resize your company, you need to think about how you are going to make the cuts and how you will deliver the news to stakeholders in your business. The process of change can determine the success and long-term benefits of the restructuring process, as much as the substance of what is actually done.

There are positive steps you can take today to ensure, not only that you can pick up market share while other companies fail, but also structure your company so that you exit the recession on a firm footing, in a lean condition and ready to accelerate revenue growth and improve your margins.

Points to remember:

* Show commitment to stakeholders (including employees) and you will reap the rewards when the economy turns around.
* Consider the values of your own company when making tough decisions.
* Focus on MAXIMIZING VALUE for all stakeholders.

Restructuring and Reconditioning

If you owned a sports franchise and your team had just won the championship, you should spend your off season analyzing why you succeeded last year and finding new ways to improve next year.

Your athletes need to train even harder in the off season to win by a higher margin next year.

Maintaining last year's performance does not win championships. You need to improve every year.

Whether or not you have made tactical improvements in recent years, you need to spend some time considering tactical changes that can and should be made. You are playing a different game on a different field. You need to make wholesale changes to adapt to the new game.

Remember that doing nothing can quickly lead to failure. You need to consider every option you have open to you and brainstorm every structural change that you could make. Talk through all of your options and ideas.

You need to be able to make changes for the sake of your company and for the sake of your employees.

You need to be able not only to survive, but also to outperform your competitors during a time of reduced volume.

Out of every recession, new market leaders will emerge. There are always a few surprise winners and a few surprise failures. If your company fails, everyone loses except your competitors.

One thing is critical. You need to Act Now. Structural changes can start delivering changes immediately.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.

Mergers & Aquisitions includes buying, selling, merging and valuing midsize companies.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

ClearRidge provides Top Tier advice and relationships with Middle America values and work ethic.

We have directly owned, operated and managed midsize companies. We know the business from your perspective.

4 Myths About Restructuring Experts

2009-03-24T12:33:00.002-05:00

What is the role of a restructuring expert?

To step into a Company that is in crisis, force some layoffs and slash costs? No. No. No.

Restructuring is a word most business owners want to avoid, yet ongoing restructuring processes are central to the success of the world's best companies.

Unfortunately, media coverage has associated restructuring with failure, but if implemented appropriately and before a company gets into trouble, can be a key to long-term success.

Myth 1 - Fancy Plan and Walk Away

Restructuring professionals come up with a fancy plan, take a fee and walk away. Not True.

First of all, qualified restructuring professionals are usually Certified Turnaround Professionals recognized by the ACTP and are members of the Turnaround Management Association.

To achieve this designation they have met the rigorous requirements of education, years of experience in the field, completed exams to confirm their technical knowledge, submitted case studies from successful engagements, passed interviews, a screening process and have had professional references verified.

Secondly, CTPs like to be referred to as resultants versus consultants. Meaning results are achieved as opposed to just being talked about. Walk the walk versus talk the talk.

CTPs have proven operating experience in most aspects of business from finance and accounting to manufacturing and distribution to sales and marketing.

If the company owners and senior management are willing and able to acknowledge the need for unbiased expert advice, an independent restructuring professional is much more likely to drive success.

Owners and Senior Managers understand their industry, employees and their company better than anyone.

Restructuring professionals bring experience and a track record from countless real-world companies, where their solutions have delivered long-term health, growth and profitability.

Collaboration between managers and a restructuring professional delivers fast, effective and long-lasting results.

Restructuring professionals provide the leadership, processes and day-to-day decision-making needed to lead the development and implementation of a restructuring plan.

Myth 2 - Restructuring Always Involves Layoffs

Not true.

Restructuring begins with a thorough understanding of the current processes and utilization of resources (people and assets), including technology. The Restructuring plan will include changes in the business' operational model only in areas that increase the leverage of all of these resources to maximize value for the business enterprise.

Areas in the business model that are consistent and repetitive should be standardized and processed with technology to maximize efficiency.

This frees up time for the existing employees to be more focused on adding value with customers, vendors, and other team members with support and training.

It is true that if the company has failed to operate a lean business model, that layoffs are possible, but that is the decision of the owners and senior managers. It is not the goal of the restructuring professional. Employees are the lifeblood of the company.

Remember.
The most successful entrepreneurs are those constantly looking for ways to improve their Company. Restructuring is a cost-effective and integral part of the process.

Myth 3 - Too Expensive

Not true.

Too expensive is a relative term. Doing nothing may be catastrophic. You could lose your company if you live in denial and ignore financial, operational and strategic problems. Waiting too long to engage a Restructuring Expert will cost you far more in the long run.

Having said that, you should only engage a Restructuring Professional if you feel confident that they will be able to add enterprise value far in excess of what it costs to hire them. If it costs $25,000 to add $250,000 to the bottom line, you got a great deal.

There are going to be many firms starting up as a result of the financial crisis. You should take your time interviewing a restructuring professional. Seek professional references from banks and attorneys who have hired them to help their clients and have them explain how their process could work for your company.

For a successful restructuring process, you want the experience of professionals who have successfully completed many restructuring projects over many years. It is a specialized skill and requires a specialized expert to add real and lasting value.

When you have researched and chosen the best firm for your company, it is time to be clear on what they need to achieve.

Ask your restructuring expert to detail in writing everything that they hope to achieve for your company.

In addition, you may want to carve out some of their fees into performance-related incentives. If you align their pay with your goals, then they will have additional incentives to perform.

Myth 4 - Only a Short-Term Solution

Restructuring is just financial engineering and it will only have short-term effects.

Not true.

Financial Restructuring is only one part of the process. It is, however, critical to the long-term success of your Company.

If your Company has too much leverage or fails to meet the earnings covenants in your Credit Agreement, then the restructuring of your Balance Sheet is required. This involves evaluating all of your Company's Assets, developing and executing a plan of action to increase the Asset turnover ratio and improve your company's liquidity.

Debt must be evaluated with a plan of action to reach a debt level that can be serviced and remain within negotiated covenants. This can involve bringing in equity capital, negotiating haircuts with lenders as well as negotiating deals with vendors to inject capital back into your business.

A quality restructuring of your Balance Sheet will position your company not only to survive, but to thrive for many years to come.

If you want to learn more about how Restructuring Experts could add value to your or your client's Company, please call our office in Tulsa at (918) 392-2900.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.

www.ClearRidgeCapital.com

M&A Data - Making Sense of Conflicting Reports

2009-03-04T13:17:00.002-06:00

In 2009, the financial newswires are sending us mixed messages.

1) PricewaterhouseCoopers just released a report showing huge declines for global deals in the Industrial Manufacturing sector.

2) The same week, GF Data Resources reported that middle market deal volume for transactions valued between $10 million and $250 million remained strong in 2008.

So, on one hand we have terrible numbers for 2008 acquisition activity and the next report tells us everything is fine.

We highlight the data from both reports and then explain what it means for middle market companies in the US.

PWC Reports Negative M&A Activity

Last week, PricewaterhouseCoopers LLP ("PWC") came out with their report of 2008 M&A Data in the Industrial Manufacturing Sector, analyzing mergers and acquisitions with a disclosed value over $50 million.

The number of Mergers and Acquisitions in the industrial manufacturing sector dropped 32% in 2008 compared to 2007, with total dollar amount of deals declining 57%.

The research appeared in PWC's report: "Assembling Value: Fourth-quarter 2008 Mergers and Acquisitions Analysis" released last week.

In 2008, there were 141 deals above $50 million, compared to 206 deals in 2007 and 169 deals in 2006.

Total dollar amount of deals reached $39 billion in 2008, less than half of the $88 billion in 2007.

The average dollar amount of deals dropped to $275 million per deal in 2008, compared to $424 million in 2007 and $545 million in 2006.

Fourth Quarter 2008 shows steepest declines
Q4 2008 showed a particularly steep decline with only 11 deals, compared to 71 deals in Q4 2007 and the dollar amounts in Q4 2008 were only $3 billion, compared to $40 billion in Q4 2007.

$1 billion+ deals
In 2008 there were only 5 deals with a disclosed value over $1 billion, compared to 17 in 2007 and 23 in 2006.

Financial buyers
Financial buyers, who are typically very active in the manufacturing sector, only acquired 37 companies in 2008, compared to 72 in 2007 and 58 in 2006.

Strategic buyers
Strategic buyers acquired 104 companies in 2008, compared to 134 deals in 2007 and 111 deals in 2006.

PWC's data does not include most of the middle market deals under $50 million and many of the deals under $100 million where deal terms and sale prices remained confidential, but it is a good indicator of recent trends across the middle market.

Source: PricewaterhouseCoopers LLP

GF Data Resources reports High Valuations and Strong Deal Volume

GF Data Resources released its Middle Market M&A Valuation Report for the fourth quarter of 2008 the same week. GF Data Resources is a proprietary database that collects data on Private Equity transactions valued between $10 million and $250 million.

According to GF, Middle Market deal volume and valuations held steady across all industries from Q3 2008 to Q4 2008.

Deal Volume
114 Private Equity firms contributed to the report and they completed 25 deals in the fourth quarter of 2008. 27 deals were completed in Q3 2008, compared to 50 deals the first half of 2008. This confirms steady acquisition volume through all four quarters of 2008.

A driver for this deal volume is the substantial availability of cash at Private Equity firms. Many of the Private Equity firms ClearRidge has worked with in the last few months have confirmed that they are sitting on up to 90% of the capital they raised in 2007 and 2008 and they are being encouraged by their limited partners (investors) to keep the money, go ahead and source new acquisitions.

This untouched cash is often referred to as "dry powder" and the substantial stock piles of cash will prove to be a significant driver to Acquisition volumes by Private Equity firms in 2009.

Valuations
"Fourth quarter valuations remained in line with quarterly averages dating back to mid-2007, when the mortgage lending crisis first affected public equity markets," according to Andrew Greenberg, CEO of GFDR.

The primary valuation metric - Total Enterprise Value as a multiple of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA) was 5.9x for Q4 2008, down from 6.3x in Q3 2008.

Debt Levels
The biggest change in 2008 was a decrease in debt levels for the acquisitions. "Debt levels fell sharply, a result of the tightening credit markets and the lack of available cash needed to finance these deals," according to Mr. Greenberg.

"Total debt and senior debt declined dramatically, falling to 2.4x Adjusted EBITDA and 1.9x, respectively," said Greenberg. "Those number were 3.4x and 2.6x, respectively, in the third quarter, and averaged 3.4x and 2.5x respectively for the first half of 2008. As a result of declining debt levels, average equity contributions soared to 59.9 percent, up almost 20 percentage points from the third quarter of 2007."

Debt Pricing
Debt spreads widened, as the 90-day LIBOR interest rate (a benchmark for commercial lending) dropped from 4.1 percent on September 30 to 1.4 percent at year end. Average initial pricing on senior debt declined only slightly (from 7.4 percent to 7.2 percent), causing the average spread on senior debt to jump from 4.3 percent to 5.8 percent. Spreads on subordinated debt also increased.

Individuals and companies interested in subscribing to the Middle Market M&A Valuation Report can contact GF Data Resources by visiting their website, www.gfdataresources.com. Source: PEP Digest.

The Truth Behind The Numbers

Acquisitions are still happening. Deals are getting done.

For an acquisition to get to the finish line, it needs to make sense for the acquirer and make sense for the company being acquired. Nothing has changed there.

The Sale Price of Your Company
It is true that companies are still selling for high valuation multiples. However, acquirers are forward-looking in their valuation, so last year, they would have used your 2007 full-year EBITDA number and then paid a multiple on their projection for full-year 2008 EBITDA.

Moving to the present, if your EBITDA was $7 million for 2008 and a company like yours should sell for 5x, then if you anticipate 2009 EBITDA remaining at 2008 levels then you could still anticipate that your company should sell for $35 million. Good news.

However, many companies are likely to face a tough 2009. Let's say you expect your 2009 revenues to decline and as a result you project your 2009 EBITDA to come in around $4.5 million. Well, it is still reasonable to expect a 5x multiple or more, but now that 5x may is worth around $22.5 million on projected numbers.

So, how do you get back the additional $12.5 million your company could have sold for last year? You need to be more creative and more flexible.

Instead of requiring full cash payment at closing, you should consider a combination of seller financing, stock and warrants, in order to get closer to last year's expected sale price of $35 million.

Even if the buyer tried to negotiate a reduced multiple to maybe 4.5x, that could be acceptable if they are willing to add further consideration (cash, stock, warrants) for special consideration and intangibles, which could include high market share, significant customer relationships, brand name recognition, or any other intangible that sets your company apart from the rest.

Getting your deal done is an art not a science. Every company is different, every situation is different and every deal needs to be different.

Deals are getting done. Debt financing is still available for buyers. You just need to work smarter and harder in the current environment to get your deal done.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.

Supply and Demand – Maximize Sale Price

2009-02-16T13:12:00.001-06:00

Supply
You own a unique company with its own distinctive characteristics and competitive advantages. There is a very low supply of privately-held midsized companies. You may only have a handful of competitors in your space. So, if an entrepreneur, strategic buyer or investor wants to enter your industry, they either have to either overcome what may be significant barriers to entry or buy one of the current market participants. Companies in your industry are few in number.

Demand
1) Consider how many thousands of corporations, financial buyers, wealthy investors and operators want to get into your industry.

2) Of the thousands of buyers for midsized companies in the US, there may be as many as a few hundred who would have real motivation to buy a company like yours and would be prepared to pay at least a fair market price.

3) Of these several hundred, there may be thirty or more who would enter into a bidding competition any pay a very attractive price to buy your company. First of all, however, they need to know that the opportunity exists.

Only a few logical buyers?
It is a regular statement from owners of successful businesses that there are only a few logical buyers for their company. This may be true for your company, but nine times out of ten, you just need to think outside of the box to identify who else might offer the highest price with the terms you are looking for.

When a large public company is acquired, there is information available to every potential suitor in the world. In most cases, you can be sure that a public company has sold for the highest price possible on that given day. Why? Because every possible buyer had information available to allow them to bid on the company.

And remember, just like a public company, you own a valuable asset in short supply.

Unfortunately, when it comes to selling a midsize company, you don't want to let the whole world know you are selling your company. The downside of keeping it a secret and only talking to a handful of buyer prospects is that you give the buyers the power and negotiating strength when in fact you should be the one in control.

Unless you take a direct, pro-active approach, you are going to be at the mercy of luck coming along at the right time and after a few phone calls, having the right buyer take an interest. Even if the best buyer came along, they’re not going to pay you the highest price, because they don’t have to.

If a buyer suspects that there are only a few others competing to acquire your company, they have limited competing bidders to worry about. Statistically, there is such a remote chance that any of the other buyers are going to pay a premium price, that all they have to do is wait until you are worn down and ready to accept a reduced offer. At most, they will only pay a fair market price. Why would they pay any more if they don’t have to?

And, even after they have signed a Letter of Intent to buy your company, they can always stall the process by giving it enough time during due diligence and highlighting some weaknesses. Every company has faults, and they’ll just use some of yours to pretend that they are less interested and less willing to honor their initial offer. As long as potential buyers play the waiting game, chances are you’ll end up selling to them for a significantly lower price than what they are able and willing to pay.

Watching and Waiting
Unfortunately, as we have all learned in life, simply waiting for something good to happen, rarely rewards us. Instead, we need to make sure that every prospective buyer who could have a real interest in acquiring your company is at least made aware that there is a company of your size, type and approximate location available to buy.

They won’t know the name of your company, you won’t compromise confidentiality, but you will learn which prospective buyers are really motivated.

There is demand, but it’s up to you to find it
Remember, there is demand out there for your company, but unless you are proactive and carefully consider your approach, buyers won’t come to you in sufficient volume to give you the negotiating strength necessary to enhance the value of your company. Over 80% of clients who hire ClearRidge ultimately choose to sell to a buyer they have never heard of and almost certainly not one that appeared on their shortlist of the best buyer candidates.

Plan of action
So, what should your plan of action be? First of all, search for the hundreds of strategic or financial buyers who could have an interest in your company’s type, profile and industry (of course, without them knowing who you are).

Second, before they find out which company is for sale, make the prospective buyers jump through a few hoops and prove their motivation (i.e. with examples of previous acquisitions they have completed, capital they have available, an estimate of terms they would be prepared to offer and their experience in your industry). That will get the list down to a more manageable number.

Third, get them all to sign a confidentiality agreement.

Only then do you share the identity of your company.

What is the result?

High Demand (30 or more buyers) + Very Limited Supply (only your company available)

= Significantly Higher Sale Price.

It is not easy to perfect this process, but the logic is very clear.

Put yourself in a position of negotiating strength and you will be amazed at how you can achieve a significantly higher price, agree to better terms, and also ensure that the deal process is completed in an efficient and timely manner.

Just ask a friend who has sold their business the wrong way, and they’ll tell you all about the missed opportunities, complications and problems that occurred along the way.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.

2009 Bankruptcy M&A 20 times higher than in 2007

2009-02-04T11:20:00.009-06:00

It has been widely expected that 2009 will be a year of increased distressed M&A activity, and data from January 2009 backs that up.

According to a Thomson Reuters study, there has already been $14 billion of divestitures through bankruptcy in the first month of this year.

Themes this week:

1) 20x Increase in Bankrupt M&A Activity

2) M&A Debate - Keep Doing Deals or Hunker Down?

20x Increase in Bankrupt M&A Activity

9% of January's M&A Activity involved bankrupt companies. This is over 20 times higher than the figure of 0.4% for 2007.

Furthermore, this 9% covers only bankruptcies. New bankruptcy rules and the extreme scarcity of DIP (Debtor in Possession) financing means that most midsized companies cannot afford to go through the bankruptcy process.

This means that the actual number of distressed M&A deals is likely much higher.

Distressed M&A activity could result from:

1. Larger strategic buyers picking up struggling smaller market participants

2. Out-of-court settlements and pre-bankruptcy sales

3. Sale of non-core assets to streamline operations

4. Over-extended companies reducing leverage and realizing cash

5. Mergers of troubled companies

6. Forced sale through bankruptcy

Only no.6 in the list above is covered in the 9% of M&A activity reported by Reuters so far this year.

In the Thomson Reuters' study, there were 210 deals in 2008 that sold or merged operations of bankrupt companies. That is up 55% from the 140 deals in 2007.

According to a Debtwire survey of hedge fund managers and trading desks, distressed asset sales are expected to rise 91% this year.

When a bankruptcy does occur, it may be from a pre-negotiated settlement between secured lenders and stakeholders to sell assets through Section 363 protection.

Many companies that are in trouble and near bankruptcy are scrambling to forge alliances and build relationships with potential buyers in the event that the worst scenario should happen.

Even for healthy companies, it makes sense that business owners should be exploring some form of joint venture or merger to combine efficiencies and ensure their survival through these difficult times.

M&A Debate - Keep Doing Deals or Hunker Down?

Deloitte Consulting LLP had a recent debate in an article: "Boom or Bust: Keep Doing M&A Deals or Hunker Down?" (click to link to article)

Below is a summary of the points and counterpoints of the debate.

Position 1) Don't do any M&A Deals.

Position 2) Keep doing M&A Deals

Private Equity firms, which account for a reasonable proportion of M&A activity are counting on bolt-on acquisitions to stay active and grow their portfolios. Progressive PE firms are looking to identify companies within their geographies and product lines to expand their reach.

Organic growth may not be available for some time, so they must look to acquisitions. Synergies gained from successful integration will, more than ever, be a key measurement of a successful deal.

As we have stated in our previous articles, deals will be done in 2009 but they will require more creativity in the way they are structured and more stringent due diligence.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.

Commercial and Industrial Lending Temporary High

2009-01-27T12:39:00.003-06:00

Two weeks ago we broke news about credit markets beginning to loosen up. The sun was shining in early January.

We also reported "volatility is the only thing that seems to be predictable right now." Well, sure enough, the volatility has continued.

Three themes for this week:

1) Lending at largest banks has declined

2) Commercial and industrial lending is higher, but history predicts big falls in the coming months.

3) January's Commercial Paper gains are erased

1) Lending at largest banks has declined

The Wall Street Journal reported on Friday that lending at many of the nation's largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available.

According to WSJ analysis, ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008.

2) Commercial and industrial lending is higher, but history predicts big falls in the coming months.

Looking exclusively at the largest banks does not, however, give you an accurate picture of lending activity.

According to data from the Federal Reserve Bank of St. Louis, in December 2007, commercial and industrial loans were up 20% year-on-year. In December 2008 (one month ago), lending levels were up another 10%, at their highest level in years. One explanation could be a rush at the end of 2008 to refinance existing debt.

If you take a look at commercial and industrial lending rates in the last 50 years, history suggests there are big falls on the way. According to data from the Federal Reserve Bank of St. Louis, in previous recessions, commercial and industrial lending has declined up to 10% year-on-year within a year of the recession ending and hit the lending low several months after the recession was over.

Astute business owners are not waiting for tougher times ahead, but are sourcing replacement debt refinancing today.

The FED is doing the best they can with the TARP money, but it would be bucking a historical trend if lending rates increased this year. Take a look at the chart below from the Federal Reserve Bank of St. Louis:

The shaded areas indicate previous US recessions.

You can see from this chart that in 2002, after the recession had officially ended, commercial and industrial loans declined around 8% from the previous year.

The biggest problem with replacing or sourcing new debt is inspiring confidence in the lender that they will see their loan repaid. Oftentimes, much more can be done by the Borrower to present clear and accurate data and projections, as well as promising real-time financial reporting to the lender.

In good times, lenders will take more risk where there is uncertainty. In tough times, lenders are more cautious and require more certainty. It is up to you, the Borrower, to give the lenders that certainty.

3) January's Commercial Paper gains are erased

As we reported two weeks ago, Commercial Paper was trading at the fastest pace since May 2008. Unfortunately, we may have spoken too soon.

As a reminder, commercial paper is an IOU from a large bank or corporation, which matures within 9 months. Some commercial paper is backed by assets and some is traded purely on the bank or company's reputation and credit-worthiness. As you would imagine, it is used for short-term debt obligations and trades at a discount to the face value of the paper.

It is a sign of confidence when commercial paper is being actively traded, but according to Federal Reserve data, volumes have now declined for the second week in a row and wiped out much of early January's gains.

I guess we'll just have to get used to this volatility - it doesn't seem to be stabilizing anytime soon.

The total commercial paper market is down over 20% in the last eighteen months to $1.69 trillion from the peak of $2.2 trillion during the summer of 2007.

Hopefully, we'll bring you better news in the coming weeks, but please take this away with you.

If the historical worst case happens as in previous recessions, we may see a 10% reduction in commercial and industrial lending. A 10% reduction still means that lending is at 90% of the levels that we see in the good times.

Just make sure you're not in that 10%. It's easier said than done, but with careful planning and accurate forecasting, you can even get troubled companies through new or replacement debt financing. You just have to be open, clear and communicate well with new lenders and present them with reliable and reasonable forecasts. You should also map out best case and worst case scenarios.

Lenders want to make loans - you just need to make them feel comfortable that they'll get their money back.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.

Lessons from Troubled Companies - 5 and 6

2009-01-22T10:27:00.001-06:00

LESSON 5 - ACCOUNTS RECEIVABLE

The Business Cycle is not complete until you collect the money. Sales and Gross Profit can be extraordinary, but if you do not collect the money you can't pay the bills or make payroll.

Accounts Receivable management requires not only that your company has discipline, but also that your customers pay on time. The temptation to be flexible with customers is greatest when sales are stagnant and competition is high.

Many management teams of troubled companies are pursuing revenue growth so aggressively that they fail to enforce payment terms on certain customers, and they may even take on customers who are trying to avoid tough credit policies with their competitors. Guess which customers are most likely to default on their credit.

Many companies borrow against or factor their receivables to shorten their A/R turnover (sale to cash days). The importance of prompt collections does not go away. Generally, businesses can only borrow 85% of their receivables that are not more than 30 to 60 days past due. The business then incurs the interest charges and is still burdened with the delinquent dollars.

Successful companies have a strict credit policy and they begin from Day One with firm and consistent application of this credit policy. The truth is that your customers will have more respect for your company if you maintain your discipline.

Your A/R discipline is a reflection of your company's ability to deliver and perform on difficult tasks and in tricky situations. Failure to follow this discipline registers with many customers and competitors as a sign of weakness. Short-term success may be followed by failure in the long term.

LESSON 6 - DEBT

In today's tough business environment, too many businesses are drowning in debt. Companies may have industry leading profit margins, but with leveling or declining revenue growth these companies are struggling to cover their interest costs and debt service requirements. As discussed earlier, many companies, especially start-ups and troubled companies, must determine how much debt is the cap. If you're burning cash too fast and you have to float more debt or raise more capital, then start back at lesson number one and read the lessons over again. There are underlying issues that need to be cured.

All successful businesses have a fundamentally sound, effective, and efficient finance function. Whether a company is an early stage company or a mature company in a consolidating industry, the basic financial scorecards must be kept and studied. Troubled companies' management teams are usually in denial when it comes to the financial trends and scorecards.

If all of this sound likes the basics of business, it's because it is the basics. Unfortunately, there are too many CEOs, CFOs, and Management Teams that do not maintain the intense and persistent focus that is necessary to build and sustain a successful business.

Bankers, private equity professionals, successful CEOs and CFOs are fundamentalists. They guard cash as if the business' life depends on it. They develop and study the business plan and then challenge the assumptions that the Company's success hinges on. They hold the management team accountable for the development and execution of sound cash, operational, and CapEx budgets.

Before they invest or loan funds, they are confident in the quality and commitment of the Management Team, feel secure that the business has adequate HR and technology resources, efficient systems and processes, and they are convinced that there is a viable core business purpose within the industry or marketplace. Every business owner would be well served to employ the same discipline and best business practices on a day to day basis.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.

Lessons from Troubled Companies - 3 and 4

2009-01-20T16:32:00.002-06:00

LESSON 3 - CONTROLLING COSTS

Controlling costs is usually the most effective and quickest method of increasing profitability in any company. Reducing manufacturing costs and inventory purchase costs, as well as reducing operating costs increases profits dollar for dollar. A dollar increase in sales is discounted by the Cost of Goods Sold before it improves profitability.

Budgeting is the only sure method to controlling costs. Study the cost data and its drivers for every manufacturing, purchasing, and operating account or category. Conduct a consistent monthly evaluation of cost variances, actual to budget, and study their cause and effect. Use this data for future action items or increased accuracy in planning.

Lean and efficient companies are process oriented. All repetitive tasks (actions) should be incorporated into standardized Standard Operating Procedures (SOPs) that can be measured with Key Performance Indicators (KPIs). These KPIs need to be monitored daily, weekly, and monthly to provide assurance that costs are under control. This allows for immediate action to stop the cash burn when performance is outside the acceptable range.

Utilizing technology is becoming the favored method of reducing costs. Technology utilization can improve processes with streamlined data capture, processing, and reporting the right information, processed within approved methods, and reported in a user-friendly, consistent and timely manner. Technology also improves employee productivity by eliminating unnecessary steps and in turn reducing unnecessary staff and payroll costs.

The most cost effective companies have developed a lean culture to reduce spending on anything unless it is necessary to provide quality products or service.

LESSON 4 - FIXED ASSETS AND INVENTORY

Fixed Assets and Inventory make up the largest dollar investment for most companies. Unfortunately, too many business leaders do not focus enough attention on the Return On these Assets (ROA).

Accounting systems should be in place to report the profit earned from these assets individually and as a category.

When the management team repeatedly studies ROA, they will be able to determine any action that may be necessary such as reducing inventory levels, securing new outlets for excess inventory, quicker manufacturing cycles, and changing the inventory mix to increase those with higher ROA.

In respect to fixed assets, a CAPEX budget should be a component of every company's business plan. The CAPEX budget begins with the line managers creating a list and estimated cost of new machines or equipment (or major repairs) they believe are necessary to maintain or improve quality, service, or cost reduction through efficiency gains. Most companies only have a limited amount of funds available for CAPEX one year ahead, so the focus on ROA will ensure better decision making with facility and equipment investments.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.

Breaking News from Banks and the Credit Market

2009-01-16T11:12:00.001-06:00

Banks have confidence in each other again.

Commercial Paper is trading again.

In this blog, we highlight and decipher this week's leading indicators from the credit markets.

The spread needs to drop below 0.5% (50 basis points) to really signal a healthy banking credit market, but we are sure getting close. And a lot closer than we thought possible just a few weeks ago. Volatility is the only thing that seems to be predictable right now.

Take a look at the chart below, which shows 12 months of the TED Spread and you can see for yourself.

TED SPREAD - LAST 12 MONTHS

HOW DID IT HAPPEN?

In late 2008, Central Banks across the World were collaborating to end the crisis. They were slashing interest rates and lending cash at an unprecedented rate. And it worked!

That is not to say the credit crisis is over for good. And just because the banks are lending to each other doesn't mean they are lending to companies. There's no guarantee credit markets won't freeze up again, but it's certainly a very healthy sign.

Commercial Paper is trading at the highest volumes since Lehman Brother collapsed in September.

Investors are snapping up new corporate bonds at the fastest pace since May, driving down yields from record highs once they begin to trade.

Just this week, some companies are starting to take advantage while the good times last, most notable of which is McDonald's, the world's biggest restaurant company, which raised $750 million in 10-year and 30-year bonds this week.

In 2009, rising confidence in corporate bonds may help many companies that need to replace $135 billion of debt this year in the U.S.

We certainly need this increased confidence. Commercial lending to businesses has a lead time of many months and any increased confidence in corporate bonds will take time to trickle down to middle market companies.

Business owners may not witness the effects until late 2009, but at least there is something to look forward to.

OUT OF THE WOODS?

A normal TED Spread number would be around 0.25% (25 basis points), so at 0.98%, we're still 4 times higher than normal.

The rate on three-month Treasury bills was 0.06% (6 basis points) on Monday. One year ago, three-month Treasury bills were 3.16% (316 basis points).

Banks are still wary of lending to each other. Financial institutions held more than 300 BILLION euros ($400 billion) in overnight deposits yesterday with the European Central Bank. The daily average in the first eight months of 2008 was 427 MILLION euros.

Let's take time to digest that number. This weeks, banks in Europe were holding almost 1,000 times as much money overnight with the European Central Bank than they were this time last year. They want to sleep soundly at night. Better lower overnight rates than waking up with the bank you lent to last night in default.

So, here's the $350 billion question. What should our President-Elect do with the other half of the TARP dollars. Does he need to do anything with it at all?

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $2 million to $25 million in EBITDA and $10 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.

http://www.clearridgecapital.com

Lessons from Troubled Companies - Part 1

2009-01-16T11:05:00.001-06:00

Turmoil in the Credit Markets may have a much broader impact on companies than most people imagine. From defaults on loan covenants and worsened terms for debt financing to reduced sales from nervous consumers, ongoing business operations are going to be tough for many companies.

If you are called in to rescue a company in distress, the first rule is to get back to basics. Each situation is different, but the common denominator in most distressed companies is poor management practices. That doesn't mean lack of effort, desire or motivation to perform. It does, however, mean that there have been some fundamental errors in judgment, strategy and decision-making in the years leading up to that point.

Managers must have access to relevant, current financial and operating information if the company is to have any chance of success. But that's not all. They must not only have access to that information, but they must be willing and able to analyze the information correctly and employ a disciplined approach which enables them to act on the information to move the company forward and/or protect it from distress.

You could write several books on the lists of reasons that companies get into trouble and in a long career of restructuring troubled companies, there are many stories to tell. To start with, though, over the next few weeks, we're going to bring you 2 lessons each week that will go a long way to ensuring business success.

LESSON 1 - CASH MANAGEMENT

Cash is the lifeblood of every company. Without cash, the company will cease to exist. Every CEO and CFO should demand a strict control and reporting system for cash management. No excuses. The tone is set at the top and begins with expenditure control. A policy should be in place with a dollar limit on normal and necessary manufacturing and operating expenses that can be incurred by the designated managers. Line managers overspending will quickly drown a company.

In distressed situations, a rolling 13-week cash forecast, along with a comparative cash flow analysis is mandatory. In fact, a consistent rolling cash forecast should be mandatory for every company.

These reports should identify cash inflows from customers, debt issues and investors, and the sale or disposal of assets or business units. You need to identify cash outflows from operations, to suppliers, debt service, and the purchase or investment in assets and other businesses.

If the company has more cash flowing out than flowing in, you are "burning cash".

If the company is a start-up or troubled company, the cash burn rate is critical. Management must know how much cash the company expends every week, month, and quarter. It is their responsibility to ensure that cash expenditure is within projected budgets given to Investors and Lenders. Remember, they made their decision to fund your company based on your business plan.

LESSON 2 - PROFIT AND PROFITABILITY

Profit and profitability (margins) come a close second to cash. In order to increase cash levels, companies become profitable or increase profitability, increase equity in the form of debt or capital issues, and sell off assets.

Even if management exercises one of the latter two options, sooner or later, if the company wants to be a successful enterprise, it has to become profitable. Again, the company culture or attitude starts at the top. Everyone in the company must think and act towards growing sales and revenues, and reducing costs.

Gross Profit is the amount of sales dollars left after the costs of the product or service. In order to set a Gross Profit target, you should consider the minimum dollar amount the Gross Profit needs to be in order to cover the operating expenses, interest payment requirements, debt service requirements, and the net return expected by the shareholders. From this, you can work out what the minimum Gross Margin needs to be. If this minimum targeted Gross Margin causes the sales prices to be noncompetitive, then management needs to study their business and competitors to identify the reasons.

Comparison to a much larger competitor will identify their advantages due to size and volume in areas such as per unit manufacturing costs and increased purchasing power. Conversely, larger companies have a higher fixed cost platform to overcome, which will give them bigger challenges in times of stagnant or declining revenue.

Mid size and smaller companies need to differentiate themselves by unique features and benefits such as location, breadth and depth of inventory, improved technical expertise, customer service and responsiveness, unique products, or any other added value that allows the customer to justify paying a higher price.

Management needs to continually evaluate ways to improve efficiency and reduce operating costs. These may include reducing the number of key management personnel that have become less productive but remain highly paid, reducing the number of locations or space to reduce overall occupancy costs, review company participation in employee benefits, evaluate services that are being outsourced or maybe should be outsourced, consider risk management alternatives to reduce insurance costs, replacement versus high repair costs on machinery and equipment and contributing or raising capital to reduce interest costs. Today's successful business leaders will dedicate resources to technology utilization which has proven to be an effective tool to increase productivity and improve efficiencies while reducing operating costs.

A fair return to the shareholders is required, but when shareholders have unreasonable ROI demands, management may increase their debt burden, raise their prices to cover debt service requirements and these unreasonable earnings goals which create a non-competitive product or service that will reduce sales and revenues as customers are unwilling to pay the higher price.

Successful business managers constantly study and compare their company to its competitors in product or service offerings which include pricing structures, gross margin percentage, operating costs as a percentage of revenue and actual dollar amount, and operating income (usually EBITDA) as a percentage of revenue.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

M&A includes buyer and seller representation for companies with $2 million to $25 million in EBITDA and $10 million to $500 million in revenues.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.

Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.

http://www.clearridgecapital.com