Business Broker Blog

Deal-Making - What does the Future Hold?

The big M&A deals get all the visibility and we're starting to see some activity at the top of the business pyramid. But there is more deal-making going on beneath the radar screen. Buyers and sellers of small and medium sized companies have begun to stir, and indications are that this activity will continue to accelerate. The consensus among experienced business brokers and M&A advisors is that 2010 will be a very good year for deal-making. Many brokers had deals go south because the buyers were unable to get financing. But the sellers are still their clients and they are hopeful of getting a deal done in the foreseeable future. The climate for deal-making is certainly improving and there are many reasons for this:

 Pent-up Demand - typically, following a recession there's a pent-up demand for goods and services. Purchases were put in a holding pattern. This is also true with business transactions. This process was amplified by the depth of this recession, the worst that most of us have experienced.

 Baby Boomers cashing out - It's been estimated that the next several years will see the largest transfer of wealth in the history of the country. Boomers retiring or just burned out will be transferring ownership of their businesses. It's estimated that the number of businesses for sale will double in the coming years.

 Technology - Rapid technology advances are driving consolidation. In distribution, for example, the profitability of individual companies depends on Inventory Management and Order Fulfillment. In the last ten years productivity has increased by 40% because of technology. Smaller companies that don't have this technology will be acquired by companies that have the technology.

 Foreign Buyers - there's been a steady increase in the number of foreigners buying American companies. British, French, and oil-rich Middle Eastern countries in particular have been aggressively buying American companies.

 Private Equity Groups - most Private Equity Groups (PEGs) have been in a holding pattern for the last couple of years and they are loaded with cash. Investors are beginning to apply pressure to these PEGs to do some deals after a long hiatus.

 Credit Availability - Credit is easier to come by now although restrictions are tougher than they were a couple of years ago. The covenants are tighter and the requirements for a business loan are stricter with commercial banks. The SBA has lifted its limit of $250,000 for goodwill and some fees have been reduced or eliminated. However, the SBA is stricter relative to the experience requirements of the buyer.

Because of the recession, many corporations have downsized and become lean and mean. Consequently, there are potential buyers with business experience and money looking for businesses to buy. That, coupled with the businesses that will be available for sale, should mean a significant increase in deal-making in 2010 and beyond.

 

Exit Planning - What to do

At some point in time every business owner will exit his/her company. Most owners do little or no planning for one of the most important events in their life. Why is this? Most owners are just too busy with day-to-day operations and they are just not aware of the vital importance of Exit Planning. Business owners need to build and shape their company in order to attract the best buyers. So Exit Planning needs to focus on these key areas:

• Maximize your company's value - There are obvious things like increasing earnings, increasing the demand for your products and/or services, and fine-tuning the company's infrastructure. Be sure to understand your business strengths, weaknesses, opportunities, and threats.
• Minimize taxes - The tax issue plays a huge role in the ownership transfer of your business. Be sure you elect the appropriate legal entity and corporate structure so you can avoid costly taxes.
• Facilitate due diligence - Due diligence is one of the important steps in the exit transaction process. It is when the business buyer has the right to inspect the business and test every representation. If it goes smoothly, it can expedite the process. If not, it could cause a buyer to re-negotiate the price and terms or, worst-case, it may un-ravel the deal completely. Proper Exit Planning ensures that the critical information is accessible, and accurately reflects the true condition of the company's sources of income, assets and liabilities.

• Ensure the survival and growth of the business - Exit Planning helps prepare the business to ensure the key assets are easily transferred, key employees are retained, and the revenues and earnings are sustainable post transaction. The higher the buyer's level of confidence that the revenues and earnings are sustainable and transferable, the more they are willing to offer for the business.

When do you start the process? Generally, the sooner the better, even if you are two or three years away from exiting your company. Exit Planning will put you on the right track to maximize the value of your business. To start the Exit Planning process, you need to assemble a team of advisors including:

• Attorney - The attorney should have experience in business transactions. An attorney will also be called upon for estate planning, tax planning, pre-transaction due diligence, etc. Consequently, it is best to work with a law firm that has expertise in all of these functions.
• Accountant - The Accountant or CPA not only generates your financial statements and prepares your tax returns, but also ensures that your accounting is done under Generally Accepted Accounting Principles (GAAP). Your CPA can suggest the appropriate level of financial reporting to attract the highest quality buyer, should your statements be Compiled, Reviewed, or Audited.
• Wealth Management Advisor - The net worth of many business owners is concentrated in the business. When ownership transfer occurs, the equity that the owner had in the company has been transferred to a more liquid form (cash, stocks, etc.) and needs to be managed according to the owner's needs and wants. A Wealth Management Advisor will help plan your financial future.

• M & A Advisor - The M & A Advisor is your link with the buyer community. He/she should be able to evaluate your company and determine how it aligns with buyer criteria, and suggest ways to increase the value of your company. When your company is ready, the M & A Advisor can advise how to properly document the company to attract the best possible buyers. The best buyers may be public or private corporations looking for strategic or synergistic acquisitions, or financial buyers such as private equity groups looking to re-capitalize the company for growth.  The M&A Advisor will package and market your company to the buyer community. During this deal-making process the Advisor will screen buyers for confidentiality, financial and business viability, evaluate offers,  negotiate letters of Intent, and help facilitate due diligence and the closing process.

It is difficult for most business owners to allocate time to think about Exit Planning. Most owners are optimistic, busily planning for the future growth of the company and dealing with day to day challenges. By selecting the right team of advisors, the business owner can properly prepare their business without wasting valuable time. In the end, with proper planning, they'll be able to complete the sale of their business with the best buyer in the market at the best value and terms.

6 Ways to Increase Business Value

When a strategic or financial buyer invests in a company, they are in essence investing in a stream of future cash flows. At the end of that stream of cash flows comes the "terminal value" - the last big cash flow from their eventual exit event. Naturally buyers will want to minimize the risk that they won't receive those future cash flows. The more you can reduce a potential buyer's risk, the greater your company will be worth. So what can you do in your company to reduce that risk? What could potentially happen that could negatively impact profitability and what can you do to mitigate that risk? Here are a few things you can do:

1) Diversify your customer base. Having more than 25% or so of revenue coming from a single customer is a big risk.

2) Separate yourself from the company as much as possible. Easier said than done especially for small companies - but the less integral the owner is to the operations of the company the lower the risk to a new owner.

3) Groom management and offer key employees "stay bonuses" so they are incentivized to stay with the new ownership.

4) Contracts with key suppliers and customers can ensure that those relationships transfer to successor ownership.

5) Manage your assets. Make those necessary ongoing "maintenance" capital expenditures so that your equipment isn't out of date and in need of replacement ahead of schedule.

6) Financial statement accuracy. Ensure that your accounting system is up to date and have financial statements prepared annually by your accountant. Reviewed statements are better than compiled - and some buyers may even require audited statements. They may cost more but the perceived reduction to risk in the eyes of the buyer will almost certainly increase the value of your business enough to more than cover the cost of the audit.

These are just a few of the many ways you can reduce risk in your business. The more you can focus on risk reduction the more your business will be worth.

Exit Strategies: How Business Owners can Prepare for a Sale

Every business sooner or later will be sold or transferred to someone else. Whether that someone else is an insider (e.g., a family member or key employee) or an outsider, certain steps can be taken to ensure that the transfer achieves the goals of the business owner. This process is known as exit planning. Unfortunately, the majority of business owners do not take the proper steps to maximize the proceeds they'd receive upon the sale of their company and/or achieve their overall objectives.

Set goals for yourself

You may have put together a business plan when you started or acquired your business, but how often have you updated it? I'd recommend that you annually sit down and reevaluate your strategic plan for yourself and your business. Project the business three to five years into the future. Will you be entering new markets or introducing new products?
Also, how do you see yourself transitioning out of the business? Will you sell to a third party or keep the business in the family? Do you plan to retire upon exit or will you be starting a new career or buying another business?

Assemble a solid team

There are numerous professionals involved in successful exit planning, many of whom are probably your current advisers. Your team should include: attorney; accountant; wealth adviser; mergers and acquisition adviser/business broker; insurance professional; and any other trusted advisers. Each of these professionals brings vital skills to the table.

Watch your expenditures

Be careful where you spend your cash. Clean up your income statement and eliminate unnecessary expenses. The most likely valuation of a profitable company involves the capitalization of a company's cash flow; so every dollar saved on your P&L equates to two to four dollars of value in your company.
Also, make sure that you earn a good return on investment on capital expenditures. Put yourself in the potential buyer's shoes - what about your company is valuable? Make sure the capital and time you invest in the company enhances that value.

Make sure your information systems are up to date

Owners and managers should have systems in place so that information received is timely and accurate. These systems need to be transferable to the buyer. While a spreadsheet of financial data may work for the owner, would a new owner be able to understand it? Bookkeeping should be performed using standard accounting software such as QuickBooks. The same goes for any other system in the business - if the industry standard is to have certain software to handle inventory or project management, then the company should have that software in place.

Management and/or trained employees in place

A business is difficult to sell if the owner is too embedded in it. A buyer will want to be able to step into the business and take over from as close to Day 1 as possible. (Often sellers stay on for a finite transition period after the sale.) Talk to members of your exit planning team regarding creative ways to create incentives for key employees to stay.

Manage the relationships with customers and suppliers

Your goal in selling to an outside party is to minimize the perceived risk of buying your company. A key component to this is customer diversification. If any one customer comprises greater than half of your revenue, you're at risk of that customer leaving and inflicting a potentially mortal blow to your business. The same risk exists if any one supplier of a key material or service has too much power.

Perform pre-transaction due diligence

Review with your advisers all of the items a potential buyer would want to review, including contracts, leases, equipment lists, etc. Additionally, you'll want to ensure that you have up-to-date financial statements from the last three to five years available, prepared by your CPA. It may make sense to pay for more in-depth financial statements such as reviews or even audits if your company is large enough. Lastly, make sure that these items, as well as any potential "skeletons in the closet" are documented and presented to the buyer. Obviously, if the skeletons can be removed then do so, but definitely make sure that a buyer isn't surprised. That could kill the deal.

These are certainly not the only things you can do to ensure a smooth exit plan. Most of all, heed the advice to hire professionals to assist you. With the right help, you greatly improve the odds of achieving your goals!

 

Transfer your Business - 3rd Party or Family?

In a survey conducted by a Midwestern university several hundred business owners were asked "What are your plans for business succession - to pass the company on to your children/key employees or sell to a third party?" Seventy percent (70%) responded that they planned to pass the business on to children/key employees and 30% responded that they would sell to a third party. Several years later these same business owners were contacted. Of those that transferred ownership, about 30% passed the business on to children/key employees and about 70% sold to a third party. The reality was that the vast majority sold to a third party even though their original intent was to pass it on to children/key employees. There are several reasons for this - the major reason being that it creates the biggest payday.

So now you plan to sell to a third party in 2-3 years. What are you going to do after you sell your business? Will the proceeds from the business support that? Do you know the type of buyers that may be interested in acquiring your company and what they're looking for? Is your company ready for sale? What can you do to maximize the value of your company in the eyes of prospective buyers? In summary, do you have a well thought-out plan? Transferring ownership of your business may be the biggest financial event of your life - you should have a plan.

Another survey, this one by ROCG, an international consulting firm,  asked several hundred business owners who wanted to exit within 3 years if they had a plan. Eighty percent (80%) responded in the negative. The same survey asked "what is the most important objective in the sale of your company?" Eighty percent (80%) wanted to maximize the transaction amount. A good strategic exit plan gives you the best chance of receiving the maximum transaction amount.

Conversely, lack of a plan can cost you a lot of money. How do I know? It happened to someone I know. See the blog below titled "Strategic Planning".