Business on the Market
Publicado en: The News
Lunes 9 de marzo de 2015
By J.E. Collinson
For many successful entrepreneurs, the most difficult decision of their career is deciding when the time is right to sell up and move on.
This can be for personal reasons; wanting to retire but not having anyone to pass the business on to or for business reasons, perhaps because further growth would demand large capital investments the owners or their associates are not prepared to make. It may be that they simply judge selling to be the most astute move.
However, many business owners find when this moment comes they don’t know where to turn for advice. Many go to their lawyers or bankers, but they often lack the requisite knowledge of the business sales market.
The News spoke with founder and managing partner of Zimma Corporate Finance (ZFC), Arseny Lepiavka, Mexico City-based mergers and acquisitions specialists with more than 15 years’ experience in these type of transactions.
ZFC was founded in 1999 with three prime objectives, he said. First, to provide the same kind of services that the big investment banks like Meryl Lynch, Goldman Sachs and JP Morgan provide but to Mexican businesses in the $10 to $60 million range.
Second, to provide a local service with a continuity of personal dealing with the client rather than forcing people to deal with people remotely, and third, to ensure that all quality controls throughout the transaction stay within Mexico and under the watch ZFC.
In an average year, ZFC closes five or six transactions, with an enterprise value of $10 to $50 million.
In 2005 they partnered with M&A International, and are now part of an umbrella group of 46 offices globally, of which ZFC is the sole representative in Mexico. In 2014, M&A International’s sales were valued at over $22 billion globally.
“The market in which our company works is one which is always active, practically independent of economic cycles here in Mexico,” said Lepiavka. “This is because a big portion of businesses are family owned – more than 90 percent if you exclude those owned by foreign investors – so often when a family business wants to sell, it is often because there are no inheritors.”
“This happens due to age, not to economic cycles, so there is always movement,” he said.
Taking advantage of dedicated mergers and acquisitions office such as ZFC has several benefits, he said. There is the understanding and expertise that comes with experience, and contracting out to a third party means the entrepreneur will not risk neglecting regular business due to a lengthy sales process, nor lower its standing in the market by being seen to try and sell their own company.
Lepiavka tells me that the process of selling a business usually lasts around eight months, and is divide into three distinct stages.
First, a careful evaluation of the company is completed. Using internationally-accepted methods, ZFC assesses the business, its market and its financial projections, and reaches an estimate sale value. This phase usually takes two months, and if the projected value is acceptable to the client they proceed to the next stage.
Promotional materials are then made for the company, and a list of potential investors is drawn up and contacted. At the end of a three-month period it is expected that there will be at least one serious offer from a viable investor.
If one of these offers is accepted, that investor is given exclusivity and ZFC proceeds to the third phase, lasting around three months and comprised of a comprehensive audit of the legal, fiscal and accounting details and a drawing up of the sales documents.
In general, he said, the price businesses sell at is within the price range predicted in the company’s first evaluation.
A major problem he often encounters is that business owners do not have a strong control or oversight of their accounting, and so do not have a good idea of the real value of their business. Before deciding to sell, he said, it is important for entrepreneurs to ask themselves if they are really following adequate standards of evaluation.
Internationally recognized techniques such as comparing the company’s value against similar organizations on the stock market; looking back at the market over the last 24-36 months to see how similar organizations have sold; or conducing discounted cash flow analysis (whereby projected cash flows are summed at a discounted rate, so the total future cash flow is equal to the net present value) can give business owners a much better idea of their business’ worth.
“If these methods are followed correctly,” he said, “you should arrive at a value that is accurate to within 10 percent.”
Another problem facing the market is that banks give credit based on clients’ guarantees rather than the business, he said. Banks ought to focus on understanding the type of business that is generating the cash flow, rather than focusing on the guarantee a borrower can give that debt will be repaid.
If the banks were to take a slightly more flexible attitude, he said, a much larger market could open up.
“I don’t say there shouldn’t be guarantees or commitments on the part of the client to pay, but if the banks looked a bit deeper at the source of the repayments, they would be more agile and there would be a greater amount of credit in the market,” he said.
Looking ahead, Lepiavka tells me the organization’s principle aim is not to grow but to focus on maintaining a high quality of service.
“What we want is to keep attending to a small group of clients, attend to them well, and continue to develop a history of successful transactions. We have more than 60 closed transactions at ZFC and I believe there is not one in which our client would express a negative opinion of our services. So, our plan is to continue improving the quality of the product and the service, and maintaining personalized attention to the client, but without aiming to increase the number of our associates or partners.”
The international demand for Mexican business is growing, however. In particular, Latin American countries, principally Colombia, Chile and Brazil, are starting to show much more interest in investing in Mexico, he said.
“(Mexico) has the potential for growth that already-developed countries don’t have. Companies that sell consumable products and that want to keep growing find in Mexico opportunities for growth at 6-8 percent, whereas in developed countries growth will be in the range of 2-3 percent,” he said.
In general, he had a positive outlook for the business-sales market in Mexico. When businesses are sold, he said, there are always fiscal experts involved, serious professionals who know the rule of law and ensure that everything is done to improve the interests of the sellers, within the legal boundaries.
“I think businesses could grow more, however, if they had more access to credit. And this would happen if the banks concentrated more on how the businesses function and less on the quality of the guarantees,” he said.