OK.  So your company has all the internal characteristics to be an attractive acquisition target.  But what about the external environment?  Wouldn’t the current financial crisis have to be a terrible time to sell?

 

1. Seller supply and demand – just like anything else, supply and demand affect price.  Do you think there are more or less companies today that have a strong selling scenario?  Many company’s sales and profitability have flattened or declined.  If you have a strong performing company today, you are one of the few that buyer’s and financier’s have to look at and thus supply and demand should help you get a good price.  The supply of strong performing companies for sale is diminished and favors the sellers.  The baby boomer business owner wave of retirements will change this in the future with many more sellers coming to market.
2. Buyer supply and demand – you might think that nobody would be buying in this economy.  But look at all the downsizing and people that are losing their jobs.  In recessions individual buyer ranks swell as people get laid off and look for businesses to buy.  Private equity groups are sitting on cash from investors and need opportunities in which to deploy that capital.  And corporate acquirers, faced with more difficult organic growth, look for strategic acquisitions to capture market share, add new offerings, expand geographic territories, etc.  So right now there are many buyers looking at a few strong opportunities which is good for sellers. 
3. Performance timing – from where you sit today, which do you think will be better – the last three years or the next three years?  At the point you decide to exit, the immediate past three year history will be the financial history you will be selling from.  If the current recession lasts two or three years, you may need to wait five or six years before you can generate a good history to sell from.  Sales and profitability trends are very powerful motivators for buyers and their advisors.
4. Market timing – how would you like to be selling an evening newspaper or auto manufacturing related business right now.  Conversely, wouldn’t you love to be selling an infrastructure contracting company, a green business, or an alternative energy company.  The time to sell and get the best price is when the market for your goods and services is bright and expanding and when future potential can be played up to the buyer. 
5. Taxes – there are three parties to every transaction – the seller, the buyer, and the IRS.  Minimizing taxes involves structuring, allocation and the tax laws at the time of sale.  Taxes on capital gains and dividends were reduced to the lowest levels in recent history early in the Bush administration.  Generally, the most favorable allocation is to capital gains at a tax rate of 15%.  If this rate goes to 20%, you’ll need to sell your business for 6% more just to break even.  If it goes to 28%, you’ll need to sell for 18% more to break even.  And the new legislation “ARRA” includes some special tax breaks for S Corp sellers that converted from C Corps and sell in 2009-10.  From a tax standpoint, the present may be the best time to sell to maximize your after-tax proceeds.
6. Financing – we have all heard how tough the financing environment is and that the banks are not lending.  But if you are in a strong selling position, you’re going to be one of the few standout opportunities in this difficult environment and banks need and want to make high quality loans.  Interest rates are extremely low reducing the cost of capital for buyers and increasing returns on investment.  For smaller deals, the SBA has waived some loan fees and increased the percentage it will guarantee for the lending institution.  So again, for companies in a strong selling position, financing is available and at a low cost for the borrower.

In conclusion, it would be disingenuous to fail to say that despite all of the above, selling price multiples are down somewhat in the current environment.  But good companies that are performing well will still bring a good price if properly marketed to take advantage of the above external factors.  The key for business owners is to look ahead and weigh their desire to exit against their expectations of what the above factors may look like at some future point in time if they wait.  Strategic Endeavors LLC can bring valuation knowledge and market knowledge together to help you determine the best time to exit and how to begin to prepare for that day in the meantime.

So how do you recognize the time when you can sell high?  Here are some clues to help you recognize it:

1. The past three years show rising sales and cash flow.  Your financial reporting system is detailed with reporting capabilities that track key indicators in your business, ratios that benchmark superior performance, and calculations that document compliance with loan covenants.  Depending on the size of your business you have reviewed or audited statements from a professional accounting firm that bring credibility to your results.
2. The market for your products and services is growing, you are well positioned to capitalize on the potential, and you have research to support that claim.  You know what your competitive advantage is and have a marketing plan that details your strategies to beat the competition.
3. You have an empowered management team that is actively running the business.  Protections and incentives have been put in place to reduce the threat of employees leaving with your intellectual property or customer base.  You work reasonable hours and are able to take time away from the business.  There is an organization chart with clear lines of authority and responsibility.
4. There is evidence that your people, which you claim to be your most important asset but which you do not own and cannot sell, are committed to and likely to stay with the company.  This can be documented by high sales to employee ratios versus the industry, low turnover ratios, records of training and investments in personnel, clear personnel policies, employee recognition and incentive programs, etc.
5. You have made it a priority to minimize sales concentration with any one customer and have diversified your supplier base to reduce exposure.  Your customers have relationships with people in the company other than yourself and you can produce documentation on customers such as length of relationship, sales by customer, customer intelligence information, and customer feedback and surveys.
6. You have documented your intangibles such as your processes, systems, and methods.  There is a list of your intellectual property and it has been copyrighted or otherwise protected.  You have carefully reviewed contracts and sought to preserve assignability whenever possible to enable transfer without third party approvals.
7. You have a list of tangible assets and a schedule for planned replacement.  You maintain accurate inventory measurements and have management systems to monitor and control inventory.  This is confirmed by strong turnover ratios compared to industry benchmarks.  Obsolete inventory is sold, donated or liquidated.  Your facility is clean, organized and attractive in appearance.
8. You have maintained a strong relationship with an accountant, attorney, banker, insurance agent and others that think highly of your business and would want to continue to do business with your company after your departure.
9. You have a written business plan that ties in with all of the above and shows where the company wants to go in the next five years.  Managers are familiar with the plan and regular meetings are held to review progress and update the plan.  The plan was presented to and approved by your Advisory Board of outside advisors that bring varied perspective and expertise to your company.

The present environment would have to be a terrible time to sell – right?  Value is a function of cash flow, perceived risk, and supply and demand.  If the above describes your company, your cash flow is strong, risk has been minimized, and the number of other businesses for sale that are as attractive as yours are very few.  We receive emails every day from private equity groups looking for attractive investments.  Corporate managers are getting laid off in high numbers and many will be adding to the ranks of individual buyers.  And while banks have tightened their criteria, they are still seeking to make loans for solid business ventures.  Meanwhile, many companies have flat or declining sales and profitability and do not have a strong selling scenario.  So if you have maximized cash flow and reduced risk, properly marketing your business to take advantage of the current lack of supply of good opportunities may produce an excellent result, even in this market.     

 

What should you be doing in the meantime?  Striving to build the kind of company described above.  The more your company looks like this, the better the position you will be in to sell and get a premium deal.  Many people that approach us are tired, bored or burned out.  Why not put together a five year plan to prepare your business for sale and make that your last major project.  Even if you sell in two or three years, any progress you make and having a defined plan in place will increase the value of your business.  Let us help you prepare an exit plan to make the most of the final sale you will ever make – the sale of your business.  Part of this plan will be determining when your sale objectives can be met and what has to happen to meet them.

 

 

 

 

Leadership Breakthroughs 2009

Click here to see Agenda

We are participating in a forum being put on by Sharp Innovations to celebrate their 10 year anniversary. The event will take place from 8:00 – 10:00 am on Wednesday March 25th at the Eden Resort Inn & Conference Center and there is no charge to attendees. The event is focused on helping decision-makers make better choices and become better leaders in 2009 and beyond. Jim Eshleman will be serving on a round table with 10 other service providers to address questions on a wide range of business topics. Kate Eshleman Senior Business Analyst Strategic Endeavors, LLC www.strategicendeavors.com email: kate@strategicendeavors.com Cell: 215-990-6333 Office: 717-898-7662 Fax: 717-898-7752

Please join us for a seminar:

February 4, 2009

8:00 a.m. – 11:30 a.m.

Click here for more information.

In our seminar on how to “Build Value in Your Company,” we will talk about each of the following value drivers:

• Upgrading financial reporting systems to identify value.
• Making the most of tangible assets in a sale.
• Maximizing going concern value.
• Capitalizing on your workforce-in-place.
• Maximizing value in customer-supplier relationships.
• Documenting information base and know-how.
• Positioning contractual relationships for saleability.
• Identifying business value, personal needs, and bridging the gap.
• Minimizing due diligence pitfalls and price erosion.

Preparing your business for sale will increase the value you will receive, shorten the selling cycle, reduce advisory costs during the selling process, and maximize the probability of closing the transaction.

Whether transferring a privately held business to family, employees, or a third party, there are multiple issues and options to consider.  For many business owners, their business is their largest single asset and may be the key to funding their retirement lifestyle.  How can a business owner get the funding they desire and still make the transfer viable for the transferee?

 

Step one is to have the business valued from a third party perspective.  How can you develop a good transfer strategy if you don’t have a realistic value for the item you are transferring?  Unlike real estate, businesses have high intangible components of value.  Industry rules of thumb (multiples of sales or cash flow) are averages of all the good and bad businesses that sold in a specific industry and will not capture the unique qualities and strengths of your particular business.  Strategic Endeavors LLC has outsold the rule of thumb value for a particular business by as much as 100%.  Relying simply on a rule of thumb may result in severely under-selling your business.

 

The answer after step one may be to build the business value to produce the income stream that a shareholder needs to retire.  Remember, a business is worth what a buyer is willing to and can justify paying and not what a business owner thinks he needs to retire.  If the seller’s needs cannot be met now, put a plan in action to take the business where it needs to be to achieve the seller’s goals.  This is why it is critical to start this process at least 3 to 5 years in advance of an anticipated exit. 

 

Maybe a two-step process can achieve the goal where a portion of the business is sold now (i.e. to a private equity group) and the seller partners with the buyer and takes advantage of the buyer’s resources to build up the recapitalized company to produce a much higher value for the portion of the business retained by the seller.  This portion is then sold in a second sale.

 

If transferring internally to family or employees, why should the selling shareholder receive less than if sold externally?  Is this fair to other family members that are not involved in the business?  Could creative financing strategies be used leveraging off of the trust and relationship the seller has in family members or key employees to achieve a transaction at a fair market value (but at other than typical market terms) that will fund the seller’s retirement lifestyle?

 

The point is, once an owner knows the value of his/her business, there are multiple options and strategies to transfer that value in a way that is equitable to all the stakeholders.  To identify the best strategy, a business owner should consult with a business intermediary that knows the market, a lawyer and accountant with mergers and acquisitions experience, and advisors knowledgeable in estate planning, taxes and wealth management.

 

Lancaster, PA – Right when the first wave of baby boomer business owners are ready to retire, here comes what is arguably the worst economic crisis since the Great Depression.  Will these business owners be able to retire?  Will the value of their businesses take a hit along with the stock market?  What can these business owners do?

 

“One strategy would be to get to market as soon as possible”, says Jim Eshleman, President and Founder of Strategic Endeavors LLC, a mergers and acquisitions consulting firm catering to small to mid-sized privately held companies.  “Business values are based on the last three years of history.  While many companies have a good three year history to sell from now, that may change if the country goes into recession over the next year or two.”

 

“And if a recession depresses results, it may take another three years after that to build a good history to sell from and result in a business owner having to wait five years or more to get back to where they are today”, says Eshleman.

 

“Another reason to consider going to market now is that the individual buyer is back in the marketplace”, notes Eshleman.  “Big corporations are shedding people and many of these folks are tired of corporate America and make good buyers for small businesses.”

 

“Now obviously financing in the current environment is somewhere between difficult and impossible.  Lenders have tightened up their lending criteria which depresses values that they are willing to finance.  The all cash window for the Seller has closed.”

 

But, there may be a silver lining in this cloud.  Price has always been related to terms.  Eshleman says “The more the Seller is willing to finance, the higher a price he/she should be able to get for their business.  And not only can they get a higher price, but it is an opportunity to earn above market interest rates on the financing and defer and possibly reduce taxes by getting installment sale tax treatment on the proceeds.”

 

Finally, notes Eshleman, “There are strategies a Seller can employ to protect their interest under the Seller note.  And if the notes are structured properly, there is a secondary market for seller financed notes by which the Seller can sell the note and cash out early.”

 

 

 

 

In the sale of a privately held business, you will likely run across the following terminology:  main street, middle market, business broker, intermediary, investment banker, and cash flow. 

What does it all mean?

First, the private business market is described by the size of business being sold.  Historically, businesses that would sell for less than $1 mil were called main street and businesses over that were called middle market.  Today, some may say the breakpoint is $3 mil or $5 mil, but the concept is the same.

Main street businesses are typically more of the mom and pop variety.  The owner is likely to play a bigger part in the daily operation of the business with little or no supporting management in place. Financial reporting and business system documentation are less detailed and relationships with third party advisors/resources (accountants, attorneys and bankers) may be non-existent or on an as needed basis.  Often times the buyer may be an individual that is buying a job as well as buying a business.

Middle market businesses are more likely to have made the transition from being founder/owner driven to professionally managed by a team.  They may have an advisory board or board of directors and likely have established relationships with third party advisors.  Business systems and relationships will be formalized and documented.  Buyers can include high net worth individuals, corporations, or private equity groups.

Traditionally, business brokers have sold main street businesses and investment bankers have sold middle market companies (particularly with transaction values of $25 mil and up).  Investment bankers may be NASD licensed and engage in activities such as capital raising and taking a company public.  Intermediary is a term used within the brokerage industry and its largest trade association (International Business Brokers Association – IBBA) and is often used by advisors that straddle the two markets or focus exclusively on the middle market.  The most recognized certification in the main street and lower middle market is the IBBA’s CBI, “Certified Business Intermediary.”

Business brokers operate more like a real estate office with agents, listings, pre-printed forms, product (businesses) with prices, sole advisor status, and an agent mentality.  They typically charge less or no upfront fees and represent many opportunities at one time – 10 to 15 per agent.  Intermediaries and investment bankers function like professional consultants with client engagements, custom professional documentation, fee based products and services, auction style strategies as opposed to pricing the business, team format with multiple advisors, and an employment mentality.  They work on fewer opportunities but with a much more intensive focus.

The yard stick of value in the main street arena is cash flow defined as SDE – Seller’s Discretionary Earnings.  This number includes the total compensation of one owner and total compensation less market replacement salaries for any other owners.  Middle market business pricing is more frequently expressed as a multiple of cash flow defined as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amoritization).

The point is that the main street and middle market arenas are different and to get the best results, you need to select an advisor who understands and is equipped to play in the appropriate market.  Business pricing is not purely logical and is driven by the perceptions and emotions of the buyer.  Finding the best buyer, creating the highest perception, and managing emotions along the way can have a dramatic impact on the selling price.  Hire the right professional to get the best result.

Jim Eshleman, CBI, Strategic Endeavors LLC

Click here to view our businesses for sale.

It’s an exciting time to be buying or selling a business because it means that there’s growth and opportunity for everyone.  And, with a large population of Baby Boomers eyeing the golf course for good and wanting to ease out of their businesses, we have great opportunities that are ready for a new infusion of innovation and capital.

In our blog we’ll be discussing the thousands of items that go into a private business transfer.  We’ll talk about the up-sides and the down-sides that you’ll go through in this process and we’ll pave the way for your satisfaction in a deal well-done.

So, join in the discussion and send us your comments.

Jim Eshleman

Kate Eshleman