Tag Archives: economic environment

light reflecting off gold bars

Don’t Count On The Current Gold Rush Lasting

The recent economic recession forced society to relook at what we consider to be financial norms. What was considered reasonable several years ago is now unjustifiable based on today’s new standard.

The comfort of having money in an actual wallet is greater than having a pricey purse to carry it in.

It is possible that the same fear that shifted people’s spending habits is what has driven the price of gold to an all-time high.

In my book, “Financial Intelligence,” I show the historical volatility of the price of gold per ounce. Ten years ago this July, gold was trading at approximately $288 per ounce. Today, gold is now trading just shy of $1,200 per ounce. That is a near 15 percent compound rate of return per year over the last 10 years, while the stock market has gained no ground.

Now that the economy is slowly stabilizing, will gold continue to be a profitable investment? Only time will tell, but history suggests that there most likely will be a decline in price. Everything in this modern economic world is cyclical and vulnerable to corrections.

I am amazed about how many people assume that because gold is a tangible asset, it does not carry any risk. Despite what the late-night infomercials say, there is risk in gold and you should consider that risk before investing in it.

In my opinion, when you start to see repetitive get rich quick TV commercials, you should begin to doubt that “investment.” Remember in the late 1990s when TV commercials were touting that through day-trading stocks you could retire in your 4’s? Or the real estate gurus that told you that you could make millions in real estate if you attended their workshops? Today you can’t watch TV without seeing some type of commercial encouraging you to buy gold.

Given the economic environment that we just experienced, it makes sense that gold appreciated in value. Gold historically has increased in value during times of great uncertainty, but the tide is slowly changing. If the global economy can avoid a double-dip recession, we may see the price of gold revert back to its historical mean.

Apart from winning the lottery, there is no such thing as a get rich quick strategy. It always takes longer that you originally hoped and there are always setbacks.

It is always a wise move to invest in an asset that you feel meets your long-term investment objective and that enhances your diversification. Don’t try to time the market or try to get in on the next big thing; you could do more damage than good.

Bottom line, if you had a crystal ball, you should have invested in gold 10 years ago. Now it may be too late.

Now’s The Time For Business To Streamline And Maximize Cash

Now’s The Time For Business To Streamline And Maximize Cash

How do strategic growth-oriented organizations find and exploit the opportunities inherent in any downturn? Recently, Ernst & Young surveyed 3,100 entrepreneurs around the world to discover the actions entrepreneur-led companies are taking to remain on course during the current economic times. Contrary to what you may think, the survey found that today’s economic environment has opened up space in local and global markets.

Strong business leaders are adapting to the difficulties in sourcing finance and maintaining liquidity, and understanding the pressures on their people, customers and suppliers. Change for everyone seems inevitable, and already some businesses are emerging as leaders in accelerating that change. What do market leaders need to do to be successful?

Despite the changes in the economic environment, net cash flow determines management’s focus. The dominant trend in the past six months has been an acceleration of management’s efforts to improve business performance. They are right to do so regardless of economic scenarios:

  • If the recession continues — or even worsens — then cash and access to credit will continue to be constrained and conditions will remain extremely difficult. The focus on relative performance will intensify.
  • If the rebound is already in sight — if there really are signs of “green shoots” — management needs to be prepared to act quickly. Typically, a rebound arrives with speed, giving management little time to respond.

Three elements are critical to an organization’s ability to react to future opportunities: an efficient operating model that maximizes your company’s strategic advantages, cost reductions that do not damage the organization’s strategy or customer’s experience, and a focus on cash forecasting.

A robust cash-forecasting process can create a “cash culture.” Improving cash awareness through internal procedures and policies drives an increase in accountability and responsibility. In addition, successful companies acknowledge financial concerns before they become a burden and make swift decisions when they need to be made.

Expand your customer base
A majority of entrepreneurs surveyed — 67 percent — are pursuing new market opportunities. But growth is only possible when companies have the required resources, and for now, this means cash. A strong liquidity position provides the basis for a wider array of financial choices to have available when business conditions improve, whether that means broadening a customer base, attracting and retaining people, acquiring strategic businesses or assets, or driving operational performance.

At the same time, entrepreneurs understand that some customers will probably fall away during tough times, and they reinforce procedures to manage these reductions or failures. When expanding your customer base, keep these three things in mind:

  • Understand whether your products or services are necessities or luxuries. Position yourself to help your clients through leaner times.
  • Focus on neglected or overlooked markets while building customer loyalty.
  • Manage your customers’ perceptions of your business.

Review tax position to uncover cash
Tax is between the third and the fifth largest expense for most companies, but only 23 percent of entrepreneurs surveyed review their tax strategies to reduce expenses and uncover cash. Government deficits and revenue needs are affecting global tax policy around the world. The recent fiscal stimulus package includes significant tax measures — in fact, tax measures comprise a larger share of the overall packages compared to spending measures, including:

  • Accelerated depreciation programs.
  • Carryforward and carryback provisions for net operating losses.
  • Adjustments to corporate income tax rates.
  • Enhancements to research and development tax credits.
  • Indirect tax changes.

While some opportunities are likely to arise from this, there are also many potential threats and a general tightening of enforcement and compliance efforts by tax authorities.

Focus on core skills
In being forced to reflect on the health of their businesses, entrepreneurs may initiate a transformation of their business model so it becomes significantly better adapted to tomorrow’s environment. They do this by identifying their core competencies and focusing on what they do best. Ancillary functions not aligned with key strategic goals can be considered as potential outsourcing targets, while divestment may be appropriate for service lines that are not aligned with the core business.

The survey of entrepreneurs suggests that, generally, there has been a pulling back of plans to outsource or to use shared service centers. Internal audit, tax and legal services and knowledge management are key exceptions where lack of in-house skills may force the decision. Companies may be reluctant to transfer responsibilities to a third party in today’s environment, preferring to retain control in-house. However, outsourcing may well provide the increased flexibility and cost reductions that business leaders are looking for. A credible case can be made for outsourcing non-core roles in order to safeguard the core, laying the foundations for a durable, flexible business model that will position an organization more strongly in a post-crisis environment of increased competition and tighter cost control.

Reshape your business
To broaden their customer base or enter new markets, many entrepreneurs see a marked increase in potential mergers and acquisitions at reduced prices. Their recipe: cautious raising of capital mixed with a renewed focus on having the right balance sheet and business model to capture acquisition opportunities. Their advice: Divest unprofitable units while seeking and investing in opportunities from the crisis.

These are times when new market leaders rise to the top. The economy is not a zero-sum game where one side must always lose to let the other win. Only if the majority of businesses improve will the economy turn around.

The views of the entrepreneurs surveyed reaffirm these messages and make one major addition — the need to act more quickly. Regardless of whether recovery is just around the corner or the clutches of recession risk are getting tighter, there is no time to delay improving your business. Accelerating the change is the only option.

money pile

Raising Capital In A Financial Drought Is Tough, But Not Impossible

In today’s turbulent economic environment, many companies are finding their cash flows temporarily reduced due to difficult business conditions. Less cash flow generated from operations can cause a working capital squeeze or make existing lenders uncomfortable and/or uncooperative, particularly if the company has violated a loan covenant or agreement. In the past year, we have witnessed a dramatic pullback on the part of all lenders, especially banks. If a bank has the power in its relationship with a borrower due to a broken agreement or covenant, a company could find itself in real trouble unless it is able to raise capital from another source.

What types of capital are currently available?
The answers vary based on the company’s size (revenue, profits, assets, etc.), history of financial results, strength of its management team, and industry.

In general, there is debt and equity (i.e., stock), but capital should be considered on a spectrum from senior to junior. The most senior capital is typically a bank loan secured by a first lien on all the assets of a company, followed by second lien debt and then unsecured debt. As a general rule, the more junior the capital, the riskier and more expensive it is.

No matter the interest rate, senior debt will be cheaper than other capital. In the current market, cash flow-based senior lending has all but dried up. It seems that cash flow senior loans are available only to those companies with strong cash flows — in other words, those that don’t really need the money. On the other hand, if a company has significant assets and is not already leveraged, the owners should check with their bankers; interest rates may be higher and advance rates lower, but senior debt may be available.

Let’s assume bank debt is not available — that leaves equity (common and preferred stock) and subordinated debt (sometimes called mezzanine debt because it comes between senior debt and equity in the capital structure). It will be least expensive if owners are able to access friends and family as investors. That said, many entrepreneurs prefer to keep business and family separate, so that leaves high net worth individuals (angel investors) and institutional investors.

How can business owners prepare to raise capital?
Regardless of the type and source of capital a company chooses to pursue, there are several steps to take to ensure the capital-raising process runs smoothly and, more importantly, maximizes the chances for success.

Prepare an executive summary of the business. Describe the company and how it makes money, be sure to discuss products and services and talk about the company’s challenges and opportunities. Also provide biographies of key members of the management team. Use charts and graphs to make strong points about financial performance and industry dynamics.

Assemble a historical financial information package. Include at least three full years of historical financial statements. Audited financial statements are best, but statements reviewed or compiled by a recognized accounting firm likely will suffice. Also, include monthly financial statements for the last fiscal year and the year-to-date period. It is helpful to include information such as sales and gross margin by customer and/or product to help investors consider concentration risk. In addition, provide a detailed breakdown of costs and expenses, including information regarding capital expenditures. Try to break down capex by expenses required to maintain the business and those that contributed to growth.

Assemble a financial planning package. Include the current-year budget and a forecast for the coming year. A detailed bottom-up analysis is essential to creating credibility with investors. Future growth will be the decisive factor for equity investors. Include projections for the next five years if possible, even if they are just a best guess driven by top-line growth rates and margin assumptions; they will be helpful for investors who want to understand the potential of the business.

Select an online data room provider and begin uploading documents for investors to review. Be sure to include all key contracts, credit agreements, charter documents, board minutes, tax returns, etc. An online data room will streamline the due diligence process significantly, requiring less of the management team’s time and shortening the overall time to close.

Prepare a PowerPoint presentation that walks investors through the business, its historical results, challenges, opportunities and projections. Include details regarding the use of proceeds. Invite the most interested investors to visit the company and use this presentation as a basis for discussion.


Where do business owners go to find capital?

The best advice for owners and management teams is: Do not underestimate the time required and the complexities involved with undertaking a capital raise. Never be afraid to admit that you are in over your head and need the help of professional advisers. Investors, particularly institutional investors, are currently at an advantage. In today’s business environment, capital is scarce and at a premium. To get the best deal for your company you need to bring your A-Game and your A-Team. A variety of corporate and/or business advisers such as attorneys and accountants may be able to help business owners determine the best sources of capital and recommend an investment bank to assist with a more comprehensive review of capital-raising alternatives, as well as sources of potential capital. It could be the difference between using a watering can versus an industrial sprinkler when combating your company’s capital drought.

Hospitals And Health Care Organizations Are Making Tough Decisions To Ride Out The Recession

Hospitals And Health Care Organizations Are Making Tough Decisions To Ride Out The Recession

After a decade of significant growth, the Valley’s health care industry has become an economic driver for the state. During this severe economic downturn, however, the health care industry busted the myth of being recession proof. But that doesn’t mean it’s recession battered.

Health care organizations have weathered the economic turmoil better than most industries in Arizona. For example, the Arizona Department of Commerce reports that in July, year-over-year job losses in health services stood at 1 percent, or 3,200 jobs. That was the slowest rate of loss of any major industry group in the state.

Nonetheless, hospitals and other health care organizations are feeling the effects of the recession and are working diligently to match revenue with expenses.

“Overall, the financial picture for Arizona’s hospitals is somewhat improved from the third and fourth quarters of 2008, despite decreases in volume,” according to Jim Haynes, vice president, finance, and Chief Financial Officer for the Arizona Hospital and Healthcare Association. “That improvement is not due to better payment from payers, like the federal and state governments. It is directly linked to the steps hospitals took in late 2008 to contain and cut costs in response to the economic environment.”

Case in point: Linda Hunt, service area president for Catholic Healthcare West Arizona, which includes Chandler Regional Medical Center, Mercy Gilbert Medical Center and St. Joseph’s Hospital and Medical Center, says many local hospitals are facing state and federal funding cuts, as well as dealing with growing numbers of people who are uninsured. In addition, admissions in some specialty areas are down because people are waiting longer to seek health care and are canceling or putting elective surgeries on hold.

Catholic Healthcare West also has seen a decrease in donations. Many donors are either curtailing their commitments or making smaller donations.

“The health care industry is strained just like any business,” says Hunt, who continues to serve as president of St. Joseph’s. “Financially we’re facing cuts, plus we don’t know what health care reform is going to bring, so we don’t know what our future is going to be. That’s stressful for the industry across the board.”

To deal with the economic slowdown, Catholic Healthcare West started making cutbacks and implementing cost-saving measures last September. St. Joseph’s reduced travel and catering expenses by 35 percent for a cost savings of $780,000 in fiscal year 2009. The hospital also became more diligent about the use of linens and replaced disposable pillows with sanitary reusable pillows, saving $90,000 in FY 2009. The hospital’s management team also took a 2 percent or more pay cut to help save jobs.

“We met with all the employees and they came up with great money-saving ideas,” Hunt says. “When all was said and done, employee suggestions helped save us more than $3 million a year. We are back on budget and that was our goal.”

Phoenix Children’s Hospital also has been prudent in pushing expenditures back. It cut administrative and advertising costs and stopped using traveling nurses, a move that saved the hospital $7.5 million a year. Bob Meyer, president and CEO of Phoenix Children’s Hospital, says they also have taken a hard look at attrition over the past eight months and have backfilled only 30 of 100 open positions. Phoenix Children’s $588 million expansion, which kicked off in 2008, has been scaled back, as well. Plans now call for shelling 1.5 floors of the 11-story tower for future growth.

“Given the economy and Medicaid reimbursement uncertainty (about 50 percent of kids in Arizona are on Medicaid), we have to be more conservative and push expenditures back,” Meyer says. “But even shelling floors will increase the number of beds we have from 345 to 486 when we open, which is what we need. Our patient volume is growing 15 percent a year and every bed in service is occupied almost 100 percent of the time.”

The tower’s first four floors will be completed in late 2010. Occupying the floors will be a cafeteria, kitchen, clinics, an imaging center and a retail pharmacy. The remaining floors of the tower are dedicated to the hospital’s Center’s of Excellence, clinical programs and private patient rooms. They will be finished in late 2011.

To keep Scottsdale Healthcare moving forward, President and CEO Tom Sadvary cut expenses and re-focused capital spending on medical technology, information systems and refurbishing projects. He also streamlined the management and executive team structure, creating fewer layers and a more agile organization. Green measures also were implemented at Scottsdale Healthcare’s three hospital campuses. Examples of the efforts include:

  • Replacing 40 pickup trucks with electric vehicles at all three hospital campuses.
  • Installing energy efficient lighting in three parking garages, saving approximately $82,000 annually.
  • Reducing natural gas consumption by 10 percent at its power plants.
  • Replacing 300 copier machines with new models that use 40 percent less energy.
  • Eliminating printed payroll notices, saving approximately $150,000 annually and some 200,000 printed notices.

Sadvary contends that Arizona’s health care industry remains healthy and strong despite reimbursement challenges, nursing and physician shortages, and the abrupt changes the health care industry has faced over the past two years.

“I’ve been in Arizona 23 years and I’m proud of the health care industry here and what we’ve done to grow talent, capacity and to improve the size and sophistication of services for patients,” he says. “Arizona knows how to step up and we will continue to do that despite challenges along the way. The health care industry is sensitive to the budgetary issues the state is facing. And while we are all trying to be efficient and frugal with resources, our costs are going up. We’re doing the best we can to manage and provide great care with no more dollars coming in from the state.”

Banner Health President and CEO Peter Fine is a firm believer that major changes are coming down the pike in reimbursement formulas for Medicaid and Medicare that will cause more pressure on local hospitals. If that happens, he says, hospitals will have to make very difficult choices on what services to provide and what services they can no longer afford to provide.

“With rising costs and so many cutbacks in health-care spending, it’s amazing that hospitals and physicians can prosper today, as well as forecast for the future,” Fine says. “Companies have to be flexible enough to embrace change and move with what’s happening environmentally. Banner demonstrates flexibility by making investments grow and starting new programs. We also have great leaders at all levels and we invest in talent management, so our people are developed and prepared to lead us through tumultuous times.”

In spite of the economy, Phoenix-based Banner Health is continuing to make investments and grow in the communities it serves. Banner recently invested $289 million to build a new, seven-floor, 200-bed patient tower and emergency room at Banner Thunderbird Medical Center in Glendale. It also invested $12 million to rebuild the old Banner hospital in Mesa and create the Banner Simulation Medical Center, the largest simulation training center in the nation. The 55,000-square-foot center opened in August and has 20 full-time employees who will train 1,200 to 1,500 medical professionals (nurses, physicians, surgeons, respiratory therapists) annually. The simulation medical center occupies the bottom nine stories of the building, with the top eight housing Banner offices.

Students at the simulation center train on high-fidelity, electronic mannequins that look like human patients and come in a variety of shapes and sizes. The mannequins have a heartbeat and they talk, burp, sweat and bleed. They also have medical maladies such as strokes and heart attacks, as well as give birth and “die.”

“Banner Simulation Medical Center is basically a hospital where we can train nurses to work and interact with 20 patients on a floor at a time,” says Dr. Marshall “Mark” Smith, senior director for simulation and innovation at Banner Health. “Nurses that graduate from medical school can manage one patient, not multiples. We now have the ability to train new nursing graduates to care for multiple patients without putting them at risk or overwhelming them. ”

www.chwhealth.org
www.phoenixchildrens.com
www.shc.org
www.bannerhealth.com
www.azhha.org

Keith Maio President and CEO National Bank of Arizona

CEO Series: Keith Maio President and CEO National Bank of Arizona

Keith Maio
President and CEO
National Bank of Arizona

Assess the current state of the banking industry in Arizona.
It looks pretty tough. The economic environment is difficult. What we deal with in Arizona is that we have a real estate-dominant economy, so many of the local banks are heavy in real estate lending. And — as we all know and see and live in our homes every day — assessed values and real estate valuations have declined dramatically, and that puts pressure on banks. That’s starting to trickle through to the consumer segment and small business segment. Everybody is feeling impacted. That being said, I would tell you that the banks in Arizona, the vast majority, are highly capitalized. So they’ve got the capital base to weather the storm.

In terms of the storm, are you seeing any light at the end of the tunnel?
I haven’t seen the light yet. I know it’s there, but I haven’t seen it yet.

How has the turmoil at the nation’s largest banks affected Arizona-chartered banks?
I think it’s a little bit anecdotal in nature. Some of the problems that the big banks feel are not felt directly by the more local, Arizona banks. Local banks tend to be a little higher capitalized, which is a good thing, and their exposures are more direct-lending exposures versus securities investments and off-balance sheet vehicles.

At the end of the day it’s all about credit contraction, so it impacts people different ways. But the local banks are more direct lenders, so it’s what happens directly in their market.

Do you think that’s a positive thing?
I think it’s a positive thing, other than the fact that we have been impacted so badly in Arizona relative to the rest of the country. So that makes it tougher. But at least when you have direct exposures, you are able to assess on an individual basis what that exposure is.

We are hearing more about the role off-bank balance sheet structures have had in the sharp decline in capitalization among the larger national banks. What type of exposure to such off-bank balance sheet structures do local banks have?
Local banks don’t have much exposure there, and what it allows those banks to do is to assess their risk on a transaction-by-transaction basis, rather than market valuations on pools of securities. So it’s a little easier to assess their risk. Local banks have a little bit more capital to weather the storm, but their exposures on the lending side tend to be a little bit greater than the large national banks.

What challenges and opportunities does the current financial crisis hold for local banks in general, and National Bank of Arizona in particular?
Having been through this before, I think there is an opportunity — and as a CEO you’ve got to always look at the long run, not just the short run. You need to manage what we’re all in the middle of today, but you need to keep an eye on the long run. In getting through this, these tough times actually make people and good organizations better. You’ll learn, ‘What could I have done better before,’ and people who want to improve will improve.

Organizations that can improve end up much better off in the long run. And generally, anytime you have a market disruption — which this is — there’s turmoil in the market and there’s disruption. However, over the long run it presents market-share opportunities to banks. I think that’s an opportunity a lot of us have in the long run — to resettle what the market shares look like at the end of this. For the survivors, it’s a very good thing.

At the end of the day it’s all about credit contraction, so it impacts people different ways. But the local banks are more direct lenders, so it’s what happens directly in their market.

Do you think that’s a positive thing?
I think it’s a positive thing, other than the fact that we have been impacted so badly in Arizona relative to the rest of the country. So that makes it tougher. But at least when you have direct exposures, you are able to assess on an individual basis what that exposure is.


We are hearing more about the role off-bank balance sheet structures have had in the sharp decline in capitalization among the larger national banks. What type of exposure to such off-bank balance sheet structures do local banks have?

Local banks don’t have much exposure there, and what it allows those banks to do is to assess their risk on a transaction-by-transaction basis, rather than market valuations on pools of securities. So it’s a little easier to assess their risk. Local banks have a little bit more capital to weather the storm, but their exposures on the lending side tend to be a little bit greater than the large national banks.

What challenges and opportunities does the current financial crisis hold for local banks in general, andNational Bank of Arizona in particular?
Having been through this before, I think there is an opportunity — and as a CEO you’ve got to always look at the long run, not just the short run. You need to manage what we’re all in the middle of today, but you need to keep an eye on the long run. In getting through this, these tough times actually make people and good organizations better. You’ll learn, ‘What could I have done better before,’ and people who want to improve will improve.

Organizations that can improve end up much better off in the long run. And generally, anytime you have a market disruption — which this is — there’s turmoil in the market and there’s disruption. However, over the long run it presents market-share opportunities to banks. I think that’s an opportunity a lot of us have in the long run — to resettle what the market shares look like at the end of this. For the survivors, it’s a very good thing.

    Vital Stats





  • Executive vice president, Zions Bancorporation, parent company of National Bank of Arizona
  • Joined National Bank of Arizona in 1992
  • Has served as president since 2001; appointed CEO in 2005
  • Current chairman, Arizona Bankers Association board of directors
  • Bachelor of Arts, University of New Mexico; graduate, Pacific Coast School of Banking
Selling Businesses

Tips On Finding A Buyer For Your Company In Tough Economic Environment

Yes, the lofty business valuations supported by an overabundance of cheap debt have come and gone, but valuations are still attractive by historical standards and deals are still getting done. The companies that are achieving the highest valuations, best terms and actually getting to the closing finish line are approaching the market in a more systematic and pragmatic fashion. Even in today’s turbulent economy, it is still possible to achieve an attractive deal for your shareholders.Here are some practical tips CEOs should consider before endeavoring to sell their companies:

Strategic buyers are driving valuations
Corporate buyers are back with a vengeance after years of being at a significant competitive disadvantage relative to private equity groups flush with cheap debt and the ability to over-leverage deals to justify higher and ever higher valuations. While the market uncertainty has certainly made everyone more cautious, many companies have responsibly maintained conservative balance sheets and are actively seeking acquisition opportunities. You can expect a more thorough and lengthy diligence process, but the strategic buyers are often the most attractive and viable liquidity event available for most sale candidates in today’s market. Most sellers should now focus their efforts on well capitalized strategic buyers to achieve the most favorable outcome for shareholders.

Private equity groups are down but not out
Typically, private equity groups (PEGs) seek significant debt leverage on their equity investment to achieve higher equity returns. With the unprecedented collapse of the debt markets, there is little to no debt available for a typically structured PEG transaction. However, some PEGs specialize in full capital structure solutions, essentially underwriting their own debt for the deal. These PEGs are especially attractive in today’s market. Many of these full-capital-solution PEGs are understandably looking to capitalize on their unique advantage by acquiring companies at lower deal valuations, so they are not likely to outbid a well capitalized strategic buyer. At the same time, many traditional PEGs are still flush with cash and need to put the money to work, so they are accepting lower returns and are pursuing deals with more conservative capital structures. While PEGs are less aggressive on valuations across the board, they should still be approached by most sellers and included in any sales process intended to maximize valuation. Don’t count out the PEG world entirely, but at the moment, the smart sellers are focused more intently on well capitalized strategic buyers.

Create a competitive environment
The primary function of an investment banker is to identify all the likely potential buyers for a company, both strategic and financial, and then create a competitive environment whereby you are able to achieve the best possible transaction for your company by comparing various alternative proposals simultaneously. The best transaction usually involves numerous factors that are specific to each seller, but will generally include price, terms (cash, stock, earnouts, etc.), certainty of closure, cultural fit, and many times other qualitative factors. The sales process is part art and part science, and the experience of your investment banker is critical to achieving the optimal outcome. You should carefully evaluate the expethem, and be sure to ask for client references. Occasionally, a one-off negotiated sale can achieve an optimal outcome, but more often than not, a professional process run by an experienced investment banker will yield far superior results.

Create value with pro-forma “add-backs”
The primary valuation metric in most deals is a valuation multiple based upon earnings before interest, taxes and depreciation (EBITDA). Most buyers are willing to give credit for reasonable pro-forma “add-backs” to EBITDA. If you raise your EBITDA, the purchase price is raised correspondingly by a factor of the purchase multiple (every dollar you gain here can add $5, $6 or $7 to the purchase price). This can be a huge value creator, and can increase the valuation achieved for your company by 10 percent to 30 percent in most cases compared to relying on Generally Accepted Accounting Principles (GAAP) EBITDA. A professional investment banker is well versed in the types of issues that can effectively be positioned for “add-back” credit. These typically involve one time or unusual expenses, investments that GAAP won’t allow you to capitalize, excess salary draws (salary that should be viewed as dividends), M&A process costs, and certain legal costs, among others. This is another area where a good investment banker can add significant value to a transaction by providing good advice identifying and negotiating for these items and not leaving any economic value on the table.

Run your business and leverage your advisors
Letters of intent, or LOIs, are almost always non-binding; you don’t get your check until the deal closes. It can be a long and frustrating process managing the due diligence and documentation process, often taking between 8 to 12 weeks and hundreds of hours of time that can be a serious distraction from running your business. Make sure you have a point person on the management team to coordinate, and most importantly leverage off your legal advisors and investment bankers throughout the process. Good lawyers and investment bankers can take a good portion of this burden off your shoulders and leave you more time to run your business. This is critical. If the interim financial results of your business suffer as a result of your management team being distracted, this can sideline your deal or at the very least result in a downward renegotiation of valuation. Run your business, run your business, run your business. Nothing is more important.