Thursday, May 31, 2012

Investment Banking Series | MBE Magazine


Investment Banking Blog Series – Sell Side M&A Process (Article 3 of 4)
Earn-Outs … Do They Work?
By: RKJ Partners, LLC (Cyril Jones & Gregory Ficklin)

An earnout provision in a business sale refers to a transactional tool used to compensate a seller for future profits or sales.  It is a contingent provision of the purchase price and is typically an amount paid in addition to the base purchase price.

An earnout provides for additional compensation to the seller if the financial performance of the company exceeds certain pre-determined levels. An earnout provision can provide real advantages to both the buyer and seller.  Some circumstances are particularly conducive to a transaction structure with an earnout component.  An acquirer customarily wants to buy based on today’s earnings or sales and conversely the seller seeks a price based on tomorrow’s profits or sales due to the “potential” of the business.  Situations in which an earnout may apply include:  If the price gap between buyer and seller valuation is significant, an earnout can be a reasonable method to bridge this difference based upon actual future results.  For example, a seller may believe the company is poised for substantial expansion and therefore deserves an aggressive or premium price.  An earnout rewards the seller financially should the expansion materialize but will not penalize the buyer if the expansion does not take place.  If the business is heavily dependent on the seller’s relationships, an earnout can incentivize the seller to properly transition these relationships after the closing.  It also creates an additional incentive for the seller to remain with the company in a productive capacity post closing.  If the company is introducing new products or services that are not reflected in historical performance and have yet to materialize into tangible sales and earnings, an earnout provides the seller with an opportunity to reap the rewards on the investment made prior to the closing.  This is also applicable to situations in which the firm may be losing money, but is turning the corner toward profitability.  The company may have major customer concentrations or may be on the verge of receiving a very large contract or order. An earnout enables the seller to be compensated for these events without adversely affecting the buyer should they not materialize.

Many professionals think that earnouts should only be used if absolutely necessary to complete the transaction. Possible reasons why earnouts may not be appropriate include:  The seller does not intend to remain with the company for the earnout period.  In that case, a seller may not be interested in an earnout if they have no control over the company’s performance. 
In the event the buyer and seller do not have a comfort level with one another, it would be difficult to implement a mutually acceptable earnout.  
Earnouts can be difficult to administer and may complicate a transaction that would otherwise be straightforward and well defined.  
It may be difficult to determine the future variable to which the earnout will be linked (i.e. sales, gross profit, net profit, etc.)  

Deciding what to use as a benchmark is one of the preliminary points to determine in structuring an earnout.  Should the benchmark be linked directly to gross sales, gross profit or pre-tax net profit?  It is risky for a seller to allow net profit to serve as the benchmark since the buyer can control net profitability by increasing selling, general & administrative expenses, thus lowering net earnings.  The downside for the acquirer in allowing the earnout to hinge on sales is that the seller may be incentivized for unprofitable sales.  A compromise solution is to link the earnout to a specifically defined formula to determine gross profit.  For example, in a distribution business it may be gross sales less cost of product and freight in. In a manufacturing or service business, it may be gross sales less material costs and direct labor costs. This rewards profitable sales and removes discretionary operating expenses from the equation.  An earnout is usually based upon an incremental amount above a base performance level. The base purchase price is already accounted for in the guaranteed portion of the purchase price (cash and promissory note). The earnout component therefore will apply to incremental amounts. It can also be structured to work on a cumulative basis so shortfalls in one period can be made up for by a strong future period. Non-operating income and any sale of non-producing assets are normally excluded. An earnout period typically ranges from one year to five years.

In today’s economy, where rapid changes are commonplace, technology is fast-paced and there is a high degree of uncertainty, an earnout provision may be an appropriate solution to make the deal work. It can be structured as a “win-win” since the buyer is happy to pay the additional purchase price if there is additional revenue with which to pay it. The seller benefits by only sharing in the profit, while the acquirer assumes all of the risk.  However, an earnout will only work well if it is carefully structured and fairly benefits both sides of the deal. 
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RKJ Partners, LLC (www.rkjpartners.com):  Cyril Jones and Gregory Ficklin are Managing Partners with RKJ Partners, LLC.  RKJ is a minority-owned, Atlanta, GA based investment banking firm formed to assist lower middle market growth companies in execute transactions between $2MM and $75MM.  Specifically, RKJ provides buy-side and sell side M&A advisory services, capital raising services and strategic advisory services.

Sunday, May 27, 2012

What is a Capability Statement?

A Capability Statement is a short document that introduces your company's products and services to an agency, to a prime contractor, or to a potential teaming partner.

At a glance the reader can see your company's qualifications, the products/services you are offering, and any special licenses or certifications you might have.


The document should be no more than 1 or 2 pages. Use bullet points to make it easier to read. Incorporate your company's logo, brand and colors if possible.


Your Capability Statement should include:
  • The products or services you are offering. (Core Competency)
  • Your experience in this field. (Past Performance)
  • Why your Company is different. (Differentiators)
  • CAGE; DUNS; GSA; CCR; ORCA; NAICS; certifications (8(a); veteran-owned, MBE, WBE); security clearances.
  • Company address; email; and point of contact.
  • History
  • Your Staff
  • Your Equipment or Resources: Specialized equipment or resources that enhance your product (s) or service (s).
  • Where to find you
  • References
Next week I will blog about important changes to CCR and ORCA.

You may contact Sean at 201 916-9799 or at sean@seaninc.biz or support@fedradar.com.

Wednesday, May 23, 2012

SBDC Q&A: How to Research International Markets

By Rieva Lesonsky

Have you considered exporting internationally? With 95 percent of the world’s consumers located
outside the United States, and a high demand for American products, international markets can be an
area of immense opportunity for small businesses. Many entrepreneurs are intimidated by the
thought of going global, but with proper market research and guidance beforehand, they needn’t be.

What is the first step in international market research?
“Before a company even starts the research process, they need to determine if they are ‘export ready,’ “ says SBDC Business Advisor Lynn Stewart. “Do they have the resources—time, money, personnel—to devote to exporting?” Stewart recommends the SBA’s Export Business Planner as a good tool to get you started assessing your export readiness.

How can doing market research help an entrepreneur determine the best international markets for his or her products?
“It’s important to research how well your product fits a foreign market. Is there a demand? What is the price point? Who are your competitors? With taxes and tariffs, can your product be competitive?” says SBDC Research Coordinator Christopher Carter. “Macroeconomic indicators such as GDP growth, employment rates and birth rates will give you an overview of the state of the economy and population.” A bonus: Research may show you foreign countries where products that are less successful in the U.S. could be in high demand, adds Stewart.

How can an entrepreneur narrow down which countries to research?
Start by looking at where your competitors are going, Stewart advises. To which countries are they exporting? Then investigate country and industry reports to identify export trends and growing markets for your product and/or industry. Trade associations, U.S. government databases and reports from other global organizations are an excellent source for this type of information. Because they border the U.S. and benefit from NAFTA, Stewart says, Canada and Mexico are a good starting point
for new exporters.

Once you have narrowed down your options, what are some of the key questions to ask about each market?
Start with a country assessment, which examines each country’s geographic, demographic, economic, cultural, political, legal and infrastructure, says Stewart. Then perform a market assessment, which examines the size, characteristics and projected growth of the target market; your competitors’ products, prices, marketing methods and distribution channels; any licenses or certifications needed to export to the country; tariffs and import regulations that will affect you; and how you will distribute your product or service (agent, distributor, licensee, etc.). Finally, says Carter, research whether you need to modify your products or packaging. “Certain colors or designs can have different meanings in different countries,” he explains, “and in some lower-income countries people want smaller package sizes, since they live on small daily earnings.”

What resources can help an entrepreneur research international markets?
Carter and Stewart cite a wealth of online resources, including the U.S. Department of Commerce and Department of State, the CIA World Factbook, the International Trade Administration, Global Edge (hosted by Michigan State University), industry associations and websites, and TradeStats Express. Offline, you can get help from the SBDC, SBA, SCORE, Centers for International Trade and Development (CITDs) and U.S. Export Assistance Centers (USEACs).

Is it necessary to actually visit the countries where you’re considering selling your products or to meet with potential retailers?
“Face-to-face meetings are always good, but we have many clients who have successfully exported using local distributors, without having visited the country,” says Carter. However, he highly recommends participating in trade shows, either in the target country or the general region. Stewart cautions that you should always vet any distributor or agent carefully. “Assess their operation, financial situation, market knowledge, marketing plan, other products they carry or represent, company background and technical ability.”

When you have gathered all your research, what factors should you consider in deciding which market or markets to target?
While there are many variables to consider, Stewart says the main factors are market potential (where
will your product make money?), the competitive environment, ease of market entry and the presence
of qualified partners. It’s recommended that small businesses select one or two markets first, then
move on to others as they gain experience. “Selecting regions of focus such as Asia or Latin
America rather than countries in different areas of the world is more cost effective, especially in terms of marketing, product modifications and travel,” Stewart says. “There is also the added benefit of regional trade agreements as well as using one country in the region as a gateway to others.”

Rieva Lesonsky is founder and President of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses. Before launching her business, she was Editorial Director of Entrepreneur Magazine. Follow Rieva at Twitter.com/Rieva and visit her blog, SmallBizDaily.com, to get the scoop on business trends and sign up for free TrendCast reports.

You’ve got questions. We’ve got answers. For more information, contact the Small Business Development Center: 866-588-SBDC. www.smallbizla.org

Friday, May 18, 2012

Homework Assignments That Win Government Contracts

WHEN IT COMES TO government contracting and the federal market place, the goal is simple one: to win all the government contracts that you after. After all, it is all about winning and improving your winning percentage. Start to focus on learning exactly how to minimize or even eliminate your competition. The smart companies do exactly this.

Here are some homework assignments that, when completed, will help you win more and more government contracts. Why will they enable you to win more government contracts? Because when completed, the information contained in these assignments will enable companies to obtain and apply actionable, multi-dimensional knowledge in order to enact timely decisions that support their government contracting activities. This capability is called situational awareness and allow companies to manage or make decisions about the federal market place as a whole rather than evaluating a decision in a narrow context.

For example, there is an opportunity on FedBizOpps.gov that appears to be right up your alley, literally perfect for you. But is it really? Do you have a prior relationship with the agency? The buyer? Is this a new contract? A re-compete? Do you know what companies will bid against you? What do you about these companies? Can you beat them? Do you know how to beat them?

 BASIC MARKET INFORMATION- SITUATIONAL AWARENESS ASSIGNMENTS

1. Create an exhaustive list of all the agencies that buy what you sell.
2. Find out how much each of these agencies spends on your products or services.
3. Rank the agencies by total amount spent on your products or services.
4. Determine where the agency's buying centers (contracting offices) are located.
5. Determine who are the individuals (contracting officers, specialists, technical representatives, etc,) in these buying centers that are doing the actual buying.
6. Determine how much these individual buyers are buying during a government fiscal year. At one (1) time.
7. Determine how often these individual buyers are making purchases. Daily? Weekly? Monthly? Quarterly?
8. Determine how these buyers buy what you sell. What contracting vehicles do they use? (For example, a GSA contract or a 8(a) sole source award basis.
9. Determine from what companies (i.e., your competition) are they buying now?
10. Find out how much they are buyng from these companies.
11. Determine how often they are buying from these companies.
12. Determine the prices at which they are buying from these companies.
13. Determine if Sawyer & Associates, LLC is able to help my company with these homework assignments?

Sawyer & Associates, LLC can help your company with these homework assignments in two ways. First, Sawyer & Associates expert instruction and consulting services will:
(a) Complete all or any part of these assignments for your company; or (b) Provide your company an instuctional road map for completing the assignments.

Second, Sawyer & Associates, LLC can assist your company transform these completed assignments into a truly solid foundation that will make the federal government your largest customer. This transformation will be based upon proper business planning, the continual gathering, expanding, refining, and validating of customer and competitor intelligence, smart targeted marketing, and relationship building.

Next week I'll will blog about the importance of having a Capability Statement.

You may contact Sean at 201-916-9799 or at sean@seaninc.biz or support@fedradar.com

Monday, May 7, 2012

Sell Side M&A – The Due Diligence Process (Article 2 of 4)


By: RKJ Partners, LLC (Cyril Jones & Gregory Ficklin)

Due diligence in the context of a business sale is the process that a buyer goes through to verify that the representations about a company made by a seller are materially accurate.  Buyers seek to satisfy themselves and their stakeholders as to the current condition of the business, thus reducing the chance of any post sale surprises.

It is common for a buyer to make a purchase offer based upon general financial and operational data that has been supplied during the marketing phase of the sale process. For confidentiality reasons, these representations are all that a seller should be expected to make until such time as there is a "meeting of the minds" or a business agreement between the parties. Such an agreement should include purchase price, terms and transaction structure and will generally be confirmed in a Term Sheet or Letter of Intent, signed by both buyer and seller.

Performing financial due diligence prior to a price and terms agreement would be putting the "cart before the horse". A seller should only divulge sensitive information about his or her company if it is known that there is a financially acceptable transaction in place. Buyers typically want to perform due diligence prematurely, so as to minimize their risk in proposing a deal.  Allowing this process to begin before a formal offer is made is one of the most common and costly mistakes that an inexperienced seller makes.  A seller’s primary objective in due diligence is to emerge with the deal intact (i.e. with no revision in price or terms). A seller can maximize the probability of a successful outcome by preparing for the due diligence process. 


It is critical that the seller receive in advance, a due diligence checklist from the buyer, to facilitate having the information organized and ready for review. Well organized and complete information increases the seller’s credibility and a buyer’s confidence in the business. If a seller notices any inaccuracies during this preparation phase it is preferable to bring it to the prospective buyer’s attention in advance to preserve credibility. In the event certain negative information turns up during due diligence, one of three things will happen: the buyer may be willing to follow through with the agreed upon price and terms anyway; the buyer may opt to pull out of the transaction; or the buyer may agree to proceed with the transaction conditioned upon renegotiating price, terms or deal structure. Typically, unless material information was omitted or misrepresented in the marketing phase, deals that were properly prepared emerge from due diligence relatively unscathed.

Due diligence can be classified as external or internal. External due diligence relates to industry factors such as economic conditions, demand forecasts, trends, pending legislation, industry risk factors, expansion opportunities, new technology, competition, etc. and are not company specific. External due diligence can and should be done by the buyer at an earlier stage since it is not reliant on specific company information and is not sensitive or intrusive to the company.

Internal due diligence relies on information specific to the subject company. The following are the most common areas reviewed:  Financial – accuracy of financial statements and recast profit adjustments; Tax & Payroll – up to date and historical tax filings; Operational – general business structure and risks; Inventory – confirming no stock obsolescence; Legal – existence or status of any lawsuits; Regulatory – compliance with applicable agencies; Environmental – ISRA compliance; Employees – status of key employees; Customers – in good standing and likely to remain post transaction, etc. Certain aspects of due diligence are more sensitive than others. 


Customer and employee due diligence typically fall under this category and should be put off as an end phase of the process. It may be the final step prior to closing, perhaps after contracts are signed and all other contingencies have been satisfied, including any required financing. This affords the seller a comfort level that once this final aspect of due diligence is addressed the deal will immediately proceed to closing, assuming there are no significant unexpected findings.

Every due diligence varies depending upon the complexity of the company, size of the transaction, the specific buyer and a buyer’s familiarity with the industry and company. The process can range from a few hours to several business days. If an "insider" such as an employee is buying the company, there may be little need for due diligence since he or she is already intimately familiar with the business. In summation, due diligence is an inevitable part of the business sale process. To insure that everything will go smoothly, make sure that all representations made during the selling process are materially true and correct. Take the time to properly prepare for due diligence and keep in mind that as a seller, your goal is to survive it with your deal intact
RKJ Partners, LLC (www.rkjpartners.com): Cyril Jones and Gregory Ficklin are Managing Partners with RKJ Partners, LLC. RKJ is a minority-owned, Atlanta, GA based investment banking firm formed to assist lower middle market growth companies in execute transactions between $2MM and $75MM. Specifically, RKJ provides buy-side and sell side M&A advisory services, capital raising services and strategic advisory services.

Thursday, May 3, 2012

HBCUs: The (re)Birthplace of Entrepreneurship

By Ron Busby

        I had the pleasure of attending (and serving on a panel) the recent White House HBCU Entrepreneurship Conference. A blue-ribbon panel of luminaries from academia and industry was on hand at the invitation of avid USBC-supporter Marie Johns, Deputy Administrator of the SBA.

        Enlightening. Encouraging. Affirming. Each of these could describe the outcomes of the all-day session. It really had my "Rattler" (FAMU)/Clark Atlanta University blood pumping!

        The unanimous consensus of everyone in attendance? America's Historically Black Colleges and Universities must commit themselves to: develop the next generation of Black business leaders; be centers of excellence and thought leaders on entrepreneurship; jumpstart innovation in the communities they serve; and encourage and foster entrepreneurial activity among students before graduation!

        As you might imagine, the discussions were wide-ranging, touching on globalization, technology, re-engineering education models, access to capital, and the lingering impacts of discrimination on all of the above. There were reports of real-world successes from most recent Bennett College President, Dr. Julianne Malveaux, and Johnson C. Smith University's Ron Stodghill. Though not HBCUs, Silicon Valley's Mission College (represented by President Laurel Jones) and Dr. d.t. ogilvie of Rutgers delivered highlights of real-world examples of the kind of innovation that HBCUs can emulate and monetize.

        The stark harshness of the reality as presented by one panelist brought home just how critical it is that HBCUs embrace this latest challenge: the total revenues of all 2 million Black-owned businesses contribute less than 2% to America's GDP! As incredible as that sounds, that figure represents growth in performance - and highlights just how much room to grow Black business owners have.


        So, it’s pretty simple to me… the USBC is going to pitch in and do what we can to help. We’ll start by making sure several student business leaders are able to attend our upcoming School of Chamber Management this July 24-28 here in Washington, D.C. Maybe they’ll learn something… maybe we’ll learn a thing or two from them.
We’ll also commit to encouraging closer cooperation between our member chambers and the business departments of HBCUs located near them. I’m certain only good things can come from increased interaction between current and future business leaders.

        There is no question that the rebirth of Black Entrepreneurship will take root and grow on the campuses of America’s Black colleges and universities. Thousands of bright, talented young men and women focused on using their brains to change the economies of their communities
and the world… What’s not to like about that?

        And finally, I must acknowledge President Obama’s Administration. I have mentioned Deputy Administrator Marie Johns from SBA, Donald Cravins from the Senate Committee on Small Business and others, but the President gets it! Virtually every agency has embraced his insistence on inclusion. Maybe I'm just feeling good because I'm the product of two HBCUs, but to have the White House in the fight with us...that's really a good thing!


Ron Busby is President of U.S. Black Chamber, Inc.  www.usblackchamber.org

Tuesday, May 1, 2012

Financial tips every business owner should utilize to give debt a miss

Opening a business is a huge responsibility on your shoulder as you'll be subject to constant change in your profit and loss statement. It is a tough job to maintain a standard ratio between what you earn and what you invest. Falling into the high interest debt cycle is a very common phenomenon when you have a business of your own but it is not that there are no ways in which you can come out of it. Though debt consolidation and commercial credit counseling options are there to bring you out of the debt hole, yet it is always better to remain financially sound so that you don't have to waste your time running behind debt relief companies. Here are some sound financial tips that you should follow in order to keep debts at bay.
  • Create a pragmatic cash flow projection: Since you start operating, you shouldn't expect your sales to reach the level of your expectations within a year or two. Though you may have a terrific business plan, it may take time to test the market and then start creating the difference within the market. Therefore, when you don't have the clear idea of the business sales, you should underestimate your potential business income so that you can create a strict budget.
  • Make list of what you spend in a month: Just as you need to formulate a budget on a personal level, similarly, you also have to make a list of the expenses that you make in a month. Take a pen and paper to form the list so that you have it in written. After you do so, make sure that the amount of money that you spend is less than what you make in a month in order to maintain the balance and avoid falling in debt. Always stay within your means.
  • Reduce your commercial debt: When you already have the tension of repaying your debt obligations, you can't perform your commercial tasks in the proper manner as you'll be often disturbed by the creditors and the collection agents. Take professional help so that you can repay your debt obligations with ease and start afresh. You may get help from a commercial debt consolidation loan or from a commercial credit counseling agency.
  • Try to curb your expenses and look for discounts: If you're the business owner and you have the mentality of spending all that you earn as profit, you need to change this immediately to get better results. Try and save the profits so that you have some funds ready to fall back on when you fall in financial danger.

Therefore, if you don't want your business organization to drown in a sea of debt, you should follow the above mentioned steps and live debt free. However, when in debt, don't refrain from seeking help of a professional lest you aggravate the situation.

Kavin Matthews is a financial writer who resides in Denver. He loves to contribute his articles to financial websites, communities and blogs and assists people and business firms in getting out of debt. Some topics covered by him are eliminating business debt, business debt consolidation and effects of debt settlement on your credit score.