- Results based on confidentiality, competency and integrity.

Seller Resources

 


6 Steps To Adding Value to the Sale of Your Company


1.    Building the niche

All buyers of companies look for the seller who has carved out a powerful niche in which to do business.  The focused niche player has strong margins, is more profitable, and has greater barriers to competitive entry.

A+ companies have overall profitability in the range of 18 percent plus, as a percentage of sales, and sometimes go as high as 25-30 percent.  They are often dominant players selling their products in their particular focused market – and they usually offer some products no one else does.  They typically have a defined business category which they understand well – and this gives them the ability to be first with the changing technologies and trends deemed desirable in their business segment. The better you understand your customers, and the products which attract them, the easier it becomes to service that solid niche presence in your marketplace.

2.    Building a financial track record

Buyers look closely at financial history in assessing value.  They look for strong profitability, steadiness of progress over recent time periods, and solidity of fundamental balance sheet.

The more you can keep costs well controlled and profits growing, the better.  It is easy in the mature company to become increasingly complacent about cost control.  To stay in that A+ category requires ever-vigilant focus upon improving profitability.

Also, as you build, your plans should include steady and fairly aggressive pay down of debt.  Most buyers, when they pay a multiple of cash flow, generally begin with a cash flow definition known as “EBITDA” (earnings before interest, taxes, and depreciation allowance), less normal recurring “Cap X” (Capital Expenditure Requirements).  The amount they pay is what they expect to pay for a normal mix of assets and liabilities, excluding interest-bearing debt.  Excess cash on the balance sheet can typically be added to the price.  Thus, the truly healthy company with minimal debt and/or strong cash, is highly reassuring to buyers, and generates strong confidence quickly.

3.     Understanding growth potential

When analyzing a client seller, we commonly begin with a SWOT analysis (strengths, weaknesses, opportunities, threats).  To optimize strengths, one element to the attractive analysis is measurement of the size of your primary customer segment – both size today and possible size of future growth.  Even the best niche market in the world, if it’s total potential size is tiny, is not very attractive.

As you begin to see weaknesses in the market road ahead, look for replacement segments in emerging new markets for possibilities.  Analyze the forward prognosis in demographics and retail trends, and in every other bit of information you can glean, to give you glimpses of the possible future.

4.    Secure the intangibles

Intangible assets enhance value.  The most obvious intangibles relate to patented products, or products subject to exclusive supply agreements.  As your market presence and distribution networks become increasingly powerful, it gets easier to command exclusivity in sourcing the product.

Trade names and trademarks create value.  Be diligent about the legal maintenance of such intangibles.

An equally important, but often neglected intangible asset is key people.  Depending upon the state laws, non-compete agreements may not prevent you from losing good talent, but they can prevent key people from walking out with a head start in the form of business taken from you, as a former employer.

By the way, a firm, long-in-place non-compete for top management is something that needs to be in place, as a matter of course, well in advance of consideration of sale.  If non-compete agreements are put in place immediately prior to sale, employees are likely to resent the change, and feel unfairly treated by both the exiting seller and the new corporate buyer.

5.   Housekeeping

The basic “housekeeping” which precedes sale is enormously simplified if it has become a real habit of the organization.  “Housekeeping” means maintaining clean financial records with audits or reviews on an annual basis by an outside CPA firm.  It means have defensible tax positions – nothing outrageously risky or “on the edge,” having clean environmental and safety records.  It means complying with OSHA, ERISA, and any other governmental rules and regulations.  It means fully and properly adhering to rules for sales taxes, use taxes, franchise taxes, etc.


All of these areas and more will be reviewed in depth by an incoming buyer, and major uncertainties or exposures will show.  Additionally, any buyer paying an aggressive price will expect the seller to make certain representations and warranties about the condition of the company being sold.  The seller need not make reps and warranties about the future in any way, except he will need to say that he has fairly disclosed known threats and claims.  He will also have to attest that he has told truth and has not misled the buyer intentionally.

6.      Positioning for the future.

You can build into your plans the mechanisms to enhance value of your company.  By doing so, you ensure that your company will be worth more in the future, and you increase its stability and security right now.   You make your employees safer, in that they will be more desirable to a future buyer of the premium company.  The outcome can be the best possible for everyone from the owner/CEO down through the youngest mailroom clerk. 

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A Checklist for Bringing Top Value in Business Sale

 

If you are contemplating sale of a company, there are “tricks of the trade” that you could and should use to obtain top value.  The following is a brief checklist of major deal enhancement techniques to consider as you go through the selling process:

1.   Create competition:

The one way to ensure a sales price at a top competitive market rate is to invite competitive suitors to the negotiating table.  Buyers have an obligation to their own shareholders.  They can’t offer to pay you the premium for value, unless they MUST due to competitive pressure.

2.   Do the homework:

Prospective buyers are not only the obvious head-to-head competitors.  Think 360 degrees.  Often the company in “adjacent” markets is actually the more eager prospect to buy.  They get something NEW from you – something they don’t already have. 

3.   Guard confidentiality:

Is this a conflict with checklist item #1 above- to “create competition”?  No, but it does require caution and methodically controlled process.  Talk to multiple buyers, but only a few – and choose them carefully.  Insist that any competitive suitors sign a non-disclosure agreement before you enter into meaningful discussions.

4.   Hire professional help:

The best sales are always assisted by professional outsiders.  It takes from 1,000 to 1,500 hours in total to sell a company.  Hire a professional.  The return to you will be far more than what you pay.

5.   Resist the “stop-shop”:

Don’t commit to a buyer exclusivity agreement until you’re really agreed, in writing, on the fundamental details of the transaction.  Also, remember– you are agreeing to exclusivity on the terms proposed.  If the buyer changes those terms, you need to be free to reconsider alternatives.

These are only a handful of the items you will want to consider as you move forward to consider sale, but they can make a tremendous difference it terms of the results you get from the selling process.
 

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Business Sale: Gold at End of Rainbow


In recent years, merger and acquisition activities have risen to an all-time high – both in number of transactions and in transaction pricing.  Entrepreneurial owners who have built competitive winners are reaping tremendous rewards.  Philosophically, it’s all that’s right about our free economy.  The daring entrepreneur works 12-hour days, borrows money, bets the ranch, and slaves away to make his business great.  It becomes great.  He creates jobs.  He produces quality goods and services.  He pays taxes.  He helps the economy.  Surely it’s a good thing when his reward at last comes at the end of the rainbow, and he sells well.

But, alas, that is not always what happens.  The sale of business experience isn’t always so rosy. 

What makes one owner cash in for untold, almost preposterous riches, while another exits with barely tolerable pricing or with handcuffs to his desk for five years to come?  The purpose of this article is to explore that question and the answers to the question.

In the real life workings of business ownership - particularly for today's technology companies and systems integration businesses - the timing of an owner’s sale of his business is typically not strategically planned well in advance.  Sale of a business is far more frequently opportunistic – and dependent upon the owner’s chance receptivity to the regular barrage of calls he gets from possible would-be buyers.  He has a bad day, or he sees a major investment or a major risk in front of him, and he says, “Maybe I should consider sale now.”  Seldom does it occur that this owner would decide that it’s strategically the right time to sell, screen and hire competent professional help, identify and investigate buyers, and then initiate contact.  Such actions are time-consuming, somewhat intimidating and well outside of the practiced areas of expertise of a business operator.  Instead, the owner simply responds one day to the dozens of calls he gets, week in and week out, probing for interest in sale.  The buyer he talks to may or may not be the “best” buyer.  Alas, without careful planning and effort, the final sale of a business may be literally almost left to “luck”.

Back to the original question then – what is the element of difference that creates tremendous value and astounding business pricing for the lucky few?  The answer is not a simple one-liner, but it’s close.  Competition creates and drives value.  It is the number one distinguishing characteristic for creating buyer appetite.
The single most common mistake sellers make lies in their lack of a professional strategic approach in their consideration of sale.  They naturally have a great fear of talking to multiple buyers.  Owners don’t know who to talk to.  They don’t have time to talk.  They mistrust the willingness of prospective buyers

to keep matters confidential.  So, they quietly move forward with one or two of the less-than-best buyers.  Costly mistake!In a market where the buyer wants the strategic fit, where he knows he is not alone in the search for that fit, and where the seller under consideration offers some special unique advantage, the buyer knows he will ve to be competitive in pricing to win the day. The courtship is on!

The second most common problem for the inexperienced owner considering sale is often in setting his price.  Buyers inevitably probe aggressively and ask point blank what the owner wants in pricing for his company.  The seller feels rude, or even foolish, if he doesn’t respond.  Regardless of the price set, the buyer will offer less.  Thus, if pricing was 50% lower than the buyer might have been willing to pay, you will never know.  If the price is 50% higher, the buyer will see the seller as foolish, unrealistic, and unworthy of pursuit.
 

Professional investment bankers will not set price.  They make the buyer set price.  Buyers don’t like that a lot, admittedly, but the best ones do step up to the plate, and take a swing.  The market speaks, and price is set by the natural velocity of free trade and competitive appetite.  A beautiful thing!

As advisors to business sellers, we see hard proof of these fundamental rules of our free market economy every day.  In October of 1999 we were hired by a systems integrator to help them complete sale of their Company.  The owners had the buyers identified, had a 10 million dollar cash offer from the buyer on the table, and really wanted to hook up with that buyer.  However, they knew the pricing wasn't very good.  We helped them ask the buyer to reconsider and make their proposal more competitive.  To ensure competition, we also talked with a few other buyers.  The original suitors raised their proposal to 25 million cash plus 15 million dollars in post-closing incentives.  We closed the deal in January, 2000.  Quite frankly, I suspect we could have closed for even more with other suitors, but our client truly loved the original buyer, and was please with the deal.

Was the buyer b
eing unreasonable to try to buy the company for 10 million dollars at the front end?  No.  They had a responsibility to their shareholders to buy as economically as the market would allow.  We, however, were most pleased to help them justify an improved market price.  Subsequent to closing, the buyers and sellers continue to be extremely pleased with the relationship, and are prospering financially.

So where are all these good and competitive types of buyers?  Who will they court next, and why?

The technology and system integration industries are in metamorphosis.  They are blossoming.  They’re changing.  Companies which were once machine shops doing sheet metal with some onsite assembly have grown up to be turnkey design/engineering houses, and system integrators, and more.  Little pocket niches are emerging for companies which cater to one specialty customer type – or even to one customer alone. 

The winners in this fast-changing market will be the business owners who have

 

 

 

a)    the savvy to pass the baton to the next generation before stumbling into a growth plateau they can’t       handle and

b)    the strategic foresight to professionally orchestrate sale instead of reacting to the buyer who happens along.

The moral of the story is – opportunities abound.  Enormous wealth is possible, more than ever in history, for the astute business owner.  New business investors will provide capital and opportunity for growth to all-time highs.  Live, learn, and stay alert.  Prosperity, profit, and amazing opportunities lie ahead!

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Buyer's Perspective on Business Value

 

Every business owner has at some time wished for some single correct formula for calculation of “true” business value.  The beauty of a free market economy (and the artistry of great merger and acquisition success) is that value moves and lives and breathes.  Free market value is almost as difficult to analyze intelligently as the tax code. 

None the less, in real life, business sellers and investor buyers each have to start someplace in quantifying value expectations.

There are dozens, possibly even hundreds, of formula approaches possible, but most sellers go at the valuation process far more simply than buyers.  The most common approaches by the seller, in ascending order of realistic viability are: 


a.) The seller asks himself “How much do I need to live comfortably for the rest of my days? (Absolutely irrelevant to any buyer)


b.) The seller seeks published information on pricing and calculates price relative to aggregate sales volume, to estimate value as a multiple of sales volume.  (Usually wrong, and relevant only if all possible buyers can produce uniform profit percentage returns on a given volume)


c.) The seller uses some multiple of earnings which he has heard about as a norm for his business (simplistic, but by far the closest of these three to likely reality).

Buyers, on the other hand, generally go through a far more complex analysis.  In attempting to discuss a professional buyer’s eye view to the question of valuation, we’ll group the main concepts of buyer pricing issues into four segments.  
 

Mechanical Earnings Multiple Calculations

Buyers almost inevitably start any analysis with some variation of an earnings multiple formula.  Before applying their earnings multiple, they first recast the financial statements of the seller, to try to make such statements owner neutral.  Any impacts of distorted financial results due to specific seller ownership are carefully removed from the calculation.  For example, if the CEO and owner is replaceable for $200,000 in salary, on the open market, but his present salary is $500,000, the buyer adds back $300,000 to earnings.

After measuring what they believe to be a fair performance level of the company, before owner distortions, the buyer then typically applies some rule of thumb multiple to resultant earnings.  Rule of thumb multipliers for a typical manufacturer, for example,  may range from as low as four to as much as eight times earnings, depending on the business niche.  In most specific business sub-segments, a vast majority of buyers will think of fairly consistent ranges as normal multiples for valuation in that segment.
 
The multiple is typically applied to EBIT (earnings before interest or taxes) or to cash flow, usually approximated by EBITDA (earnings before interest, taxes, depreciation, and amortization) less normal capital expenditures.”


The first, the simplest, and the most mechanical element of valuation is done.  (A note of caution here, however:  Earnings multiples are applicable only if there is a positive earnings level.  For companies losing money, the more common starting point in value is somewhere between asset liquidation value and asset book value.  For easy turn arounds, value goes up, and for companies in highly troubled markets, or for companies with very severe problems, values drop.)

Buyer Synergy

The next critical element in the buyer calculation- which the seller may never fully know or appreciate- is the buyer’s analysis of synergy.  If the buyer is confident that they can dramatically improve their own overall earnings by ownership of the target, they can afford to pay more. 

Synergy may come from simple cross sale of capabilities to a greater breadth of customers (buyer to seller and vice versa).  It may come from ability to reduce overhead in the combination.  It may come from dozens of possible benefits of combination.  Regardless of specific source or reason, the buyer has value in synergy when he knows that he can add more to his overall performance than just the simple addition of combining his earnings with those of the seller. 

Capital Requirements

Next, the buyer must factor in some consideration of possible cash required to make the purchase.  If the prospective target has no potential for bank financing, which would preferably be used to cover a part of the purchase price, then the buyer will need a greater capital investment up front.  Less cash will be accessible for other needs.  A greater investment will be at risk.  Alternatively, if the company to be purchased can immediately borrow part of the purchase price on its own stand-alone merit, the buyer may reduce up front cost and risk, which makes the transaction more desirable. 

Buyers need to calculate rate of return on invested capital.  They need to consider how long their investment will be tied up before pay back.  They need to consider opportunity cost, in comparison to alternative uses for their investable cash.


One common mechanism for reducing up front cash required when bank debt is not available is a longer-term pay out to the seller.  Such delayed payment may be either as simple as a delayed note over a long term, or as complete as a bonus payment to the seller contingent upon performance results.  While not a favorite mechanism from the seller’s view (and thus a potentially dangerous approach in a bid situation), this can be at times the only viable way to bridge a gap between seller desires and buyer risk tolerance, especially if the seller is a company with inconsistent results or disproportionately low borrowing capabilities.


Market Impact

The last major element to the typical range of buyer considerations required is the estimate of market impact.  The buyer must somehow estimate the competitive pricing likely by other potential buyers.  If the seller has no other candidates, the buyer has an ideal lack of competition, and can afford to some extent to be slow in increasing price.  This is not to suggest a classic “low-ball” bid.  It doesn’t pay to get far under normative pricing, because even the seller who wasn’t actually marketing his company will inevitably begin checking around for alternatives.  However, in the case of minimum competition, careful and conservative pricing is probably very appropriate. 

If the seller is known to be talking to multiple buyers, the buyer must be more careful to at least place themselves in the running as a clear and earnest contender, with a reasonably aggressive initial bid.  If there are multiple good strategic buyers, pricing is likely to be pushed upward for synergy.  For example, if a company is producing $10 million in annual earnings as a standalone, but there are five buyers for whom it could produce $20 million per year, the pricing will likely land at a multiple on earnings between the two levels.  The winning buyer will likely be the one who shares the greatest portion of the extra value with the seller by increasing his offered price. 

Naturally, these are only primers to understanding the professional buyer’s view to business value.  Every situation has individual idiosyncrasies, and every buyer may have a different profile and a different fit.  The best teacher of value is competitive experience. 

As you go forward in exploring acquisition possibilities we wish you well, as one of our clients put it recently, in a post-closing celebration toast, “May our acquisitions today pay dividends tomorrow.”

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Gathering Ammunition For Selling Your Business At Maximum Price

One extremely useful element in preparation for sale, which can and should be practiced well in advance of sale, is the gathering of market intelligence. Such intelligence includes data about who the buyers commonly are in your business segment, but it’s also much more. It’s about how buyers determine value, and what types of companies they like to buy.

Discovering long-term trends and patterns in your industry can be immensely helpful when it’s time to cash in. Additionally, the accumulation of operating statistical information about others in your industry can be a great tool. It will alert you to the problems and opportunities, whether you’re considering sale or not. Finally, when the time comes to sell, it gives you the powerful ammunition with which to identify and better prove your strengths by comparison to industry norms.

The process of gathering functionally useful market intelligence is best pursued from several different angles:

1. Who is buying whom, what are they paying for purchase, and what are the long term strategic targets,

2. What is average and what is good performance in your business niche, and how do you measure in comparison to others in your market, and

3. What are the long-term trends and shifts taking place in your industry, with respect to the basic shape and form of your prime customers, your product, and its delivery?


In some industries, an owner can gather excellent data, such as industry norms, directly from trade associations and magazines. More commonly, however, the information which is publicly available is imprecise and not quite on point to your particular business. For example, industry categories are often too broad to allow accurate comparisons. Obtain all possible information, but don’t use it without careful scrutiny.

Mark Twain said, “There are three kinds of lies: (1) lies, (2) damned lies, and (3) statistics.” Statistical comparisons are worth the time to obtain and analyze, but only with due care to find information of real pertinence and comparability.


The best information may come from buying groups or joint-venture alliances, or even from conversations with friends. The more you’re able to build your understanding of how you fit into the picture of your total market, and where your company is particularly strong or weak, the better you will be able to deal with the questions that will arise in marketing your company.

It pays to be vigilant and attentive to changes in your marketplace; the gradual but significant trends. When business is tough or stressful, most owners tend to buckle down and focus on the details with such intensity that they totally lose sight of the big picture. Once every few months, the prudent owner will lift his head and try to look from afar. Such vision will offer keen insights not only into prudent operating or marketing direction, but also into sourcing for premium buyers of the future.     
  

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Golden Parachutes for Troubled Companies:

Protecting your Nest Egg


Our firm has made its living for more than eighteen years by selling companies - some in great times, at absolute peak moments, and others at moments where they were heading downstream quickly, and fast-approaching the waterfall drop-off to end it all.  This year we  keep hearing owners say, "It's getting really tough to make money in this industry" (and they're talking about a frighteningly wide range of industries).  "I don't think I can sell right now, even though I would love to reduce risk.  I feel like I have to wait for an upturn."



So, if it is really bad - if your profits are getting impossible to hold, what should you do? 

Protect yourself!  Take charge and sell while you, your company, and your employees can still survive!  You can do it and still come out whole! 



Facing Facts


The hardest thing for the owner of any down-turning company to face is that the business may not be "fixable" by existing management, or by the kids coming along. It takes great courage and resolve to move decisively to sell before it's too late, but the payoff is two to five times more in value.  Business descent inevitably accelerates, like a bicycle on a downhill path without brakes.  Just slowing the descent is hard. Turning and coming back to the top is extremely difficult, requiring an owner willing to invest substantial money and time to back the changes needed.


We sold a metal stamping company in Chicago several years ago.  The owners of the company had been flirting with the possibility of sale for about 5 years.  As times got increasingly tough in their industry, they took on new, large, but not-very-profitable business.  They knew it wasn't the most desirable business, and yet they rationalized that surely it did help to "cover costs."  Finally, they found themselves with a nicely sizable company in total revenues, which was consistently LOSING money.  They finally pulled the trigger and hired us to sell them.  Two months after we began the selling process, the company was thrown involuntarily into Chapter 11 bankruptcy, due to actions taken by fearful trade creditors.  We continued with our selling efforts, and finally got appointed by the federal bankruptcy judge to continue representing them in sale.  We did get it done, and we got enough to pay all of the banks, all of the trade creditors, and a little to the shareholders.  The final proceeds were almost $25 million less than we had first estimated 5 years earlier.  That was true in spite of the fact that the federal bankruptcy judge said he had more bond-posted, able bidders in the courtroom on the final day than he had ever seen in this type of proceeding, in his entire life-long career.  Thus - we did a great job comparatively and competitively, but we brought a disappointingly small amount to our shareholder clients.  Timing made all the difference.

There are a great many companies today, which are struggling, but which are only now coming to fully appreciate their problems. In today's economy, combined with a new and higher level of international competition, they suddenly feel the pressure - with great force! The cold, hard fact is that continued overseas pressure, a decade of consolidation, and depressed U.S. markets have created tough times.  If you're in a pressured industry segment today, it will probably continue to be more difficult to be strongly profitable. 



Tighten Up


If you're tough minded enough to face reality and to move aggressively to save what you can, begin with a hard look at yourself and a healthy dose of belt tightening. You may have to stop the bleeding just to survive long enough to sell. 


Cut every cost you can, to trim down to a firm, solid core. Don't mortgage your future.  Keep cognizant of the fact that core assets and good people will be needed for the next step up.  However, resist the urge to rationalize or stall.  If you have excess people, cut back. Where costs can be pared down, do it.  Tighten up!  Watch cash flow with the keenest of interest.


Punch service to an all-time high.  Look for opportunities to strengthen and lengthen service connections to key customers.  Build "partnerships" to enhance customer ties.  Add services, such as design assistance or finish and assembly aid.  Stay alert to opportunities for advantage when competitors falter.

 


Get Expert Help


Without delay, NOW, get the process of sale started.  Do not pick up the phone and open up dialog with every casual prospective buyer you know.  Your employees will hear and become afraid. Your customers will hear and will begin developing "back up" sources.  Be smart, and hire professional help to sell your company. There are dozens of excellent business brokers out there, and they are clamoring for work right now.

Moving quickly is tremendously important for the troubled company.  ("If you're gonna skate on thin ice, you gotta be FAST!")  Professional help can make an enormous difference.

Be selective. Hire someone who focuses only on the purchase and sale of businesses.  Your attorney or CPA may be happy to take the job, but they won't have the focused experience or expertise to do it as well as a specialist. Neither do you.  Check references. Look for experience with turn-around sales.  Look for intensity and commitment in the firm you hire.



What will professional help cost? For the mid-sized or larger transaction (say, $25 million plus), a Lehman formula is common (5% on the first $1 million, 4% on the next $1 million, then 3%, then 2%, to a residual 1% on the balance). For the smaller transaction (say, under $10 million), broker fees are higher - perhaps 10% on aggregate proceeds, and the brokers actually do less of the work. Nevertheless, good representation will put money in your pocket, every time.  Also, be warned, virtually all quality intermediaries will charge some up-front retainer.  Frankly, if they work for no up-front retainer, they probably aren't very good, and you will get what you pay for. Our advice would be to find a quality expert, seek a fee arrangement that will incent the broker with a strong success element, and check references. The best have done this before and have done it well.



Calm Lenders and Investors


Depending upon how distressed your company is, you may have some critical issues looming with banks or with other lenders or investors. Communication often can alleviate enormous tension. Your bank does not want to own your assets.  Your investors will not like surprises.  Often a well-timed and frank discussion of your recognition of the problem, and the actions that you are taking to correct it, will go far in calming outside pressure.


Usually it pays to tell bankers that you are planning sale. In most distressed situations, bankers are pleased and relieved and will react very supportively.  They may grant you a standstill on principal payments, interest, or both.  They will, however, want to ensure that when you exit, they get paid off. Thus, if they don't have all assets pledged as collateral, they may seek to tighten up their position. Your intermediary or business broker should be able to help and advise you, and keep financial backers calm.

Whatever the level of proactive disclosure you choose, be scrupulously honest in all communications with lenders and investors. You will be glad to have earned their trust and cooperation in tight moments ahead.



The Chapters


Three or more creditors can throw a company involuntarily into bankruptcy with legal demand.  Alternatively, a company may choose to voluntarily seek Chapter 11 status, to operate on an ongoing basis, while being sold.  Chapter 11 is a distinct disadvantage in sale from a marketing view because everyone will know you are weak, and that the company can be purchased for a low price. However, buyers love the "no strings attached" cleanliness of purchase.  When they buy through Chapter 11, they are guaranteed clear title, with no exposure whatsoever for liabilities relating to past operations.  Also, the Chapter 11 filing does buy time by freezing debts for the prospective seller, and forestalls repayments until matters are resolved.  Chapter 7, alternatively, is bankruptcy with the intent to liquidate and close operations.  Under Chapter 11, you may achieve some value for ongoing customer relationships, intangibles and goodwill, and a significant core of people may well go on to jobs with the new owner. Under Chapter 7, operations generally cease as soon as practicable, and there is seldom any potential for a goodwill element in sale.


The issues in consideration of bankruptcy election are complex, and far beyond the scope of this article. However, if there is any possibility that sale won't result in proceeds adequate to pay off all creditors, then you, as owner, need to fully understand and consider every alternative.


So, what makes sellers come out well?


1.    Move early and move quickly - sell before value deteriorates.


2.    Tighten your belt to prevent further value from draining away.

3.    Hire expert professional help.


4.    Be forthright with lenders and investors - you need their cooperation.


5.    Know and study your rights, to protect your assets.


There is an old saying, "You can't really tell who's swimming naked until the tide goes out."  If you think that it might be you, stop pretending, for goodness sake!  Move while the getting is good, and save your company. 


Buyer markets today are strong, broad (very international in scope), and highly acquisitive.  If you're struggling, timing is not bad to get cash and help.  If you're doing well today, you're even MORE valuable and desirable.  Use the law of supply and demand to your advantage!

 

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In the Selling Process, the Shorter the Timeline, the Better



In the selling of any business, especially in times of a volatile or uncertain economy, speed is of the essence.  Faster is always better, and can radically improve the likelihood of success.


The total process of selling a business can take anywhere from two months to two years. Two months is unusual in the extreme, and requires aggressive buyers in hand at the outset and a willingness on the part of the seller to settle for nominal investigation of possible competitive bidders. On the flip side, two years is extremely slow, and generally would indicate a serious problem.


A reasonable timeline would be six to ten months. The first two to three months are generally required to gather information about the company for presentation to buyers and, at the same time, to identify and research who the best buyers may be.

Information to be presented needn’t be pulled to an elaborate bound-book format in this process. In fact, we recommend strongly against any printed material that cannot be easily updated and revised as the process evolves. However, material does need to be accurate, professional, and presented in a way to clearly set forth key elements to the deal that makes the opportunity attractive to buyers. The package of data which you give to buyers is a selling piece, albeit very soft sell.


With respect to buyer search work, the temptation to rely on old biases and assumptions about possible buyers makes it difficult for anyone heavily involved in the company to gain adequate distance to think most creatively. Also, the time to do a quality job in buyer search is extensive. Hired help is worthwhile, to try to contract the timeline somewhat, but in any and every case, this is time well-spent.  Solid competition can make an enormous difference in deal velocity and resultant likelihood of success.

After information is well developed and you are ready to launch, the early contact stage can be expected to take about another two months. For any given buyer prospect, it make take anywhere from one to ten days just to get the confidentiality agreement signed, depending on whether or not the buyer requires advance legal review before signing. Although our firm generally uses a very straightforward one-page document for this, we have at times had to deal with longer, more complex, formats due to a client’s attorney preference, resulting in a longer timeline.


From signing of the confidentiality agreement, it will typically take several more weeks to get the buyer the first phase of information, and for the buyer to consider their initial interest level. The faster that buyers return to you with eager requests for further data the better. Detailed questions are a good sign of real interest.


By the time you get to the stage of explicit response to buyer questions, you’re likely to be at the three- to four-month mark. When you have a nice mix of interested parties and you have provided them with solid information, it is time to call for bids. Best buyers should, by this time, be fairly far along in their thinking and able to establish price quickly. Bids can generally be requested with as little as a week’s notice, if all is in place.

When bids are received, it is prudent to select more than one party to with which to continue discussions. Next-phase actions will include invitations for tours of facilities, and meetings with the CEO or owner. Arranging such visits will probably take several more weeks, but, if all goes well, you will then be set to enter into a Letter of Intent with your chosen favorite, or move directly toward the Definitive Purchase Agreement. It shouldn’t take more than a few weeks to negotiate the formal Definitive Purchase Agreement, and not more than another sixty to ninety days to complete the due diligence and close.


Regarding the overall timeline, keep in mind that faster is ALWAYS better. A hundred things can go wrong and foil the sale. A handful of things WILL go wrong—inevitably. They have to be fixed, and fixed again, to stay on track. The tighter the time frame, the less opportunity for fate to introduce new challenges to your successful completion of sale.
 

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Selling in a Down Economy

 

Using a "Down" Economy to Advantage

 

As business owners today read a constant barrage of bad economic news, many are finding themselves worried about whether or not they'll be able to leave their companies at the time they had originally planned.  Owners worry about what such difficult credit markets may mean to potential buyers - and in some cases, they worry even about raw survival, if the downturn holds for long

 

The best and the brightest of owners out there today will look for ways to turn those hard times to their benefit.  There is an old saying that in every crisis moment for a business, there is the "seed of an equivalent benefit." The trick is in finding that benefit.  There are two such possibilities connected to the merger and acquisition markets of today that owners should be thinking about

 

  1. Buyers outnumber sellers 

With today's aging demographics, there is an enormous amount of baby-boomer capital in play - seeking solid placement.  The equity funds which may have included 50 or 100 real, viable investment groups 20 years ago, have risen to in excess of 2,000 today.  When the stock market is most volatile and scary, suddenly the ownership share in a real income-producing, value-growing company, with hard assets and longstanding customers, begins to look like a much "safer" bet for investors.

 

Our firm sells privately held businesses.  As recently as 10 years ago, very few of those deals were ever won by the "equity fund" buyer.  Today, over half of the successful business sales go to equity groups.  Equity groups today are credible, strong, aggressive buyers, who have earned their stripes.  These companies pay competitive multiples for the businesses they buy, and it creates an entirely new dimension to the selling process.

 

If you are one of those fortunate few companies still holding your own, in sales and profitability, even in today's rough economy, the opportunities can be tremendous for sale!  Competition to buy those companies that have managed to remain fairly steady today, is enormous.  The future for many of those companies looks even greater today, because the weaker, less effective among the competition will fail - thus leaving survivors even stronger for the next phase.

 

Additionally, companies facing real threat of failure in these pressured times, may also take advantage of such competitive buyer markets.  It's true that if you aren't performing well, pricing for you is never going to compare to the pricing for those companies which are providing 20% pretax income on a growing sales volume.  However, if your asset base is strong, and/or if your sales volume is fairly high, there will be buyers who believe they can "fix" your company, and those buyers will compete in acquisition pricing to win a chance to do that.

 

  1. Troubled competitors may offer great acquisition opportunities. 

When the economy slumps, companies that were making only a modest profit can very quickly slide into crisis.  As they face fear of failure and increasing needs for capital to remain afloat, they may suddenly become much more receptive to new possibilities of business combination.  If a prospective buyer has a strong sense of what may be amiss for the competitor, and (even more importantly) if they may know how to correct the problem, the dynamics of a combination can truly become the 1+1=3 advantage.

A combination of two "adjacent" competitors can offer tremendous potential for building.  Customers of one may feed the other access to new markets.  Products or services new to one of the new partners, may offer potential for expansion to customers across both companies.  The net result from such a combination can be a much faster path to growth and market dominance, than could ever have been achieved through just normal internal growth.

 

There are real risks to any acquisition, and just ratcheting up top line sales is not enough to secure real growth in value. However, if owners are aggressive and supportive of growth in the right directions, the upward curve can be accelerated VERY dramatically by acquisitions, and such opportunities are significantly greater it times of stress to an industry.

 

If either of these strategies has appeal to you, call us, and we'll be happy to do an analysis for you of opportunity today in your specific industry.  We love to sell strong companies, and we will provide a free salability analysis to any company who meets our target salability parameters.  Additionally, if we can help owners to do business-building acquisitions for solidification of their futures, we are confident that the relationships we form will put us at the top of the list for the future, when the new, budding, growing company may want to consider "cashing in".  

 

Create the "seed of an equivalent benefit" by moving with the economy today!  If we can help you, we will.

 

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The Art of Selling A Business

Selling a business is a strange blend of art, science, and psychology.  The perfect result is the American dream; hard work, courage, and innovation pay off with glittering wealth and glory.  However, even the most astute business owner can fumble or miss the brass ring.  The following comments are geared toward highlighting a few of the most common misconceptions and mistakes, and sharing proven tricks of the trade which get top results.

Crystal balls don’t work

Business owners assume that they know the most likely buyers for their companies, based on who has inquired about purchase or who is hot in the rumor mill.  They also prejudge and exclude prospects, sometimes missing the most wildly aggressive bidders.  Experience proves that owners simply do not know.  In a constantly changing market, the most aggressive buyer is rarely the obvious.  The highest priced proposal we generally receive is usually not the one predicted at the outset.

Filling your dance card

Business owners are reluctant to “shop” their companies.  They are uncomfortable making an overt approach to prospective buyers whom they do not know and trust.  Fearing the potential impact of rumors, they don’t want many people to know they are considering sale.  The most common owner reaction to this fear is the inclination to talk only with a handful of buyers, and those buyers are usually not well-chosen. This approach allows buyers to set lower prices and command tougher terms. 

Competitive pressure pays big dividends.  As Al Capone was once quoted as saying, “You can get more with a kind word and a gun, than with just a kind word alone.”  Competition forces the buyer to put his best foot forward.

No such thing as “Off the Record”

The fortunate buyer who calls at the right time often gets a very open discussion of the owner’s willingness to consider possible sale.  The owner assumes that as long as only a few buyers know about the opportunity, confidentiality will be controlled.  However, it is often during these early conversations that damage is done.  The inexperienced seller doesn’t obtain a signed nondisclosure agreement until he begins to share financial documents.  The enthusiastic would-be buyer finishes his conversation with the seller and may walk back into a sales meeting with an excited announcement about a possible acquisition.  From there, it’s a short hop to customers and employees. 

Conversely, the prudent seller first obtains a signed nondisclosure agreement from prospective buyers, before any serious conversation about possible sale.  Rampant rumors about the potential for sale can only harm competitive desirability and can create serious operational problems.

Comparing Apples and Oranges

Every industry has commonly known rules of thumb for pricing of businesses.  Sellers often hear that companies in their niche are selling for some standard multiple of pre-tax earnings, and then quickly accept that as gospel for the pricing of their business.  However, the application of these rules of thumb can be vastly divergent between one buyer and the next.  If the industry rule of thumb pricing is 6-8 times pre-tax earnings, a buyer may pay 8 times earnings for the gross assets of the corporation – leaving the seller to pay off all liabilities of the corporation.  Suddenly, the 8 times earnings offer looks more like 3-4 times earnings, on a net basis.  Another buyer may offer 6 times earnings for stock – taking all assets and liabilities as part of the deal.  Sellers need to be wary of rule of thumb valuation mechanisms. 

Value is what competitive buyers will pay in a moving market place.  The true market value can be estimated in advance of sale, but only with diligent study of the market place and careful analysis of the individual company circumstances.

Showing your hand.

Business owners considering sale will very quickly meet with the question of “asking price”.   Professional investment bankers rarely preset pricing.  They let the buyer set the price point by competitive bid.  Buyers put great pressure on the seller to voice what he would accept for the business.  Most novice sellers succumb to that pressure, and throw away the potential for top premiums.  Others try to build in enormous leeway by asking for such preposterous amounts that the buyers quickly back away, assuming the seller is ridiculous in his expectations and would be impossible to deal with.

Top pricing is most commonly achieved by letting the buyer set the level.  Most offers fall within a fairly predictable range.  However, there will be just a few - maybe only one or two – far higher than the pack.  The “premium” buyer is found.

If they don’t ask, still tell

Viable buyers control substantial amounts of cash, and make critical decisions for their investor groups.  They are likely to be very bright people who ferret out the business risks and eventually ask the right questions.  To achieve top pricing, sellers should be absolutely frank and forthright in all discussions with prospective buyers.  If a seller discloses weaknesses up front and intelligently, the buyer may well perceive the problem as an opportunity.  “If the company is doing this well now, in spite of the problem in their sales staffing, just think how much better performance will be after we correct that problem.”  Additionally, the trust level resulting from such honesty makes the remainder of the negotiation infinitely easier and enhances the relationship post-sale.

Consummated deals with truly premium pricing grow from an underpinning of fundamental integrity.

Have I got a deal for you

Buyers are quick to offer the seller a letter of intent to sign.  Sellers accept, believing they have a deal.  However, a great many of these deals never get to closing – or if they do, it’s at a severely reduced price.  The classic letter of intent binds only the seller.  The buyer invariably has the right to drop out, if his due diligence is unsatisfactory, at his sole discretion.  The seller, in the meantime, is asked to commit to an exclusive process by agreeing that he won’t talk further with alternative buyers.  Bad deal.  If competitors are chased away, the buyer now has tremendous negotiating power to reduce price or strike tougher terms.  The seller is forced to choose between accepting the changes or incurring the time, cost, and risks of beginning the entire process anew. 

The solution?  Don’t accept a letter of intent until the buyer has truly committed to the deal.  Consider a substantial deposit.  Work cooperatively with the would-be buyer to find some way to allow him to answer his critical questions and concerns in advance of entering into an exclusive relationship.

In conclusion - selling a business is a strange blend of art, science, and psychology.  Handling the process effectively can pay huge dividends.  Owners usually only have one chance to get it right, so it’s well worth the time and torment.

Study the elements of value.  Build a strong, controlled process for the task.  Get competent professional help.  Research prospects extensively.  Guard confidentiality.  Be scrupulously honest and straightforward.  Stay calm and steady, and don’t forget to mind the store.

At some point, every business owner gets the chance to cash in on all of that risk and hard work.  Never to work again?  No – highly unlikely.  But never to “have to” is a nice place to be.

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The Power of a Good Team and Professional Intermediary

 

In selling your company, it is absolutely critical, if you are to maximize results, to get the right team working for you. That team includes the intermediary who will represent you overall, the attorney who will handle document preparation, the CPA who will coach your team on the tax aspects of the transaction, and the internal resources who will support the gathering of necessary information and may even be involved in late-state interviews with prospective buyers.


Sunbelt Business Advisors will find prescreened buyers, make the initial approaches, respond to buyer inquiries and proposals, and quarterback the entire process along to the goal line. It’s a critical job. We will make the most of your life’s work. It can be a scary thing to consider handing over such immense responsibility to someone you hardly know. But it’s so important that you do. You’re only going to sell your business once! You must hire the best representation available the first time.

If you don’t give this task to someone with the proven techniques, resources and experience in the valuing, marketing, negotiating, and selling process, you are absolutely guaranteed to achieve lesser results. Neither your attorney, nor your CPA, nor your COO, nor your lifelong smart business friend will even come close to the capabilities of well-qualified professionals, like United Business Brokers.

So how do you know if a professional intermediary is any good? Begin with selecting a firm that focuses entirely upon seller representation. They are specialists, and their livelihood depends upon successful closings! If your deal is only supplemental income to a separate core business, it will not be receiving the same intense dedication. It’s a little like bacon and eggs. The hens are involved, but the pigs are committed.

Then check to see if they have a Certified Business Intermediary (“CBI”) designation from the International Business Brokers Association and a Mergers & Acquisition Master Intermediary (“M&AMI”) designation from M&A Source. That professional intermediary will spend hundreds of hours focused on this one task for you. They won’t be distracted by a separate workload, and they won’t be losing a client when they successfully complete the sale. Don’t choose the least expensive; as in most things in life, you get what you pay for.

It’s important to check references. A professional will gladly supply a list of completed deals and client contacts. Do not skip this step. It is also important to seek someone who will design a strong incentive system that will ensure they will keep working aggressively for you and are paid very well if, and only if, they make a successful sale. And ask about success rates. Although no one will be 100% successful, the best can come pretty close. Never hire anyone who insists on a fee up front.

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Value Enhancement Checklist

Overall salability

A.           Perform periodic (we suggest quarterly) analysis of approximate value levels of the company, based on a simple multiple of pretax earnings calculation; seek outside expert advice for comparative multiples common in your industry.

B.                   Develop a file of press clippings with historical information about related industry buy or sell transactions which have occurred in recent times.

C.           Build a press file with clippings on company progress, awards, and newsworthy events.

D.           Develop a listing of all intangible assets owned, and use such listing as a checklist to ensure keeping patents, copyrights, license agreements, or any other assets of this sort current and up-to-date.

E.           Prepare at least an annual SWOT analysis - Strengths, Weaknesses, Opportunities, and Threats, and utilize information gleaned to enhance action plans for the coming year.

F.            Review compliance history with ERISA, the IRS, and with Sales and other tax authorities, with focused attention upon "cleaning up" any pending issues or risk areas.

 

I.      Financial

  1. Develop solid and steadily improving targets for prime financial objectives,  including:

    1.         Pretax earnings, as a percentage of sales

2.         Sales growth, as a percentage, per year

3.         Gross profit margins

4.         Debt levels (object here is declining)

  1. Plan to "clean up" all balance sheet items, writing off any unusable or non-salable items on the balance sheet, and making sure all liabilities are reasonably and conservatively stated.
  2. Prepare an annual budget of planned financial performance, and become accustomed to utilizing this tool to site any problems or changes which might require attention.
  3. Obtain any available key financial statistics from others in your industry, and  compare and analyze your reports relative to other norms, to both know your strengths, and to monitor and correct potential deficiencies.
  4. Evaluate and enhance financial reporting systems, to ensure, a) timely and quick internal statement availability (preferably within 7-10 days of each month end, b) minimal "audit" or review adjustments at the end of each fiscal year,  c) reliable and well-policed inventories of all active and current contractual commitments, d) regular monthly compliance checks to ensure adherence to all loan covenants, and e) up-to-date corporate minutes.

 

II.  Marketing and Sales

  1. Develop quality hard-copy brochures of products or projects being sold.
  2. Develop a photo file of products or processes successfully completed.
  3. Consider a customer satisfaction survey, to document results, and to provide feedback for any areas needing remedial attention.
  4. Track sales order backlogs, or prospective sales lead inventories regularly, and begin to monitor year-to-date trends of such prospect or backlog reports to same reports from prior years.
  5. Analyze top customers with > 5% of company volume, and work on long term sales contracts, special services, or other mechanisms you might develop to solidify such relationships.
  6. If you use dealers or reps for sales efforts, periodically do an evaluation of quality and range, and develop a long term plan for continuous enhancement of network.
  7. Develop a positive PR plan within your industry, to build reputation.

 

III.  Staff

  1. Assess organizational management strengths, and target development of at least two tiers of potential leadership within each major area;  try to ensure that no single individual manager has direct report responsibility for more than 6 individuals (except at the lowest and simplest levels).
  2. Consider implementing a policy with non-competes for people in management  posts, and confidentiality requirements with secrecy agreements for anyone who deals in proprietary confidential information.
  3. Build a plan to ensure key customer contact with more than one person in the organization.
  4. Inventory your management strengths, with special attention to anyone 55 or older, to ensure you have identified potential developing people as possible future replacements.



IV.   Property and Equipment

  1. Build a photo file with clear quality photographs of all facilities.  If possible also maintain blueprints or floor plans of all key facilities.
  2. Consider an appraisal of real property owned by the company.
  3. Consider equipment appraisals, and/ or equipment replacement cost analyses for files.
  4. Take an "outsider" look at plant and offices, to ascertain clean-up needed well ahead of prospective buyer visits.
  5. Assess any compliance issues with OSHA, EPA, water, sewer, or clean air authorities (if applicable), or other governmental agencies or authorities. Develop plans to move to a clean bill of health in all areas in advance of sale.
  6. Consider a Phase I environmental review, if you have never had one done.

  

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Want Cash For Today and Staying Power for the Future?

Consider Equity Funds

                             
As we face the current uncertain economy, it's easy for the business family that has all of its eggs in that one business "basket" to feel nervous.  However, there are real alternatives today that simply weren't there 10 years ago.  There is a category of business buyers - the "equity fund" buyer - which, although it has been around for many years, has finally, this century, become a true competitive buyer for the middle market company.

Our firm sells privately held mid-sized companies - commonly ranging in size from $10 million to $250 million in sales.  We have been doing that for the past 18 years.  Only in about the last 5 years have equity funds started winning our deals!

There has been a veritable explosion in the number of equity fund buyers recently.  Our private database of qualified equity funds is now over 2,500.  Additionally, they are pricing their purchases today to compete with strategic buyers.  Ten years ago our sellers ended up being sold to private equity funds in maybe 1 in 10 deals.  Today, it's more like half of all deals in this size segment.

The private equity fund also offers some twists in form and content which, depending on your circumstances, can be quite appealing to the family business owner.

Management stays in place

The private equity funds want management, and even most long time shareholders, to stay involved with the company. They hope such historically important key people can be part of the company's future, and its growth. Private equity funds don't have a stable of industry experts or other employees which they can move in to replace your people.  If you enjoy your business, but need capital for growth, or simply want to reduce your risk by taking a few chips off of the table - they can offer you a great way to do it!

Financial incentive for future growth

The typical equity fund likes to leave anywhere from 10% to about a third of ownership in the hands of former shareholders and/or employees.  This leaves some of the key operating management with a strong incentive to continue to nourish and support the company.  In just a handful of years, we have seen a number of these smaller minority retained pieces become almost as large in value as the original super-majority sold!  If you are optimistic about your company's future - particularly if your company gets a bit more capital and some sophisticated advisory guidance, this can be a great way to direct your future.

Evolving job roles for senior executives (having more fun)

We also see a great many owner executives who are excellent at certain aspects of their business, but not at everything.  It's those weak spots that haunt owners and keep them up at night, and they can be the hardest areas for that owner to mend or to develop beyond.  For example, the owner who is a natural born people-person - a great boss, and a good salesman - may be weak in financial control issues, or administrative function (that's not his natural gift, or his personal preference).  Post sale to an equity fund, he has assistance in getting top quality people in place for those jobs - and he becomes free to once again do what he's great at.  (Win/ win, for both the seller and the equity fund).

In spite of all of these supportive and complimentary comments about private equity funds, they are difficult to deal with for private company sale in a few ways.

The "con's" of equity fund buyers

Equity funds know less about your industry, and yet can be very aggressive, in the heat of competition for the deal, in trying to get you very quickly "committed" to them. They ask for an exclusivity agreement, requiring you to agree not to talk to other buyers. All too often they may rush you to that step, before they have evaluated fully. If that causes them later to "back out," or to propose major changes to the deal, that can cause you as Seller to have to back away and start the entire process over. The cost to the seller of a failed effort is enormous - both in terms of professional service and support, but more importantly, in terms of lost alternative buyers.  Equity funds also depend heavily on bank backing, they require greater access to employees pre-closing (even requiring advance contracts in some cases), and they move more slowly than the average "strategic" buyer.  Some equity funds are far better than others with respect to such negatives, and a strong intermediary can help you evaluate, control the process, and hopefully sort these things out. 

In summary, equity groups are a complex and sometimes difficult group to court as prospective buyers, but it's also a group that can offer a whole new range of potential solutions for the private business owner who wishes to reduce risk.

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What To Do When Buyers Call


Every business owner is approached from time to time by would-be buyers who express interest in courting you for acquisition.  The way you handle those early forays can make a huge difference in the likelihood of a successful and lucrative sale.  Even if you have no interest in sale today, you can use these early probes to learn much about your market place, who buyers are, and what elements of value in your company will create the most sparkle/the most dynamic competition for your company on the day you decide that it’s time to sell. 

First of all, realize that 75% or more of the approaches you may get from would-be buyers will in reality be approaches from intermediaries, seeking to represent buyers who might acquire you.  Early stage discussions can quickly allow you to screen and identify the nature of the caller.  Ask directly in the first conversation.  Are they an intermediary who represents buyers, an intermediary wishing to represent you in sale or are they a part of an equity fund or a strategic corporate buyer who thinks they may have interest in your company? 

Let’s consider the last category of inquirers first.  If the caller is an employee of the potential purchaser, get a pencil, take notes and ask questions that will help you understand their interest as possible buyers.  Even at these earliest stages, begin the conversation by clarifying that you expect the conversation to be entirely confidential.  Tell the buyer that you are not currently being held for sale, but that you always have interest in being alert to opportunities.  Tell them you need a bit of background to even decide whether it’s worth talking further.  Specifically, ask the following: 

Why do they think the company might fit their acquisition interests? 

If they are a strategic corporate buyer, do they know what you do, and seek to own that capability?  Understand what they do now, and where they hope to evolve, to better understand how you might fit with them.

If an equity fund is calling, what size acquisitions do they target?  What other companies do they own, or have they owned in the past, that maybe similar, and how have those companies performed for them?  What % do they buy, with the acquisitions they do? (Do they buy 100%, or do they require sellers to continue to hold a percentage of the company?).

For any buyer, ask what profitability (pretax profits as a % of sales) do they think is good?  What growth rate do they think of as respectable and desirable? 

(Then we get to the really interesting question!).   

How do they typically price acquisition targets? 

Most buyers have a pre-set concept of likely pricing based on a multiple of pretax cash flow they may pay.  If you do a good job of handling this conversation, you may learn of  a range of possible values they may set, in later making you an offer.  The best buyers will be proud to tell you that they sometimes pay a strong multiple – perhaps a 6–7 multiple.   The buyers who are quick to tell you that they don’t pay the most (but, of course, they are still great buyers- for other reasons) are probably not likely to be very aggressive in pricing.  Also, probably half or more of the people you talk with will duck the question entirely.  (They don’t want to lose your interest by quoting a conservative pricing model, and yet they are afraid of quoting you an aggressive model, because it may “cost” them by getting your expectations too high.) 

If you can’t get this last and most valuable bit of info – you still have gained good foundational info – and later when you are ready, a hired intermediary can probably learn more for you, by pre-screening before next stage conversations.  (Buyers will tell an out- side intermediary more – especially when they realize that without such info, they may never even get to “look”.)

What about the caller who acknowledges that they’re a seller rep – and they want to represent you?  Ask them the same questions about value.  If they’re out and about in your industry, they should have information, and examples of companies they have sold.  Ask them what makes them different or better than others at what they do.  If you like what they tell you, ask that they send info on their firm, and references of deals they’ve done, for your files.  Tell them you’re happy to keep their info on file, and you’ll call them if or when you have interest.

If the caller says they represent buyers, ask who they are representing, in this call to you.  If they won’t tell you, they probably don’t have anyone yet in mind.  (You do not want these people to go out casually “shopping” buyers for you.  They will be careless about confidentiality and sloppy in what they tell about your company.)  If they do have a specific buyer, ask why they think this buyer is a fit.  Then, ask the same questions you would have asked of the buyer directly.  If they can answer well, keep their info at hand, to call them back when you may have interest. 

What about the buyer who does sound like a good fit, and who you think you’d like to talk with further?  Before you tell them almost anything about your company, have them sign a written confidentiality agreement. 

If you know of a good seller representative that you like and trust, bring them in immediately.  They can give you important and valuable help in presenting info attractively, desirably, and correctly to the buyer from the start.  It can greatly increase your chances for success.  You will also have far fewer calls into your place of business, if you have someone offsite to handle next-stage contacts.  Even if you start off by paying a flat hourly rate at $300 - $500 per hour for this - it can be worth millions to you in the end, with a more handsomely priced acquisition.

If you want to inch forward on your own, without help, at least get the non-disclosure in place first.  Then proceed with care, and… warm them up!

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Why Profit Isn't the Only Factor that Affects Selling Price



Is the amount that a buyer will someday pay directly related to company profitability? Yes and no. The amount that the buyer will pay is a direct corollary of two factors:


1)  The buyer’s estimate of what profit HE will be able to produce by operating your
     company, and


2)  The buyer’s perception of the likelihood of competition beating his offer.


Except in cases of newly emerging proprietary technology, the buyer’s estimate of profit potential is almost always linked strongly to history. Of that history, clearly the most important element is the most recent time period. Nevertheless, ideally, in preparing for sale, you would like to build a solid and relatively stable historical picture of growth—both in sales and in profitability.


The profit piece of the picture can and always will, from the buyer’s viewpoint, take into account ownership quirks. For example, if the owner takes zero salary but works sixty hours per week, the buyer will recognize that a replacement cost will be required to pay someone else to do the job the owner is now doing. Alternatively, if the owner works ten hours per week, but pays himself an enormous salary, that salary clearly looks to be, at least in large part, owner return on equity. The buyer will add such salary back to get the true stand-alone profit picture.


Buyers will thus focus upon the “owner-neutralized” historical profits from operations. Buyers will also view the company with an eye to what they believe they can make from it. Thus, if the seller is carrying ten expensive administrative people which the buyer could do without, that will be built into the buyer’s analysis. If the buyer thinks he can double sales of the seller in a heartbeat by expanding the seller’s product offering to his own existing customer base, that too will be a factor.


There is one other peculiarity to this concept of profit impact on pricing that is worthy of mention.  Generally, as any market analyst will tell you regarding price-point relationships to earnings, the P/E ratio (price to earnings) doesn’t mean anything when there is no “E.” However, in the sale of a business as a whole, as a going concern, there are exceptions to this fundamental investment wisdom. Although profitability invariably is a powerful determinant of business pricing, there are situations where even loss operations can produce aggressive competitive pricing among buyers.


We once sold a $30 million plastics company with consistent losses for the past three years running. The company had heavy debt levels, and their banker sponsored a buyer who offered to assume the debts and pay $500,000 for the company. In spite  of the loss environment, we were confident that competition would drive price to at least a few million dollars, and we encouraged the seller to hold on, to resist the pressure from his bankers, and to let us talk with other prospective buyers. In three months time, the company was sold for $3.5 million in cash. There was no multiple-of-earnings justification and no substantive market value of assets to aid in the value determination. The price came entirely from raw competitive interest.


Poorly run businesses with low or zero profitability, if they have strong volumes and/or good gross margin, may still be perceived well. If a clear and viable case can be made to buyers that the earnings potential is strong, even where history is weak, buyers will compete for the purchase. Once again though, their appetite and their aggressiveness in pricing will depend on their belief that such competitive pricing is necessary to win the deal.

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How to Avoid a Small Business Tax Audit

Posted March 9th, 2011 by ybo

Small business owners have always been at an increased risk for being audited. In fact, sole proprietors - the most common of small business ownership are 10 times more likely to be audited than other business entities. That's mostly because the Internal Revenue Service believes approximately $100 billion in income from small businesses, home offices and other individually operated sources goes goes unreported each year. Experience has also proved to the IRS that small business owners tend to offer the most fertile ground for audits. Therefore, these entrepreneurs typically receive scrutiny than even multimillion dollar corporations.

While the odds of being audited are greatly increased as a small buisness owner, the fact is the IRS only audits about 1 percent of both personal and corporate returns in any given year. So in the bigger picture, the chances of an audit are still pretty slim. Although, even the most straight and narrow of business owners can never completely eliminate the chances of an audit. Yet there are plenty of things small businesses can do to reduce their chances of being put under the IRS' microscope.

REduce your "DIF" score. The IRS selects many returns for audits by using a secret scoring system based on a Discriminant Inventory Function (DIF) score. THis highly confidential scoring system is based on the IRS' experience with taxpayers with certain credits or deductions within certain income levels. For filers with higher than average charitable contributions or business expenses, it could increase the chances of an audit. More simply put, tax returns with more red flags tend to score higher and are more likely to be subject to an audit. And while it's impossible to actually know one's DIF score, incorporating as many of the following tips is widely believed by many tax experts to lower it.

Be honest. Mark Twain is famous for saying, "If you tell the truth, you don't have to remember anything." As obvious as that sounds, that's actually good advice for dealing with the IRS. THe more liberties you take with your taxes, the more likely you are to live in constant fear of an audit. If you play fair and tell the truth, you have nothing to hide or worry about.

Hire a professional. Tax laws seem to change and get more complex every year. The money, time and headaches saved by brining in a professional tax preparer could more than pay for itself. Plus, they can point out numerous tax breaks and other ways to save owners many not know about. Even for those with taxes that are relatively straightforward, getting professional advice can go a long way to help minimize the risk for an audit. But choose a pro wisely. If the IRS believes a preparer is prone to taking too many unwarranted deductions on their clients' returns, then all the preparer's clients may be at risk of an audit.

File on time. Paying business taxes late (or not at all) is one sure way to draw attention of the IRS. Know all the deadlines for quarterly and estimated tax payments and pay them online whenever possible. If necessary, file an extension and send a small payment as a sign of good faith (in cases of owing money). Some experts will also say not to file too early because it gives the IRS more time to examine your return.

Report all income. Don't event think about "forgetting" to report some income no matter how insignificant. The IRS is getting more and more sophisticated about tracing money and payments each year. The IRS uses W-2s and 1099's to cross-check income and if a business's numbers don't match with what has been reported, it usually triggers an automatic audit.

Pay attention to details. Cross all the "T's" and dot every "I." Answer all questions on all forms and schedules. Be neat, don't forget to sign your name, double check Social Security or Tax ID numbers, and explain all entries or omissions that are not easily understood. If something is overlooked or isn't filled out, the IRS may wonder what else may have been forgotten.

Math errors. Simple arithmetic mistakes are a quick way to induce an audit. Math errors can usually be avoided by filing electronically or at least by using a calculator. In recent years, the IRS has claimed that math errors are found on less than i percent of returns that are filed electronically versus about 20 percent on paper returns. If an e-filed return contains a math mistake, it is not accepted and sent back for correction.

Avoid filing certain forms or schedules. A number of tax experts will say that filing certain tax forms and schedules can almost assure an audit in many situations. For example, filing a "Schedule C" - the form showing profit or loss from a business - has historically been an audit trigger on many sole proprietors' returns. Also, for those with a hobby that they've turned into a business, they many file a "Form 5213" which keeps the IRS form auditing for five years. However, at the end of that five-year period, entrepreneurs will need to show profitability in at least three of those five years. But for many, the simple filing of that form all but guarantees a closer examination by the IRS at the end of those five years.

 

 

 

 

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