Thursday, April 5, 2018

Sell-Side M&A


RKJ Partners, LLC is an Atlanta, Georgia based investment banking firm designed to specifically assist dynamic, lower middle market growth companies in executing transactions less than $100MM.
 Part 1

All Revenue Is Not Created Equal


April 2018


A business owner should always have a realistic understanding of the factors that increase or detract from business value, regardless of their intention and timing of selling the business. A common misconception is that someone can estimate the value of a business based upon a formula that is tied to gross revenue; however, experienced buyers and valuators appreciate that all gross revenue is not created equally and the factors that impact quality of revenue play a significant role in the value of a company. Fact: Business value typically has very little or nothing to do with gross revenue.
Which company would you value higher: 1) A company generating $12 million in revenue and $400,000 in earnings, or 2) A business generating $7 million in revenue with $1.5 million in earnings? With all other factors being equal, the company producing $5 million less revenue but yielding 21.4% return is worth substantially more than its larger counterpart that only yields earnings of 3.3%.
Sophisticated acquirers understand that it is profitability rather than revenue that drives value. Revenue can typically be increased if there is no concern for the profit margin associated with the increased revenue, and customers will do business with you if you are willing to “give your products or services away”. Differences in profitability have an unmistakable impact on value and marketability. Factors that lead to differences in predictability and sustainability of revenue are harder to identify and quantify. The more predictable and sustainable the revenue stream, the higher the associated value. Conversely, the greater the uncertainty that particular revenue streams will continue going forward, the lower the value. The following risk factors and value drivers are primary determinants impacting predictability and sustainability of revenue:
  • Customer Concentration: Revenue concentration is a major factor impacting value. There could be two companies that have identical sales and earnings; however, if one company has three customers that represent over half of the total revenue and the other company has no client representing greater than ten percent of total revenue, then second company, with a more diversified customer base, will generally command significantly higher value and provide the acquirer with a greater comfort level. When there is revenue concentration, one event that leads to a loss of a major customer can significantly impact a company’s earnings overnight.

  • Past Performance Mirroring Anticipated Future Results: Someone buying or valuing a business will rely on historical financial information only to the extent that they consider historical performance is indicative of what is likely to transpire going forward. For example, if 50% of a company’s revenue is tied to a product line that has a questionable future due to changes in technology, little or no weight will be applied to its historical performance. This would be the case for a company such as a compact disc manufacturer that may have had substantial historical earnings; however, changes in technology and electronic media cast doubt on future demand for these products.

  • Legislative Changes: Government policy and regulation are other elements that impact various industries. A good example is companies that rely on third party reimbursement such as health care companies who depend on Medicare and Medicaid reimbursement educational companies who need federal and state student funding; or businesses impacted by international trade regulations and restrictions. The less reliant a company is on third party influences, the less they are subject to being impacted by changes in areas that are out of the company’s control.

  • Repeat Customer Base: There is a considerable difference in revenue quality between a company that generates the majority of its revenue from repeat business with established customers compared to “one and done” type of companies with few repeat orders. Repeat business creates predictability and stability. Even if the end users are different, cases whereby a company’s sales originate from relationships with established referral sources, lead to the ability to accurately forecast future revenue streams and ultimately earnings. The more these repeat relationships are likely to impact future revenue, the greater the associated goodwill value. Furthermore, the greater the barriers of exit that exists for customers to make a change, the more predictable the revenue stream. For example, in manufacturing and pharmaceutical packaging, if changing vendors requires that a company incur significant costs and delay in new tooling or government agency approval, it will deter changing suppliers.

  • Bidding vs. Direct Purchase: As a general rule, less value is placed on a company whose revenue is heavily reliant on a bidding process. Many think of this as only acquiring a company’s reputation and its right to bid on future business. Construction companies face challenges in this area impacting value and marketability since most of their revenue is obtained on a bid basis and is therefore not predictable. It follows that the more you can differentiate your offering and offer proprietary based products or services, the greater the perceived value. Bidding can also be mitigated by longevity on contracts and number of historical contract renewals.

  • Customer Relationships: Relationships can play a major role in predictability of revenue and ultimately earnings. If the business owner controls or is the key point of contact for critical customer relationships, then there is an inherent dependency on the Shareholder’s active involvement and management of the customer. The ability to transition these relationships and create multiple points of contact within an organization to manage and retain the relationship, all increase comfort level, the ability of an owner to exit in a timely fashion post-sale, and ultimately overall value received. An acquirer will be wary if the sustainability of a revenue stream is completely dependent upon an existing owner. Relationships with key employees hold the same risk. For instance, a company who has a salesperson that controls 80% of the revenue is highly susceptible to the risk of them leaving with these customer relationships. Ideally a company should strive to have multiple points of contacts within its own organization as well within the customer’s organization. If there is one key player in the company that the business channels through and that one person was to leave, it is likely that the business would follow. This can be mitigated by the seller incentivizing the employee in the sale and/or paying them a retention bonus at the end of each of the first two or three years that they remain with an acquirer.

The aforementioned factors have a major impact on the value that potential acquirers place on a company’s revenue stream. Whether your intent is to pursue a sale of your company in the near future on hold onto your business for the long term, paying attention to the factors discussed above will enhance your company’s value, decrease risk, and provide increased options and opportunity.
About RKJ Partners, LLC

RKJ Partners, formed in 2008, is an established advisor to leading lower middle-market growth companies. We provide our clients with experienced-based solutions and unbiased advice. Our comprehensive array of strategic advisory and execution capabilities allows us to meet the needs of our clients and provide an outstanding level of service in connection with a variety of transaction processes, including:
      • CAPITAL ADVISORY
      • MERGERS & ACQUISITIONS
      • STRATEGIC ADVISORY


CYRIL JONES
Founder & Managing Partner

GREGORY FICKLIN
Managing Partner

WILL ROSSER
Managing Director

RHETT PLOTNER
Vice President

PETER WRIGHT
Senior Associate

Wednesday, March 14, 2018

Three Ways to Empower Our Daughters to Build a Better Workplace

Words of Encouragement on International Women's Day 2018
By Fran Pastore, CEO, Connecticut Women's Business Development Council

Standing in line for a cup of coffee at a local breakfast spot, I witnessed the helplessness inflicted on a young cashier from a #metoo moment. Her rattled expression and slumped posture after fielding a customer's unwanted advances reflected that what should have been a simple business transaction had turned to harassment, inappropriate and demeaning.

Many of us have #metoo stories from the workplace. As a young insider trading analyst, I was slapped on the rear by a colleague on the floor of the New York Stock Exchange. My daughters, too, share appalling stories about suggestive remarks and unwanted, sexually explicit texts from male mentors and coworkers. While women now earn more college and graduate degrees than men and the businesses we own generate over $1.6 trillion in revenues and employ 9 million workers in the U.S., alone, we have a long way to go to ensure that young girls never have #metoo moments in their workplace. At the Women's Business Development Council where I have worked for more than twenty years, I receive calls from women of all socio-economic backgrounds, from a student at Yale University to a 75-year-old retiree who is demanding change and wanting to know what they can do to make it happen. Heres how we can empower ourselves and our daughters to be the change the world needs to see:

Gain new skills to achieve economic security

Lack of economic security leaves women vulnerable. The 25-year-old woman who served me coffee in rural Connecticut couldn't confront the harassment she received at work without breaking company policy that forbid her to from talking back to customers. She couldn't go to her boss without risking the minimum wage job she and her children depended on for survival. If she had economic security and access to better job options, she may have felt more secure in reporting the incident, demanding better treatment and protection at her job, or seeking an alternative. Gaining new skills, a college degree, certification in a trade or software program empowers women. It leads to self-reliance and economic independence, which give women the ability to make choices, to leave jobs where they are not treated well, and to seek better opportunities for themselves and others.

Start your own business and become a leader

An impressive 1 in 11 adult women is an entrepreneur and the number is on the rise. While accessing new markets and capital remains the biggest challenges for women business owners, progress is being made toward helping them overcome these obstacles. The business climate is ripe for female-run enterprises thanks in part to new legislation that has eliminated some of the barriers women business owners have experienced when pursuing government contracts. Additionally, financial institutions are beginning to attract more women and more female run angel investor firms and venture capital investors are investing in women-led firms. Forging change from within, corporate culture and policies like the one that forbids a service employee from confronting an unruly customer, and policies on maternity and family leave that make for inflexible, unsupportive workplaces will evolve to better advocate when women are in leadership roles to create and enforce them.

Take a step for others by sharing time, experience and financial contributions

The #metoo movement and the media buzz around it have inspired women to fight for change by investing their time, talent and financial support to promote a more equitable workplace and economy. Organizations like the WBDC offer those with expertise in areas such as personal finance, running and managing a business, banking, and marketing a way to connect with and guide women seeking economic empowerment. Volunteers can offer mentorship and training through workshops and seminars to provide resources and encouragement, including business plan review, help with financial forecasting, pitch presentation, loan application preparation, lending referrals and personal finance. When women entrepreneurs receive the training they need to launch new businesses and scale existing ones, creating jobs for themselves and others, they stimulate economies and build strong communities.

A better workplace is within our reach. With the help of supportive men to elevate and advocate for our work and our rights, we can promote education to open better opportunities, encourage more women to take on leadership roles, and share our skills and experience to create the equality and guidance young women need and deserve. Together we can put an end to inappropriate behavior in the workplace. After all, we have far better stories to share.


#Me2Take2

Friday, January 26, 2018

What’s in a Name? Business Diversity and Innovation in Content Marketing

By Sarah Saker

There is a lot of advice out there on content marketing, and for good reason. Content is the key to higher Google rankings and gaining more organic traffic. There are also a lot of thoughts out there on business and diversity and inclusion (D&I) initiatives. Both are seen as valuable yet separate initiatives. This approach is filled with wrong thinking. 

The reason is simple: diversity matters in the workplace for several reasons, many of them related to an evolving marketplace. While Baby Boomers still make up a large percentage of buyers, Millennials are the next generation of customers, and they are not only a diverse group, but they are demanding corporate responsibility in many areas from the companies they purchase goods from. 

Diversity and inclusion are not just numbers games or politically correct workplace initiatives. They are about bridging opportunity gaps, and those gaps exist in content marketing just as they do in many areas of business. 

So, what do we do about it? It is about more than just the content we create or even who creates it. Any D&I initiative starts with a name. What does that mean?

The Name of Your Blog or Website

Names relate to several things related to content marketing. We’re often too close to our own work to realize how certain phrases or words can be potentially offensive. We need to analyze several things when it comes to website and blog names: 

What do the initials of our site/business spell? While this can be humorous, like when the Iowa Department on Aging determined that doa.org was not appealing to senior citizens and changed their name. It sounds simple, but the number of horribly named websites out there is astounding. 

What does our site/business name spell when it is run together? Website names are often devoid of punctuation, but if you run the names of two people together or the name of a business or occupation, this can result in some horrible combinations. A less offensive, yet humorous one is American Scrap Metal, whose site americanscrapmetal.com also spells “Americans crap metal.”

How can these errors be prevented? There are several steps to take, and while they may seem obvious, many businesses neglect one or more of them, much to their detriment.

  • When naming your website use a domain name search tool, and pay attention to the variations offered by software. Sometimes this will enable you to spot the above errors when you see the name in a different context. 
  • Write your business or domain name down or type it, and move the spaces around. This sounds simple, but it can save you a lot of trouble. 
  • Abbreviate, and look closely at initials. A business started in early 2002 had the initials WTC. They lasted less than six months, renamed the company, and still went out of business.

The Title of Your Blog Posts

The focus in content marketing is often SEO and a title that has a “hook” so the reader will click on and read the article. 

Blog titles can be offensive. While they usually are not run together (your blogging program will insert dashes between words) so the URL is not offensive, the title itself can have a double meaning you may not see or realize right away. 

While you can go back and delete a Tweet or post, if someone who was offended took a screenshot it can easily go viral. 

Prevent this by:

  • Allowing someone else to edit your posts before you put them up. They will spot things you do not and will be able to tell you if they feel that it is offensive. 

  • Don’t “impulse post.” Write a post and then wait to put it up until you have had a chance to review and get a new perspective. 

The value of diversity in the workplace is the opportunity to bridge gaps that may otherwise widen if we ignore them. Invite everyone to collaborate, review, and participate in content marketing efforts. 

We can all do better when it comes to diversity and inclusion. These initiatives are not just about numbers or clever words. They should be a part of our company culture, and should be reflected in everything we do, even the name of our website and blog posts. 


Sarah Saker is a business coach and freelance writer that specializes in helping SMBs setup processes for customer support and predictable growth. When not writing or coaching, Sarah can be found on her (small but growing!) family farm. Connect with Sarah on about.me/ssaker for coaching or writing help.