CBI

What Are Your Company's Weaknesses?

2009-06-24T06:58:00.000-07:00

The Following is an excerpt from Privately Held Company Newsletter

Every company has weaknesses; the trick is to fix them. There is a saying that the test of a good company president or CEO us what happens to the company when he or she leaves. Some companies on paper may look the same, but one may be much more valuable, due to weaknesses in the other.
Not all problems or weaknesses can be resolved or fixed, but most can be improved. Fixing or improving comapny weaknesses can not only significantly improve the value, but also increase the chances of finding the right buyer.
Here are some common weaknesses that could cause concern for acquirers and lead them to look elsewhere for an acquisition.

"The One-Man Band"
Many small companies were founded by the current president who has made all of the major decisions. He has not developed a succession plan and has no one in place to take over if he gets hit by the proverbial truck. He is the typical one-man band and, as a result, the company is not an attractive target for acquisition.

Declining Industry
Companies in a declining industry have to be smart enough to see it and make changes. One successful example was a company that made ties; somebody within the company was smart enough to see the decline in this apparel item and switched their business to making personalized polo shirts. A company can still make ties but has to have forsight-and ability-to move into new product(s) as well.

Customer Concentration
This area is a major concern to most buyers. It is not unusual for the one-man band to focus on what made the company successful - one or two major customers. The relationships with these customers have been built over many years and are seldom transferable. Finding new customers may take time and money, but it is absolutely necessary if the owner wants to sell.

The One Product
Many one-man band run companies were based, and still are, on the manufacture and sale of one product; or hte creation and development of a single service. Henry Ford made a wonderful car - the Model A- but that's all he made. General Motors decided that many people would liek something different and were willing to pay for it. Fortunately, for Ford, he caught on quickly, but Ford almost went out of business with the thinking that one model fit everyone.

Aging Workforce/Decaying Culture
Young people are not entering the trades, leaving many jobs such as tool and die positions filled with "old hands" who will soon be retiring. Technology may be able to replace these workers, but that decision has to be made and implemented. No one wants a business that will ahve idle machines with no one trained to operate them.

There are many other areas that could be considered company weaknesses. If there is a Board of Directors or an Advisory Board, perhaps they can help the one-man band create a succession plan and, just as importantly, a successor. Certainly, the time to do all of this is before the decision to sell is made. Whether current ownership plans on staying the course, or eventually selling the company, the good news is that resolving company weaknesses is a win-win situation.

Skeletons in the Closet-What an Acquirer May Really Be Looking For

2009-05-18T07:33:00.001-07:00

The following is an excerpt from Privately Held Company Newsletter.

The due diligence process involves the acquirer's financial team, the legal team, and may also include other experts used to review additional areas of the target acquisition. Since this process includes a thorough examination of the details of the business, it is important that prospective sellers become aware of any "skeletons in the closet" due diligence may uncover. While some questions follow that may help identify the skeletons lurking within, a business intermediary professional is an excellent person to help a seller become aware of other potential issues and how to deal with them.

Management

Is the owner/president/CEO constantly interrupted by telephone call, emails or other diversions that require immediate attention? These interruptions may indicate a business in crisis or a general failure of management to control the business.

Do employees seem to take pride in what they do and also in their company? Are they happy?

Does the business experience a lot of turnover in either management or at the general employee level?

Marketing

Is the company experiencing loss of market share, especially when compared to competitors? Price increases may increase dollar sales, but the important measure is unit sales.

Is the company introducing new or improved products or services? A firm's ability to do this is a critical part of the operation, affecting its success and potential for growth.

Does the company participate in trade shows? Is the interest level high, or is the activity over at a competitor's booth?

Does the company have an excellent Web site and is it technologically above the competition?

Finance

Does the firm produce monthly financial statements? Are the annual financials produced on a timely basis?
Does the company take advantage of trade discounts, or is it late on paying its bills? These practices could be a sign that the company has poor cash-management policies.
Are the margins and benchmarks better than industry standards?
Has the company used its entire credit lines and, if so, how (and why) have they been used? Is the firm on any kind of credit watch?

General Business

Is the firm in a stagnant or even dying market, and can it shift gears quickly enough to make changes or enter new markets?
Does the company have too many suppliers - or not enough? Is the inventory turnover better or worse than the competition or industry standars?

These are just a few of the business areas that an astute acquirer would investigate, but these areas may be outside the scope of the general due diligence procedures.

The due diligence on the financials and the legal aspects are obviously very important, but the answers to the above questions may ultimately determine whether the offered price is held firm or even if the sale is finalized.

Selling a Company in Turbulent Times

2009-04-10T08:12:00.000-07:00

The following is from The Privately Held Company Newsletter.

Many owners of small to large businesses were recently side-swiped. Very few saw it coming, but turbulent times are here. Some of these owners put off selling their businesses or, for the time being, put off even thinking about it, much less beginning the process. Now, with the economy in the tank, is it too late to sell or to put the business on the market?

Some business owners will decide to sell despite the times due to illness, personal issues, or because they have already put off retirement. All is not lost! It may not be the best time to sell, but those who elect to go to market may be pleasantly surprised. There are still some compelling reasons why now may be a good time to sell one's business.

First, if many business owners put off selling their businesses due to the current economy, there will be a shortage of companies for sale. And, while the old adage that there is always a market for good companies may be trite, it is also true. If there are fewer companies for sale, then pricing shouldn't be hampered too much. If an acquirer is in the market, they will have to pay what the market will bear. Supply and demand will work for sellers.

Second, the jury is still out on what will happen to the capital gains tax. It is the lowest in many years. There are those who say that it will be raised to pre-Bush times and others who say that there won't be any new taxes for quite a while. Why take chances? What we do know is that the capital gains tax is low now, which could make it a good time to sell. After all, it is the after-tax proceeds that really count.

The newspapers, the Internet, and the television are full of bad news about the economy: car dealers are folding, big box stores are filing for bankruptcy and the stock market is in the doldrums. There is always a demand for good businesses and there are still buyers who want to buy. So, if you are serious about selling, why not call a business intermediary professional to find out what is really happening in the marketplace?

Preparing the Business For Sale

2009-03-20T07:21:00.000-07:00

The following is an excerpt form our Privately Held Company Newsletter:

For sellers to receive top dollar for their businesses, planning is critical! It is not something to put off just prior to the decision to sell. Following are some factors to consider, both long-term and short-term.

Long-Term Considerations
Ideally, the seller will start planning a full year in advance of a sale, because numerous elements will take considerable time and expense to execute. Most small private companies, for example, have their financial documents "reviewed" or "compiled" but rarely audited. Auditing statements involves conducting an actual physical inventory, with each accounts receivable and all other financial details verified in the process. While audited statements are mandatory for public companies, many private companies opt not to pay the extra cost of auditing, which can range from $10,000 to $40,000. However, an audited statement, which is a verification of the reported numbers in the financials, may result in a higher offer by the buyer.

Other items to address in preparation for selling a company include cleaning up the balance sheet of old debts and writing off uncollectable accounts receivable and old inventory. This ensures that the buyer is not deterred by a less than pristine fianncial statement.

Settle outstanding lawsuits and engage top management in non-competitive and stay agreements.

Further, make sure the plant is in excellent physical shape; spruce it up if need be. If the facility does not show well, it will very quickly turn off buyers.

Short-Term Considerations
In addition to the long-term issues discussed above, certain elements need to be considered in the short term. Prior to going to market with the sale of a company, sellers need to allocate about two to four months for organizational purposes. A critical element in organizing a business sale is to assemble a team of advisors, including a mergers and acquisition (M&A) intermediary. This representative will partner with the seller during the entire selling process and will probably be in contact with the seller almost daily for the next six to twelve months. The Intermediary will also orchestrate the process and asct as "quarterback" for the team of advisors. A transaction attorney, an accountant, and most likely a tax attorney who will be knowledgeable about the company's personal affairs should also be by the seller's side.

Next, it is advisable to have a valuation of the business that not only determines the "anchor" price but also supports the seller's reasoning in the negotiating process. Along with the business appraisal, sellers should consider obtaining a machinery/equipment appraisal and a real estate appraisal. The buyer will need theses separate appraisals to know what will be required in order to finance some of the hard assets.

Finally, the preparation of the selling memorandum by the intermediary is the major selling tool in the entire process. This document describes in detail the industry, the company, the financials, and investment considerations.

Along with this document, a seller should have a "war room" of various documents pertaining to the business: lease agreements, bank agreements, a sales representative agreement, and corporate minutes. The war room would be the single place where all of the necessary secured files are kept. Theses file contain all the pertinent facts of the company, which buyers will want to review as part of their due diligence process.

There is an old saying that the right time to prepare to sell your company is the day you start the company or purchase it.

The M&A Counsel: It's A Great Time To Sell A Business....

2009-02-10T07:08:00.000-08:00

It's A Great Time To Sell A Business...If You Can Find The Best Buyer And The Buyer Can Get The Deal Financed.
Thomas K. Warburton
Warburton Capital Management

The Following is an excerpt from the Bluestem Resources Affiliated Group, LLC

Supply and Demand-The basic forces of economic nature. Many of us studied these concepts decades ago in entry-level economics courses at universities where we were distracted by the opposite sex and intoxicated by the freddoms afforded while pursuing a college degree. We may have considered that we woul done day own a business, but did we ever consider that we would sell a business.

Well, now its 2009. Many of us captured the spouse of our dreams and have parented college student sof our own. Over the years, we built a business thorugh hard work, determination and unadultersted stubbornness. Now we are getting in touch with our own mortality. We realize that somebody else is going to own our business someday and we intend to exercise maximum control over that transaction.

Let's revisit our college days and the lessons of our Economics Professors. Specifically, How Supply And Demand Impact Selling A Business From The Buyer's Perspective.

The Supply/Demand relationship between business Sellers/Buyers has remained constant through the ages. Business owners "Supply" enterprises that generate "Free Cash Flow" and business buyers "Demand" that "Free Cash Flow" at prices (multiples) that make sense. Prices (multiples) expand and contract for a variety of reasons beyond the scope of this article, however, I would like to focus on one phenomena that impacts a Buyer's decision of "how much to pay" = Access To Capital.

Business Buyers require Access To Capital because they generally utilize Borrowed Funds to finance a transaction. When access to capital is plentiful...buyers willingly pay more to acquire Free Cash Flow Because The Can. Likewise, when access to capital is low buyers pay less because they can't fiannce transactions.

At the risk of being obvious, "The Current Credit Market Is Having A Huge Impact On All Things Economic". Loans are viewed as "edgy" today that were "a laydown" only 12-18 months ago.

The grid below presents the universe of possibilities for Bankers (Supplying Capital) and Business Buyers (Demanding Capital):

The Merger & Acquisition Industry (which matches Willing Buyers with Willing Sellers at Reasonable Prices) is confronted with a Credit Market bogged down in box "C". This makes transactions difficult.

THE BANKERS PERSPECTIVE - I have many friends who are Commercial Lenders with prominent local, regional and national Banks. The temperature of these Lenders is consistent and characterized by comments like " we are not making many loans today", "our credit committee is reluctant to loan money" and the tour de force of negativity "we can't even get a good loan through a committee".

THE BUSINESS BUYER'S PERSPECTIVE - Business Buyers are enjoying an overwhelming supply of opportunities to consider. Aging Baby Boomers have spent the last 30-40 years of their lives building businesses that they now want to sell to finance their retirements. There are more privately owned businesses for sale today than there have ever been and the credit markets are frustrating Business Buyer's efforts to fiannce transactions.

So, the logical question is, "How Can I, The Business Owner, Hoping To Sell My Business At An Attractive Price, Get A Deal Done?" I have only one suggestion = Engage An Experienced And Professional Merger And Acquisition Firm.

A Professional Merger and Acquisition Firm will perform many valuable service:

They will tell you "if your business is ready to sell". Taking your company to market with shoddy financials or poorly capitalized is an invitation to frustration for a seller.

They will tell you "what your business is really worth". Forget about the emotions and all the years you've invested. Your business is worth "a number".

They will "approach and pre-screen prospective buyers". Finding a willing buyer is useful only if that buyer can close the deal. Recently a buddy of mine invested 9 months of his life attempting to sell his business only to have the deal blow-up at the closing table because the buyer couldn't get financing and wanted him to "carry back" a substantial portion of the purchase price subordinated to senior debt.

The will "negotiate deal terms". The price you will get for your business is important, but the negotiation of the employment agreement, the representations/warranties and other terms could come back to haunt the seller if not handled appropriately.

The will "get the deal to the closing table". The complexity of events and emotions that occur between "the offer" and "the closing" will inspire frustration and rage that require more than a little of the objectivity provided by A Professional Advisor.

In closing, supply and demand will affect your ability to sell your business. If you want to sell your business today there is some good news and some bad news. The bad news = Supply Of Capital. Credit Markets are making it tough to get deals done. The good news = Demand For Businesses. There are an enormous number of qualified buyers anxious to buy good businesses if you get to them...and they can get the deal financed.

Economic Impact on Business Brokerage

2009-01-06T07:49:00.000-08:00

The following article was published by Business Brokerage Press.

A recent survey (September 2008) conducted by businessforsale.com - a leading international listing site - revealed the following about the current economic situation and its impact on business brokerage.
Seller financing is not the only issue to have come out of the economic slowdown. Brokers reported the following common issues:

Sales are harder to complete when there is no real estate attached to the business.
There are more corporate buyers investing in smaller businesses.
Buyers are using lack of financing as an excuse to make lower offers.
There is a lot more caution in the marketplace.
Sellers have nowhere to re-invest the money from a sale.
It's generally harder to find financing, particularly to get an SBA loan. Application processes are longer and credit is tightened.
Smaller deals are not completing.

Overall Market Activity

Businesses are still being sold; however, 50% of brokers beliwve the process is taking longer than it did last year. On average it takes 12 months for a buyer to be found and a deal to complete - 3 months longer than this time last year. 12.7% of brokers believe there has been no change in the length of the business sales cycle.

Comment:In addition, at the recent International Business Brokers Association conference, we heard quite a few stories of deals that fell apart primarily due to financing. The loans couldn't be obtained, the business didn't pass muster with the bank, or the bank just plain wouldn't even consider the loan. Most of these were SBA loans. On the flip side, quite a few attendees said they were making deals, especially on smaller businesses.

Some of the common issues listed above are fairly obvious, but others deserve some discussion. We suspect that the deals with real estate involved are easier to get financed than those without it. Real estate always has intrinsic value, so banks and SBA (7a) loans are much easier to obtain with real estate included as security.

We also think that corporate buyers (by this we mean buyers who worked in the corporate world who we assume have been let go) are looking at smaller or less expensive businesses because they can't get home equity loans or they can't get them for nearly as much as they had hoped. This is then coupled with the lack of available financing mentioned previously.

We find it interesting that buyers are making lower offers using the lack of financing as an excuse. We would have thought that the opposite would happen. Sellers generally look for a higher price if they are financing the sale. Outside financing usually results in an all-cash sale or pretty close to it. Cash generally commands a lower price than one that is seller financed. As an aside, we feel that the current economic situation will create a lot of first-time buyers due to the layoffs and downsizing being done by corporate America.

Today's buyer is probably a lot more cautious due to the current economic times. Money is tight and there is a lack of available financing, forcing buyers to use their own capital or what they can borrow on their home equity. Since the majority of them are first-timers, they are cautious - and scared. Business brokers have to take this into consideration when working with them.

Now, more than ever, there is no such thing as too much information. Not only as much financial data as possible is necessary, but seller training, operations manuals, key employees who will stay, and seller financing are critical. Remember, seller financing is also a big confidence builder. Buyers feel that if the seller is financing the sale, he or she must be confident that the business can afford the payments, but also provide a livelihood for a buyer. It's alos importnant the landlord is agreeable to the sale; that a franchisor is reasonable about transferring the franchise to a new buyer, etc. In other words, the preparation is all important. A snag, such as an uncooperative seller, landlord, or note holder, can scare off a first-time buyer who is already petrified about depending on a small business to support his or her family.

It is also very important that we brokers well the small business lifestyle; the fact that an owner can't be fired, there is always cash flow, and that most businesses have a great upside with new management. Numbers are important, but lifestyle and owning your own business are key selling points today!

Smaller deals are probably not closing because the buyer is afraid to make the leap of faith necessary to become a small business owner. In today's environment, business brokers must spend time with a buyer and delve into whether he or she has what it takes to make that leap of faith. Sellers also have to be educated on how serious they are about selling. Many sellers back out of a sale when it dawns on them that they now not only won't have anything to do, but they won't have an income - unless they are providing seller financing. There is a very old and trite adage: A successful sale of a business requires a willing seller and a willing buyer. That is more necessary today than ever.

Buyers Aplenty for Businesses on the Market

2008-12-08T07:32:00.000-08:00

The following is from The Keene Sentinel
By Anika Clark
Sentinel Staff
Published:
Saturday, November 22, 2008

The national news is filled with stories about businessess - and the people who man them - drowning in a choppy economy.

With all this activity, business brokerage firms report they're comfortably above water. But some say the strength of their sector isn't the result of more people wanting to jump from the self-employment-ship so much as a swell of people looking to climb aboard.

"This has been actually one of our best years." said Brattleboro-based Philip H. Steckler 3rd, vice president of the New England firm Country Business Inc. "Every good business, viable business, that I've had out of here, we've sold."

Richard H. Thackston 3rd, president of Keene-based Century 21 Thackston & Co., echoed him.
"Business brokerage has been pretty good...in the last six months," Thackston said. "Sometimes when people see that their middle management job, or whatever, is likely to go away, they typically start thinking about what else they can do."

"Where regular employment goes away." he added, "people look for other, more creative , ways to earn a living."

Pamela J. Lynch, vice-president of Leonard Lee & Co. - an Amherst commercial real estate and business brokerage company that covers Southern New Hampshire - similarly described how that sector can be stimulated by a floundering economy.

"I think it's driving business more," she said. " There's more buyers looking to buy businesses."
Basically, she said, many people are looking to "buy themselves a job."
And with recent announcements of massive upcoming layoffs at firms such as Fidelity Investments, which employs New Hampshire workers at its Merrimack location, she said this trend's going to continue.

"A lot of those people are going to be thinking about buying a business and we've already been contacted by some," she said, referring generally to people emerging from corporate layoffs.
Also starting to notice an uptick in people interested in business ownership is Gary W. Oden, who works with prospective and veteran business owners alike as regional manager for the Keene branch of the N.H. Small Business Development Center.

Oden's encountered newbie business owners entering everything from the baking to pet grooming fields, and he said he had one client who saw entrepeneurial opportunity in converting trucks into hybrids.

Still, he said, he generally sees a rise in people looking to be the masters of their own business destinies between summer and fall - in part, he explained, because of psychological tendency to view September as a "new beginning" - and said this season's uptick doesn't seem too much greater than any other autumn.

"We're seeing a bit of an increase in activity, but I can't attribute it necessarily to the economy," he said. "I would have thought that if it was really the economy, you would have seen a tripling of the calls to come in, and we're certainly not seeing that."

Regardless, Keene residential and commercial real estate broker Moe Mozier of Re/Max Town & Country, said his work as a business broker has been "fairly active" even as residential real estate has "slowed considerably."

"Most of everything I've done in the last two or three months has been commercial," said Mozier, who said he's already seen the bad economy act as a catalyst for new business ownership and expects this to continue.

Specifically, Mozier predicted career-changers will be drawn to his bread-and-butter sector- the notoriously risky realm of restaurants- because of a lifelong dream or the assumption that owning an eatery doesn't require the same level of education as being a plumber, electrician, lawyer or doctor.

Everyone tends to think they can run a restaurant, he explained, and new owners often hire staff who know more about the field than they do.

The result?

"The tail wags the dog," he said, "and they're out of business."
But when novice restauranteurs are out of business, Mozier's in, since he works on behalf of both buyers and sellers. While Mozier said it's too early to notice any trend in his own business, he said that given the challenges facing restaurants in today's economy, "There's no question, there's downturn....There'll be more on the market."

Lynch, of Leonard Lee & Co. specializes in selling smaller "mom and pop" businesses ranging from hair salons to convenience stores. She also sells the assets of closed companies, including restaurants, where the assets can represent greater value.

"There's always restaurants that fail and close down for one reason or another," she said. "I can't say that there's an increase in them," she said.

But the future, she predicted, will be a different story.

"I think we'll see more restaurants probably coming on the market as assets," she said. "When the economy was hot here...some things were overdone. There were probably too many restaurants- too many pizza places- that were opened in certain areas. There's just too much competition."

Meanwhile, she said, businesses that are staying afloat are opening additional locations.
With commercial real estate prices coming down in recent years, she explained, "It is a good time for them to expand because they can get into a different market at a lower cost."

Donald F. Giancola, executive vice-president of Country Business Inc. - which provides business brokering through its Portland office to Maine, the New Hampshire Seacoast and Route 93 corridor- said he's seeing more acquisitions of smaller companies.

Giancola, who said his office's usual load of 15 completed transactions annually has remained stable, cited the economy as one possible reason he's seeing this trend.

"If a company's having a difficult time growing because it's in a market area that has not done well, then it's easire to grow through acquisition," he said. "They can either expand geographically, or they're expanding through a product line extension."

Like Giancola, Steckler said his rate of completed transactions has stayed steady during the trying economic times.But, he said, he's having to work harder to find for-sale businesses that meet his company's success standards to take on as clients.

"What concerns us as a company," he said, "is if we're not seeing any product for sale, or very little product for sale, what happens next year?"

Still, Steckler was one of several brokers who said their sector is afforded stability since some of the key factors that lead people sell their businesses- such as boredom, burnout, divorce, retirement- remain fairly constant through financial highs and lows.

"Frankly, I think that you're going to have an opportunity over the next few years for buyers and sellers simply because so many business owners are baby boomers," according to Steckler.
"There are a lot of businesses out there. This economy may weed some of those out...but the criteria that makes people want to sell is still there," he said. "You're not going to live forever, and you're not going to own your business forever."

Should You Be Selling Your Company...Now?

2008-11-20T08:17:00.000-08:00

The following is an excerpt from our Privately Held Company Newsletter.

It all depends! There are all sorts of studies, surveys and the like suggesting that with the "baby-boomers" reaching retirement age, the market will be flooded with businesses for sale. The consensus is that with these privately-held company owners nearing retirement age, the time to sell is now. In one survey, 57 percent of business owners said that their age was the motivating factor for exiting their business. In another one, 75 percent of owners with revenues between $1 million and $150 million stated that they looked to sell within the next three years. Reading all of this information, one gets the feeling that over the next few years almost every privately-held business will be on the market.

While there are always going to be those who feel that Armageddon is coming, or that all of these companies are going to be on the market on the day that baby-boomer owners hit 65, there are some compelling reasons to sell your business now - and some reasons that may compel you to hold off. First, we'll address the reasons to sell now. Under the Bush administration , the capital gains tax rate was reduced from 29 percent to 15 percent - almost cut in half. That is a pretty significant reduction. However, there is the distinct possibility that a new administration in 2009 will see fit to change this, and an increase is a real possibility. The tax issue is an important reason to consider packing it in now. Another good reason is that it just may be time to "smell the roses," as they say. After running the business for so many years, "burn-out" is a very valid reason for selling. Many business owners may have, without actually realizing it, let their business slide a bit. You lose a customer or client here and there and don't make the effort to replace them. Or, you don't make the effort to check back with the supplier who has promised to give you a better price on an important product or service. It's too easy to stick with the one you have been dealing with for years, even though you know the price is probably too high.

On the flip side, it is also easy to convince yourself that the business is down a bit this year, mostly due to the current economy, likely reducing the value of the company. Maybe waiting until things pick up a bit and values increase would be agood idea. Too many business owners feel this way, but unfortunately no one can predict the future. New competitors may enter your market. Foreign competition may move in. You may not have the energy or that "fire-in-the belly" you once had, so the business may slide even further.

You could also point your finger to the tightening of credit and ask, "How is a buyer going to finance the business?" Despite very low interest rates, borrowing money has become more difficult. People seem to be pulling back a bit, so maybe no one will want to buy the business. Thirty-five percent of business owners, in another survey, said they were going to hold off selling because they felt their business would continue to grow and therefore, hopefully, also increase in value.

There is an old saying that the time to plan your exit strategy is the day you start running your business. Business owners can't outgrow interest rates, capital gains or aging. The time to sell is when you are ready to sell. There is truly no right time, but understanding the tax implications now should play a very important role in the decision if you are considering a sale in the next two or three years. The mere fact that you have read this far may be a sign that now is the time to sell. To learn more about current market trends, what your business might sell for, and what your next step might be, contact us.

Improving Your Prospects for Selling

2008-10-28T06:55:00.001-07:00

According to a Price Waterhouse Coopers survey of more than 300 privately held U.S. businesses that have sold or transferred, the most common steps companies take to improve their prospects for a sale, prior to taking the company to market include:

Improving profitablilty by cutting costs
Restructuring debt
Limiting owners' compensation
Fully funding the company pension plan
Seeking the advice of a consultant or intermediary
Improving the management team
Upgrading computer systems/process

Qualitative Factors That Impact Price

2008-09-25T09:10:00.000-07:00

The Following is an excerpt from Arne & Co. BTM Newsletter by Darrell Arne

So, what is Price? Webster would define Price as the amount of money needed to purchase something. In the context of a business transaction, a term closely related to Price is investment value - defined as: the value to a particular investor based on individual requirements and expectations.

The definition of Price above refers to a "particular" investor (buyer), just as there will be a particular seller. The real world of business transactions involves people. People with deeply held values, differing backgrounds and knowledge, and who are emotional - just being human. That's why people are so often unpredictable.

So when buyers and sellers look at a business to be bought and sold, the Price they see will be influenced by their particular motivations, perceptions of risk and growth of the business, and their overall knowledge of the process. Price is also affected by how it's negotiated. The adage is:

"You determine Value and negotiate Price".

The test for possible overpayment begins with an analysis of the operating cash flows of the business. EBIDTA (earnings before interest, taxes, depreciation and amortization) is often the cash flow measurement from which pricing decisions are made.

If a buyer and a seller can agree tha the business produces a certain level of EBITDA, then the Price can be tested to see if it satisfies the buyer's post-transaction claimholders to EBITDA.

Those four claimholders are:

Uncle Sam: The state and federal income taxes on entity profits

Lenders: The principal and interest repayment on acquisition loans

Investors: The return on and of the cash equity the buyer puts in to make the acquisition

Company: The working capital and capital expenditures needed for future growth

If the buyer's claimholders to cash flows are not met, then the Price may be too high and/or terms too stringent. The reverse is true as well. If after meeting the buyer's claimholders' to cash flows, there are excess post-transaction cash flows remaining, then the Price may be too low, and/or the terms are too lenient. Therefore, not giving what the seller wants - the highest Price and the best terms.

Ultimately, the objective is to demonstrate that the pricing and deal structure satisfies the buyer's post-transaction claimholders to cash flows, while also satisfying the seller's expectation of receiving the highes Price and best terms.

A Win-Win Method in Negotiating Price

In the well know best seller on negotiation - Getting to Yes - the authors suggest this four-step negotiation methodology:

Step 1-Separate the PEOPLE from the problem

Step 2-Focus on INTERESTS, not positions

Step 3-Invent OPTIONS for mutual gain

Step 4-Insist on using objective CRITERIA

Ideally, the goal is to negotiate a Price that's a win-win for both the buyer and seller; and, leads to a wise agreement, which the authors define as: one which meets the legitimate interests of each side to the extent possible, resolves conflicting interests fairly, is durable, and takes community interests into account.

Top Ten Mistakes Made by Sellers

2008-08-28T06:17:00.000-07:00

The Following is an excerpt from our Privately Held Company Newsletter:

Neglecting the day-to-day running of their business since it will sell tomorrow.
Starting off with too high a price since the price can always be reduced.
Assuming that confidentiality is a given.
Failing to plan ahead to sell/deciding to sell impulsively.
Expecting that the buyers will only want to see last year's P&L.
Negotiating with only one buyer at a time and letting any other potential buyers wait their turn.
Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time.
Not accepting that the structure of the deal is as important as the price.
Trying to win every point of contention.
Dragging out the deal and not accepting that time is of the essence.

Finding the Deal

2008-07-18T06:59:00.000-07:00

The Following is as excerpt from Russell Robb's book, Buying Your Own Business 2nd Edition.

Brian Knight is the president of Country Business Inc., a thirteen-office business brokerage firm that specializes in the purchase and sale of small and mid-size companies. While Country Business sells mostly businesses with sales of less than $3 million, they are considered an excellent resource for individual buyers seeking to acquire companies in the lower end of the middle market, especially in Maine, New Hampshire, and Vermont.

Knight wrote the book Buy the Right Business - At the Right Price, however, the following information was delivered to the New York Venture Group during Knight's speech on "How to Find a Business to Buy."

The demand for small businesses far exceeds the supply. Screening telephone calls from Knight's Manchester Center, Vermont office, most inquirers are looking for small medium-tech manufacturers with a proprietary product and a proven record of increasing revenues and profits. The buyers would like to move to the Stratton, Vermont area and have a relatively short commute to the target manufacturing company. The only problem is that there are very few manufacturers in Vermont, particularly in the Straton area. What is available as businesses to buy in Vermont are hospitality and retail companies. The first lesson to be learned as a buyer is not to have unrealistic expectations.

Concurrent with the first lesson is deciding whether you should buy a company at all! Buying a company, much less finding a company to buy, does not suit everyone, nor does it assure financial success. Buyers can and will succeed if they buy an excellent book on this subject, seek professional advice, and take their time (maybe two years).
Knight emphasizes that buyers should:

Be self-analystical of their capabilities.
Write down their acquisition criteria.
Carefully interview and select a buying intermediary.
Work on interpersonal skills with a potential seller.

Country Business' mission is to find good and profitable businesses, not to represent unprofitable businesses. Knight believes that the key to success in finding the right business to buy is your ability to commit to the above items. If you can do so, success in finding the deal will be more likely.

Last Call Sale!- Likely end to 15% Federal Capital Gains Tax Rate

2008-06-27T06:52:00.000-07:00

The Following is from the IBBA Weekly Newsletter

By:Dolliver H. Frederick
President, Frederick Capital Corporation, Newport Beach, CA

Most of us are familiar with our wives "encouraging" us to participate in "The Sale Event of the Year" as leading retailers cajole us (well, at least our better halves) into believing that the savings will make the shopping event memorable! Well, we have just that ocurrence "before our eyes" as we make our way through the balance of 2008!

What I am referring to is the LIKELY END to the 15% Federal Capital Gains Tax Rate. With "absolute certainty" we hear and see the Democrats expound on "just what rate" they would like to see in place, be that 25% on the low side, most talked about 28%, but sometimes as high as 35%. It could be expected that even with a Republican White House, the desire for appeasement (reaching across the aisle), will likely cause the Capital Gain Rate to be increased as a result of "trade offs" for other tax concessions. Couple with State (9.5% plus here in California) Capital Gain tax rates, we have a MATERIAL CHANGE on the horizon! Many state rates are a function of the Federal rate, so they merely move up "in sync" with the Federal rate.

This "highly probable" Tax Change will make a very significant difference to our clients. The business owners who are "wholly motivated" by the net proceeds after tax that our divestiture will provide them, by way of example, a $20 Million sale (with minimum tax basis) would drive a tax liability of approximately $4.9 Million. With the expected "new rates" posted January 20, 2009 (or shortly thereafter) the Tax Liability would be approximately $6.9 Million on the low side, to over $9.0 Million if the higher limits are achieved. We can see that this difference of grater than $2.0 Million tax liability will certainly make our days far more difficult. Now, what can we do about it?

Firstly, we can make certain that any one of our clients who is "on the fence", gets off that fence, and moves forward with a sale that closes before January 20, 2009, or better even, a close before year end 2008, just in case "they" cause the rate increases to be retroactive to January 1, 2009.

Now, that is good news for us for the last half of the year. Further, we can begin to educate our clients on the various finance vehicle that are within our purview, any of which could eliminate (or at least "permanently defer until death) their tax liability. For example the ESOP is a superb tool, which would allow the seller to take 1042 Election, and defer the entire proceeds (through an appropriate investement in an "allowed investment") from tax liability throughout his/her lifetime, at which time the proceeds would get a step up, and the liability would disappear. We also have the Structured Sale alternative, wherein his tax liability is deferred against an annuity and life insurance, once again providing him/her with a permanently deferred tax alternative to having to pay his tax within twelve months (or less) of the sale.

It is my belief that we, as Business Brokers/Investment Bankers have a distinct responsibility to ensure that our clients are receiving the most contemporary of approach alternatives, to ensure that they are making "an informed decision" at all times. We are starting to touch on some of these areas at our Conferences, as I am certain we will expand on these "teachings" as their necessity becomes compelling and the courses become available.

These are very exciting days. The paradigm is shifting, and shifting quickly, as we are expected to be "fast on our feet" to provide answers, compelling answers to business owners who have worked their entire life to now realize upon their life's work. And we are expected to provide the optimum advice (or assist them in identifying practitioners) to ensure that their course of action is best for them.

We find it imperative to work with Financial Advisory firms who will act as a "go to" for the Business Owner, the people with whom he will trust his proceeds and provide him/her with the "right" level of risk/reward to their proceeds. The sooner the business owner "engages" with the fund's manager, the sooner he/she will be focused on "life after" the deal closes, and the more inclined they will be to embrace an early close. Also, to take advantage of the current BARGAIN Capital Gain Tax Rates, which "we" will probably never see agin in our lifetimes!

As Tim Russert said so often, and with gusto..."go get them. Tiger", and occasionally "go Bills" too!

Advantages to Small Business Ownership

2008-06-05T08:32:00.000-07:00

The Following is an excerpt from the book: Buy The Right Business- At The Right Price by Brian Knight

One of the most interesting discoveries we have made as consultants and agents in small business acquisitions is that the advantages of small business ownership are not widely understood. For example, it comes as a great surprise to some, that Congress has blessed the small business owner with a great deal of tax shelter in various forms.

For those who are constitutionally suited to small business ownership, the freedom and independence involved are even greater rewards that anticipated.

Because so few people understand how important the advantages of small business ownership can be when an acquisition is properly designed, this outline will be a helpful starting point.

Those who value their independence will find plenty of it in small business. They will have no one to answer but themselves. They will be completely responsible for workin ghours and conditions and for the success of failure of the enterprise.The small business owner has virtually unlimited freedom of choice to grow or stay small, change businesses, determine hours, products, services and organization, etc. Those who are well-suited to small business ownership often consider this the most important reward it offers.
The business owner will experience a much broader degree of business and management activities than it is possible to find in most careers. He or she will not be confined to a single management or job activity. This can lead to a far more complete understanding and knowledge of business processes.
The rewards will be directly tied to performance. A business owner will not be competing wiht others in the same organization or be required to work for someone else's goals.
One can earn an unlimited amount of money if sufficiently capable and committed. Conversely, one can lose everything of not up to the challenge involved.
A small business can offer an unlimited opportunity for creative talents of the owners. Small business ownership can be an ideal existence for people with talent and creative abilities.
It is possible to make a small business a family operation for those who wish to be clsoer tot heir families. Under good circumstances it can be an ideal learning and working environment for young people who are given the opportunity to participate. Conversely, those who do not wish continuous associations in work in addition to home life are well-advised to avoid the pressures a small business can create.
A small business is probably the best legal tax shelter in existence. Extensive benefits and tax write-offs can be built into a small business operation, particularly when the real estate is owned. Small business owners rarely have to pay substantial taxes until they are earning a substantial amount of money and enjoying an abundant life-style. Special benefits can include subsidized living expenses and shelter, transportation, entertainment, company insurance, medical benefits and many others.
A small business with real estate assets and responsive management can be virtually inflation-proof.
A well-run small business can be an even better estate builder than residential or income real estate. With the demand for small business growing and a scarcity of attractive, profitable ones, many owners find themselves with a much greater net worth than they would have had in traditional careers.
A great deal of assistance (far more than most people realize) is available for those wanting to consider small business ownership. A wealth of outstanding information, manuals, industry data, management assistance, courses and helpful organizations make the risk far lower and the rewards far higher than most people believe it will be.
Small business ownership has an increasing status as the institutional structure of society faces change and challenge. Even small businesses that were once considered routine or unexciting are now commanding great respect as the attractions of small business ownership become more widely recognized.
It appears that the small business sector of our country is now growing far more rapidly than big business.
Those with good basic management training will usually find a major competitive advantage over most competitors. Trained corporate managers often find that their planning, marketing, operating and/or organizational skills give them a major competitive edge. The required skills can be learned and developed by anyone with determination and normal intelligence.
Many families are able to get a large amount of equity to buy a business as a result of the steep inflation in residential housing in the last twenty years. This equity earns nothing intil it is liquidated; by investing it in the earning assets of a small business, a substantial earning power can often be generated.
One is free to choose, within limits, the environment and area that is most pleasing and healthy, entirely according to one's own value system. Those who find their present area of work a problem will have no such restrictions in choosing a small business. Similarly, the small business owner is free to conduct his or her business activities entirely according to personal ethics and values.

What Are Buyers Looking for in a Company?

2008-05-12T09:26:00.000-07:00

The Following is an excerpt from The Privately Held Company Newsletter:

It has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price.

Quality of the Earnings

Some accountants and intermediaries are very aggressive when adding back, for example, what might be considered one-time or non-recurring expenses. A non-recurring expense could be: meeting some new governmental guidelines, paying for a major lawsuit, or even adding a new roof on the factory. The argument is made that a non-recurring expense is a one-time drain on the "real" earnings of the company. Unfortunately, a non-recurring expense is almost an oxymoron. Almost every business has a non-recurring expense every year. By adding back these one-time expenses, the accountant or business appraiser is not allowing for the extraordinary expenses (or expenses) that come up almost every year. Theses add-backs can inflate the earnings, resulting in a failure to reflect the real earning power of the business.

Sustainablity of Earnings

The new owner is concerned that the business will sustain the earnings after the acquisition. In other words, the acquirer doesn't want to buy the business if it is at the height of its earning power; or if the last few years of earnings have reflected a one-time contract etc. Will the business continue to grow at the same rate it has in the past?

Verification of Information

Is the information provided by the selling company accurate and timely, and is all of it being made available? A buyer wants to make sure that there are no skeletons in the closet. How about potential litigation, environmental issues, product returns or uncollectible receivables?

The above areas, if handled professionally and communicated accurately, can greatly assist in creating a favorable impression. In addition, they may also lead to a higher price and a quicker closing.

Is This A Good Time To Sell?

2008-04-09T08:45:00.001-07:00

The National Political Scene and Taxes
Barron's Speaking of Dividends column ( Dec. 31, 2007) should serve as a wake up call to all business owners with regard to tax policy after the next election cycle. Even if the GOP wins the White House, a Republican president will probably be dealing with a Democratic Congress. The more likely scenario is an all Democratic government. Under current law, it would take an act of Congress to keep the dividend tax rate at 15% otherwise it will return to 39.6% in 2011. It is possible that Democrats will decide to keep the dividend and capital-gains rate equal to each other, which would imply that both would increase to as low as 25% but more likely 28%, nearly double the current 15% rate.

Interest Rates and Inflation
Maintaining a lid on inflation continue to be a central focus of the Federal Reserve. Bench mark interest rates have decreased, credit appears to be tightening, but borrowing rates for acquisitions of successful businesses remain low. However, with a continued strong economy, the cost of borrowing is likely to increase. Other things being equal, "value" and interest rates work inversely to each other-as rates move higher, value moves lower.

Private Equity Groups
Demand for business acquisitions from all sectors-high net worth individuals, corporations, and private equity groups-all remain strong. Private equity groups in particular have been an aggressive force in acquiring middle-market transactions--we have managed transactions to equity groups where the purchase prices have been as little as $5 million. These groups have money and need to utilize these funds. We are just learning about some of the advantageous tax rates utilized by these groups. The tax loophole of capital gains treatment for management fees are likely to be eliminated. Further, if investments by equity groups fail, and some will, demand from these groups may taper off.