How Does Your Business Compare?

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When considering the value of your company, there are basic value drivers. While it is difficult to place a specific value on them, one can take a look and make a “ballpark” judgment on each. How does your company look?

Value Driver Low Medium High
Business Type Little Demand Some Demand High Demand
Business Growth Low Steady High & Steady
Market Share Small Steady Growth Large & Growing
Profits Unsteady Consistent Good & Steady
Management Under Staffed Okay Above Average
Financials Compiled Reviewed Audited
Customer Base Not Steady Fairly Steady Wide & Growing
Litigation Some Occasionally None in Years
Sales No Growth Some Growth Good Growth
Industry Trend Okay Some Growth Good Growth

The possible value drivers are almost endless, but a close look at the ones above should give you some idea of where your business stands. Don’t just compare against businesses in general, but specifically consider the competition.
As part of your overall exit strategy, what can you do to improve your company?

© Copyright 2015 Business Brokerage Press, Inc.

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Empire’s Top 10 Reasons Businesses Do Not Sell

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A little secret about the M&A and Business Broker business.  It is estimated a minimum of 25% and a maximum of 75% of all businesses which go to market NEVER sell.   Whatever the real figure is, why do some businesses not sell.  From Empire’s 11 years in the industry, our experience leads us to believe these are the Top Ten Reasons;

1.  The owners expectation for the value of their business is much greater than a real world valuation.

2.  The owner is the main person in the business with little or no management team to support the business if something happens to the owner.

3.  The business has a high concentration of revenues in 1-2 two customers.

4.  Several family members are part of the business.

5.  The business is in a space (industry) which is changing

6.  Revenues are declining and the owner claims it is because he is slowing down.

7.  Owner takes many perks from the business which are not really “add backs”.

8.  Owners are unfamiliar with the selling process and are not prepared for the due diligence.

9.  The owner has taken the steps necessary to plan for  an exit strategy.

10.  Owner did not realize the value or consult with a trusted M&A advisor or Business Broker prior wanting to sell.

The Confidentiality Agreement

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When considering selling their companies, many owners become paranoid regarding the issue of confidentiality. They don’t want anyone to know the company is for sale, but at the same time, they want the highest price possible in the shortest period of time. This means, of course, that the company must be presented to quite a few prospects to accomplish this. A business cannot be sold in a vacuum.

The following are some of the questions that a seller should expect a confidentiality agreement to cover:

  • What type of information can and can not be disclosed?
  • Are the negotiations open or secret?
  • What is the time frame for which the agreement is binding? The seller should seek a permanently binding agreement.
  • What is the patent right protection in the event the buyer, for example, learns about inventions when checking out the operation?
  • Which state’s laws will apply to the agreement if the other party is based in a different state? Where will disputes be heard?
  • What recourse do you have if the agreement is breached?

Obviously, executing an agreement does not mean a violation can’t occur, but it does mean that all the parties understand the severity of a breach and the importance, in this case, of confidentiality.

While no one can guarantee confidentiality, professional intermediaries are experienced in dealing with this issue. They are in a position to understand the extreme importance of confidentiality in business transactions as well as the devastating results of a breach in confidentiality. A professional intermediary will require all legitimate prospects to execute a confidentiality agreement.

A confidentiality agreement is a legally binding contract, enforceable in a court of law. It establishes “common ground” between the seller, who wants the agreement to be extensive, and the buyer, who wants as few restrictions as possible. It allows the seller to share confidential information with a prospective buyer or a business broker for evaluative purposes only. This means that the buyer or broker promises not to share the information with third parties. If a confidentiality agreement is broken, the injured party can claim a breach of contract and seek damages.

© Copyright 2015 Business Brokerage Press, Inc.

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What’s Hot and What’s Not

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What is NOT hot is businesses that are over valued.  A buyer must get a return on his investment (ROI) which most sellers do not understand.  I wish I had a dollar for every seller who said “If a buyer just put more money into this business, it will boom which is why I want more for the business”.

What is Hot?

Top Ten Businesses by Search Impression for April 2015

  1. Restaurants
  2. Bars
  3. Fast Food – Non Franchises
  4. Convenience Stores
  5. Home & Garden Businesses
  6. Café Bars
  7. E-Commerce Businesses
  8. Fast Food Franchises
  9. Sandwich Shops & Delivery
  10. Bagel Shops

 

Top Ten M&A Businesses for April 2015

  1. Car Wash & Valet
  2. Gas/Petrol Service Stations
  3. Mining Businesses
  4. Distribution Businesses
  5. Main Contractors
  6. Manufacturing Businesses
  7. Wholesale Businesses
  8. Auto Repair, Service & Parts
  9. Fabrication Businesses
  10. Construction Businesses

 

Trends and Topics Business

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The state of the M&A and Business Brokerage business is very positive.  Several reports show the activity to be significantly higher over last year with the future looking very positive.  A recent report said Small Business Sales were up 6% over last year which was a record breaking year.  Speaking of records, this same report said the Median Cash Flow of all recent business sales hit an all time high.  With revenues and profitability up, the sales price multiples are rising also.  These increases lead one to believe the market is currently balanced, where both buyers and sellers are receiving value from the transactions.  One might conclude that the current market may be characterized as neither a seller’s or a buyer’s market but things might change in the future.  Why?

It is a well publicized fact that about 10,000 baby boomers reached age 65 every day and for the next 15 years.  Did you know that approximately 70% of all businesses are owned by people over the age of 53.  The owners of these business will probably will need to liquidate their ownership to try to fund their retirement or capture the wealth they have established over the life of the business.  If all of these business owners over age 53 want to sell their business, the amount of capital required to purchase them would be in the neighbor hood of $10 Trillion dollars.  Where is this capital going to come from?  These is quite a bit of “dry powder” with the PEG’s and of course there are investors and entrepreneurs looking for businesses but the amount will be far less than what is needed.  Less than enough money chasing too many business for sale will drive down the values significantly.

Of course this is not the scenario right now but in the coming 3-5 years, the market will be turning from the current sellers market to a neutral market to a buyers market with the influx of Baby Boomer owners wanting to exit their business.  Can an owner really wait to sell their business?  If they do not sell now, they might have to wait until the next seller’s market which might be 8-10 year from now.   But why wait?

Common Reasons for Selling

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It has been said that the sale of a business is usually event driven. Very few owners of businesses, whether small or large, wake up one morning and think, “Today I am going to sell my company.” It is usually a decision made after considerable thought and usually also prompted by some event. Here are a few common “events” that may prompt the decision to sell:

Boredom or “Burn-out” – Many business owners, especially those who started their companies and have spent years building and running them, find that the “batteries are starting to run low.”

Divorce or Illness – Both divorce and illness can cause a rapid change in one’s life. Either of these events, or a similar personal tragedy, can prompt a business owner to decide that selling is the best course of action.

Outside Investors – Outside investors may include family, friends, or just plain outside investors. These outside investors may be putting pressure on the owner/majority owner in order to recoup their investment.

No Heir Apparent – In this scenario, no family member has any interest in the business; and the owner has not groomed his or her successor. Unfortunately, in this event the owner often continues to run the business until he is almost forced to sell.

Competition is Around the Corner – In this scenario, the owner would have been better off selling prior to competition becoming an issue.

A “Surprise” Offer is Received – This may be about the only reason not truly event driven; an unsolicited offer is presented that is too good to pass up.

Everything is Tied Up in the Company – The owner/ founder sometimes becomes aware that everything he or she has is tied up in the business. In other words, all the eggs are in one basket.

Should Have Sold Sooner – Owning a small to midsize company (or even a large one) is not without its risks. A large customer goes under, suppliers decide to increase their prices, trends change, business conditions change, etc.

Surveys indicate that many small company owners do not have an exit strategy; so, when an event does strike, they are not prepared. Developing an exit strategy doesn’t mean the owner has to use it. What it does mean is that a strategy is ready when the owner needs it.

A professional intermediary can supply a business owner the real world information necessary not only to develop a plan, but also to know how to implement the plan when it becomes necessary.

© Copyright 2015 Business Brokerage Press, Inc.

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Valuing the Business: Some Difficult Issues

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Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate.

Here are some issues that must be considered when arriving at a value for the business:

Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms.

Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue.

Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value.

Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption.

ESOP Ownership – A company owned by employees, either completely or partially, requires a vote by the employees. This can restrict marketability and, therefore, the value.

Company/Industry Life Cycle – A retail/repair typewriter business is an obvious example, but many consumer product firms fall into this category.

Other issues that can impact the value of a company would include inventory that is dated or not saleable, reliance on short contracts, work-in-progress, and any third-party or franchise approvals necessary to sell the company.

© Copyright 2015 Business Brokerage Press, Inc.

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Considering Selling? Some Important Questions

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Some years ago, when Ted Kennedy was running for president of the United States, a commentator asked him why he wanted to be president. Senator Kennedy stumbled through his answer, almost ending his presidential run. Business owners, when asked questions by potential buyers, need to be prepared to provide forthright answers without stumbling.

Here are three questions that potential buyers will ask:

  1. Why do you want to sell the business?
  2. What should a new owner do to grow the business?
  3. What makes this company different from its competitors?

Then, there are two questions that sellers must ask themselves:

  1. What is your bottom-line price after taxes and closing costs?
  2. What are the best terms you are willing to offer and then accept?

You need to be able to answer the questions a prospective buyer will ask without any “puffing” or coming across as overly anxious. In answering the questions you must ask yourself, remember that complete honesty is the only policy.

The best way to prepare your business to sell, and to prepare yourself, is to talk to a professional intermediary.

© Copyright 2015 Business Brokerage Press, Inc.

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Is Your “Normalized” P&L Statement Normal?

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Normalized Financial Statements – Statements that have been adjusted for items not representative of the current status of the business. Normalizing statements could include such adjustments as a non-recurring event, such as attorney fees expended in litigation. Another non-recurring event might be a plant closing or adjustments of abnormal depreciation. Sometimes, owner’s compensation and benefits need to be restated to reflect a competitive market value.

Privately held companies, when tax time comes around, want to show as little profit as possible. However, when it comes time to borrow money or sell the business, they want to show just the opposite. Lenders and prospective acquirers want to see a strong bottom line. The best way to do this is to normalize, or recast, the profit and loss statement. The figures added back to the profit and loss statement are usually termed “add backs.” They are adjustments added back to the statement to increase the profit of the company.

For example, legal fees used for litigation purposes would be considered a one-time expense. Or, consider a new roof, tooling or equipment for a new product, or any expensed item considered to be a one-time charge. Obviously, adding back the money spent on one or more of these items to the profit of the company increases the profits, thus increasing the value.

Using a reasonable EBITDA, for example an EBITDA of five, an add back of $200,000 could increase the value of a company by one million dollars. Most buyers will take a hard look at the add backs. They realize that there really is no such thing as a one-time expense, as every year will produce other “one-time” expenses. It’s also not wise to add back the owner’s bonuses and perks unless they are really excessive. The new owners may hire a CEO who will require essentially the same compensation package.

The moral of all this is that reconstructed earnings are certainly a legitimate way of showing the real earnings of a privately held company unless they are puffed up to impress a lender or potential buyer. Excess or unreasonable add backs will not be acceptable to buyers, lenders or business appraisers. Nothing can squelch a potential deal quicker than a break-even P&L statement padded with add backs.

© Copyright 2015 Business Brokerage Press, Inc.

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Do You Have an Exit Plan?

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“Exit strategies may allow you to get out before the bottom falls out of your industry. Well-planned exits allow you to get a better price for your business.” From: Selling Your Business by Russ Robb, published by Adams Media Corporation Whether you plan to sell…