Micro indicators are key middle market strategies

In the foreword of their 2017 Global Transactions Forecast, a joint report prepared by Oxford Economics and Baker McKenzie, they state, “…after continued instability in the first half of this year, the signs indicate that both M&A and IPO activity will pick up significantly as 2017 progresses and into 2018.”

This comes as welcome news to Charles Botchway, founder and Chief Executive Officer of Madison Street Capital, LLC, a global investment banking firm that specializes in corporate financial advisory services and mergers and acquisitions services for lower end middle market businesses. Based in Chicago, and with offices in Asia and Africa, Botchway co-founded the firm seven years ago and works with both publicly and privately held companies.

“Because of the segment of the market we’re in, the middle market, our clients are very entrepreneurial. One of the things I find is that their business is typically their largest asset that they own. They’re looking for somebody who’s going to be a fierce advocate on their behalf, especially on the sell side if they’re looking to exit the business,” said Botchway.

During a recent interview with “Advisors Magazine” that included a discussion about the pros and cons of equity financing for middle market companies, Botchway called it the most expensive financing option available.

“From a company’s perspective, especially with an early stage company that doesn’t have the balance sheet to support a debt facility, being able to attract an equity investor is important. It doesn’t saddle the company with debt that it may not necessarily be able to service, and that applies to older companies as well. But once you bring in an equity investment, they own part of the company and receive a share of profit distributions,” he explained.

Conversely, with financing arrangements, once the principal and interest is paid back, the company’s obligation ends.

“Once the debt is settled, it’s settled. The equity is yours and you don’t share your future success and distributions with anyone else,” Botchway said.

“Each of these structures have their place and their benefits. The advantage of equity is you don’t have to pay it back and you don’t have to be saddled with debt that you may not be able to support. On the flip side, it costs you more and stays with you for the long-term,” he said.

As the bank regulatory environment continues to tighten and the private credit markets expand, venture debt has become the go-to source for working capital for growth stage companies. For the first time, young early stage companies and startups have the opportunity to get debt as opposed to raise equity which is often difficult to do according to Botchway.

“For a company that doesn’t have the assets or the cash flow to support a traditional debt facility, venture debt is a new innovation that is really welcome in the marketplace, and I don’t think it’s going to go away anytime soon,” said Botchway.

The tech IPO market continues to rebound and M&A activity moves along at a steady pace. Additionally, valuations of emerging companies decreased overall last year along with the rate of venture equity investing. Advisor Magazine asked Botchway if these trends will make it harder for venture-backed companies to continue to raise capital at higher valuations. He offers an interesting perspective.

“The assumption is that it’s the macro factors that impact valuation. I think that for companies trying to raise new rounds of money at higher valuations, the dynamics are more micro,” he explained. “To get a higher valuation on the next round, the company should have attained certain milestones that were set up during the previous round, and if the company hasn’t moved forward at all from when it raised its last round of money, then it doesn’t deserve a higher valuation – regardless of what the macroeconomics are.”

He continued, “If the marketplace is trending towards higher valuations and multiples are higher, that doesn’t necessarily mean that a particular company that’s not hitting its targets deserves to get a new round of financing at a higher valuation. The specific details of a particular company going out into the marketplace to raise a round is more impactful to valuations than what the overall economy is doing.”

Botchway acknowledged that while both public and private companies should stay focused on short-term targets, it must be done in tandem with setting strategies for long-term success.
“The conversation has been centered around short-term activity for way too long. Publicly trading companies are making announcements and reporting their earnings on a quarterly basis and CEO’s are focused on making short-term improvements that allow them to announce better earnings the next quarter, and the next quarter after that, to satisfy analysts.

There isn’t enough conversation being had about the capital expenditures that it takes to grow a company, and how that’s tied into long-term revenue growth. There seems to be a focus on short term cash flow, versus what it takes for long-term sustained growth and profitability of companies, and I think that needs to change,” explained Botchway.

Madison Street Capital, with its extensive experience for raising capital for middle market companies and supporting a wide range of transactions, has been built on a plan of controlled sustained growth with strategic benchmarks along the way.

“We’re unique in the marketplace in that we’re a boutique firm, but we act, move, and operate with a mindset of the bulge bracket firms,” Botchway said, adding that clients receive senior level attention that they wouldn’t get with larger firms.

“We have solid pipelines that we’re working on going into 2018, so we’re excited,” he said, adding that he’s energized by industry discussions about potential tax cuts for corporations. “It doesn’t matter what the rate is, as long as something does happen, it’s going to be a boon for the business environment and M&A activity.”

For more information on Madison Street Capital, LLC visit: madisonstreetcapital.com