COVID-19: Business Implications Series — Should Your Business Apply for a CARES Act Loan, EIDL, or Both?

On Friday, March 27, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law.
The CARES Act has created several new Federal Small Business Administration (SBA) loan programs or amendments to existing programs, including Economic Injury Disaster Loans (EIDLs), to assist businesses that have been impacted by COVID-19.
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What is a Payroll Protection Program (PPP) loan within the CARES Act?
A PPP loan is an SBA loan program offering loans of up to $10 million to any business concern, including independent contractors and sole proprietors. The loans will be issued by SBA approved lenders (i.e., banks).
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Features
  • A CARES Act loan is 100% SBA backed.
  • The loan does not require collateral or personal guarantees.
  • All loan application fees are waived by the SBA.
  • The loan has a maximum 4% interest rate and maximum maturity date of 10 years.
  • Payments are deferred 6–12 months.
  • The loan has no prepayment penalty.
Uses
  • In addition to uses already allowed under SBA’s business loan program, funds can be used for payroll costs, group health, mortgage and other debt interest, rent, and utilities.
Potential Loan Forgiveness
  • Some of the loan proceeds may be forgiven when used for payroll costs, interest payments on mortgages, rent, and utility payments.
  • Adjustments are made for both the number of Full Time Equivalents (FTEs) retained during the loan period as well as for payroll deductions greater than 25%, with several qualifiers.
How has the CARES Act amended EIDLs?
The CARES Act made several changes to the EIDL program, as described in our previous COVID-19 communication.
  • The CARES Act makes applying for an EIDL loan significantly easier with a new web application portal.
  • The CARES Act removes standard EIDL program requirements, now allowing applicants to also seek financial assistance elsewhere.
  • The CARES Act amends the EIDL loan program by providing an emergency grant of up to $10,000 to businesses while their EIDL loan is being processed. The advance may be used to cover payroll, sick leave, mortgage payments, and other obligations; and does not have to be repaid even if the EIDL loan application is denied.
Should your business apply for a CARES Act loan, EIDL, or both?
The short answer: it depends. Because each business is different, every business should consider the various assistance programs available to determine which fit is best, including other programs and benefits that are available.
BlueWater Partners is committed to supporting you during this unprecedented time, for guidance on your business’ specific situation or for additional information about the CARES Act and EIDLs, please email Ron Miller or Jeff Jackson.

COVID-19: Business Implications Series — Economic Injury Disaster Loans (EIDL)

The U.S. Small Business Administration (SBA) has designated COVID-19 as a qualifying event for the provision of Economic Injury Disaster Loans (EIDL).

Small business owners in all U.S. states and territories are currently eligible to apply for a low-interest loan due to COVID-19. An EIDL might be the best option to bridge your working capital requirements over the next 60–120 days or longer. Below are answers to the most commonly-asked questions about EIDL that BlueWater Partners has received.

What is an EIDL?
An EIDL is a low-interest, fixed-rate loan that can provide up to $2 million in assistance for small businesses severely impacted as a direct result of a declared disaster, such as COVID-19.
  • Administers vital economic support to help overcome temporary loss of revenue.
  • Helps meet necessary financial obligations (fixed debts, payroll, accounts payable, and other bills) that your business could have met had COVID-19 not occurred.
  • Prevents having to go through a bank to apply for a loan.
  • Fixes the interest rate at 3.75% for small businesses without credit available elsewhere.
  • Offers loans with long-term repayments (up to 30 years) in order to keep payments affordable.
  • Currently, initial repayments are deferred for four months.
What is the first step?
Perform an assessment of your business to determine the impacts of COVID-19 with a primary focus on your cash flow.
  • Determine the potential for delayed payments from your customers.
  • Understand the impacts of idle inventory due to production slow-downs or stoppages.
  • Prioritize payroll, benefits, and taxes, and take a close look at your current vendor obligations.
Is your business eligible to apply for an EIDL?
If your small business suffers substantial economic injury as a direct result of COVID-19, you may be eligible for EIDL financial assistance. EIDLs are available to small businesses that meet certain SBA size standards, which vary by industry.
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What are EIDL’s lending criteria?
  1. Applicants must have a credit history that is acceptable to the SBA—extenuating circumstances include recent bad credit that’s shown to be caused by COVID-19.
  2. You will need to prove that you have the ability to repay the loan.
  3. When applying for loans greater than $25,000, your business will likely have to pledge collateral for the loan.
    • SBA requires borrowers to pledge what is available; they prefer real estate.
    • Loans under $25,000 can be unsecured.

Please know that BlueWater Partners is committed to supporting you during this unprecedented time. If you have questions, concerns, or would like assistance with your EIDL application, please email or call us. We’ve been through the application process and we’re here to help.

Coronavirus Disease 2019 (COVID-19): Implications for Business

While the health and safety of employees is the number one priority, companies will also grapple with other urgencies.

In BlueWater Partners’ experience, crises come with both short- and long-term implications. Companies differentiate themselves by how well – and how quickly – they react. Successfully navigating crisis will assure stakeholders that a company can be a strong partner in the future. ­

COVID-19 will test an organization’s ability to manage through and, in some cases, survive major disruption and uncertainty. Leaders need to be more proactive now than in any time in recent memory. Below, we’ve outlined a few actions to help leaders think through their own crisis management plans – they are not all-inclusive or detailed enough to substitute for a thorough, company-specific analysis.

Perform a stress test on your company.
  • Model out the impact of a material drop in revenue (10%, 20%, or more).
  • Communicate the potential impact to your customers, suppliers, bank, and other stakeholders.
  • Prepare a range of business disruption scenarios.
  • List the steps you can take to react to and mitigate the potential damage (e.g., cost reductions).
  • Prepare for high absenteeism.
Evaluate your supply chain.
  • Identify critical components, parts, and suppliers.
  • Map your supply chain and its risks – know who your suppliers’ suppliers are.
  • Consider backup or secondary sources to mitigate risk, especially if they are offshore.
  • Confirm each supplier’s production capacity and your place in their schedule.
  • Determine whether each vendor is prepared for high absenteeism.
Communicate more frequently than normal.
  • Keep all of your stakeholders informed on a regular basis.
  • Be ready to share contingency plans as the environment changes.
  • Be proactive – don’t leave your stakeholders wondering.
  • Present solutions, not problems – going to your stakeholders with a plan will earn you cooperation, time, and support from customers, lenders, and suppliers.
  • Stick to the facts, and disclose the bad news with the good.

While ensuring continuity of operations, your company should implement strategies to protect your employees from COVID-19 — click here to learn about the Centers for Disease Control’s Interim Guidance for Businesses and Employers.

Please know that BlueWater Partners is committed to supporting you during this unprecedented time. If you have questions or concerns, please email or call us.

Expect Activity to Accelerate in 2018

SUMMARY & OUTLOOK

Expect Activity to Accelerate in 2018

Heading into 2018, the state of the mergers and acquisitions market looks strong. U.S. target middle market announced deal volume climbed 19.6% to 9,630 YTD 3Q17. Value grew 15.4% to $183.0 billion during the same period. And, purchase price multiples hit 7.5x EBITDA in 3Q17, raising the last twelve month average to 7.0x.

Debt and equity capital continue to be plentiful. M&A leveraged loan volume amounted to $249 billion through 3Q17, up 12% year over year. Dry powder available to private equity groups and cash held by corporations remain at or near record levels.

Overall, the economic variables that drive M&A continue to be sustaining.

  • The Conference Board Leading Economic Index® (LEI) for the U.S. increased 1.2% in October to 130.4 (2010 = 100), following a 0.1% pickup in September, and a 0.4% increase in August. The expansion of the LEI suggests that the U.S. economy will continue to grow through 4Q17 and into 2018.
  • According to the “second” estimate by the BEA, real GDP increased at an annual rate of 3.3% in 3Q17, following a 3.1% bump in 2Q17. Positive contributions from inventory investment, nonresidential fixed investment, and exports were partly offset by negative contributions from residential fixed investment and imports.
  • Total nonfarm payroll employment increased by 261,000 in October as the unemployment rate crept down to 4.1%, the U.S. Bureau of Labor Statistics reported.
  • The Consumer Price Index for All Urban Consumers increased 0.1% in October and 2.0% during the last twelve months. The Producer Price Index for final demand advanced 0.4% in October and 2.8% during the last twelve months, the sharpest increase since a rise of 2.8% during the last twelve months ended February 2012.
  • The Conference Board Consumer Confidence Index® stood at 125.9 (1985 = 100) at the end of October, its highest level in almost 17 years. Consumers’ more buoyant assessment of present-day conditions, the job market and business conditions were thought to be the primary drivers of the boost in confidence.

Taken together, our outlook for M&A activity in 2018 is positive. Retirement, concerns about the window closing, and shifts in strategy continue to bring sellers to the table. Aside from geopolitical risks, the lack of available, high quality targets is probably the greatest threat to another robust year.

For more information or to discuss how BlueWater Partners can help you evaluate your financial and strategic alternatives, please contact us.

 

M&A ACTIVITY

Deal Volume

Source: Thomson Reuters

According to Thomson Reuters, U.S. target middle market announced deal volume increased 19.6% to 9,630 from 8,049 through the first three quarters of 2017 and 2016, respectively, and pushed last twelve months (LTM) September 30, 2017 volume to 12,270. This marks a continuation of the upward trend that began at least five years ago.

 

Source: FactSet

Technology Services was the most active sector during the last three months (L3M) ending September 30, 2017, according to FactSet. The next four most active sectors include Commercial Services, Finance, Consumer Services and Health Services. The top four have essentially remained the same during the last year or so.

Deal Value

U.S. target middle market announced deal value rose 15.4% to $183.0 billion from $158.7 billion during the first three quarters of 2017 and 2016, respectively, according to Thomson Reuters. At the same time, average deal value dropped 3.6% to $19.0 million from $19.7 million.

Source: GF Data

Purchase price multiples, which had dipped slightly in the first quarter of 2017, surged in the second and third quarters. According to GF Data, the average multiple for transactions with $10-250 million Total Enterprise Value (TEV) catapulted to 7.5x LTM adjusted EBITDA during 3Q17, the highest mark in the 15-year history of the database. The “size premium,” which is the spread between the lower middle market ($10-25 million TEV) and upper middle market ($100-250 million TEV), averaged 2.4x during 3Q17, down somewhat from the average of 2.8x during 2014-2016. During 3Q17, lower and upper middle market companies traded at 6.9x and 9.3x, respectively.

Debt and Equity

Source: GF Data

Middle market transactions were funded with 4.6x total debt/EBITDA on average during 3Q17, up from 4.0x in 2016. This reflected an increase in senior debt combined with a decrease in subordinated debt. Senior debt in 3Q17 rose to 3.8x from 3.0x in 2016. Subordinated debt decreased slightly to 0.8x during 3Q17 from 1.0x in 2016.

According to Thomson Reuters, leveraged loan volume expanded to $1.07 trillion YTD October 2017, 53% higher compared to the previous year. More specifically, M&A leveraged loan volume increased by 12% to $249 billion. After tightening for most of last year into this year, middle market yields tightened again in 3Q17 to 5.94%.

 

 

Source: GF Data

Equity contributions, which averaged nearly 50% in 2013, continued their retrenchment to 42.3% through YTD 3Q17. This trend has been aided by steady valuations and surging debt. As interest rates rise, either buyer or seller expectations will need to adjust.

The amount of cash held by corporations remains at or near a 10-year high, and the amount of dry powder available to private equity groups reached another all-time high. According to FactSet, S&P 500 aggregate cash positions (ex-Financials) have remained at about $1.5 trillion during the past few years. Similarly, Preqin reports global callable capital reserves (“dry powder”) of buyout funds rose to $608 billion in September 2017.

 

SELECT ENGAGEMENTS

Knapp Energy, Inc. (“Knapp”), a leading distributor of fuel, lubricants and propane to commercial and residential customers, has been acquired by Crystal Flash, an employee-owned energy distribution company. The acquisition enabled Crystal Flash to expand its capabilities, footprint and talent. All employees of Knapp were retained.

BlueWater Partners acted as the exclusive financial advisor and Lewis Reed & Allen acted as the legal counsel to Knapp for this transaction.

 

 

Deals aplenty: Survey results point to stronger M&A market in 2018 (MiBiz)

“In terms of confidence and growth and leading economic indicators, and the amount of capital, it’s all very supportive of transaction activity.”

Building Value Through Culture

Ray Beerhorst, Director
BlueWater Partners, LLC

Business owners and leaders are continually striving to maximize their financial performance while staying competitive in an ever changing, global environment. They continually lean-out operations, reduce fixed overhead, reduce inventories, and add automation. But why are some much more successful than others? How do some companies ignite growth like a nuclear chain reaction and achieve critical mass? What are they doing to make it appear easy?

The common denominator is culture.

Successful companies have embedded synergistic, rapid learning in their work teams and middle management as a result of leadership, vision, and culture. Rather than being distracted by climate, leaders have focused on building a culture that creates the climate for innovation, change, and competitive advantage.

There is a distinct difference between the culture and the climate of an organization. The climate of an organization consists of “the way things are.” In other words, what is sensed or perceived while working with (or in) an organization. Leaders use terms that describe outcomes such as employee engagement, teamwork, and quality products or services. Culture, on the other hand, consists of “the way things are expected to be done.” In other words, culture is the shared interpretations, beliefs, and values that drive behavior in the organization.

One way to understand the relationship between climate and culture is to visualize a tree: Climate is the trunk, branches, leaves, and fruit; culture is everything below the ground—the root system that supports the tree. To improve the health of the tree (climate), there must be intentional focus on building a healthy root system (culture). By working on shared interpretations/beliefs and values, the team strengthens the organization’s root system and lays the foundation for sustainable growth and longevity.

Most companies today only look at the root cause of quality or production issues. Great companies dig deeper to address culture and build value before performance, innovation, competiveness, or morale decline.

At Bluewater Partners, our goal is to help good companies become great. We’ve been helping clients create, manage, and realize business value since 2001. Our expertise includes facilitating acquisitions and divestitures and advising destressed companies. In our experience, culture matters.

If you’re interested in discussing our approach to assessing your organization’s culture and identifying levers to drive specific outcomes and increase value, click here.

M&A Expected to Pick Up in 2014 (MiBiz)

“At BlueWater Partners LLC in Grand Rapids, Managing Director Matt Miller expects moderate growth in 2014 in M&A deal volume following a “good year” in 2013. Among the primary drivers: the retiring baby-boomer generation.”

Anatomy of a Letter of Intent

A letter of intent (LOI) is a documented handshake between a potential buyer and a potential seller that sets forth the principal points of the agreement. In this way, an LOI mitigates the risk that prolonged negotiations may not result in a closing. In addition, with transactions requiring financing, the buyer’s lender may require a signed LOI before issuing a commitment to finance the acquisition. An LOI may even enable accelerated compliance with regulatory requirements such as those under the Hart-Scott-Rodino Antitrust Improvements Act.

But to be most effective, it’s critical that an LOI clearly delineate the binding provisions from the nonbinding ones. Briefly: The binding provisions regulate the negotiation process; the nonbinding provisions outline the transaction and its structure. Note that even though they’re nonbinding, there is a “moral commitment” by both sides to abide by the nonbinding provisions.

Binding Provisions

Binding provisions may include buyer access to the target company’s facilities, books and records, and require the target’s cooperation in the due diligence process. They may also contain a “no-shop” or “exclusive-dealing” provision that prohibits the acquisition candidate from directly or indirectly soliciting or entertaining offers from, or negotiating with, third parties in a transaction similar to the one the LOI outlines. Another common binding provision is that the seller must operate the company in the ordinary course of business. A mutual, comprehensive confidentiality provision protecting both parties and encouraging forthright dealings is also customary.

Each party typically bears its own costs and expenses and helps the other prepare and file for any necessary consents or approvals from lenders, landlords or third parties. It’s advisable to include a statement that the binding provisions constitute the entire agreement between the parties, superseding all prior oral or written agreements, and that the LOI may be modified only in writing, signed by both parties.

The binding provisions may also specify jurisdiction and venue for any disputes involving the LOI. It may be wise to include a provision relating to the LOI’s termination, perhaps incorporating a breakup fee. But note that the breakup fee normally isn’t the only remedy in the event of a breach by the seller

Nonbinding Provisions

The nonbinding provisions may be broadly scoped, including a description of the transaction type, a good-faith estimate of the closing date and a summary of the target executives’ employment agreements. They may also incorporate an adjustment to the purchase price based on changes in the consolidated stockholder’s equity following a specified date. In addition, they would address the preparation and approval of definitive documentation that would contain customary and comprehensive representations, warranties, indemnities, terms and conditions. Last, they could set forth escrow provisions for holding back a portion of the purchase price for specified contingencies.

One caveat: The LOI drafter must ensure that the nonbinding provisions cannot morph into binding provisions. The most powerful weapon against this danger is clear and concise draftsmanship. However, the courts have given significant weight to communications and other actions between the parties. For example, a statement such as “We have a deal,” followed by handshakes all around, may persuade a court that the parties intended to be bound.

Safety’s Sake

Nothing guarantees that a deal will close successfully – or at all. But a carefully crafted LOI certainly paves the way to a smoother transaction. In essence, they’re written agreements with the target made before the purchaser incurs full-blown negotiation and due diligence costs. Please call us for assistance with LOIs or any other aspects of an acquisition or merger.