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Absentee Business Ownership

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Thinking about acquiring a business and running it absentee?  My suggestion is that you think real hard and consider a few following points before jumping in those turbulent waters.

 

Sail your ship with a hand at the helm

Five years ago, we sold a long-standing food distribution business to a very experienced buyer from the corporate world.  He was leaving a very lucrative salaried position with substantial bonuses.  He decided to remain at his corporate job for a few months until his bonus situation materialized for the year, then he planned to tender notice and shift to his newly acquired business.  In the mean time, he brought on a seasoned CEO who he planned to keep in the senior leadership of the company.  The only problem was that the buyer’s salary and bonuses remained too attractive to give up, and he never left his corporate job.  This left the new CEO who was corporately savvy, but not so savvy to the food distribution industry, manning the ship. The short of it was that the storms that the new CEO was forced to steer through were much too strong for his abilities.  Within two years, the company went under.  The buyer never did take personal, full control of the company, even though he had personally invested over $1,000,000 of his own money with substantial additional lender financing.  Had we known at the time of the acquisition his eventual decision would be to run the business absentee, we would certainly have counseled against it.

 

What you may gain or lose

We are often asked, “Why can’t I just bring in a good manager, or promote someone from within?”  Although there certainly exist opportunities to do so with good people, the applications of making it work are few.  The larger the business however, the more it does make sense.  In fact, as a smaller business begins to expand, and with the expansion a widening of the employee base takes place, the better the potential exists to find qualified people to step up and run the company.  Most of us as consumers know immediately when a fast food franchise has an on-site owner.  The service is faster, the food is prepared as anticipated, and the cleanliness of the store is noticeably better.  The profitability and eventual success of the company can also be measured as a result of hands-on management/ownership.  Fast food, restaurants, convenience stores, and other retail establishments can be horror stories without the owner on board.  Although you may gain some free time personally, you may lose a substantial amount to dishonest, or less than productive employees who otherwise would work diligently under the owner’s watchful care.

 

Learn it, build it, and manage it yourself

In the long run, I believe business owners; especially small business owners, should learn their business, build it, and manage it personally.  No other person will run the business quite like you the owner.  No one will treat the business and the employees the same and no one will have the same motivation to see it succeed like you the owner. There is no substitute for keeping your hand on the wheel of the ship, especially when it concerns a small business.

 

-Bradley G. Marlor MBA, CBI is a Managing Partner at Utah Business Consultants and a Certified Business Intermediary. Utah Business Consultants is a full-service Business Brokerage and Valuation firm.

Succession Planning For The Family Owned Business

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Many entrepreneurs who have family-owned businesses say that their most difficult challenges are deciding who will succeed the current generation and how to preserve and build the company’s value by providing for a smooth transition of ownership and management.  Statistics support their concerns:  Only 35 percent of family businesses survive past the first generation of ownership.  Only 20 percent survive to the third generation.  Yet, more than half of family-business owners don’t have a written succession plan, and when there is a plan it’s often inadequate, either because no family member wants – or is able – to manage the business, or because too many family members want to run the business.

 

Owners of closely held and family businesses are often too focused on day-to-day challenges, and they often fail to plan for the eventual transfer of the fruits of their labor to their families.  In doing so, they jeopardize the future of their companies as well as the financial security of their families.

 

Succession is the process of preserving the real assets, spirit, ideology and mission of a family business for the next generation without extreme financial, emotional or management hardship.  Succession predictably involves financial, emotional and management challenges.  The goal of succession planning is to keep the challenges from creating extreme hardships that can imperil or prevent the continuity of the business.

 

There are two major activities involved in the process of family business succession.  The first is the actual transfer of ownership and management of a family business to the next generation through sales, gifts and estate.  The second activity is the operational survival and continuity of the business owned and operated by the next generation.  Just because the next generation owns the business does not mean that succession will take place.

 

For your planning to lead to successful transition, you had better have an action program to keep you on track.  The typical succession planning process involves several independent elements of family and business that can combine and derail your plan.  These volatile combinations include business control, money, taxes, family members and personal health.  Unfortunately, in the touchy, emotional family environment, there is no way of predicting what subjects will cause an explosion.

 

Although you can approach succession planning from several different directions, experience has shown that an effective succession process typically has these common action steps:

  1. Getting started
  2. Establishing succession objectives
  3. Assembling a capable planning team
  4. Reviewing alternative action steps
  5. Reconfirming objectives
  6. Developing an action plan
  7. Identifying a planning leader
  8. Following through with the action plan
  9. Passing the baton of management control
  10. Achieving succession success

 

Succession planning is a process, not an event.  And once the formal succession plan is in place, it must be an evolving document that’s reviewed and updated from time to time to reflect changes in the marketplace, competitive conditions, or your health or capabilities.


Wayne A. Simpson CPA, M&AMI is a Managing Partner at Utah Business Consultants and a Merger & Acquisition Master Intermediary with the M&A Source. Utah Business Consultants is a full-service Business Brokerage and Valuation firm.

Buying Your Own Lifestyle

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Buying a business, no matter the size or industry, is also buying a lifestyle.  Most buyers of businesses, when asked why they want to buy a business or go into business for themselves, state that they want to control their own destiny or don’t want to work for anyone else.  Making more money is far down the list.  In fact, most buyers who have left the more lucrative corporate world claim that they would never go back to it. Although most buyers would probably not admit it, the decision to buy a business is primarily a lifestyle choice. In this context, the type of business or the geographical place is immaterial– it’s the switch from jobholder to business owner that is the dramatic change. Just giving up the “frequent flyer” out-of town trips and the constant meetings may be a lifestyle change for many. One buyer said that he saved 1000 hours a year by adding up the cost of commuting and time spent in meetings.  For many new business owners, the lifestyle change becomes just as important as the money.

Sellers of businesses should keep in mind, however, that a lifestyle business is determined by the buyer– not the seller.  It is the buyer’s perception that gives a business its “lifestyle” quality.  No matter how quaint the bookstore may be or how intriguing the small manufacturer might be, buyers are not going to overlook the basics they expect to find before even thinking about the style of life it might provide. Buyers are still going to consider:

  • Is there enough cash flow to cover the debt service?

  • Is there also enough to pay a reasonable salary to the owner?

  • Is there some left over to provide a fair return on assets and the buyer’s investment?

Furthermore, there are other considerations. Some typical lifestyle businesses– a country inn or bed and breakfast, for instance –may be real estate driven.  That is, the real estate contains the real value of the business; the real profit lies in the equity in the real estate and its possible appreciation. Therefore, in considering these types of businesses, the buyer may be willing to overlook some of the items listed above.  The lifestyle decision may outweigh the normal return a prospective buyer expects when buying a business. There are those who are willing to make less money or overlook cash flow for the right lifestyle business.

Obviously, it could be said that every business offers a lifestyle opportunity for someone.  Even unprofitable businesses are targeted for acquisition. However, most buyers wanting to acquire a new lifestyle and create their own destiny will be looking for a business that will enable them financially to enjoy their new lifestyle. Regardless of the operating performance, lifestyle is in the “eyes of the beholder” – the buyer.

-Bradley G. Marlor MBA, CBI is a Managing Partner at Utah Business Consultants and a Certified Business Intermediary. Utah Business Consultants is a full-service Business Brokerage and Valuation firm.

Time Can Kill A Deal

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Many factors can bog down the sale of a business.  In fact, more than purchase price or structure, time is the most likely reason that a business sale may fail.

Time can breed frustration and fatigue. As a potential sale drags on, the owner is left in an uncomfortable state of flux.  The buyer may also become frustrated as fees mount.  The deal can reach the point when one party declares… “It just wasn’t meant to be.”

National figures indicate that the average business sells in 6 to 12 months from start to close. Once a letter of intent (LOI) has been signed, the final due diligence and closing process usually takes 30 to 90 days.

So how do you keep the sales process moving forward?

 

Attentive Advisors

Your business intermediary, attorney, and accountant should be able to give you the time, attention, energy and resources necessary to focus on your deal.

Obtaining appraisals, ordering environmental investigations, transferring licenses, title work and many other details need to be handled properly and in a timely fashion to be able to close a transaction.  There’s a lot to coordinate and missing just one detail can cause a delay in closing the deal.

 

Transition Specialists

From your business broker or intermediary to your attorney and accountant, you want to consider hiring specialists in business transitions.

Inexperienced advisors tend to be overly conservative to protect their liability. That can drag out the negotiation process and may cause frustration for the parties involved.  If you are serious about selling your business, you really don’t have the time or money to pay to educate your advisors on the mergers & acquisitions process.

 

Comprehensive Overviews

Your advisor should spend the time packaging the business up front. A comprehensive business review can be developed that answers 80 to 90 percent of the standard questions a potential buyer will have.

 

Seller Preparation

Be prepared to move forward emotionally and financially.  A seller will sometimes thwart the sale because they haven’t seriously considered their future plans or their financial expectations are out of line.  A professional advisor should be honest in what he or she believes the market can bear and should not let you go to market with an unreasonable asking price.

 

Buyer Screening

Finally, your intermediary should screen all buyers to ensure they are serious about the potential acquisition and have the financial means to move forward with a transaction. You don’t want to waste time with buyers who simply can’t afford a purchase. Also, your intermediary should make sure that the buyer is using a bank that has a history of funding deals. Many banks will only finance the purchase of equipment and inventory and won’t finance any goodwill. Working with the wrong bank can really slow the process down.

Selling a business can certainly be an emotional ride.  It’s a time to work with deal makers and specialists who will help to minimize the stress and help everyone move forward toward the timely completion of the business sale.

Wayne A. Simpson CPA, CBI, M&AMI is a Managing Partner at Utah Business Consultants and a Certified Business Intermediary. Utah Business Consultants is a full-service Business Brokerage and Valuation firm.

Selling Your Business? Follow These Ten Commandments to Avoid Wrecking the Deal

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  1. Place a reasonable price on your business. Since an inflated figure either turns off or slows down potential buyers, rely on your professional service provider to help you arrive at the best “win-win” price. Remember, a transaction will consummate only when a buyer and seller come to reasonable terms.
  1. Carry on “business as usual.” Don’t become so obsessed with the transaction that your attention wavers from day-to-day demands, affecting sales, costs, and profits. Since the selling process could take six to twelve months, the buyer needs to keep seeing a healthy business.
  1. Engage experts to insure confidentiality. A breach of confidentiality surrounding the sale of a business can change the course of the transaction. Professional intermediaries can channel the process and the parties involved to keep the sale within safely silent bounds.
  1. Prepare for the sale well in advance. Be sure your records are complete for at least several years back and do all pertinent legal or accounting “housecleaning”–as well as a literal sprucing-up of the plant or store.
  1. Anticipate information the buyer may request. Most buyers will require three years worth of financial data including tax returns. In order to obtain financing, the lender will require a business appraisal as well as a real estate appraisal including an environmental assessment (where real estate is concerned).
  1. Achieve leverage through buyer competition. This can be tricky; you are wise to create a competitive situation with buyers to strengthen your deal position. In actuality, one buyer is no buyer.  The sales process should stimulate multiple buyers with multiple offers.
  1. Be flexible. Remember the forgotten Beatitude: “Blessed are the flexible, for they shall never get bent out of shape.” Don’t be the kind of seller who wants all-cash at the closing, or who won’t accept any contingent payments or an asset transaction. Depend on the advice of your professional service providers–their knowledge of financing and tax implications– to keep the deal sweet instead of sour.
  1. Negotiate; don’t “dominate.” You’re used to being your own boss, but be prepared to learn that the buyer may be used to having his/her way, too. With your consultant’s help, decide ahead of time when “to hold” and when “to fold.”
  1. Keep time from dragging down the deal. Time kills all deals. To keep the momentum up, work with your intermediary to be sure that potential buyers stay on a time schedule and that offers move in a timely fashion.
10. Be willing to stay involved. Even if you are feeling burnt-out, realize that the buyer may want you to stay within arm’s reach for a while.  Most transactions will require the seller to assist in transitioning for up to 90 days — sometimes longer.  Determine in advance how you can best affect a smooth transition.

The House or Your Business… The Selling Tactics are Similar

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Throughout my life I’ve seen many different articles on owning your own home. The statistics show that Americans change homes once in every 7 years on average. What fascinates me is not the “how” of this change, but the “why”. It appears that for your typical American, a change of residence is made not because it is necessary, but simply because they can. With the right financial situation, change can make their life better or simply supply a change to keep things interesting in their life. I’ve discovered that there are parallels between this mindset and business ownership. There is a new standard for business in which a founder may start one company, take it to its potential and then sell and move on to bigger and brighter opportunities. Why do they do this? For the same reasons as homeowners: they have all of the tools they need, the potential is there and the time is right.

Purchasers

It is a blessing to live in a place flavored by capitalism. It’s our choice to purchase or to sell. Just as with real estate, companies are bought by a large variety of purchasers. If you’re searching for an upscale penthouse, or a humble cottage, you have a world of options. In business nowadays, the same mentality exists and flourishes. From a world-wide franchise to a mom-and-pop eatery, you can have your pick at the business buffet. The real challenge is not for buyers but for sellers. Similar to real estate, sellers of businesses must groom and nit-pick their product so that it sells at its potential. The selling points of business are found in potential profit immediately and in the future, absence of heavy competition, the industry wherein it resides, and the possibility of capital growth.

The Right Time

It would be a dream to make a good sale on your house during a period of heavy competition, with an upbeat economy, and rates of interest that have never been lower. You can’t always tell the tide when it’s allowed to roll in, but you sure can jockey for a position that takes best advantage when the moment comes. How? By patiently waiting to sell until the year end operating data shows great bounds in company profits. Or by waiting to show that new changes you’ve implemented increase company profits. Or by reducing potentially negative factors like low morale or unpaid liabilities before making the move to sell.

Seek Assistance

Selling a house or a business are two of the most important deals you can make. In either scenario professional assistance is shown to greatly improve outcomes in terms of profit maximization and migraine minimization. Just like you would never dream of performing open-heart surgery on yourself, utilize an available and knowledgeable group of business professionals (CPA, Lawyer, Business Broker) to get your deal done right.

Owners of companies are more alike with homeowners then they may realize. They are both constantly vending a very important product in two very similar markets. Some for a change of pace, others are ready to retire, and others for reasons known only to them. At the end of the day everyone should maximize results in their sales opportunities. Why? Because they can, and it’s what we do here in America.

Evaluating Business Acquisitions Through Profitability

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Comparability in businesses is virtually an oxymoron. Every business is different, including franchised businesses. Having owned a franchise personally, I can tell you that although our services were the same as other franchisees, our employees, our clients and our profitability were certainly unique.

As you evaluate various businesses for the purpose of acquisition, although there is recognized differentiation, still there should be consistency in how profitability of businesses is calculated. Using a homogeneous method of profitability comparison, will allow you to fairly judge the value of businesses, despite their differentiation.

The comparability standard we use in general terms is: Total Owner’s Discretionary Cashflow. Specifically, we use EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), adjusted by owners discretionary expenses. If you are not familiar with the term EBITDA, don’t worry, any financial adviser you employ in the due diligence process will be. Effectively you are evaluating the business profit on a pre-tax, pre-interest, pre-depreciation and amortization basis. Add to that the owner’s salary and other non-business essential perks and you have a picture of the business’s “Total Owner’s Discretionary Cashflow”.

Having arrived at the discretionary cashflow figure, you can then calculate your own personal financing costs to acquire the business, plus any capital requirements you forecast the business to need (i.e. additional equipment and inventory, or capital for growth purposes). Going through the above exercise on all businesses you evaluate will allow you fair comparability across various industries.

Profit alone however, is not the sole indicator of total value. Although profit is typically the focal point of what buyers are looking for, the income statement analysis should be accompanied by an analysis of the balance sheet. Given comparable discretionary cashflow, a balance sheet with substantially more assets will attract higher value. Why? The buyer will have more tangible assets to continue running and growing the business, and any lenders used in the acquisition process will be happier to lend with a stronger asset base.

What are owner’s discretionary expenses? Basically any expense that is not required to operate the business is a discretionary expense and should be added back to the cashflow of the business. Examples of discretionary expenses would include personal vehicles, personal travel and other entertainment that are non-business related. We’ve seen everything from the building of a vacation home in Belize to girlfriends in Las Vegas that ended up as ‘business” expenses. It’s important to weed out the discretionary, from the truly legitimate business expenses, in order to fairly understand the full profitability of a business.

 

-Bradley G. Marlor MBA, CBI is a Managing Partner at Utah Business Consultants and a Certified Business Intermediary with the International Business Brokers Association. Utah Business Consultants is a full-service Business Brokerage and Valuation firm.

Should I Buy a Business that has Customer Concentration?

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Over the years we have been engaged with a healthy number of businesses vexed by customer concentration. We have seen many more we elected not to represent. Those we elected to pass on had concentration issues with little to no defensible position relating to concentration. One letter from a concentrated customer ending its relationship and the company would be toast. The final answer of whether or not to acquire a business with customer concentration should be prefaced with answers to the following questions:

1) How deep is the customer concentration? In selected industries, concentration of 10% or more might be considered high. However, generally 20% or more concentration should be cause for concern. If a customer generating revenues of 20% or more is suddenly lost, unless immediately replaced, it would have a serious to devastating impact to the bottom line. Concentration over 50% should be dismissed as an unacceptable target unless very unusual circumstances exist.

2) How easily can the customer leave? If the business servicing the customer has proprietary assets – – tangible or intangible, it can make a big difference. Simply having a “good relationship” with a customer is not enough. Differences in pricing can quickly change the mind of a customer; there is little security in a longstanding relationship where pricing is concerned.

3) What are the gross and net margins of the company? This question should be obvious. The higher the margins, the higher the degree of comfort should exist in the target company given higher levels of customer concentration. Higher margins may be indicative of proprietary products or services that allow the target company to operate very profitably. It may also indicate the targets ability to quickly replace lost clients.

4) One final question is whether the business can expand out of the concentration issue? In other words, can the business continue to grow, thus diluting the concentrated customer? Most business owners don’t want to lose their golden customer, but instead of growing the rest of their customer base (including new customers) they allow the concentrated customer to absorb more and more of their products or services.

Customer concentration can transform an otherwise profitable, successful company to an unattractive target. Buyers should be careful of courting a concentrated target company; sellers should start today on diluting in order to strengthen marketability.

 

–Bradley G. Marlor MBA, CBI is a Managing Partner at Utah Business Consultants and a Certified Business Intermediary with the International Business Brokers Association. Utah Business Consultants is a full-service Business Brokerage and Valuation firm.

It’s Better To “Cash-Out” Than To “Burnout.”

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Burnout can come with a business that’s successful as well as one that’s failing to grow.  The right time to sell is before the syndrome becomes a threat to the effective management of a business. What are the warning signs of burnout?

That isolated feeling. The burnt-out owner has been “chief cook and bottle washer” for such an extended period of time, that even routine acts of decision-making and action-taking seem like Herculean tasks. These owners have been shouldering the burdens alone too long.

Fuzzy perspective.  Burnt-out owners are so close to their work that they lose perspective. Prioritizing becomes a major daily challenge, and problem-solving sometimes goes no further than the application of business Band-Aids that cost money in the long run rather than increase profits.

No more fun. Of course, owning a business is hard work, but it should also include an element of enjoyment. The owner who drags himself or herself through every day, with a sense of dread–or boredom–should consider moving on to a fresh challenge elsewhere.

Just plain tired. Simply put, many business owners burn out from the demands placed on them to keep their companies operating day after day, year after year. The schedule is not for everyone; in fact, statistics show that it’s hardly for anyone, long-term.

The important point here is for business owners to recognize the signs and take action before burnout begins to hinder the growth–or sheer survival–of the business. Many of today’s independent business owners feel they’ve worked hard, made their money and sense that now is a good time to “cash-out” and move on.

By:  Bradley G. Marlor MBA, CBI

Utah Business Consultants

Weighing Your Options: Buying vs. Starting a Business

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So you’ve been in Corporate America too long; you can no longer stomach the grind, the stress, and the hours.  You’ve been padding your corporation’s pocket, yet your pockets are seemingly empty.  Something has to change.  You realize that changing companies might provide a different view, but what you really yearn for is a whole new landscape, the ability to create and mold your environment to your own advantage.  And you want to feel duly compensated for the brainstorms, the headaches, and the emotional wear and tear. What are you waiting for? You have the skills, why not start your own business?

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