XPX MEMBER SPOTLIGHT: CHRIS MANICK

XPX Chicago member Christopher Manick, M&A/SBA Specialist with Busey Bank, recently transitioned a 30-year-old niche manufacturing company in the Chicagoland Area. The transition in ownership occurred between the seller and the company’s Shop Supervisor/Manager, who had been with the company for over 20 years. 

The sale and transition of the business was not easy or quick. After several years of the broker trying to attract strategic buyers, the broker refocused efforts on selling the business internally to the Shop Supervisor/Manager – who had the technical knowledge and experience to continue to run and grow the business.

The seller and buyer of the transaction faced a number of challenges with several failed attempts to secure bank financing. Once the transaction was presented to Busey Bank, the deal was structured with a $5 Million SBA 7a Loan that financed the purchase of the company’s commercial real estate, highly specialized heavy equipment and a significant amount of goodwill.

This transaction left in its wake:

• A multimillion dollar payout for the seller that secured his family’s retirement
• Secure jobs/careers for 20 employees, most of whom had been with the company for 10-20 years
• Referrals made from the Deal Team:
• • M&A Attorney
  • Wealth Management Advisor
  • PEO Firm

At XPX Chicago, we are a community of professional advisors who work collaboratively to help U.S. privately-held businesses build long-term, sustainable and realizable value. Share your success stories with fellow XPX members by e-mailing them to Laura Yunger, CEO of Saltare Solutions and XPX Chicago Communications Chair: lyunger@saltaresolutions.com

It seemed very logical that the run up in equities in late 2017 in anticipation of lower corporate tax rates would significantly raise the value of privately held firms and ESOPs. The basic math of valuation dictates that higher free cash flows equals higher values. A no-brainer. However, we're starting to see data and anecdotal evidence that maybe valuations have remained more stable than we thought.

The drop in the top federal corporate tax rate from 35% to 21% was seen as exerting upward pressure on values as investor get to keep more of the cash flow. The stock market sure reacted in late 2017 with a big run up widely attributed to tax reform. Although many ESOP-owned companies pay reduced or zero effective tax rates, valuations of these companies are done on a tax paying C-Corp basis. Lower tax rates mean more free cash flow which increases the values. Early this year, ESOP appraisal firms gave indications of year-end valuation increases of 15% or more based solely on the lower tax rates, but cautioned that other factors such as growth rates and interest rates would be impacted by tax reform.

While there is no index of valuations, my conversations with appraisal firms indicate YOY increases in the 8-12% range for most ESOP companies based on the EOY 2017 valuations. The more modest increases are due to a combination of projected higher interest rates, slightly lower growth assumptions and the cap on interest deductions to 30% of EBITDA.

EBITDA multiples on public companies began a significant increase in late 2017 based on expectations of the lower tax rates and values on private companies are following. The EBITDA multiples increased from about 9.5x to 10.3X as tax reform became a reality. Early this year, we all assumed that prices paid for private companies by PE firms would follow the price increase of public companies. Interestingly, in Q1 2018, EBITDA multiples in middle market buyouts don't show that bump . According to GF Data, multiples for $10-250MM deals returned to about 6.9x after spiking to 8.0x in Q4 2017. 6.9x is consistent with 2017 averages. First quarter data is notoriously fickle and quarter to quarter variances can be wide, so it is a bit early to call a trend based on Q1 2018. However, I would not be surprised if valuations for private middle-market companies proved more resistant to increases than originally expected.

There may be a bit of a governor on deal valuations driven by a few factors. Private equity (PE) is the primary market maker in setting prices. PE buyouts usually rely on debt financing for a majority of the capital. I think it is likely that a combination of availability of debt capital and the new limitations on deductibility of interest is tending to cap how high EBITDA multiples can go. Due to regulatory pressures (and common sense) banks are loathe to exceed 2.5-3.0x in senior debt and 4.5-5.0x in total debt. The junior lenders may also have a ceiling around 5x either due to leverage or coverage limitations. Prices and leverage were already at very high levels in 2017 and any increase in purchase multiples would need to be 100% equity financed, driving down returns. Couple that with the limits on interest deductions to 30% of EBITDA and you could see an offsetting downward pressure that could keep multiples in check (although at a relatively high level).

We'll keep an eye on how this plays out as 2018 progresses. Should be interesting.

See the full blog here

XPX Chicago Members & guests enjoy a social get-together after work to start off the weekend with food and cocktails at Flagg Creek Golf Course in Countryside, Illinois.

Panel left to right

Dan Rahill – Tax Partner at BDO, Michael Karmin – Wealth Advisor at Strategic Wealth Partners, Howard Bakrins – Tax Director at Kutchins, Robbins & Diamond Ltd, Renee Morawa – Senior Tax Manager at Sassetti LLC, Frank Washelesky – Personal Financial Specialist at Ostrow Reisin Berk & Abrams, Ltd, Peter Holton – Partner at Caber Hill Advisors

Panel left to right

Tim Van Mieghem - The ProAction Group, Laura Yunger - Saltare Solutions, LLC, Larry Gard - Hamilton-Chase Consulting, Roberto Garcia - Insperity, Trevor McClain-Duer - Cendrowski Corporate Advisors, Tim Trela – Momentum Advanced Planning

Moderator, Tim Trela of Momentum Advanced Planning asking panel questions.

Attendees listen attentively to discussion on What Owners' Need to Know About Business Improvement, Growth, and Value Creation.

Panel left to right

Moderator: Peter Holton – Caber Hill Advisors, Eric Marzinke - ProMark Planners,  Michael Stuart – The Stuart Legacy Alliance, Tyler Qualio JD - Sentinus, Michael Karmin – Strategic Wealth Partners, Kevin Davey – Northwestern Mutual

The discussion of Owner Wealth included key issues such as:

• What issues should the owners be dealing with?
• What is the best way to deal with multiple owners with potentially different personal goals and priorities?
• What planning process should owners undertake? 
• What suggestions should the owners consider?
• What role does company retirement plans and insurance have in the planning?

XPX Chicago celebrated the 2nd Quarter Networking Social by bringing the two geographies launch members together again for a joint networking event at the Tortoise Club in Chicago

Members and guests had the opportunity to connect with colleagues from the entire Chicagoland area to celebrate the beginning of spring. 

XPX Chicago meetings are held twice a month in two different locations. Meetings are held in Oak Brook & Chicago to allow members to attend their most convenient location.  Venue will be specified on the email invitation and on the website.