Tag Archives: m&a

TO CHANGE YOUR BUSINESS MODEL: BE BRAVE

In the today’s rapidly changing world you must constantly seek to improve your business model and act bravely anytime you see the chance.

You´ll have challenges (some call them problems). Take it as a strategy game where you compete with everyone else. Think that life is like the game of Monopoly and that everything goes back inside the box once the game ends. You included. It doesn´t matter how large the company you have built is, what´s important is the road, the good you have done while travelling it, the people you have helped grow and how you have enjoyed it.

Attitude is fundamental to success. High expectations are the key to being a great entrepreneur. You´ll only try what you believe you can do, that´s why it´s critical to believe in yourself. Inside your head is where you close doors on yourself. Feel complete responsibility towards making your goal be a reality and don´t let external forces be the ones that decide your company´s future.

In order to succeed, you must first believe. You must manage your own beliefs because they´re what decide what you see and don´t see. The clearer you visualize the future, the greater your ability to shape it as you see it will be.

Be brave, follow your heart, don´t think about what others think of you. People end up following those who know where they´re going. [ii]What would you try if you knew you wouldn’t fail?

As Robert Green wrote in his book The 50th law, “People who look at an act of bravery can´t help but feel that that confidence is real and justified. They respond instinctively by supporting it, stepping out of the way or following that confident person. An act of bravery can make people kneel and remove obstacles. In this way, you create favourable circumstances for you”.

What separates those who succeed from those who fall down is the hunger to address a need and their tenacity, since a real entrepreneur seeks opportunity tirelessly, regardless of the available resources.

This article was written by Enrique Quemada, Chairman of ONEtoONE Corporate Finance Group

Agriculture Sector M&A and Earnouts

As in every sector, agriculture company owners and investors often disagree on valuation when  negotiating the terms of a potential company sale.  This is particularly the case when a valuation is based on a company’s future cash flows, which may be very difficult to reasonably forecast given the inherent volatility of agriculture commodity prices.  This uncertainty can be compounded by numerous production maturity cycle, company and agriculture sector-specific risks, such as weather.

To overcome potential deal breaking impasses that arise due to valuation issues, one possible solution is an earnout.  Earnouts are often used by private equity investors in M&A deals where the future cash flows of a business are difficult to predict or, alternatively, a company’s future business results are highly dependent on the post-deal closure commitment and performance of the sellers.  This has become an increasingly important issue in cross-border agriculture sector M&A, where investors may not have specific agriculture sector expertise and, even if they do, they may lack the ability to effectively manage a company’s business in what may be a new agriculture vertical or operating environment.

In simple terms, an earnout is a mechanism where the payment of a portion of the purchase price in a M&A transaction is deferred until a point in time in the future when pre-agreed financial or operating targets are met.  These financial targets can be based on revenues, EBITDA, EBIT or net income.  The amount of the purchase price that is deferred depends on the nature of the transaction, but factors that can affect the amount of the payment deferral are the size of the transaction, how far the parties are apart on valuation and the riskiness of future business cash flows.  How far in the future the earnout mechanism is structured also varies, but many investors would likely structure the earnout period around the investor’s planned investment horizon or the occurrence of certain key future events that will have a major impact on business performance, such as the implementation of a major new production project.

There are several challenges with using earnouts for both buyers and sellers.  Apart from the obvious issue that for the seller a significant portion of deal compensation may be deferred potentially for years into the future, the quick receipt of which may have been the key reason for the transaction in the first place, another issue is that both the buyer and seller can have incentives to manipulate earnout triggers to raise or lower the deal payout in a way that is not in the best overall interests of the business.

If the seller will remain in control of the business and the earnout is structured based on revenues, it may be possible for the seller to increase revenues by significantly increasing underlying costs, which helps the seller financially but may harm the overall financial performance of the business. On the other hand, if the buyer is in control of the business and the earnout trigger is based on a financial metric, it may be possible for the buyer to manipulate costs so that lesser earnouts in favor of the seller are paid.  Even in situations where the seller remains in control of the business and a revenue-based earnout is used, a seller may object because factors which drive agriculture sector commodity revenues are generally not in the seller’s control.

Despite potential drawbacks, the earnout remains an important mechanism to keep in mind when the parties to an agriculture M&A deal do not agree on valuation terms.  Properly structured, an earnout can help the parties share risk and, perhaps more importantly, align the interests of both the buyer and seller in the post-sale period so that both parties ultimately benefit.

Article written by Darin Bifani.

Why do we sell our companies?

Recently an important businessman asked me: “Why sell other businessmen your company? Should I be selling mine?”

The most common reasons for doing so:

1. Succession: Many businessmen do not have children interested in carrying on the family business; some study aviation, medicine or art and are not interested in business activities. As the saying goes “the eye of the master fattens the cattle”. Most businesses do not function optimally without the presence and supervision of the owners, for this reason it is common for business employees that they prefer to sell their business before delegating it completely to the employees.

2. The only constant is change: The world of business is constantly changing and it is not always easy to adapt to it. Globalisation and economic openness makes competition more and more difficult, as a result of this some businesses prefer to sell their companies to competitors or foreign companies that want to use it as an internationalisation strategy to enter the local market before taking the risk of losing market share and affect business performance. Changes in regulation, for example the form of hiring construction companies or the changing standards of The National Institute of Food and Drug Monitoring for pharmaceutical companies. They both require many investments and increased working capital. This means many businesses look for strategic partners to invest significant resources or to acquire them to survive.

3. Profit making: Selling a business with good financial indicators today is the equivalent to many years of profits. In order, for a business to grow they are required to reinvest a large proportion of net income. In spite of a business’s ability to generate income, many of the owners usually are not able to fully enjoy it because they must reinvest profits to take advantage of market opportunities, maintain their competitive position and renew assets that guarantee the longevity of the business. It is common to see millionaire owners who are living in a prudent manner sell their business to have liquidity and the free time to complete main life dreams such as; buying a yacht, playing golf everyday, traveling the world and having a comfortable lifestyle.

4. Life is short: The Germans live to work, the French work to live.What good is it to die and be the richest in the cemetery? Many people spend their whole life increasing their income and they die without enjoying it, their wealth is passed on to their heirs. I think that life is full of life experiences, servings other and leaving a legacy to society. Its important to find a balance between your work, family life, relaxation, spirituality, fun and wealth.

Why have unlimited money to travel when you no longer have the health to do so?

Enjoy the early years of your children or grandchildren it is something that can only be done at certain points in life. For me, the ideal situation would be to sell the business at the time that these resources will allow you to have financial freedom and do all those things you always dreamed of.

5. The Business Cycle: Businesses are like living organisms when born, they reproduce and they die. Who could imagine a few years ago that Nokia, Blackberry and Palm would be the ugly ducklings of the cell phone industry? or that changes in consumer taste have affect the sales of McDonalds?

A good friend says “sell the bread whilst hot”. It is better to sell the business during the phase of life when it is valuable and attractive to others. Once the business is in the decline stage of the life cycle it becomes less attractive and therefore more difficult to sell.

6. Country Risk: In Latin America there are high risk countries in terms of politics, the economy, currency etc.) When would Venezuelan and Argentinian companies have thought they would have sold their businesses a decade ago? The country risk has a high impact on the value of the businesses. In Argentina one can acquire a company and recover the capital invested over 3 or 4 years, in Colombia the same process takes normally 5 to 8 years, therefore the sale prices of traded companies reflect normally not only the state of the business (idiosyncratic risk) but also the general risk of the economy and of the country (systematic risk). Colombia remains one of the 3 most attractive countries in South America in which to invest in alongside Peru and Chile. This makes many foreign investors interested in acquiring companies in our country; however, we do not know when we will enjoy a good reputation internationally especially now with tax instability, a slowing economy and increased insecurity. This may be the best time to sell your company, tomorrow may not be.

7. Financial and Economic Crisis: The financial and economic crises repeat themselves periodically. A major setback in the stock market of China, a default on Greek debt and a decline in the value of real-estate in some cities and markets in Colombia is expected. Also the FED is expected to raise the benchmark interest rates which will affect the Riester free rate (Rf) and the value of all the companies in general. When crises come it is more difficult to sell a company at a good price so it is imperative to take advantage of good economic times to take good profits.

8. Unexpected Opportunities Some business do not think to sell their companies when a buyer unexpectedly knocks on their door. In these cases, its best to listen to the offers and despite the good performance the business has. To sell at a good price can be very attractive. “Nobody has ever gone bankrupt taking profits”

In conclusion, the response that I gave to the entrepreneur who was exploring the opportunity to sell his company to an interested strategic investor in buying it was simply, evaluate the price the investor is willing to pay. If the price is attractive it is an excellent opportunity, if there are no other personal motivations to sell; If it is not then it is best to continue growing the company and sell it later.

Finally, remember that any person can sell a business directly without the use of an investment bank, the key is to sell it to the highest bidder and in the best conditions and in order to do that, it is essential to have great advisors to help you maximise the sale price. Just as you would not go to your GP to have plastic surgery, do not expect to sell your company in the best manner without the help of an investment bank.

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Ride the wave

Every company has an optimal time to be sold and it is vital to endeavor to know when this moment is. If you are aware that this optimal selling moment will come, you won’t have to regret missing out on it.

Mergers and acquisitions come in waves. Certain circumstances provoke a large number of corporate transactions in big, medium or small companies in any period of time.

If you see an increase of M&A activity in your sector, it might be the moment to take advantage of the opportunity and ride the wave.

Access to credit plays an important role as a catalyst for corporate transactions. The possibility to get debt cheaply due to low interest rates results in more corporate transactions.

When companies are worth more they can also buy companies at higher prices by paying in shares. Overvalued stocks are then exchanged for undervalued securities or assets. This happens mainly when companies trade at higher multiples in the stock market.

Today there is an excess of liquidity in the world and easy access to cheap debt for anyone asking for loans or credits. This results in an increase in the price of assets, stocks and property, which creates a general feeling of wealth.

Having money and access to cheap credit means that companies are willing to get into debt in order to buy other businesses. That´s why we are reaching record highs of acquisitions.

In recent years, especially due to globalization, competitive pressures have accelerated the need to quickly identify the right time to sell the company.

Not selling a company when there are strong motives to do so can end up causing a loss in company value or company closure. In many cases letting a window of opportunity pass by has ended up in bankruptcy.

The important thing is to realize that selling your company is an option and that certain circumstances will make the sale very convenient. In this case, a timely decision will help create personal and economic value.

Ramp up your exit schedule and run the wave

Mergers and acquisitions come in waves. We are in one of those waves.

Trying to sell at the point where buyers are paying over the odds is a good strategy.

Today there is an excess of liquidity in the USA, Asia and Europe and easy access to cheap debt for anyone asking for loans or credits. This has resulted in an increase in the price of assets and stocks, which has created a general feeling of M&A possibilities.

Having money and access to cheap credit means that companies are willing to get into debt in order to buy other businesses, reaching record highs of acquisitions.

Access to credit plays an important role as a catalyst for corporate transactions.

The possibility to get debt cheaply due to low interest rates results in more corporate transactions.

Stock markets are at their highest. When companies are worth more they can also buy companies at higher prices by paying in shares. Overvalued stocks are then exchanged for undervalued securities or assets. This happens mainly when companies trade at higher multiples in the stock market.

We are witnessing and increate in M&A activity and reported valuations are trending above anyone´s expectations.

If you are ponder the possibility of selling your company in the near future, consider ramping up your exit schedule to fast-track your plans.

To sell a company takes time. Don’t be too late. 

Don´t forget that today negative interest rates everywhere sings a global economic malaise on the forecast and that malaise is likely to affect us all for the decade to come.

Article written by Enrique Quemada.

Mergers & Acquisitions, Compraventa de empresas

Innovate Today

I am often asked what innovation is. Is it a new unique technology, a cool new product, does innovation mean coming up with the next iPhone or medical device, can I innovate if my business is not a startup, tech company, or sexy new venture. The truth is innovation is not that complicated; in management innovation is the result of a process that brings various novel ideas in a way that has an impact in an organization, this can be a new idea or a more effective process. It can also be the application of new solutions to existing company needs; innovation is simply something that marks the company in a positive way, and as a result transfers into better solutions, services or efficiencies to your clients. That is why I always say every company can and must innovate.

Innovation is a catalyst for business growth, which is what makes it so important. Ford changed the way we produce by reorganizing the manufacturing chain and the internet changed the way we look at businesses geographies forever, but even small innovations like color coding have had a deep impact on our daily lives. We can’t grow without innovating, in biology evolution is innovation, and innovating is the way organizations and economies evolve.*1* Joseph Schumpeter argued that industries must incessantly revolutionize the economic structure from within, and that is exactly what business leaders and entrepreneurs do every time they come up with ways to improve customer satisfaction, reduce costs and times or better their relations with suppliers.*2*

The next question I’m asked is, what do I have to do to innovate. The answer is not as straight forward as for other business functions, but it is much more fun. To promote innovation leaders must be irreverent, question the way you do everything and the way your industry operates.  Be inquisitive look at your competitors, other industries and even nature. Figure out what they do and how do they do it, sometimes innovation comes from crosspollination between industries or functions, one thing is for sure innovation will not come from doing the same that we have been doing, no change has ever developed by not challenging the way things are done. And don’t forget to look into what you are doing correctly today it is easier to innovate in areas that we excel at than those where we have problems.

Innovation can easily be linked to positive changes in organizations since it usually brings with it efficiency, increased productivity, better quality and in general increase value to our clients that will translate into more market share and loyalty. But none of this is possible if we don’t create an innovation culture in the company and put in place the structures and resources to implement innovation and make it part of employees tasks, be sure you are not only creating but nurturing an innovation environment in your organization. Your top executives and you have to break away from traditional ways of thinking and doing things and learn to use change to the advantage of the organization.

All organizations can and must evolve, innovation happens by many reasons sometimes is a result of a shift of the companies environment and its need to adapt, other is because of a new technology coming into play, some innovation is a result of a failure on our normal system and a quick fix brings innovation, sometimes with us even noticing it. But if we keep our eyes opened to find unserved needs, have the best people and technology in place and are willing to put in the right resources we will be innovation drivers in our companies and industries.

 

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Innovation doesn’t happen by chance, innovation is a result of a disciplined company that is always looking for opportunities and has created the right team and environment for it, but most importantly innovation happens because we as leaders make sure that our organizations culture is aligned with it and we allocate the right resources for it to be possible. Forget about innovating for the future start innovating for the present, as with strategy the key is to think of what we are doing today and how can we do it better, how can we add more value to our clients and be more efficient, as we do this we need not to guess what the future will be like but how we can start building the future we want, it is way more fun this way. *1* Be bold and let your imagination run wild because the only limits are the ones that we set upon ourselves and our organizations, there is nothing to wild or to crazy and we must not limit ourselves because the moment when we envision a crazy new world and set our minds in making it a reality that is exactly when innovation seems to magically appear. *2*

 

Written by Iliya Zogovic, President & CEO ONEtoONE USA.

Iliya_Zogovic_Partner_USA_ONEtoONE

Mergers & Acquisitions, Compraventa de empresas

Investors look to Latin American

This year the Latin American market ignited the interest of several foreign companies, which find good growth opportunities in these countries. In November, this tendency continued, the amount of cross-border deals registered had a significant impact in the total number of deals. US-based acquirers continue to be the most active in Latin America, with 17 acquisitions registered.

US-based Cabot Internationals acquired a 59.95% stake in Negro Humo (NHumo), a Mexico-based chemical company, held by Grupo Kuo. The deal value was USD 105m. Furthermore, General Electric Company acquired IDT – Ingeniería y Desarrollo Tecnológico, a Chile-based consultancy and engineering company, held by Chile-based Grupo CGE. Highlights, in Brazil, include US-based One Equity Partners’ acquisition of a stake in Brazil-based Unicoba, through a capital increase of approximately USD 65.93m.

On the other hand, Latin American companies started to invest abroad through internationalization strategies. One of the most active countries was Colombia with eight acquisitions registered, followed by Mexico with six. Highlights, in Colombia, include Cementos Argos’ acquisition of a 53.3% stake in Lafarge Honduras, held by French cement company Lafarge, for EUR 232m.

The Latin American transactional activity dropped slightly in November, both in number of deals and investment volume compared with the previous month, according to data from Transactional Track Record. However, the number of deals announced was noteworthy, which implies that the market is dynamic. These transactions should be complete within the next few months.

Brazil-based companies continue to be the most active with 61 deals registered, followed by Mexico with approximately 19, and Colombia with 18. Among the largest deals was the acquisition agreement made by China-based CNPC – China National Petroleum Corporation of Petrobras Perú, held by Brazil-based Petrobras. The deal value was USD 2.60bn. Furthermore, still in Brazil, consortium Aerobrasil, constituted by Switzerland-based Flughafen Zürich, Germany-based Flughafen München, and Brazil-based CCR, acquired a 51% stake in Concessão Aeroporto Internacional de Confins, held by INFRAERO. The deal value was USD 612.11m. INFRAERO also reached an agreement to sell a 51% stake in Concessão Aeroporto Internacional Galeão to Consórcio Aeroportos do Futuro, for USD 8.32bn.

How can the sales process maximize the price of my business?

It is critical to distinguish between the terms “value” and “price.” Price is determined by supply and demand at any given moment. Individuals, on the other hand, assign value based on their profile and interests.

Price, in our experience, is generally a result of the effectiveness and quality of the sales process. Thorough planning, well-presented, clear documentation, access to a wide selection of candidates, effective confidentially management and proper offer negotiation will ensure you with the best price possible for your business.

The more offers a firm receives, the more likely it is to find the best buyer since more offers imply more bargaining power.

If you scour the market for potential buyers and obtain a variety of indicative offers, it will be easier to determine the price range that the market is willing to pay.

As a result, we will concentrate on the globe of prospects who may acquire or invest in your firm.

The quality of every stage of the process has a real influence on the final price. A company with an embedded value of 100 could have a poorly managed process meaning that the company is sold for 60, whereas a well-managed process could raise the selling price to 140. More than a 100% difference.

If you do end up selling your company, it is because you consider that you have either got the best possible price or at least a price that you consider acceptable under the circumstances. It is possible that, not having managed the process well, you might have inadvertently lost a lot of value.

Consider a business owner who wishes to sell a firm with an embedded value of $20 million. If the buyer is an acquisition specialist and the firm owner (the seller) decides to bargain alone, without the assistance of an M&A counsel, the deal is likely to conclude for $15 million or less. Remember that experienced buyers might use a variety of strategies to wear you down and confuse you in order to obtain a lower price.

If, on the other hand, the seller decides to professionalize the sales process, he will be able to sell his company for more than $25 million. He will prepare the company for sale with the assistance of an M&A advisor, bringing thoroughness  to the process via well-prepared documents that highlight the most valuable aspects of the company, he will look for and find buyers willing to pay the most because they are the most interested, and he will increase competition between them so that their offers increase. His advisor, an experienced negotiator, will ensure that the price is maximized while also protecting his client’s interests.

Experience has taught us that a well-managed and well-executed sales process has a significant impact on the final price and terms of a transaction. By selling your company, you are converting years of work and effort into value, and you have the potential to create or destroy a large portion of its value in a short period of time. It is entirely in your hands.