Lutz Promotes Pugh to Shareholder

Lutz Promotes Pugh to Shareholder

 

LUTZ BUSINESS INSIGHTS

 

Lutz promotes pugh to shareholder

Lutz, a Nebraska-based business solutions firm, has promoted Taylor Pugh, CPA, to Audit Shareholder in Lutz’s Omaha office.

“Taylor delivers superior service to our clients through her technical and strong client relationship management skills. She continues to make a positive impact with her involvement in many firm initiatives including recruiting, staff development and the firm’s new coaching program,” said Mark Duren, Managing Shareholder.

Taylor has eight years of experience in the industry and provides accounting, auditing, and consulting services to privately held companies. In addition, she leads the Transaction Advisory Services practice as well as consults on special projects related to forensic accounting and litigation support. Taylor graduated, with highest distinction, from the University of Nebraska-Lincoln with a Master’s degree in professional accountancy.

 

RECENT POSTS

5 Key Purchase Agreement Considerations

The purchase agreement is a major component of an M&A deal. It is the contract that documents all of the terms agreed upon between the buyer and the seller in a transaction. Without one, it would be…

read more

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VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Lutz adds Melissa Adams and Connie Harrison

Lutz adds Melissa Adams and Connie Harrison

 

LUTZ BUSINESS INSIGHTS

 

Lutz adds Melissa Adams and Connie Harrison

Lutz, a Nebraska-based business solutions firm, recently added Melissa Adams and Connie Harrison to its Omaha office.

Melissa joins Lutz Talent as a Client Relations Lead and brings over 14 years of experience in the recruiting industry. She is responsible for assisting the talent team in managing client accounts, as well as developing new client/candidate relationships. Adams specializes in search and staffing for accounting and finance positions. Melissa received her Bachelor’s degree from the University of Nebraska-Omaha.

Connie joins the firm as an Internal Staff Accountant. Her primary responsibilities consist of compiling and maintaining accounts payable records, reconciling credit cards, generating checks, and other administrative tasks. Harrison brings over 11 years of relevant experience in bookkeeping, accounting, billing, and compliance.

 

RECENT POSTS

5 Key Purchase Agreement Considerations

The purchase agreement is a major component of an M&A deal. It is the contract that documents all of the terms agreed upon between the buyer and the seller in a transaction. Without one, it would be…

read more

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

5 Key Purchase Agreement Considerations

5 Key Purchase Agreement Considerations

 

LUTZ BUSINESS INSIGHTS

 

5 key purchase agreement considerations

bill kenedy, LUTZ consulting and m&A shareholder

 

The purchase agreement is a major component of an M&A deal. It is the contract that documents all of the terms agreed upon between the buyer and the seller in a transaction. Without one, it would be nearly impossible to bring a deal to a successful closing. However, for a buyer and seller to reach deal closing, they must settle a few key matters within the final contract.

Below are five important topics to consider in an M&A transaction’s purchase agreement:

1. Purchase Price

Most M&A deals are negotiated on a “cash free/debt free” basis. In simple terms, this means the seller keeps all of the cash and pays off all of the debt at the time of the sale of the business. In almost all circumstances, shareholder loans, bank debt, unpaid dividends and overdraft facilities will be treated as debt.

2. Earn-Out

Earn-out is a mechanism used in an M&A transaction through which a portion of the purchase price is paid contingently upon the occurrence of certain events. This amount is usually calculated based on the performance of the acquired business over a specified period of time following the closing.

Earn-outs are most commonly used to bridge the business valuation gap between a seller and a buyer. It allows sellers to potentially facilitate a higher price and provide buyers with an additional financing option to pay for the acquisition through future profits of the acquired business.

3. Establishing a Net Working Capital Peg

A net working capital peg is used to ensure the seller is not collecting most of the A/R out of the business, liquidating inventories, or slowing payment of accounts payable prior to close. In the case of a deficit of net working capital at close, the buyer may reduce the cash to the seller by the amount of the deficit.

4. Equity Roll

Many buyers often encourage selling owners to “roll over” a portion of their equity. Meaning, the seller will own a minority equity position in the company after the transaction closes. Rollover equity is a form of seller financing and it is often used to bridge financing and valuation gaps. Rollover equity also represents a powerful tool for aligning the seller/founder’s interests with the buyer’s interests.

5. Other

Other topics outlined in a purchase agreement include:

  • Non-competes
  • Warranties
  • Employment agreements
  • Consents on certain contracts

All of these terms represent important legal components of the purchase agreement that should be given consideration when contemplating the sale of a business. Consulting with an M&A advisor on these matters can help your business deal come to a successful closing. Please contact Lutz M&A for questions on this topic or for transaction assistance.

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Is Value Investing Dead?

Is Value Investing Dead?

 

LUTZ BUSINESS INSIGHTS

 

is value investing dead?

Josh Jenkins, cfa, senior portfolio manager & head of research

 

Value investing has been around for nearly a century, developing a devout group of followers over time. Some of the world’s most prominent investors employ a variation of the strategy, including Omaha’s Warren Buffett. It’s not just the practitioners filling the ranks of the believers, the approach is also supported by academic research. Value investing has a strong track record with sound economic rationale to back why it has worked in the past, and why it should work in the future.

None of this changes the fact that recently the relative performance of value investing has stunk (please excuse the technical jargon). For over a decade it has lagged behind the broad market, causing some investors and pundits to lose the faith. Here at Lutz, however, we still believe. To understand why, let’s explore what value investing is, how it has performed in the past, and why we are optimistic about its future.

What is Value?

“Long ago, Ben Graham taught me that ‘Price is what you pay, value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” – Warren Buffett, 2008 Berkshire Hathaway Shareholder Letter

The above quote illustrates an important distinction that is confusing to many investors. How can you tell if a stock, or a broad market index like the S&P 500, is cheap or expensive? The obvious answer would be to look at its price. This approach feels natural, as many of us do it on a daily basis as we walk through a store or click around Amazon, but it can be misleading. The chart below illustrates the price index for the S&P 500 going back to 1928. If you tried to evaluate its merits based solely on price, you might reasonably conclude it was extremely cheap from the late 1920’s to the 1970’s. Aside from a few painful drawdowns in the 1990’s and 2000’s, the market appears to become more expensive year after year. The question is: If prices are always going higher, can stocks ever be cheap again?

S&P 500 Price Index

Source: MorningstarDirect. The S&P 500 is represented by the S&P 500 PR Index, using monthly data from 1/1/1928 to 6/30/2019. 

This is where Buffett’s quote comes into play. It is evident we have paid more for stocks over time, but has anything changed in what we receive for our money? The answer, of course, is “yes”. Decades of companies reinvesting their profits to expand and develop new technologies has resulted in businesses that are larger, more efficient, and more profitable than ever.

There are many variations of the value approach employed by the investment community. A simple one seeks to evaluate how many dollars you must pay to purchase one dollar of some fundamental metric of a company or market index. Commonly used metrics include sales, earnings (think of earnings as profits), cash flow, or book value. The value approach is centered on making sure the price you pay is reasonable relative to what you get in return. When it comes to buying stocks, what you ultimately get is an ownership stake in a company (the book value), and the right to participate in its operations (its sales, profits, and cash flows). The intuition behind using earnings (profits) as an example, is that returns will increase as you decrease the price paid for the same level of profits.

From here on “value stocks”, or simply just “value”, will refer to the subset of companies where the price paid per unit of the above fundamentals is low, relative to other stocks. If value stocks are those with the lowest price, the flip side of the coin would be growth stocks, or just “growth”. While it may seem counterintuitive to intentionally purchase the most expensive companies available, it’s actually a very popular strategy. The high flying “FANG” stocks (Facebook, Amazon, Netflix and Google), fall into this category. As their name implies, these firms are typically growing at a much faster rate than their value counterparts, and investors are willing to pay more for that future growth. The price may appear high today, but it could ultimately become a cheap purchase if the expected growth comes to fruition. The problem is investors tend to overestimate growth.

The Performance of Value

“In Theory there is no difference between theory and practice. In practice there is.” – Yogi Berra

The idea behind value investing is simple enough, but has it actually worked? To find out, we can compare the historical returns of value versus growth. Using data going back 91 years, the results clearly favor value, which outperformed the more expensive growth stocks by an average of 3.10% per year. While value has delivered higher returns over the long term, it has struggled notably in recent years. Over the last decade, the leadership has reversed with growth outperforming value by 3.44% per year. It is impossible to say precisely what has caused this change, but the massive returns from a small subset of firms (including the FANG stocks) have certainly contributed.

Historical Performance of Value vs Growth

Source: The Kenneth French Data Library; https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. Value is represented by the Fama/French US Value Research Index, growth is represented by the Fama/French US Growth Research Index. The indices are not available for direct investment, do not include costs/fees, and are not representative of actual portfolios. Returns are annualized, based on monthly data from 1/1/1927 – 5/31/1927.  

After an extended period of underperformance investors will invariably begin to question whether things have changed to the point the strategy is obsolete. While no one can say for certain if or when value will make its comeback, it is important to recognize the current bout of poor relative performance is not unprecedented. There have been several other notable periods where value has struggled.

Looking at the chart below, value has outperformed on a ten year basis during the majority of the evaluation period, as evidenced by the green line fluctuating above the grey bar marking 0.0%. When the line is blue and below the grey bar (as it is today), it signifies growth has outperformed value. The aftermath of the Great Depression (1930’s), and the run-up of the internet boom (late 1990’s) provide two stark examples of past rough patches for value.

10 Year Rolling Performance - Valus vs Growth

Source: The Kenneth French Data Library; https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. Value is represented by the Fama/French US Value Research Index, growth is represented by the Fama/French US Growth Research Index. The indices are not available for direct investment, do not include costs/fees, and are not representative of actual portfolios. Returns are annualized, based on monthly data from 1/1/1927 – 5/31/1927.  

Alas, no strategy works all the time. Value investing, like many other phenomena in the markets, is cyclical. Investors may shun certain companies for extended periods of time. This in turn makes them cheaper, and may set them up to perform better in the future. Conversely, people can get overly excited about the prospects of certain companies. As more investors buy into the ever-rising growth expectations, the price could rise too far, setting the company up to underperform. Even a wonderfully successful company can be a subpar investment by merely delivering great results when the market was expecting perfection.

 

Value Going Forward

“There is no way that we can predict the weather six months ahead beyond giving the seasonal average.” – Stephen Hawking, Black Holes and Baby Universes

Despite its struggles, there is a good reason to expect brighter days ahead for value. Given how well growth has done recently (particularly FANG stocks discussed above), the discount paid for value stocks is currently larger than normal. The chart below illustrates the discount for value companies (large and small) relative to the broad market. The middle grey bar in each section represents the average cost historically, while the green lines represent the current cost over time. The lower the green line moves, the cheaper value stocks are relative to the rest of the market.

Large and Small Cap Values

Source: Morningstar Direct. Valuations are based on an equally weighted composite of price/book value, price/earnings, price/sales, and price/cash flow of each value index relative to the broad market. Large cap value is represented by the S&P 500 Value Index, while small cap value is represented by the S&P 600 Value Index. The broad market was represented by the Russell 3000 index. Data from 1/2001 to 6/2019.

As you can see from the chart, not only are value companies trading at a larger discount than average relative to the rest of the market, they are the cheapest they have been since the early 2000’s! Unfortunately being a better deal than usual is not a guarantee that value stocks are poised to outperform in the near, or even intermediate term. Over time, however, the price paid has been shown to be one of the best predictors of future returns. Generally speaking the cheaper you can purchase stocks, the higher the returns you can reasonably expect (all else equal).

Wrapping Up

While the critics continue to debate whether or not value investing is dead, we believe those investors who are patient will be rewarded. The strategy has weathered many market cycles over the decades and endured other periods of extended underperformance. The opportunity to buy these already cheap companies at a larger than normal discount gives us a good reason for optimism.

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over eight years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Lutz M&A adds Mark Otte

Lutz M&A adds Mark Otte

 

LUTZ BUSINESS INSIGHTS

 

Lutz M&A adds Mark Otte

Lutz, a Nebraska-based business solutions firm, welcomes Mark Otte to its M&A division in the Omaha office.

Bringing over two years of consulting and valuation experience, Mark joins Lutz M&A as a Financial Analyst. He is responsible for performing business assessments and financial analyses, providing benchmarking reports to clients, and preparing marketing documents for businesses being acquired or seeking new investment. Otte graduated from the University of Northern Iowa with a Bachelor’s degree in accounting.

 

RECENT POSTS

5 Key Purchase Agreement Considerations

The purchase agreement is a major component of an M&A deal. It is the contract that documents all of the terms agreed upon between the buyer and the seller in a transaction. Without one, it would be…

read more

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850