The trend of increasing cross-border M&A has accelerated with the globalization of the world economy.
Growing interdependence and the entrance of foreign players as cross-border M&A causes
The growing interdependence between worldwide economies has increased corporate transactions between countries. Companies need to acquire enough critical mass to be able to compete against global players.
The entrance of larger, competitive foreign players shrink margins and at the same time force local companies to spend more to keep up with their research, development and innovation capacities. To survive, many companies are forced to merge in order to reduce cost or gain enough market share to create economies of scale.
Having to deal with foreign companies that are more competitive in terms of cost, size, research capacity, development or innovation, means that many companies need to look for ways to reduce costs via productive synergies with similar companies or obtain a sufficient market share in order to produce economies of scale.
Cross-border M&A and sell-side operations
The good news for sellers is that strategic acquirer are willing to pay a premium in a cross border transaction. Also, in a cross border deal, the buyer is usually willing to respect the management team of the target company.
When analyzing who might be the best buyer for your company, the key is discovering which company is the one that can obtain the most value by acquiring your company and, as such, can share more of this value with you by paying the most.
Remember that the best buyers aren’t looking for you. You are the one who needs to find them and woo them.
A big percentage of the success of a sell side operation depends on the search of the best potential buyers worldwide and reaching out to the key people in those organizations, always with confidentiality throughout the entire process.
DO YOU WANT TO LEARN MORE ABOUT SELL-SIDE OPERATIONS? GO TO SELL-SIDE SECTION AND DISCOVER HOW TO SELL YOUR COMPANY!
This article was written by Enrique Quemada, ONEtoONE President.
The need for an increase in capital to stay competitive is very common. It is possible that the business owner, especially when he or she is already in an advanced stage of life, will not be willing to reinvest capital that has already been extracted from the company and, before this, he prefers to exit the company.
The need for capital
If there has been, for example, a deterioration of capital from losses or because the company’s assets are arriving to the limit of their useful life there is a need for investment in modernization. Other times the company doesn’t generate enough free cash flow to undertake the investments. It needs to be competitive in an evolving business environment.
We had a client that owned a factory specializing in the manufacturing of machinery for food preservation. The company competed against large Swedish and American companies that, thanks to their investments in R&D, were constantly improving the productivity and sophistication of their machines. Our client was losing competitiveness and was destined to start seeing lower prices, yet he had a limited capacity for reinvestment. Fortunately he decided to sell before it was too late.
The company may need to invest money into soon to be obsolete technology in order to be viable, something that the owner doesn’t want or can’t do.
In some cases, slowly a snowball of debt is formed without you noticing. Equipment leases, operating capital lines of credit, equity lines and credit card bills now take up most of your free cash flow and you feel like you are working for the banks.
A third-generation business owner client of ours used to tell us, “if the interest rates go up, I am losing it all”. He ran the business that his Grandfather had started 45 years earlier, in early 2007 they decided to build a new manufacturing facility and leveraged the business to do it. Then the crash came, and interest rates skyrocketed while sales went down. They were able to survive the crisis and they continued to grow at double digit rates but their profits disappeared to service debt. We helped him refinance at better rates and then brought in a financial investor that made an equity investment which allowed him to keep growing his family’s legacy.
The time to get capital is now
If you have not been able to receive a dividend in years, a downturn in the economy can wipe out everything you worked for. We are today in a specially good moment to sell due to high prices, high liquidity and low interest rates. Do not miss this M&A wave because the next one might not come in decades – at least a wave as huge as this one.
When selling a company, business owners try to value different elements of their businesses in order to determine an appropriate sale price, including their assets, their cash flows and even their business relationships. In reviewing elements of their businesses that have value, one question that business owners often ask is, “What is my company’s brand worth?”
While the frequent references in business analyses to a company’s brand value may make it seem as through brand value is relatively straightforward to calculate, in fact determining the value of a brand can be very challenging due to two key reasons. The first is the difficulty of defining exactly what a company’s brand is and the second is the difficulty of quantifying brand value, particularly in a way that buyers will accept.
Despite these difficulties, brands are without question a very important part of a company’s overall value and understanding what brands are and how they can be valued can greatly broaden and strengthen the perspective and position of a seller of a company in the company sale negotiating process.
Understanding what a company brand is and how it is valued can greatly strengthen the perspective and position of a company seller in the company sale process.
What is a Company’s Brand?
A company’s brand, in the very simplest terms, is what makes the company unique and sets it apart from competitors. A company’s corporate individuality often is related to four types of associations in the minds of consumers or the market.
A company’s brand is what makes a company unique and sets it apart from competitors.
The first element of a company’s brand is its association in the mind of consumers or the market with certain visual attributes. This is often largely comprised of a company’s trademark or logo, but a company’s visual corporate identity can also be defined by products, containers or wrapping that may be visually unique. The “golden arches” of McDonald’s, for example, is a highly distinctive and recognizable feature of many McDonald’s restaurants.
The second element of a company’s brand is its association in the mind of consumers or the market with certain products or services. The stronger a brand is, the more a consumer will think of a company’s products or services when he or she hears or sees a reference to a brand. For example, when people hear the brand “Apple” they often automatically think of the iPhone.
The third element of a company’s brand is its association in the mind of consumers or the market with certain attributes of a product or service. For example, for a company in the luxury hotel segment, a strong brand has the ability to convey a greater sense of luxury than competing brands; for a company that is competing in a discount product segment, a strong brand has the ability to convey a better value for price than its competitors.
The fourth element of a company’s brand is its association in the mind of consumers or the market with how the company operates or carries out its business, ranging from how it treats employees, to its work in the community to its values. A brand that strongly projects these values can have a major impact on consumer purchasing decisions if consumers share those values.
Company Brand Valuation Approaches
Given how important a brand is to a company, the practical question is, how can it be valued? While there can be many variations on brand valuation techniques, brand valuation approaches are often divided into three categories.
Three common ways to value brands are the cost approach, the market approach and the income approach.
Cost Approach. The cost approach values a brand based on the amounts that were expended to create the brand. This can include amounts that were expended on brand advisors, trademark and logo designs, websites, social media outreach programs, advertising and community activities.
While costs spent on developing a brand are generally relatively straightforward to quantify, two companies that spend the same amount on building a brand can have very different sales, levels of financial performance and market positions. For this reason, cost approaches to brand valuation often should be viewed as providing a very limited picture of a company’s brand value.
Market Approach. The second approach is the market approach, which derives the value of a brand through a reference to other companies in the market. One way to do this would be try to derive the value of a brand by considering the value of a similar brand, but this in practice can be difficult to do because every company brand is by definition unique.
A variant of this approach is to consider performance and financial differences between companies in the market and analyze the extent to which these differences are attributable to brand value. For example, if one company sells coffee for $3.00 a cup and another company sells coffee for $5.00 a cup, if all other things are equal it could be argued that the difference in the price of coffee is attributable to the strength of the latter company’s brand.
Of course the relationship between certain financial drivers, such as product price, and brand value have to be considered very carefully because a company may hold price down for certain periods of time to try to gain additional market share.
Income Approach. The third approach is the income approach, which derives the value of a brand based on the value of the income or cash flows of a company that are attributable to its brand. If its costs two companies the same amount to produce a cup of coffee, and one company has free cash flows that are 10% higher than the other company, it could be argued that the present value of the difference between the two sets of cash flows represents the value of the company’s brand.
Conclusion
Brand valuation is perhaps more of an art that a science, and without a doubt it can be very difficult to value a brand precisely because of its intangible and unique nature. Further, converting the intangible elements of a brand into tangible financial components of a business’ value in sale negotiations is challenging because of the many factors that can contribute to differences in company performance other than its brand.
Despite the challenges involved in brand valuation, brands are an important part of a company’s value and trying to analyze a brand’s value is an important part of the analysis of the overall value of a business.
When many entrepreneurs and businesses search for capital, they often understandably place the greatest emphasis on presenting a compelling business case to investors with a clear path to strong investment returns. While this is of course always very important, particularly when making investment pitches to investors that a company does not know well, a key factor in securing investment capital is creating a solid base for lasting investor trust. If investors lack trust in a company, they will rarely invest, regardless of how great the investment opportunity looks on paper. There are five key levels of trust that entrepreneurs and businesses should strive to create during discussions and negotiations with investors.
Trust in Company Information
The first level of trust relates to information that a company provides to an investor about the company itself. Most investors will conduct significant due diligence regarding a company before investing, but regardless of how thorough a due diligence process is, there will almost always be uncertainties regarding the accuracy and completeness of information.
Companies looking for investment capital should be sure to conduct conversations with investors in a way that investors come to feel that they can trust the information that has been provided to them about the company. In addition to confidence regarding basic facts about a company, such as its general corporate and financial information, this also includes creating a sense of trust regarding information about company business drivers that can be less susceptible to objective quantification, such as the level of motivation of key employees and the strength of client relationships.
Trust in Market Analysis
The second level of trust relates to information that a company provides to an investor regarding relevant market conditions. Many investors consider investment opportunities in markets where they do not have a direct presence and they are not thoroughly familiar with local operating realities. In these situations, investors will be concerned that companies have not clearly presented all relevant market factors or have not demonstrated how these factors in practice will impact a business model or investment opportunity.
For this reason, companies looking for capital should be careful to demonstrate to investors that they have brought to the investor’s attention all key market factors that may materially affect an investment, both good and bad, and discuss how the company will address those market factors. While it may seem as though “bad” market factors will always be a negative check mark in an investment review, the reality is that every business model faces negative market factors and the companies with the best investment proposals often are those that can demonstrate that they can face these factors better than their competitors or even turn those factors into an advantage.
Trust in Care of Investor Capital
The third level of trust relates to the care of the investor’s invested capital. An investor takes a very large risk in leaving its capital in the hands of a company, not only with respect to the investment return that will be obtained, but also regarding the basic issues of ensuring that the capital that will be provided will be used by the company as agreed, that all business cash flows will be prudently monitored, that proper cash deposit and banking relationships will be in place and that all necessary procedures will be established so that distributions of capital to an investor will occur as agreed in investment documentation.
Because of this, companies that are raising capital should strive to demonstrate to investors that they will put in place all necessary procedures and maintain all necessary relationships to ensure that investor capital will be protected throughout the entire time that it will be under the company’s control.
Trust in Care of Investor Reputation
The fourth level of trust is related to the investor’s reputation. In addition to its capital, a very important asset of an investor is its reputation in the market. Regardless of the oversight mechanisms that an investor includes in investment documentation, a company will always be able to take actions that can reflect negatively on an investor, including with respect to how a company it treats its employees, its relationship with third parties and its broader role in the community.
Given the importance of these issues, companies searching for capital should strive to demonstrate to investors that they are familiar with investor compliance and reputation concerns and that they will carry out their business activities at all times in a way that reflect positively on an investor.
Trust in Business Management
The fifth level of trust relates to how management will run a company after an investment is made. Regardless of what stake an investor has in a company, it will depend on the company to not only carry out the agreed business plan, but also to advise the investor of risks that may affect that business plan and discuss with the investor how those risks will be addressed. Accordingly, during the phase of discussions with investors, it is important to demonstrate that the company will be highly proactive in bringing material issues to the attention of investors and deal with them in a transparent manner.
A compelling business plan is vital in searching for investment capital but “soft factors” are often equally if not more important than the numbers in getting investors to invest significant amounts of funds. Because of this, groups looking for capital should strive to conduct the process of discussing investment proposals with investors in a way that creates a strong basis for future trust. This will not only increase the likelihood of investment but also reduce the perception of investment risk, which often results in better investment terms and conditions.
This article was written by Darin Bifani. The photo for this article was taken by Dan Schiumarini on Unsplash.
Regardless of what stage a company is in in its corporate life cycle, the market conditions it faces or how successful it is, it can always benefit from creating a strong business plan. In addition to serving as a constant guide for a firm’s entire team, a great business plan can help articulate a firm’s vision and strategy to many different types of external audiences that are vital for a firm’s success, including customers, financing parties, potential joint venture partners and counterparties in M&A transactions. This article identifies six steps that entrepreneurs and companies should keep in mind when creating and implementing their business plans.
Step #1 Create a Strong Value Statement
The basis of every business is its core values, the principles that guide a company regardless of the business conditions it faces and regardless of whether it is succeeding or failing. These principles are not only a firm’s internal compass; they are also the key bridge between a firm and the market it operates in. As Steve Jobs said in a well-known speech on marketing, given that in a noisy world with constant competition for consumers’ attention consumers will remember very little about a business, its values are what help consumers internalize an image of a business as not only a utilitarian set of products and services, but rather as a representation of the way consumers live and want to live.
Step #2 Create a Business Plan That is as Unique as Your Business
Many business plans simply state, in essence, that a business will sell more products and services and, as a consequence, its revenues will significantly grow. But even if two businesses operate in the same market, sector and segment, there will often be large differences in how they do business. This is because they have different people, different cultures, different ways of operating and different histories. Rather than being superfluous to a business plan, these differences are often a business’ heart and soul and what make it great.
Accordingly, rather than losing what is unique about a business through off-the-shelf business plan templates that are applicable to all firms in all sectors, a better approach is not to be afraid to throw out standard business plan formats and instead create a plan that clearly presents what is different about a firm, the opportunities it sees and how it plans to take advantage of those opportunities. Create a business plan that only your business can create and only your business can implement.
Step #3 Understand Market Force Allies and Adversaries
Businesses do not, and cannot, operate in an economic and financial vacuum. As the Chinese philosopher Sun Tzu said in the strategy class The Art of War, if you want to win in war you have to have a deep understanding of not only yourself but also others. In the business context this means clearly understanding the internal and external forces that work to your advantage and those that work against you. These forces are often different for every firm and can include factors as diverse as:
Employee morale.
The nature of a business’ competitors and barriers to competition.
Financial factors such as the cost of capital.
Microeconomic and macroeconomic variables.
Regulatory factors.
To create a strong business plan, it is vital to understand the internal and external forces that work in a firm’s favor and against it. The impact of these factors can also change with positive forces creating risks and negative forces creating opportunities.
It may sound straightforward, but truly understanding our businesses and the market around us is far from easy. To understand market forces better than your competitors, it is important to have an analytical approach where assumptions about the market that are based on anecdotes about the market or unfounded perceptions are replaced with investigative processes that are designed to obtain empirical data and systematically apply that data to business plan hypotheses.
This data should provide a firm with not only actionable information regarding the current supply and demand for a product or service, but also the factors that affect that supply and demand, how they change, and factors that can affect those changes. To develop this type of vision of the market, it is necessary to both study the market from diverse perspectives and to have strong relationships with your target consumers and have a deep understanding of how they live, how they make decisions about products and services and how they use those products and services. Ultimately, every business is the sum of its clients.
Step #4 Plan for Uncertainty and Moving Targets
Business plans often paint a static view of businesses and the markets that they operate and assume that the only thing that a business needs to do going forward is more of what it is currently doing. This simplistic view of business operating realities, not surprisingly, often leads to situations where a business’ performance projections quickly deviate from business realities. Particularly for businesses that seek investment from outside investors, missing forecasts can cause investors to question a business’ credibility which of course can undermine fundraising efforts and other business initiatives.
Rather than assuming that an operating environment will be static, business plans should assume that many types of operating environments are possible.
Because of this, rather than view the future world as fixed target that will remain still as a business moves toward it, it is better to view it as a set of macroeconomic and microeconomic possibilities which have different sets of likelihoods of occurring. In this type of vision of the future businesses have to have the flexibility of reacting to different internal and market scenarios as they develop.
Step #5 Don’t Let the Long Term Become the Enemy of the Short Term
A business plan should be a document that not only inspires people to stretch for goals in the future but also provides a very concrete picture of the steps that are required to be taken to reach those goals. Businesses can fall into the trap of painting a clear picture of targeted future goals but not providing a clear path to the short term changes, quantitative as well as qualitative, that will be required of a business in order to meet those goals. A business plan fails if it cannot answer the question: “What should I be doing right now to be where I want to be tomorrow?”
Step #6 Review the Business Plan Every Day
Some companies prepare a business plan, review it once a quarter or less and then, if results fall short of projections, go through a period of internal questioning as to why the targets are not being met. However, a business plan should be a document that is reviewed on a daily basis and becomes a constant guide through changing business currents and an inspiration to meet the challenges it sets forth. It also should be a document that reflects the best of a firm and incorporates new firm wisdom as the firm grows, makes mistakes and learns from them.
Conclusion
Business plans can range from general statements of abstract goals that have little chance of being realized to living documents that play a large role in the day to day activities of a firm. There is no one correct way to prepare a business plan, but by creating a strong value statement, identifying a firm’s unique strengths, developing an objective methodology to understand the positive and negative forces that affect a firm, preparing for uncertainty, focusing on the short as well as long term and reviewing a business plan constantly, a business plan can play a major role in strengthening a firm’s business performance.
This article was written by Darin Bifani. The photo for this article was taken by Stephan Leonardi.
When you receive offers for the sale of your company, you will also receive suggestions about different payment methods. The method you choose will have a huge impact on the final price of your business.
A buyer might propose to pay all or part of the price in his company’s shares; another might want to pay one part upon closing the deal and the other part over the following years according to the company’s results. Some buyers might even suggest paying in installments not based on results.
Vendor finance
Sometimes the buyer is not able to get financing or does not have enough liquidity and he asks you to finance the transaction(vendor finance). This way, he can pay you in installments.
It is obvious that the money comes from the results of the actual company, but this should not matter to you. However, it is important to understand that there is the risk that he will not be able to pay. It is important to note that, it is crucial to establish clauses that will give the company back to you if this is ever the case.
Paying in installments
Paying in installments is very common in service companies. Buyers are usually worried that the company’s client portfolio will go along with the business owner. By paying in installments, the buyer can guarantee a transition that will allow him to get to grips with the portfolio and build trust with clients while the previous owners are still linked to the company.
Exchanging shares
In others cases, the buyer might suggest a merger via exchanging shares.
If the buyer’s company is public, it will be more profitable for him to pay with the company’s own stocks. In these cases, they will offer to pay you more than if they were paying with money, and you should evaluate the quality of the buyer’s stocks. Are they overvalued? What chance is there that they will lose value? Only accept this offer if you have faith in the future of the company that is buying yours.
If the stocks are a bit illiquid, you can agree on a repurchasing of part or all of the stocks used in the deal within a specified period.
Combination of payment methods
Other times, the buyer’s company is not capable of getting more debt and so he pays for everything with a proposition of a combination of stocks and money. This is also possible.
Sale of company vs assets and liabilities
You should also define if the transaction is the sale of your company or the sale of assets and liabilities.
A sale of assets and liabilities is a cleaner transaction that usually interests the buyer because he does not have to take on the company’s past responsibilities, but it could affect you negatively; for example, tax is higher, so it is a good idea to be aware of its impact on the final price.
Negotiation
During the discussion, many topics are brought up. Even price has many faces, and you should understand the implications of the different methods of payment.
Mergers and Acquisitions advisors are specialists in negotiation. During the negotiating stage, a lot of the value that you will reap from your business is created or destroyed. Our clients often hire us just for this negotiating period, when they have received an offer to buy their company.
You will find what you are looking for only if you know what it is that you are looking for.
When it is time to focus on what type of company would be the best fit for you, analyze your strengths, what sectors you have experience in, what type of clients have you developed a good network with, what geographical region you want to be in, and what type of business you feel the most comfortable in: manufacturing? Service? Retail? Wholesale?
The clearer you are in your search criteria, the more help you can get from others.
For example, let us assume that two directors come to see me. One of them explains to me that he is searching for companies that have a turnover of more than €10 million without giving me an explanation. However, the other says that he is looking for an graphic design company that has a turnover of more than €10 million because that is his specialty and that he has experience in leading various important groups in that sector. If an opportunity arises in the industry over €10 million, I will call the second client because he is a much more qualified candidate with many more possibilities of closing the deal since he is familiar with the sector and knows what he wants.
What geographical area interests you?
Even though it may seem counterintuitive, the more general you are, the more difficult it is for the consultors to think of you when the opportunity arises.
I remember a few directors who had worked in the construction sector who came to see me. They told me that they were interested in buying companies tat produced curtain walls. I discussed other opportunities with them but they discarded them; they had done a study and considered that the market would grow in this field and that the true opportunity for them was there. Since they were so specific in their demand, they were engrained in my memory and when an opportunity in that sector came up, I thought of them immediately.
Determine the characteristics of the ideal company
You should also clarify the turnover amount that interests you and the number of employees that would make you feel the most comfortable.
Determine if you want a company that needs restructuration and where no more funding is needed or one that is in good condition and would generate a steady flow of cash (i.e. a cash cow). Or perhaps, you are looking for one that is held hostage by its growth or one that has a lot of debt because you are an expert in negotiating with banks.
It could be that you are looking for a company that is involved in advertising or marketing because that is your strength, or you see yourself capable of generating better cash flow.
Whatever it may be, be clear on what it is that you are searching for. Once you have determined the most important elements of the company that you want, prioritize them.
I believe that experience in the industry is fundamental. The better you know a sector, the easier it will be for you to find windows of opportunity and the more difficult it would be for others to scam you.
Focus on what you can bring to the company
When you analyze a company, do not focus so much on what it does but rather on what you can do with it yourself. Does it have a reliable client base to which you can sell other products? Can the products that the company already produces have other uses by creating new markets? Do you have the capacity to take the company internationally? After that one, could you acquire more companies in the sector and that way create a relevant player in the sector?
Potential candidates
There are two types of clear candidates:
-The divestment of a division or small company that belong to a larger company: the larger company sells it because they no longer align with the strategy or because it has financial difficulties or because it has found a better opportunity and needs liquidity to finance it.
-The sale of private companies due to the retirement of the owner or conflict between the partners.
Can only large firms participate in M&A transactions? Can only multinational enterprises use M&A techniques to strengthen their competitive position, enter new markets and obtain new clients? The answer is definitely no.
Every firm, regardless of how large or small it is, regardless of the industry it operates in and regardless of whether its market is international, national or local, can become stronger through M&A. In this podcast of The Keys to M&A, we will discuss the key objective of M&A, discuss how M&A techniques can create value and list five specific points for SME’s to keep in mind when creating an M&A strategy and evaluating M&A opportunities.
For many business owners, one of the most important decisions that they will make is the decision to sell their company. A business is often the fruit of many years of hard work, establishing relationships and facing numerous challenges and leaving something behind that has been a significant part of a person’s or a family’s life for many years or even generations can be extremely difficult.
However, selling a business does not necessarily mean that the seller will need to completely leave his or her business behind. Depending on how the terms of a sale are negotiated, a business owner may continue to play an important role in a company even after it is sold, something that may be positive for business buyers as well as sellers.
Selling a business does not necessarily mean that a seller will need to completely leave his or her business behind.
Why Selling a Business Can Be Hard
There are often four reasons why selling a business can be difficult for business owners.
Concern for Firm Employees. Businesses are important sources of material wellbeing for firm employees and business owners are often concerned that, if the business is sold, these employees will lose their jobs and be left in difficult economic positions.
Concern for Clients. Many business owners have close commercial and personal relationships with clients and these clients depend on a business’ products and services. Business owners are often concerned that, if the business is sold, the quality of products and services that are sold to clients will decline, which will negatively affect clients who may have a relationship with a business for many years.
Concern about Economic Alternatives. Businesses represent a financial return for business owners based on their investment in the company. Particularly for successful businesses that provide excellent returns, business owners are often concerned that they will not be able to invest the proceeds from the sale of a company in a new business activity that will provide the same level of financial returns.
Concern About Life After the Firm. More than simply a job or source of income, for many business owners a business represents an activity that occupies the vast majority of their time. This activity often involves many professional and personal relationships with co-workers, clients and service providers and it can be very difficult to accept that from one day to the next, a life that was filled with meaningful commercial relationships, obligations and timetables will be replaced with a large professional vacuum.
Company Sale and Value Loss
Apart from concerns a business owner may have about selling a business, it is often the case that the clean break of an owner from a business will not be in the best interests of the business or the buyer.
There are two key reasons for this. The first reason is that the incoming buyer may not be as familiar with the business or local market as the seller and thus a simple handoff of the business to the incoming party may result in a significant drop in business efficiency, revenue generating power and risk management capability.
Second, an abrupt sale may cause the defection of valuable employees or clients, which can lead to great losses of business value.
Creative Win-Win Company Sale Options
Given the concerns many business owners have about selling their businesses and business problems that can result from abrupt business sales, one option to consider is a business model sale which allows the owner to remain significantly involved in a business after it is sold.
Three ways in which a business owner can remain involved in a business after it is sold is through a share sell down, a directorship role and as an outside advisor to the business.
The Share Sell Down. One approach for business owners to remain involved in a business after they sell is, instead of selling the whole company at once, to provide a structured sale of shares over an agreed period of time, such as a year, three years or five years. This approach can allow the business owner to remain significantly involved in the business and also allow the new buyer the time to acquire necessary business know-how and step into the business operating relationship in a way that does not cause operating disruptions or business value to be lost. In some share sell down structures, the owner may retain a minority interest in the business so that he or she continues to have an economic interest in the business indefinitely into the future.
Directorship. Even if a business owner sells its entire stake in a business, the business owner may participate as a non-voting director in the company to continue to remain actively involved in company affairs. This role could be combined with working on a firm project where the business owner has particular expertise, something that could create economic benefits that could be shared by the parties.
Outside Advisor. A third approach for a business owner to remain involved in a firm after it is sold is as an outside advisor where the business owner advises the firm on different matters relevant to the business depending on the nature of the business and the business owner’s strengths and interests.
Conclusion
Selling a company is a major professional as well as personal decision for many company owners. In addition to challenges for owners, the complete sale of a company can also create significant issues for incoming buyers. These issues may lead to buyers offering lower purchase prices for a company due to concerns that business value may drop after a business owner leaves or that business forecasts made based on the strengths of the outgoing owner that served as the basis for a company valuation will not be able to be met.
One solution to this is to use a company sale structure that allow owners to remain involved in a business after it closes. While the feasibility of this approach depends on what the company purchase and sale motivations are, it can often smooth the sale process position for both parties.
This article was written by Darin Bifani. If you would like to know more about how to sell your company, take a look at VALUE, WORTH, AND COMPANY SALE STRATEGY.
The photo for this article was taken by Ahmed Saffu on Unsplash.
As we move forward in the 21st century, the global agriculture sector faces two immediate and very large challenges, the solutions to which can at times be at odds with each other. The first is to find a way to produce dramatically greater amounts of food to feed the world’s rapidly growing population. The second is that agriculture production and activity can at times cause significant negative impacts on the environment.
While successfully meeting these challenges will require a sustained combination of many political, financial and industry tools, green bonds are one way to both channel significant amounts of capital into the agriculture sector and at the same time support agriculture practices that have positive environmental consequences. These bonds could become an important complementary financing source, not only for governments and large corporations, but also for smaller agriculture companies that play a very important role in the global food chain.
Population Growth and Food Demand
The global demand for food, which is already very high, will rise dramatically in the years to come. According to a report by the United Nations, the world’s population will reach 9.8 billion by 2050, an increase of more than 2 billion. This population increase will have a major impact on global demand for food. An article published by Maarten Elferink and Florian Schierhorn in the Harvard Business Review suggested that by 2050 the world’s demand for food could increase between 59% to 98%, a staggering amount.
Production Ramp-up Financial and Environmental Challenges
The goal of dramatically ramping up food production to meet food demand faces important hurdles. One of these hurdles is not only providing financing for food production initiatives but also providing that financing at a cost that agriculture projects can reasonably support.
Traditional agriculture project finance methods can be challenging to fit into simultaneously production-minded and environmentally friendly production strategies. From a credit perspective, the dependence of a great deal of agriculture finance on the use of land as loan security can limit the pace of production growth.
While private equity investments can provide large amounts of capital for agriculture projects that is based on project cash flows rather than land values, the effective cost of private equity capital can be extremely high. Further, meeting often high return requirements can lead to financing business plans which emphasize maximizing financial returns rather than sustainable agriculture initiatives.
A second hurdle is the potential negative impact of increased agriculture production on the environment. Agriculture practices can cause many harmful impacts on the environment, including the release of greenhouse gases, deforestation, massive amounts of water use and pollutants. This can cause situations where agriculture production takes one step forward but environmental protection takes two steps back.
Green Bonds and the Agriculture Sector
One financial product which has the potential to help bridge the gap between the need for increased agriculture production and concern for the environment is green bonds. While there are different types of green bonds, generally speaking green bonds are bonds whose proceeds are used, either wholly or in part, for projects that have a positive impact on the environment. “Labelled” green bonds are those which have been certified as green bonds by a qualified third-party certifying entity.
According to the standards set forth by the International Capital Markets Association, green bonds should meet four key criteria:
– They should be used for “green projects”;
-Green bond issuers must communicate several things to investors, including environmental sustainability objectives, the process by which projects are determined to be green projects and green project eligibility criteria;
-There must be a formal process for managing the funds that are invested in green projects;
-And there must be clear and detailed reporting procedures.
Under the International Capital Markets Association framework, agriculture projects expressly qualify as green projects. According to the International Capital Markets Association’s Green Bond Principles, qualifying projects include: “environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture; environmentally sustainable animal husbandry; climate smart inputs such as biological crop protection or drip-irrigation; environmentally sustainable fishery and aquaculture; environmentally-sustainable forestry, including afforestation or reforestation, and preservation or restoration of natural landscapes).”
Potential of Green Bonds
Green bonds have the potential to have a significant impact on the financial and agriculture sector. According to a report prepared by Nikko Asset Management in 2017, by the year 2020 the value of green bonds issued and outstanding could reach US $1.2 trillion.
An early green bond issuance was the issuance of bonds by the Agricultural Bank of China (“ABC”) in the amount of US $1 billion. A majority of the ABC’s lending activity is related to the purchase of grains and cereal reserves. The ABC also provides large amounts of funding to improve rural infrastructure that supports farming activities. At the end of 2017, the Agricultural Development of China issued over 3 billion yuan in green bonds (US $473 million).
Brazil, one of the world’s most important emerging markets with a population of about 208 million, has become an important issuer of green bonds. Brazil has already issued more than R $11 billion (US $3.4 billion) in green bonds. Reportedly 24% of the funds from these bond issuance were used to finance forestry and agriculture projects.
Private Placement
While green bonds are often publicly traded, they can also be placed privately. This creates a very potentially interesting financing alternative for smaller companies that have strong projects that they wish to finance but who may not qualify for trading on public markets or who may want to tailor bond terms and conditions for specific investors.
Meeting the world’s growing food demands and ensuring future environmental security requires creative financing solutions. Green bonds have great potential to become an important financial tool in achieving food production and environmental objectives.
The photo for this article was taken by Adam Morse.
