The Pre-Sale Business Tune-Up For Selling Your Business in Orange County

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Owners are often asked, “do you think you will ever sell your business?” The answer varies from, “when I can get my price” to “never” to “I don’t really know” to everything in between. Most sellers may think to themselves when asked this question, “I’ll sell when the time is right.” Obviously, misfortune can force the decision to sell. Despite the questions, most business owners just go merrily along their way conducting business as usual. They seem to believe in the old expression that basically states, “it is a good idea to sell your horse before it dies.”

Four Ways to Leave Your Business

There are really only four ways to leave your business. (1) Transfer ownership to your children or other family members. Unfortunately, many children do not want to become involved in the family business, or may not have the capability to operate it successfully. (2) Sell the business to an employee or key manager. Usually, they don’t have enough cash, or interest, to purchase the business. And, like offspring, they may not be able to manage the entire business. (3) Selling the business to an outsider is always a possibility. Get the highest price and the most cash possible and go on your way. (4) Liquidate the business – this is usually the worst option and the last resort.

When to Start Working on Your Exit Plan

There is another old adage that says, “you should start planning to exit the business the day you start it or buy it.” You certainly don’t want to plan on misfortune, but it’s never to early to plan on how to leave the business. If you have no children or other relative that has any interest in going into the business, your options are now down to three. Most small and mid-size businesses don’t have the management depth that would provide a successor. Furthermore liquidating doesn’t seem attractive. That leaves attempting to find an outsider to purchase the business as the exit plan.

The time to plan for succession is indeed, the day you begin operations. You can’t predict misfortune, but you can plan for it. Unfortunately, most sellers wait until they wake up one morning, don’t want to go to their business, drive around the block several times, working up the courage to begin the day. It is often called “burn-out” and if it is an on-going problem, it probably means it’s time to exit. Other reasons for wanting to leave is that they face family pressure to start “taking it easy” or to move closer to the grandkids.

Every business owner wants as much money as possible when the decision to sell is made. If you haven’t even thought of exiting your business, or selling it, now is the time to begin a pre-exit or pre-sale strategy.

Top Businesses for Sale

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Here is a list compiled by a leading businesses for sale website.

Top Ten Businesses for December 2013:

  1.  E-Commerce
  2. Convenience Stores
  3. Restaurants
  4. Fast Food – Non Franchises
  5. Websites
  6.  Bars
  7.  Auto Repair, Service & Parts
  8. Services
  9. Liquor Stores/Off Licences/Wine Merchants
  10. Gas/Petrol Service Stations

Top Ten M&A Businesses for December 2013:

  1. Distribution Businesses
  2. Wholesale Businesses
  3. Mining Businesses
  4. Auto Repair, Service & Parts
  5. Manufacturing Businesses
  6. Car Wash & Valet                         
  7. Food & Drink Distributors
  8. Food & Drink Wholesalers
  9. Transport Services
  10. Road Haulage & Freight Services

Business For Sale in Orange County Increased in 2013

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As a leading Broker and M&A Specialist in Orange County, it is important for our clients to have a clear picture of the current market conditions.   Several reports coming out in January indicate the number of transactions in 2013 grew significantly in Orange County led by exceptional growth in the restaurant and retail sectors.  The good growth increase in businesses for sale and closed transactions can be attributed to several factors, including the improved economy, excellent supply and demand fundamentals and continued improvement in the financials of the businesses for sale.

Considering Selling Your Business? Some Things to Consider

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  • Know the value of your business.   Don’t even think about selling until you know what your business should sell for.  Get a formal Valuation or, at minimum, a Broker Opinion of Value.  Call us to explain.
  • Get prepare to sell.  Have your financials properly prepared.  There is an often-quoted statement in the business world: “The time to prepare your business to sell is the day you buy it or start it.†Easy to say, but very seldom adhered to. Now really is the time to think about the day you will sell and to prepare for that day.
  • Sell your business when it is growing and it is doing well. The old quote: “The time to sell your business is when it is doing well†should also be adhered to. It very seldom is – most sellers wait until things are not going well.
  • Consult with your Tax guy.   Ask your accountant about the tax impact of selling your business. Do this on an annual basis just in case. However, the tax impact is only one area to consider and a sale should not be predicated on this issue alone.
  • Maintain or continue growing the business.   Continuing to manage the business is a full-time job. Retaining the best outside professionals is almost a must. Utilizing a professional business intermediary will allow you to spend most of your time running your business.
  • Finally, in the words of many sage experts, “Keep it simple.†Don’t let what looks like a complicated deal go by the boards. Have your outside professionals ready at hand to see if it is really as complicated as it may look.

How To Increase the Value Of My Business

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How valuable your business is to a prospective buyer is the extent to which the buyer can see where your sales will come from in the future.  A recurring revenue stream means the buyer might not have to inject cash into the business going forward and therefore will pay more for it.   Recurring revenue streams therefore increases the value of your business.  There are various forms of recurring revenue.

1.  Contracts (think wireless phones)

2.  Automatic renewal subscriptions (think websites which charge a monthly fee automatically charged at the first of the month)

3.  Sunk-money renewal subscriptions (think equipment lease and then subscribe to information to monetize the leased equipment)

4.  Renewable Subscriptions (think magazine subscriptions)

5.  Consumables (think razor blades)

This is the time of the year to plan for the future.  If you can incorporate a recurring revenue stream into your business you can increase its value.

 

 

Can You Really Afford to Sell?

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In many cases, the sale of a small company is “event†driven. That is, the reason for sale is often an event such as a health decline or illness, divorce, partnership issues, or even a decline in business.

A much more difficult reason for selling is one in which the owners simply want to retire and live happily ever after. Here is the problem:

Suppose the owners have a very prosperous distribution business. They each draw about $200,000 annually from the business plus cars and other benefits. If the company sold for $2 million, let’s say after debt, taxes and closing expenses, the net proceeds would be $1.5 million. Sounds good, until you realize that the net proceeds only represent about 3 1/2 years of income for each (and that doesn’t include the cars, health insurance, etc.). Then what?

The above scenario is not atypical, especially in small companies. These are solid companies that provide a very comfortable living for two owners. In the above example, the owners obviously decided they couldn’t sell because it didn’t make economic sense to them. The business was worth much more to the owners than to any outside buyer. Perhaps they thought that an intermediary could produce a buyer who would be willing to pay far more than the business was worth. But, the M&A market is a fairly efficient one.

So, what should they do?

The downside is that competition could enter the fray and their business would not bring in the same cash flow.

The business could also suffer because the owners are not continuing to build it. They apparently want to retire and take life easy, and this mind-set could dramatically undermine the business.

If the owners are forced to sell the business because it is declining, they, most likely, won’t even receive the $2 million they might have received earlier.

On the other hand, the owners, ready to begin their happily ever after, could bring in a professional manager. This addition would cut their earnings slightly to pay for the new manager, but it would also reduce their responsibilities and give the business a chance to grow with new energy and ideas.

 

Business Sales Increasing

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Recent reports are indicating sales of existing small businesses are increasing in Orange County and across the nation.  Several reasons are given for these increases:

1.  Valuations have improved due to the economy picking up steam.

2.  Banks are reported to be lending again although I have my doubts.

3.  Baby Boomers are now of the age where they want to retire and they feel more comfortable about selling now versus a couple of years ago.

4.  Private Equity Groups (PEG) are taking smaller deals as “add-ons” to their platform companies.

If I Sell My Business, How Much Is It Worth?

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This is one of the first questions I get asked from a prospective seller.  It should also be the first consideration a prospective seller considers before he decides to sell.  How do you make a decision to sell unless you know what the business could possibly bring when it is on the market.   Unlike some other intermediaries, our company, Empire Business Solutions, offers a free Broker Opinion of Value so a prospective buyer can get an idea of the possible worth of his business.  Of course, the Broker Opinion of Value does not guarantee the seller will get that price but at least he has an idea of what it might possibly sell for.  Only the open market will determine the actual value of the of the business.

More Information Suggesting It Is Time to Sell Business Orange County

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Several surveys indicated that Private Equity activity is slow but the lower middle market and main street is picking up steam, particularly to sell business in  Orange County.

Overall small-business performance has continued to improve.  According to a recent study, median revenue jumped to $420,000 in the third quarter of 2013 from $385,327 in the same period in 2012, showing an 8.9 percent increase. Cash flow increased to $98,034 from $93,000 in the second quarter of 2012–a solid 5.4 percent quarter-over-quarter and a 3.4 percent year-over-year from $94,880 in the third quarter of 2012.

Expectations of sellers are growing also.  Asking prices from business on the market has increased: The median asking price for businesses sold in the third quarter bumped up 2.1 percent to $199,000 and the median sale price rose 2.9 percent from Q2 to $180,000.

From our perspective, we are seeing sellers warm to the idea of putting their business on the market due to the performance increases they are experiencing.  Clients  who wanted to retire but felt like they missed the boat are absolutely seeing their businesses come back to the point where feel comfortable in selling.

What to Expect in Selling Your Business

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For many Owners and CEOs, selling their company is a once in a lifetime experience.  They may be very experienced but they can also be blind sided by surprises when selling their company.

#1: Substantial Time Commitment

In the real estate business, once the seller engages the broker there is very little for the owner to do until the agent presents the various offers from the potential buyers.  In the M&A business, there is a substantial time commitment required of the CEO/Owner in order to complete the sale properly.   The following examples are worth noting:

Offering Memorandum:

This 30 + page document is the cornerstone of the selling process because most business intermediaries expect the potential acquirers to submit their initial price range based on the information presented in this memorandum.  The intermediary will heavily depend on the CEO/Owner to supply him or her with all the necessary facts.

#2: The Need to Inform Other Employees in the Process

A number of owners selling their company are paranoid about a confidentiality leak regarding the sale of their company.  In fact, some owners prefer that no other person in the organization is aware of the pending sale of the company.  At a bare minimum, the CFO and Sales Manager should be informed.  The CFO will be asked to pull all the financials together, to supply projections, to articulate reconstructed earnings (add-backs) and to supply monthly statements…all of which suggest that the company is being sold.  The Sales Manager will be asked to supply the names of synergistic companies in or around the particular industry.  And, perhaps, the CEO’s secretary will be asked to set up a “war room†where all legal and contractual information is assembled for the buyer’s due diligence team.  In order to protect the company from confidentiality leaks and assure retention of key employees, the CEO/Owner should implement “stay agreements†for these key employees.

#3: The Need to Maintain, or Accelerate, Sales

The tendency for some owners is to become so distracted with the M&A process that they take their “eye off the ball†in running the business on a daily basis.  Potential acquirers will be watching the monthly sales reports like a hawk to see if there is a turn-down in business.  Acquirers become very apprehensive when they see a recent downward trend in the company they are about to acquire and may, as a result, want to negotiate a lower price.

#4: A Confidentiality Leak

Naturally, most CEOs expect the M&A process to go smoothly and usually it does.  However, there should be a contingency plan in place for such occurrences as confidentiality leaks.  The degree of damage determines what action should be implemented.   Much more serious confidentiality leaks can occur, and it is wise to discuss ahead of time how the matter is going to be handled with those concerned.

#5:  Low Bids

Ultimately, the M&A market sets the price of the company. However, rarely does a seller go to market without having certain expectations of price.  Let’s use a hypothetical case in which a company is growing at 15% annually.  The CEO/Owner believes that it is worth $6 million based on $1 million of EBITDA.  However, the top bid is $5 million cash or, obviously, 5 times EBITDA.  Assuming the business intermediary has exhausted the universe of acquirers, the seller has two choices to reach his desired $6 million selling price.  Either he can take the company off the market and return several years later when either the company’s earnings have improved or when the M&A market has heated up.  Alternatively, the CEO can negotiate further with the top bidder by selling 80% of the company now and the remaining 20% in three years on a pre-arranged formula on the expectation that business will improve.  Or, the CEO can sell the company now for $5 million with an earnout formula that might give him the additional $1 million.

#6: The P&S Agreement is Not What the CEO Expected

Numerous CEOs drive the M&A process to the letter of intent and then turn over the deal to their attorney to iron out the details of the purchase and sale agreement.  While the CEO should not micro-manage his designated professional advisers in the transaction, he should be involved throughout the process, or otherwise the CEO will invariably object to the final wording of the document at the signing state.  The area most likely to be overlooked by the CEO/Owner is the critical section of reps and warranties.

#7: Agreement of Other Stakeholders

While the CEO can negotiate the entire transaction, the sale is not authorized until certain stakeholders agree in writing, namely, the majority of the shareholders, financial institutions which have a lien on certain assets.