Tag Archives: private equity


It takes fuel to win tech race

Many of us can relate to thinking of Arizona’s economy as an automobile race. To win, you need a smooth race course, a fast car, a winning driver and high-powered fuel.
Carrying that analogy into Arizona’s technology sector, it’s clear that a lot of resources have been invested and progress has been made in building a world-class race course.  We’ve made tremendous strides in creating a business climate and technology environment for facilitating both private and public sector support to address the needs of Arizona’s technology businesses.

The Arizona Technology Council has worked collaboratively with many different technology champions to build this course. Technology issues are supported by the Governor’s office, the state’s legislature, the Arizona Commerce Authority, the Arizona Chamber of Commerce and Industry, and more.

Technology incubators and shared space facilities such as Gangplank in Chandler, Avondale and Tucson; Hackspace and Venture Catalyst at ASU’s SkySong in Scottsdale; BioInspire in Peoria; Innovation Incubator in Chandler; AzCI in Tucson; and AZ Disruptors in Scottsdale are making sure that today’s innovators are being given the right support, tools and environment to create the next big thing.

Collectively, our wins have included the passage of a tax credit for qualified research and development that is the best in the nation, the creation of the first statewide Arizona SciTech Festival and the birth of the Arizona Innovation Institute, to name a few.
Arizona’s technology industry also has great race cars. These are the technologies and intellectual property that create wealth and jobs driven by both Fortune 500 companies and entrepreneurs.  Companies such as Intel, Microchip Technologies, Freescale, ON Semiconductor and Avnet can all be found here.  Nearly all of the largest aerospace and defense prime contractors in the nation are located in Arizona, including Boeing, Honeywell, Lockheed Martin, Northrop Grumman and General Dynamics.

The state’s entrepreneurial spirit is reflected in companies such as WebPT, Infusionsoft, Axosoft, iLinc and Go Daddy that were founded in Arizona along with the many innovators that are coming to the table every day with new ideas rich in technology.

These companies large and small are driven by some of the greatest race car drivers the nation has produced.

But when it comes to fuel, Arizona’s economy has always been running close to empty. We lack the vital capital needed to win the race. Having access to angel investors, venture capital and private equity as well as debt instruments is critical to Arizona’s success.
The situation has not been improving on the equity side of the fuel equation. To offer some relief, the Arizona Technology Council is proposing legislation that would create a system of contingent tax credits to incentivize both in-state and out-of-state investors to capitalize Arizona companies.  This program, called the Arizona Fund of Funds, would allow the state to offer $100 million in tax incentives to minimize the risk for those seeking to invest in high-growth companies.  The state government’s role would be to serve as a guarantor through these contingent tax credits in case the investments don’t yield the projected results.  Expect more information on this important piece of legislation as it advances.

On the debt side of the fuel equation, there are encouraging signs that the worst of the credit crunch may be over. Early-stage companies need access to debt instruments, or loans. Capital is needed for equipment and expansion. A line of credit can help early-stage companies through ongoing cash-flow issues. But loan activity is still modest in Arizona for small companies. It remains heavily weighted toward the strongest corporate and consumer borrowers.

Capital goes hand in hand with innovation, high-paying jobs and cutting-edge technology, products and services. Before Arizona’s economy can win the race, we will need to become more self-sufficient at providing the fuel necessary to be a winner.

Steven G. Zylstra is president and CEO of the Arizona Technology Council.

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.