Articles & Press

Consider More than Money When Selling Your Business

By | Articles & Press

Sure, you want a big payoff, but when it comes to selling your business, money should not be the only consideration.  You don’t want just any buyer, you want the best buyer. With the market we’re now experiencing, many sellers are getting multiple offers, but the buyers they choose aren’t always the ones offering the most money.

 

Would you consider a lower price for a buyer that fits the company’s culture?  Would you consider an offer that’s a million dollars lower if it meant the difference between years of seller financing and cash at close?

 

It’s common for deal structures to include a variety of options which must be carefully considered and evaluated, long before you get to the negotiating table.

 

You may not realize it, but you’re positioning and negotiating from day one of a sale. Be sure your priorities are well thought out or you might give a buyer the wrong impression which can have serious consequences.  There aren’t any wrong answers – your priorities should be what you feel is important.

 

 

A prospective buyer may ask how long you’ll stick around after the sale and you may casually respond that you’ll be around as long as needed.  Then you find out that the buyer is thinking about a two-year transition when you and your wife had been discussing a potential move to Florida.

 

Something like that could blow up a deal. Had your initial response been that you would be around three to six months and then could provide consulting services from Florida, the buyer would not be counting on long-term support.  Remember, it’s always easier to give the buyer more than expected than take something away.

 

As a seller, there are some common decisions you may have to make:

 

Financing – Do you prefer a higher offer with some seller financing or a lower offer with cash at close?

 

Transition – Are you looking for a quick exit?  Does the buyer expect a lengthy transition? 

 

Employees – Sellers are often very protective of their employees.  Will the buyer relocate or replace staff?

 

Ownership – Are you looking to maintain a minority stake for yourself or your family?

 

Legacy – Most sellers don’t want to cash out and watch the company erode. Ten years from now they want to look at a successful business that they had a hand in building.

 

 

Real Estate – Is the buyer interested in your building?  Some sellers prefer to keep the real estate and draw rental income. If the buyer doesn’t want your facility, how soon can you fill it?

 

Trust – Do you trust the buyer?  Some sellers will pass up higher offers to work with a buyer they feel better about.

 

Even if you know your preferences, you may not get everything you want when making a deal.  A reputable business broker or intermediary will be sure that the right questions are asked to help you organize your thoughts; review your priorities and understand what the market will bear.  In the end, you’ll find yourself in a better position to negotiate and close the deal—without sacrificing your goals.

 

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.

Seller can stay around following the sale

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Selling a business and walking away can be very difficult.  But in many cases, there’s a transition (“training” and/or “consulting”) period dependent on the size of the company and the role of the owner.  Transitions may be as short as a month or two or as long as a year.  In most situations, the buyer wants the seller to remain on board to shorten the learning curve and help with the smooth transfer of key relationships.

In the typical business sale, a transition period of four to eight weeks is included, and sometimes a “telephone consulting period” is added (e.g., 6 months of telephone consulting not to exceed 5 hours per month).  Also, the seller may additionally be retained as a consultant at a negotiated rate.  In some instances, a long-term employment contract is negotiated and the seller maintains daily involvement for a much longer period of time.

For the owner who wants to sell the company and leave quickly, the focus should be on the development of a strong management team.  Be sure to introduce key employees/managers to your major customers and vendors and look at ways to delegate responsibilities.  The more the customers think they are interacting with “the company” versus the “owner” the easier the transition.

If you’ve established a good management team, less time will be required for the transition to the new owner.  In addition, a well developed team usually adds value to the sale.

Occasionally there are owners who want to sell but just aren’t ready to quit working.   They may be looking to sell early to get a premium price while the market is in their favor or to get away from unwanted or overwhelming administrative and management duties.

Either way, long-term employment contracts can be included in the sale agreement.  The seller can stay on board and work with the business a few more years while still drawing an income and benefits.  A number of Private Equity Groups are asking the seller to maintain a minority ownership of 10% – 20%. If the owner wants to stick around for a while, maintaining a small ownership can provide them a nice second payday.

If you’re selling your business, in most cases you won’t be able to walk away the day after the sale and in most cases, you probably don’t want to.  Talk to your business intermediary about the true timeline of the sale and transition.  If you want to sell while the price is right, but you’re not quite ready to leave immediately, consider the options available to sell now and maintain a role with the company.

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.

Private Equity Groups- The Key Players

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Over the past 20 years, private-equity groups (PEGs) have become key players in business acquisitions.  PEGs offer flexibility as a liquidity source, giving entrepreneurs the ability to take some cash off the table, recapitalize their company or simply sell and move on.
Private equity refers to buyout groups that seek to acquire ongoing, profitable businesses that demonstrate growth potential.
The private equity market had traditiaionlly been restricted to acquing larger companies.  But increased competition for those larger operations, greater growth potential for smaller firms and an easier path to exiting the investment in the future have played a role in attracting PEGs to smaller companies.
PEGs are typically organized as limited liability company partnerships controlled and managed by the private equity firm that acts as the managing members.  The fund invests in privately held companies to generate above market financial returns for investors.
The strategy and focus of these groups varies widely with different groups having varied investment philosophies and transaction structure preferences.  Some prefer complete ownership, while others are happy with a majority or minority interest in acquired companies.  Some limit themselves geographically while others will buy anywhere in the US.
PEGs also tend to have certain things in common.  They typically target companies with relatively stable product life cycles; avoid leading-edge technology (this is what venture capitalist want); and have a preference toward stable and established product lines or services.  Most prefer a qualified management team that will continue to run the day-to-day operations while the group’s principals closely support them on the Board of Director level.
Private equity buyouts take many forms, including:
Outright Sale – This is common when the owner wants to sell his ownership interest and retire.  Either existing management will be elevated to run the company or management will be brought in.  A mid-term transition period may be required to train replacement management and transition key relationships.
Employee Buyout – PEGs can partner with key employees in the acquisition of a company in which they play a key role but don’t own.  Key employees receive a generous equity stake in the conservatively capitalized company while retaining daily operating control.
Family Succession – This type of transaction often involves backing certain members of family management in acquiring ownership from the senior generation.  By working with a PEG in a family succession transaction, active family members secure operating control and significant equity ownership, while gaining a financial partner for growth.
Recapitalization – This is an option for an owner who wants to sell a portion of the company for liquidity while retaining equity ownership to participate in the company’s future upside potential.  This structure allows the owner to achieve personal liquidity, retain significant operational input and responsibility and gain a financial partner to help capitalize on strategic expansion opportunities.
PEGs have become a major force in the acquisition arena.  They can also be thought of as strategic acquirers in certain instances, when they own portfolio companies in your industry or a related area that addresses the same customer base.  These buyers may be in a position to pay more than an industry or strategic buyer that does not have this financial backing.

 

 

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.

When Buying a Business ask the Right Questions

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The first question you ask as a buyer is not directed toward the seller. The first question should be answered by you the buyer. The question is: Do I see myself running the business I’m thinking of buying? Along with other associated questions like: Am I really an employer, or an employee? Do I have the intestinal fortitude to withstand the gut-wrenching day-to-day interplay among employees, clients and vendors? Am I sufficiently capitalized to be successful long-term?

 

Having positively answered the above, never rely solely on the questions that come to your mind. Surround yourself with a business buyer team: a C.P.A. and attorney are minimum; having a financial advisor and lender is normally necessary.

 

Here is a short list of questions addressed to the seller, to which you should get good answers:

 

  • Why are you selling? Retirement used to be the main reason businesses were sold. Now, burnout seems to be most prevalent. Definitely make sure the seller has plans for post business ownership, or he/she may not be fully committed to the sale.
    • What do you do on a day-to-day basis? Find out how many hours the seller is    working, and what a typical business day is. Also, ask if there are special licenses the seller has obtained that you will need either immediately or eventually.
    • Are you willing to train me for 60 days (or longer)? The training should be included in the acquisition price. Specifying a set number of hours of training over a longer period (like a year) will allow for future questions or emergency help.
    • Do any of your clients represent more than 10% of your revenue? If clients representing over 10% are lost, the profitability of the business could be greatly diminished. It might be worth looking at a client list for the past three years to see what kind of client concentration and turnover takes place.
    • Who are your competitors? Are they larger or smaller than the business you are acquiring? Ask about the competitor’s strengths and weaknesses.
    • How can I build the business to be more profitable? If the seller has no clue how to build the business, he/she ought to get out of the industry. As the buyer however, you need to know if there is a systemic problem within the industry.
    • Are you able to take time off? Who is in charge while you are gone? If the business is tied directly to day-to-day owner management, you may not be able to plan family vacations.
    • What are the background, experience and salary of your supervisors or managers? Hopefully, these individuals will allow you to have some personal and family freedom. It’s also important to see if the business is “top” heavy.
    • What percentage of the sale of the business are you willing to finance? The minimum should be 10%. Most sellers want to minimize the carry back, but sellers should all realize buyers want them to have some “skin” in the game.
    • Who prepares your financials and tax returns? Are your financials compiled, reviewed or audited? Financials should be at least compiled by an outside CPA. Reviewed financials are better, and audited statements are the highest level.

 

Answers to these questions and others will establish whether or not you feel you can trust the seller. If you trust the seller, and the seller trusts you the buyer, few things will stand in the way of consummating a transaction.

 

-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.

The Pre-Sale Business Tune-Up

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Sellers 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 too 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, many sellers wait until they are forced to sell their business due to health, economic, or other issues; or 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. To help you formulate your plan, you should form a professional services team consisting of an attorney, CPA, financial planner, and business broker. You should meet at least once a year to update your plan.

 

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.

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.