| Wall Street reported a banner year for Mergers | | | | hard pressed to get aggressive multiples when |
| and Acquisitions activity with corporate coffers | | | | you sell. That will be somewhat offset by the |
| bursting with excess cash. It seemed like every | | | | demand of larger companies in the same industry |
| large company deployed this capital in one of | | | | feeling optimistic about the economy and having |
| three ways; a stock buy back, an increase in | | | | available capital from profits to spend. Most |
| dividends, or an acquisition. All three activities | | | | industry roll-ups were entered with great promise, |
| represent a vote of confidence in the future | | | | but for the most part were poorly executed. The |
| growth of the economy. | | | | buyers paid way too much in the feeding frenzy |
| Our economy has demonstrated incredible | | | | to grow market share - look at the waste |
| resilience in barely missing a beat during a series | | | | management, electrical and HVAC, and equipment |
| of devastating natural disasters and a huge run up | | | | rental markets as examples of low performing |
| in energy costs. Nothing on the immediate horizon | | | | roll-ups. |
| will interfere with this growth in 2006. How does | | | | The second major mistake was overestimating |
| this affect the owners of family businesses? | | | | the synergies that should be achieved with size. |
| We are just beginning the well-documented cycle | | | | The good news is that history is a good teacher |
| of the retirement of the baby boomers. The | | | | and the industry consolidators are much better at |
| baby boomers generation started and grew | | | | it. You may not get an outrageous multiple, but |
| hundreds of thousands of successful privately held | | | | you have a better chance of receiving future |
| businesses. Those owners are facing retirement | | | | value from any portion of your deal that is in the |
| as well and are faced with the difficult decision of | | | | form of company stock or performance based |
| how to retire and exit their business. Having | | | | earn-out. |
| capable and well trained heirs involved in the | | | | The good news is that attractive companies are |
| business is the easiest exit. You combine gifting | | | | very much in demand by both corporate buyers |
| and buyout to achieve liquidity for the parents | | | | and Private Equity Groups. There is a lot of |
| while allowing the next generation to continue the | | | | money waiting to be deployed. These folks with |
| business. | | | | this money recognize what characteristics make a |
| Statistics show that only one-third of all family | | | | company attractive and may bid up the price in a |
| businesses are successfully transferred to the | | | | competitive environment. Some of the |
| next generation and only 13% are transferred | | | | characteristics they are looking for are unique |
| onto the third generation. My feeling is that these | | | | market niche, barriers to entry, high margin, |
| percentages are decreasing over time. We | | | | scalability of technology, proprietary technology, |
| therefore are entering the perfect storm for | | | | contractually recurring revenue, a strong |
| mid-market M&A from the supply side. Over the | | | | management team and customer and product |
| next 10 years we will see a huge increase in the | | | | diversity. Grade your company in those areas. If |
| available businesses for sale. | | | | you have some weaknesses, address them and |
| Economics 101 would tell us that with a glut of | | | | your exit will be a lot more financially rewarding. |
| supply comes an erosion of prices. To the extent | | | | 2006 will be a very good year to sell a strong |
| that your business is a commodity type, me-too, | | | | company. |
| not differentiated, low margin business, you will be | | | | |