For those who put their heart and soul into building a business in the industrial and energy sector, the time may come when selling the business may be the right thing to do. Taking that step requires carefully following a thoughtful and executable exit plan. Following are a few key items to consider:
Have you considered selling your business? Virtually all business owners consider selling their company at some point. A sale is a normal occurrence. Owners take great risks in building their businesses and wanting to reap the fruits of their labor is natural.
The energy industry downturn is causing a number of players to raise fresh capital. But with commodity prices at current low levels and uncertainty regarding future prices, raising new capital is a difficult proposition. It is even more difficult for raise capital for private companies.
So how can you be successful? By being intensely prepared. Let me explain…
Professions in all sectors of society have become increasingly specialized over the last several decades. We have doctors, engineers, scientists, and yes, investment bankers, who have developed highly selective skill sets for specific applications.
Choosing an investment banker to sell a private middle-market business is not a choice to be made lightly. In addition to familiarity with the particulars inherent in an industry and the actual sale process, a banker’s knowledge, experience, and advice can have significant influence and bearing as to a company’s evaluation, its competitive profile, and its ultimate sales price in a transaction.
Crude Oil Downturns Happen…Relatively Often
There has been great effort spent by myriads of smart people trying to predict what crude oil prices will be in the future. Because history often rhymes, we took a look back at prices since the downturn in 1997/98 (which happens to coincide with the start of my career in the oil and gas industry). Using data from the Energy Information Administration, We found some interesting data points:
- Since 1997, we have experienced 17 oil price drops (from peak to trough) in excess of 15%. That’s almost once per year.
- There have been eight significant episodes where oil price dropped more than 25%; almost once very two years.
- Among all 17 occurrences, the average price decline was 31% and took 136 days to decline from peak to trough.
- If you look at the eight largest declines (greater than 25%), the average price decline from peak to trough was 43%, taking 217 days to play out.
- This last oil price decline, which started summer 2014 (approximately 58% from peak to trough) is the second largest we have seen since 1997 (2008 registered a drop of 79%). The duration of the decline was 224 days, slightly more than average.
- Interestingly, crude oil price reached a second “double-bottom” on the chart 49 days later (March 16, 2015). We often experience the see-saw of prices moving up and down within a trading range before breaking out as momentum builds.
- Some good news is that for price drops in excess of 25%, we reviewed what happened to oil price 12 months after hitting bottom. On average, prices were 70% higher, a rebound of almost $22 per barrel.
Who knows where crude price will be 12 months from now (for those of us who have been in the industry awhile, we learn to adapt). But, if we use the past as guide, we could be experiencing a price around $65-$75 per barrel. Just like in the stock market, prices climb a wall of worry for the oil market. We have plenty of worry now.
If oil prices rebound as they have in the past, the result would really help energy companies and would re-build confidence in the forward outlook.
Published by: Jason Wilcox, Managing Director
Wilcox Swartzwelder & Co., a boutique energy investment bank, specializes in delivering high quality financial advice exclusively to owners of middle market companies in the energy sector.
Advisory services include company sales, mergers and acquisitions, oil and gas property acquisitions and divestitures, private placements of debt and equity, litigation support/expert witness, restructuring and general corporate finance matters. Through its merchant funding activities, the Firm acts as direct investor providing flexible capital to support small, entrepreneurial companies.
Principals have more than 40 years of combined investment banking experience, closing over 100 transactions with an aggregate value in excess of $3.9 billion. They have also acted as investors with capital at risk, operators and board members in multiple companies, having navigated through various business cycles and completed transactions in both up and down markets.
The Firm is fully licensed and registered. Securities are offered through PetroGrowth Energy Advisors, LLC, a registered broker-dealer and member of FINRA/SIPC.
Why Business owners can benefit from using one.
You may not be familiar with the services a boutique investment bank can provide. But, these firms are becoming more important to business owners and investors. For private, closely-held businesses, they play a critical role in helping corporate transactions get done.
Boutique Investment Banks For the Middle-Market
As opposed to the large, headline-grabbing deals, boutique investment banks usually work on deals for companies with less than $500 million in revenue, typically referred to as the “middle-market”. These boutiques are well-suited to focus their effort and attention on these smaller deals. (more…)
Just like when you embark on offering a new product or service,you prepare the plan and muster the resources required for success. Similarly, a key element in obtaining a high purchase price and reaching your transaction goals is preparation. There are a number of preparatory actions you can take that can significantly and positively affect the outcome of a sale transaction. (more…)
Determining the best buyer makes sense only in context with your goals. Some owners may want to exit completely as soon as possible. Others, who are active in the operations, may prefer to find a buyer with whom he can continue his involvement, having achieved meaningful liquidity from the business through a partial sale. Some owners may be looking for both a substantial liquidity event as well as an ongoing financial or strategic partner for pursuing growth opportunities, such as an acquisition or other strategic initiatives. Other owners are concerned about leaving a legacy for the employees and other stakeholders. Of course, underlying these goals is the achievement of a satisfactory purchase price. (more…)
As a boutique investment bank, we expend a lot of effort providing high quality advice and delivering for our clients. We are very cognizant of the need to align our investment banking fees with our clients’ interest because ultimately we act as our client’s advocate. Completing transactions is difficult; we need to be pulling together.
Before executing a transaction, we enter into a fee arrangement with our client as documented by an engagement letter. Since we will be working together with our client intensely over the course of several months, the engagement terms and fee arrangement are generally the start of the relationship. (more…)
For public companies, an active trading market determines a company’s value. However, for private companies, there is no liquid auction market to daily attribute value to the company. For private companies, a market must be created in order to determine value. (more…)