Stepping up to the selling block

A common LBO will provide for 10% to 20% continued ownership by the entrepreneurial seller by a tax-deferred rollover of a modest amount of cash. The retained ownership keeps “skin in the game” for the owner/seller, giving the new owner comfort that the seller will continue to drive company performance post-transaction.

MINORITY TRANSACTION OR PARTIAL SALE: A transaction in which less than 50% equity is sold to a new investor is not typically used to provide cash to the owner, but is instead designed to raise cash for the company to pursue special projects or acquisitions. For example, a direct marketing owner who wants to acquire another title may decide it is prudent to partner with a private equity group to help fund the transaction.

CHARACTER OF THE NEW OWNER: The owner should consider how a buyer will take care of the employees. Will employees be fired to cut costs? For private equity buyers, the CEO/seller will be working with the new owner at the board of directors level for three to five years. He or she should research the buyer's reputation with owners of previous investments to understand how the buyer interacts, particularly through difficult periods.

STRATEGIC BUYERS: In our industry, strategic buyers are most often owners of catalog, Internet or other direct selling businesses. Apparel mailer Orchard Brands recently bought Crosstown Traders catalogs from Charming Shoppes. Owned by Golden Gate Capital, Orchard Brands targets the same audience as most of the Crosstown titles.

Blyth, a multititle operator including Miles Kimball, Walter Drake and Exposures, in August acquired As We Change, a wellness cataloger. Both of these buyers will achieve efficiencies by leveraging their existing fulfillment and purchasing capabilities.

PRIVATE EQUITY INVESTORS: Also known as financial buyers, private equity groups use large pools of capital raised from large institutional investors, such as insurance companies, pension funds and college endowments, to make investments in private companies.

Their purpose is to buy businesses, grow them and later sell them at a profit to generate above-market returns for their investors. Examples of private investors in the direct marketing industry include Golden Gate Capital (Orchard Brands and Spiegel), Webster Capital (Sundance), North Castle (Performance Bike) and American Capital Strategies (Potpourri Group).

TIMING: Timing of a transaction is one of the most significant ways to maximize valuation. Once an owner has decided to sell, the specific timing should be determined.

The best time to sell is when the company's performance is improving month-to-month. Buyers will pay higher valuations if growth is continuing long after the transaction. If the company has hit a rough patch, it is then harder to attract buyers, and valuations are lower.

In 2005 and 2006, many direct marketers were aware of rising postal costs but waited until their financial results began to decline in 2006 and 2007. By then, buyers were offering lower valuations to reflect increasing risk and dropping profitability.

Next time we'll look at initial public offerings.

David J. Solomon is co-CEO of Lazard Middle Market, a subsidiary of financial advisory firm Lazard Ltd.