From Jeffrey Davis' Desk...

What an economy! Consumer confidence is up, along with spending, the local real estate values are at historic levels and the stock market continues to be less than predictable. Yet inflation remains low and corporate valuations remain high. For the retiring generation of entrepreneurs, the greatest collection of wealth creators the world has ever known, the climate for selling a business could not be better. In this issue, Senior Consultant Dana Schneider reviews the use of a management buyout as a strategy for transferring business equity into liquid wealth. Dana includes an example of how effective this approach can be which I am sure you will find instructive.

I want to send out my congratulations to Agar Supply and to Ennvirotech who both received excellent media coverage in March. Agar's Karen Bressler had a wonderful feature article written about her and her whole line food distribution business in the Boston

Globe, while Envirotech had a cover page placement in the Boston Business Journal that explored their "Clean Air" services. I hope that you will have an enjoyable summer. Look to join us for our next Breakfast Seminar series begining early next Fall. Please visit our website at www.mageusa.com for event announcements.

Jeffrey Davis
Chairman and CEO

Securing the Future
Releasing Wealth and Relieving Risk

Now is the best time to provide for the future by capitalizing on the wealth built into your business. Despite the recent volatility in the stock markets, the US economy is growing at a torrid pace. According to government figures for the fourth quarter of 1999, the overall economy grew at a 7.3 percent annual rate, the fastest in almost 16 years, and the first quarter of 2000 looks to be very similar. For all of 1999, the economy expanded 4.2 percent, the first time the economy expanded at 4 percent or more for three straight years since 1976-1978. This growth has been driving revenues and earnings across most industries, causing corporate values to reach new heights. High valuations have prompted many middle market entrepreneurs to face the difficult question of how to realize and secure the great wealth locked primarily in their businesses, thus maintaining financial security for future generations.

The small to middle market, closely held business owner has many liquidity options ranging from an outright or partial sale to various types of buyers including competitors, financial firms, ESOPs and others. All can accomplish liquidity for the business owner, but each one has a different effect on the existing management and the entire company, including its culture.

For owners who wish to remain with the company or want to see their business maintain the successful culture that they have built, a management or leveraged buyout is often the best option. The benefits of this type of transaction to the seller can include receiving significant cash at the closing, the option of retaining a portion of equity and/or future payments. Typically the seller also has the option to remain with the business in some capacity and gives the family flexibility regarding the next generation's involvement. This approach essentially eliminates financial dependence on a business in transition. Increasingly, family held businesses are using private equity firms to affect generational ownership transitions.

These types of transactions are typically initiated by private equity firms primarily interested in building successful portfolios of profitable businesses. Preferring to utilize the strengths of the current management team, they often serve in a guiding role as an active board member. The seller may be requested to continue to work with the company in an operational or consulting position. Many of these firms are staffed by successful entrepreneurs and experienced consultants who bring strategic relationships along with the provision of growth capital. There are literally thousands of private equity firms, one for most industries, each with a different niche and strategic interest. Their interests range from sexy high risk/high reward technology industries, to solid low-tech manufacturing and service companies with sustainable, predictable growth and earnings. In addition to understanding the different types of buyers, keep in mind the factors that have a significant effect on valuation. Much like selling a house, there are many areas where attention to details will improve valuation and increase the attractiveness of your company.

• A budget and plan for future growth
• The skills of second level management
• Proper internal financial reporting.

By instituting or improving on these factors you reduce business risk and increase the likelihood of ongoing success, which in turn, makes your company more attractive to a potential buyer. Finally, just as it is important to have a good broker when selling your house, it may be in the company's best interest to consult an expert experienced in selling companies similar in size to your own.

Recently we represented the seller of an extremely profitable business-to-business low-tech services provider with revenues close to $70mm. Several years ago, the owners used private equity to affect the transition to the second generation. This allowed the family immediate liquidity along with providing the business with access to key strategic relationships and necessary capital. The senior generation retired with more money than ever imagined without risking their wealth or burdening the company with debt, leaving a stronger company to the next generation.

The second generation was able to leverage the key contacts provided by their financial buyer to move into new markets. Within three years, the next generation doubled the business' revenues and more than tripled earnings. The second generation is now seeking to secure their family wealth by selling a major portion of their equity while retaining operational control. In essence, at the top of the market, they are cashing in the majority of their equity, but continue to manage operations. In this way they eliminate their personal financial risk associated with the company. Their previous financial buyer is equally excited about capitalizing on the recent successes of the business.

By selling a large portion of their equity to a second financial buyer, the owners are realizing a new level of wealth while maintaining day-to-day control of their company. The financial buyer is relieving them of the burden of certain operations, allowing for more time to concentrate on revenues and earnings. A Board of Advisors has been added along with certain key staff to take on many of the daily administrative activities. Free to build the company further, combined with their earn-out compensation and equity, the family members are more relaxed knowing that they have secured their wealth while keeping the opportunity to add to it for years to come.

This is just one of the many options to consider when seeking liquidity for private equity. Each company has its own unique situation with its own set of potential buyers. Through proper preparation of the company, and strong analysis of the buyer market, one can realize and secure the wealth locked inside of their business.

Dana Schneider
Senior Consultant
Mage, LLC

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MAGE, LLC is proud to co-sponsor Strategic Business Forum's
Second Annual SBIZ 2000 Internet Summit
"Enabling e-Strategy: Defining and Building Successful Virtual Teams"
on Tuesday, June 27, 2000 from 3 to 9 PM.,
at the Cambridge Marriott, Cambridge, MA.
For more information: www.slf-boston.org or call 978-692-0905
Friends of MAGE receive a registration discount