Interview with Howard Fletcher of Roth Capital

BizPlanIt recently spoke with Howard Fletcher, Principal in the Corporate Finance Group of Roth Capital Partners LLC, to gain his insights into current capital and Merger & Acquisition markets. Founded in 1984, Roth Capital is one of the last remaining independent investment banks dedicated to emerging growth companies in the small and micro-cap market. In 2000, Roth Capital completed 29 public and private offerings, raising over $610 million in capital for clients. The Company also advised on 9 mergers and acquisitions in 2000. For additional information about Roth Capital, please visit www.rothcp.com

BizPlanIt: Please tell us about Roth Capital.

Fletcher: Roth Capital is a private, full service, investment bank headquartered in Newport Beach, California with offices in San Diego, West Los Angeles, Santa Barbara, San Francisco and Seattle. Roth Capital principally services the investment banking needs of small-cap public companies and emerging growth private companies.

Specifically, we offer corporate finance advisory services relating to public equity offerings, private equity placements, placements of debt, mergers and acquisitions and corporate valuations. In today’s environment, the public markets are very difficult, but we are active in placing private equity for both public and private clients, and our M&A advisory activity is busy. As everyone knows, there just isn’t a lot of activity in the new public issues market at this time.

BizPlanIt: Does Roth Capital focus on providing advisory services to specific industries?

Fletcher: Depending upon the service being offered, the answer is both yes and no. In the equity markets, we try to focus on those industries where we have research capabilities. These would generally be in growth technologies - including telecommunications and Internet infrastructure, wireless communications, semiconductors and related equipment, and emerging technologies in the biosciences and medical devices. We also have nationally recognized research expertise in certain consumer-related areas.

In the M&A world, we will consider an assignment for a company operating in just about any industry, and we have a successful track record advising companies in a wide range of industries. It doesn’t mean we’ll necessarily take on everything we look at, but we are not industry focused on the M&A side of our business.

BizPlanIt: You obviously see a lot of business plans at Roth Capital. What are some of the biggest mistakes you see terms of business plan content, format, etc?

Fletcher: The biggest mistake I see in most plans is that the forecast is often inconsistent with the company’s past history. In other words, the forecast shows a hockey stick growth pattern in revenue when recent growth has been nominal. Or the plan shows gross margins suddenly jump from 28% to 35%, or that G&A expenses suddenly drop from 20% of revenue to 15%. Those kinds of situations take a lot of explaining. Deviations from historic norms require solid explanations because prospective investors or buyers will be skeptical.

Another business planning mistake I often see relates to inadequate explanations of the fundamental assumptions underlying the plan, and how those assumptions relate to the projected performance. By this I mean the macro assumptions relating to the economy, competitive landscape, demand curve, etc. If the plan shows increasing revenue and improving margins at the same time the whole world forecasts an economic downturn, then something else must be at work and it needs to be explained – thoroughly.

Sometimes the plan is fundamentally sound, but the presentation is poorly constructed or poorly worded. Sometimes the plan contains simply too much detail, or is too technical for the audience. Or sometimes, critical elements like management experience or the competitive landscape are not addressed. If a business owner has no experience preparing a plan, or is not good with the English Language, or simply cannot adequately express the vision in writing, my advice is that he or she should get professional planning help. Not only is the content of the plan important, but the presentation of the plan and how it reads is critically important to whether or not it is going to get read at all.

Potential investors, buyers or lenders typically have opportunities to review dozens of business plans each month, or even each week. Many of these plans will never even be read, simply because of the limitations of time. For that reason, a business plan has to immediately grab attention. It has to demand to be read. Part of achieving this is a compelling executive summary. An executive summary should capture in one, two or three pages a reader’s attention, to make that reader want to dig into the body of the plan. If it does not do this, then the plan will likely just be passed up.

BizPlanIt: Have you seen a slow down in the number of business plans that have reached your desk in the past year?

Fletcher: No, if anything we are seeing increased numbers of business plans. I believe the reason is that there aren’t as many deals getting done relative to the recent past. So if you are searching for equity, you’ll likely have to show your plan two to three times more often than you might have in the recent past.

BizPlanIt: Can you outline some of the typical areas of improvement for a company interested in selling their business?

Fletcher: The process of selling a company should really begin a long time before it’s ever put up for sale. A common mistake I see is an owner taking the company to market without the appropriate level of management and financial systems/processes in place. This is often a bigger problem with private companies, because public companies generally have adequate layers of management, audited numbers, accounting systems capable of producing numbers in a short time, and organizational structure.

Private companies on the other hand, sometimes have only one or two key management people that are necessary to properly run the venture. Private companies often do not have audited statements and their accounting systems may not be sophisticated enough to produce current information on demand.

Owners should prepare for a sale by taking steps to maximize profitability and cash flow before the business goes on the market. Businesses are usually valued as a multiple of these numbers. Anything an owner can do to maximize this numbers one or two years prior to a sale will increase value. Again, owners must plan for a sale in advance. Also, creating a solid business plan showing how the company can grow into the future can be critical. Most buyers of businesses are buying growth. They need to see a plan that shows how the business will continue to grow and create wealth for the new owner. A business plan usually isn’t something a company can throw together after the business is on the market – it needs to be prepared in advance.

BizPlanIt: It is often stated that you can achieve a higher valuation if you sell to a strategic buyer versus a financial buyer. Can you provide your insight?

Fletcher: That is generally true, and the reason is that strategic buyers have the ability to create more synergy than a financial buyer would. The financial buyer needs the management team to be in place. A strategic buyer probably does not. A financial buyer needs the factory. A strategic buyer may be able to consolidate into another facility. A financial buyer needs the sales force. A strategic buyer may be able to eliminate redundant sales positions. Essentially, the strategic buyer has the ability to “manufacture” profits through the elimination of expense, whereas the financial buyer generally does not.

Unless a financial buyer already has a portfolio company in the same industry or in the same location, it will need the management structure, facilities, sales force, etc. It is not able to consolidate operations and eliminate duplicated expenses, so generally the financial investor cannot compete with strategic buyers strictly on a price basis.

But there are reasons why the sale of a company to a financial buyer or private equity group should be considered. Private equity groups can often consummate transactions faster than strategic buyers. They essentially buy and sell companies for a living, and therefore have the talent in place to get deals done. Private equity groups can also be more receptive to leaving some equity with the sellers so that former owners can participate in future upside growth. Private equity groups generally leave management, staff and facilities in place, which many times is important to the seller of a private business. And private equity groups generally have access to additional capital to support the future growth of the business.

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