“Failing to plan is planning to fail”
Every business owner, regardless of size, should have an exit strategy for his or her company. Failing to have a sound, up to date exit plan could cost an owner hundreds of thousands or millions of dollars in sale price.
A key piece to an exit planning involves putting together the right team of advisors. That team should include an M&A (Mergers and Acquisitions) Intermediary, a Business Attorney, a CPA and a Financial Advisor. This team will work together to consider legal, tax and financial matters when considering the sale or merger of a company.
A strategic exit plan begins with valuation. Every CEO should have a firm understanding of what their company is worth in an acquisition.
A valuation measures many facets like cash flow, profit, revenue and both tangible and non-tangible assets like goodwill amongst others. Factors like economies of scale and synergistic qualities with other firms of equal or greater size are also considered.
Part of the exit strategy process should be a look within the company’s infrastructure. Things that can negatively affect the value of the company are:
- Key Employees not having employment contracts with non-compete clauses
- Being over-dependant on one vendor, supplier or manufacturer
- Organizational Chart – not having proper management in place.
- A high percentage of revenue and profit being tied up in one client
- Books and Records – company records, including corporate by –laws, articles and other related items not being organized or up to date
- Patents and Trademarks not being filed and up to date
- Not having clean and organized income statements
The largest factor in valuation however is the company financials. Most buyers, unless Strategic (buying for a particular product or customer, etc), consider EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) as the determining factor of the value of the business. Having the other items in order will solidify that value; not having them considered with certainly hurt that value.
An important consideration in the value of the company, when reviewing the books, is bottom line profit. While most small to medium business owners live out of their business, it is very important in preparation for a sale to minimize discretionary personal expenses and allow for profit to drop to the bottom line. Saving a few thousand in taxes now may cost a business owner a hundred thousand in sale price later. This should be considered in the year or two leading up to marketing a business for sale.
Another key element to a successful exit plan is a having a solid succession plan in your company. An owner or one key employee should not have all of the intellectual property or contact with clients. The business should be able to run efficiently when the owner or key employees are not available. Having a number of employees cross trained to handle several aspects is very important to perspective buyers.
With a great exit plan and the right advisors an owner can maximize the value of their company and move to their next adventure.
Companies owned by professional investors usually put in place a strategic plan to build their organization and its public profile. Their intent is to maximize returns upon the eventual exit of its investors. All major business decisions to pursue acquisitions or investment in facilities, geographic or product expansion, technology, systems, personnel, etc. are influenced by the short and long term goals of ownership and the strategic plan. The management team and their advisors are familiar with the preparatory steps necessary to position the company for an eventual transaction. They each play a part in building the company’s profile so that it is appropriately positioned when it is time for an investor exit.
Other companies do not focus on exit strategies when making operating decisions. They apply their attention to day‐to-day operations and building sustainable revenues and profits. While placing efforts in this direction is not an impediment towards an eventual exit, these companies may find themselves unprepared in the event that the sale of the company becomes a nearer term objective and need to gear up unexpectedly for a sale. Why do companies have these sudden changes in plans? It can be because of a turn in the financial markets, a recent sale of another similar company at an attractive valuation, changes in the goals of ownership or for other reasons. Whatever the reason, when a sale is the right next step, many companies are unprepared. They cannot just hang a for-sale sign and start the process. A company sale is a complicated, multi-step strategic effort. Some of these steps need to be performed well in advance of any internal or public communication of the intent to sell.
One significant pre-sale step involves determining the company’s value and how to position the company’s profile to have a sale process that maximizes that value. Prospective buyers will ultimately calculate the value of a company based on a multiple of its earnings (net income, EBITDA, adjusted earnings, cash flow, etc.). That multiple will generally be determined based on similar transactions in the industry for similar companies (“comparables” or “comps”) and can span a wide range of multiples. But what is your industry and what companies in that industry have a similar business model that a buyer would associate as a comp? It may seem obvious to you but may not be as obvious to others.
A particular industry usually has a wide variety of product and service models within that industry. Valuation multiples within an industry can often span wide ranges. Companies with products or services that are considered commodities or have lower expectations for growth and profits will generally have comps at the bottom of the range of multiples. Companies that offer growth potential, a unique business model, or new technology, for example, may result in comps at the top of the range. But these lines of definition are not always clear. Your company may be similar in profile to one of these types, or you may find yourselves somewhere in the middle resembling both types of companies in different ways. That lack of clarity can be detrimental to a sale process. It allows prospective buyers to position your company where it is more advantageous for them. It is your responsibility to clear up the fog and paint a profile that is supportive of your positioning when your company hits the market for sale. It is important that as you plan your sale that you strategically build a company profile that is clear and concise and emphasizes the attributes of the higher comp companies when applicable.
Building a company profile to benefit from high comps is a strategy that requires planning, execution and time. You cannot effectively position your company for a sale if steps are not taken well in advance to maximize the most important and valuable traits of your business. These steps include updating your public footprint, promotional materials, company presentations, and most importantly, making sure that management understands and promotes the key points of the profile that you have embodied.
Regarding your public footprint and promotional materials, your website is the most available public information for any buyer researching your company. Can you imagine how hard it would be to position your company in a sale process only to have contradictory information on your website or in your customer brochures? They need to be clear and supportive of your profile positioning. In addition, all of your other social media outlets need to be supportive of the profile.
Other areas that need to be conformed to the profile you are promoting include industry publications, analyst reports, press releases, and your company board, business and customer sales presentations. During sale diligence a prospective buyer will request various types of information including these presentations. They all must conform to the positioning to support the valuation multiple you are looking to achieve.
Last, management needs to talk-the-talk. The sale process starts with several layers of management presentations. The success of these presentations can be a decisive factor in whether a potential buyer is interested in moving to the next step of the process. The company profile that is presented at these presentations must be clear and convincing. Management must also be able to effectively answer probing questions regarding the profile positioning. As additional management members are brought into the process, they also must be able to clearly support the positioning.
During the sale planning process, a company may decide to solicit input and advice from outside advisors such as investment bankers. Bankers will have intimate knowledge of your industry and all of the public and private companies that may be potential comps. They can provide guidance to help you build a strategy to maximize value based on their knowledge of the comps. When going outside the company and bringing a banker into the fold, you need to be selective with who you speak with. You should only have these communications with advisors that you trust.
Building your company profile and getting your comps right can be the difference between hitting a home run and striking out in a sale process. Appropriate planning and execution are essential.
If your company is struggling with the time, resources or expertise to address some of your more significant and worrisome financial challenges, contact SBell Consulting LLC. We can help you attack and conquer those challenges. Steven Bell, Managing Director 215-882-2671 email@example.com WWW.SBELLWEB.COM
(For more white papers visit www.sbellweb.com/resources.html)
Should you sell your business? Patrick M. Foley is the Vice President of Robert W. Baird & Co. and has provided us with an excellent article to help you to start planning the sale of your business. Please see the article and link below to learn more.
"In studying and experiencing the business transaction market I’ve found that one theme keeps coming to the fore: too few owners plan their exit well, and the result is often less money, and more aggravation. The attached article “Exit – Should you sell your business? How? And then what?” is meant to provide an overview of the issues an owner should consider when contemplating a sale. In particular, I believe it is critical to put together a strong team of advisors well in advance of an actual sale, and the article talks about how to do that. I hope you find it informative. Best of luck with your business… whatever direction it takes!"
Click here to go directly to the article to learn more http://goo.gl/ocpiJx
Patrick M. Foley, Vice President
Robert W. Baird & Co.
Less than 25% of small businesses ever sell. Engaging an exit planning advisor can be the difference between liquidating and maximizing the after-tax return from the many years a business owner has invested in building and running the business.
“I never worry about action, but only inaction.” Winston Churchill.
Every business owner should have an exit strategy. The process of developing the exit strategy and implementing the exit plan should never be postponed until it is urgent. In most cases the best strategy takes years to implement. And in some cases there are legal constraints on implementing the best strategies in the short term.
If you don’t know where you are going, any road will take you there.” George Harrison – Any Road
If a business owner wants to consider all options available, maximize the value of the business and make the exit process smooth, they should involve an exit planning advisor. Similar to engaging any trusted advisor, accountant, attorney or financial advisor, it is not a single meeting event. It is a continuing relationship that builds trust. The exit planning advisor becomes a valuable member of the team.
“In preparing for battle I have always found that plans are useless, but planning is indispensible.” Dwight D. Eisenhower.
The planning process itself in invaluable. An exit planning advisor will start with a business valuation. This work will allow business owners to gauge the difference between what the business is worth, versus what they will need to retire or will need to invest in another business venture. Once a business owner knows the value of the business they will need a plan to increase the value over time. This plan becomes a roadmap with a timeline to measure progress and with various exit ramps.
“If you really look closely, most overnight successes took a long time.” Steve Jobs.
The business value is what a willing buyer will pay after performing due diligence and deciding to proceed. To increase the value an owner needs sufficient time and the perspective to look at the business with a buyer’s objectivity. An exit planning advisor has this objectivity and knowledge. The exit planning advisor can prepare a business owner for the time consuming, complex, emotional process required for a successful transition.
“The wise man bridges the gap by laying out the path by means of which he can get from where he is to where he wants to go.” John Pierpont Morgan
Most business owners have the majority of their net worth in their business. Without utilizing the experience of an exit planning advisor, it is very risky to simply hope that the exiting process will be successful. The exit planning advisor will work with the business owner over the planning horizon to help identify areas where the value is being negatively impacted and suggest ways to make improvements that reduces the risk a buyer would perceive.
“Price is what you pay. Value is what you get.” Warren Buffet
In addition, the exit planning advisor will work with the owner’s other trusted advisors on legal and tax issues to make the eventual exit most rewarding and satisfactory.
You’re seriously considering buying a business.
It’s an exciting and sometimes stressful time. You’re ready to tackle your next challenge head-on and this new business may just be the biggest yet. But, before you get the process going, you need to ask yourself some pretty tough questions to make sure you’re really ready.
In order to help you better prepare for the purchase, answer the seven questions below. With a little insider knowledge and homework on your part, you’ll be on your way to a less stressful, more profitable and rewarding transaction.
1. Am I ready to be an entrepreneur?
This is the question most buyers ask themselves first and foremost. The answer to that question can be found by answering a few questions first:
• Am I tired of working for someone else?
• Shouldn’t I work for myself rather than make someone else rich?
• Do I want the freedom to make my own decisions and control my own destiny?
If you answered yes to these questions above, you are ready to take the next step towards owning your business.
2. Do I have the necessary funds for the down payment?
In order to purchase any business you will need a down payment. A down payment can range from $25,000 to $1,000,000 depending on the price of the business. A good rule of thumb is to figure on having at least 25% of the purchase price for a down payment. If only seller financing is available, 35% may be more realistic. Either way, it will be necessary to have funds ready and available when you make an offer to purchase a business.
3. Do I have 3 years of tax returns to use for financing?
Banks and private/seller financing will always require your personal financial documents to be examined before determining your ability to borrow funds for your business purchase. It is very important that you keep a file containing your tax returns, including all schedules, readily available upon request. Your tax returns will be the key tool when assessing your ability to borrow.
4. Have I checked my credit score?
Just like your tax returns, a bank or private financing source will want to check your credit to make sure you have the necessary credit history to repay the loan in a timely fashion. If your credit score is below 650 from any of the three (3) major credit bureaus, you might try to raise your score prior to applying for a business loan. Your credit score can be checked by going to www.experian.com.
5. Do I have a financial statement prepared for the broker?
A financial statement is a great tool to use when beginning the purchase process. It will be the one form that can be sent to your business broker, your banker, and to the seller when making an offer to purchase. Sellers like to consider things like net worth and liquidity when deciding which offer to accept.
6. Am I prepared to sign a buyer’s confidentiality agreement?
A confidentiality agreement or non-disclosure agreement is necessary to begin the search for a business to purchase. All prospective buyers will be required to sign one of these forms stating that they will not disclose any of the confidential or proprietary information that they receive. This confidentiality is paramount in the search process. However, the sharing of information with advisors such as accountants and lawyers is an acceptable practice and does not breach the confidentiality agreement.
7. Do I have an advisory team to assist with the transaction including a CPA, attorney, and financial planner?
Virtually every buyer is represented by a business broker to assist in the search for a business, an accountant to assist in the due diligence process, and an attorney to draw up and review the legal documents. Many buyers have business relationships with these types of professionals, but many times the advisors are not transaction-based. In the event that your accountant or attorney is not transaction-based, Stony Hill Business Brokers can refer several professionals from which you can choose.
At Stony Hill, we will provide you with answers like these and a lot more to help you prepare yourself to buy a business. With our consultative approach and knowledgeable background, Stony Hill Business Brokers is the partner every entrepreneur should have. Contact us today and one of our advisors will begin the process so you can begin the journey of buying your business with confidence.
I had the pleasure of working with Kevin Freeman on a deal. As a transaction advisor, I found Kevin to be very efficient, knowledgeable, and committed to serving his client’s interest in the most professional manner. This was evident when he encouraged his client to walk away from a deal when the client was ready to settle primarily out of frustration. Obviously this put Kevin’s commission at risk, but it was the right thing to do. It is always encouraging to work with another transaction advisor and to leave the experience knowing that he is representing the business brokerage industry well. I would gladly work on another deal with Kevin and would recommend business owners to trust him with the responsibility of selling their companies.
Spencer Tenney, CBI
The Tenney Group
Thought Leadership on Ownership Transition presented by Prairie Capital Advisors, Inc.
There are several paths a business owner can take when it comes to transitioning ownership.
For example, an owner may sell to a strategic buyer, to a financial buyer or to the company’s management team. The owner may also decide that a full or partial sale is several years in the future, but is interested in exploring gift and estate tax planning strategies or buying out another owner. When contemplating any transaction, obtaining a business valuation is critical and will give the owner a competitive edge. By going through the valuation process, an owner will learn which drivers that positively and negatively impact value. Armed with a valuation, an owner can make intelligent business decisions.
Key Value Drivers
Most business owners understand that private businesses are typically priced as a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). Companies with higher growth potential and greater free cash flow typically command higher multiples of EBITDA. Generally, multiples increase as the company’s size increases.
In addition to size, there are internal and external factors that affect value. Internal drivers include the company’s margins, management team depth and experience, customer concentration, business plans and growth strategies. External drivers include market conditions, lending conditions, industry specific factors and government regulations. A business owner typically has little to no control over the market conditions that affect value, but does have control over the internal value drivers.
The Valuation Process
It is important for business owners to understand the valuation process. The first step in process is scoping the engagement. This involves identifying the goals and objectives of the business owner, outlining the valuation process and determining the standard of value to be employed in the valuation. A few of the various standards of value are listed below, with the first three being most common:
- Fair Market Value
- Fair Value
- Investment Value
- Use Value
- Book Value
The standard of value applied in the valuation is specific to the goals and objectives of the business owner and should be discussed at the outset of the engagement process, prior to conducting any analysis. In certain circumstances, such as selling to an ESOP or for gift and estate tax reporting, the standard of value is mandated by law. In those instances, the appropriate standard of value is fair market value, which is the price between a willing buyer and seller, with each having reasonable knowledge of all relevant facts.
Once the scope of the engagement is determined, the second step of the process is to perform initial due diligence; i.e., collecting financial data, background and history of the enterprise, budgets, customer lists, business plans and other important documents.
Step three is a continuation of the second step. During step three, the valuator has detailed discussions with the business owner and explores the inner workings of the business. This step usually includes an on‐site due diligence meeting with key personnel. After the valuator completes step three, the valuation models are constructed (step 4). In developing the valuation models, the valuator typically considers various valuation approaches deemed appropriate by the circumstances.
Step five entails reviewing preliminary schedules with the client. Depending assignment and the scope of the engagement, the preliminary schedules may or may not communicate all of the assumptions and value conclusions. This may be to protect independence, but in all cases this serves as a quality‐control measure.
Step six is when the valuator prepares the final report and deliverables for the client.
Step seven is the formal presentation to the client, which may include an oral presentation of the report and detailed explanation of the conclusions reached.
It is never too early to start planning the transition of a business. Ideally, business owners should discuss their goals and options with their financial advisors years well in advance of any transaction because of the many complex issues that arise as a result of ownership transition. Finally, business owners should understand the key value drivers and so that they can implement a strategy to meet their long-term goals.
October 6, 2014
BizBuySell.com's Third Quarter 2014 Insight Report shows transaction levels still on pace for record-breaking year, sellers now receiving a higher percentage of asking price and improved cash flow multiples
San Francisco, CA - October 6, 2014 -- BizBuySell.com, the Internet's largest business-for-sale marketplace, reported today that third-quarter small business transactions remained at historically high levels. The full results are included in BizBuySell.com's Q3 2014 Insight Report, which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide.
A total of 1,987 closed transactions were reported in the third quarter this year, representing both a 17.9 percent increase from last year and the highest number of small business sales recorded in a third quarter since BizBuySell began tracking data in 2007. In fact, this quarter's numbers slipped just 2.1 percent from the second quarter of 2014, which remains the most active quarter for small business sales since before the recession. It also keeps 2014 on pace to record the highest number of small business transactions since the report's inception.
"After seeing a return to robust transaction activity during 2013, it's good to see that we have not plateaued and both buyers and sellers are still eager to make deals happen," said Bob House, Group GM of BizBuySell.com and BizQuest.com. "There remains a strong supply of quality small businesses on the market. As the economy and financing options continue to improve, buyers remain very interested in acquiring small businesses."
Financials Show Market Shift Beginning to Benefit Sellers
While the post-recession market has generally favored buyers, a shift appears underway, with sellers now receiving higher sales prices. The median sale price for businesses sold in the third quarter rose 5 percent compared to last year, increasing from $180,000 to $189,000. Meanwhile, the median asking price remained virtually unchanged, rising just 0.5 percent from $199,000 to an even $200,000. This means sellers in the third quarter were able to receive roughly 95 percent of their asking price, the highest percentage we've seen since the recession hit in mid-2008. Active sellers appear to be taking notice of the market change as the median asking price of businesses listed on BizBuySell.com also increased 4.3 percent in Q3.
Sellers' increased negotiation power is likely a result of stronger small business financials. Both the median revenue and median cash flow of businesses have risen each quarter of 2014, and were up 1 percent and 2 percent respectively in the third quarter.
But perhaps even more telling is how much sellers are receiving in relation to their revenue and cash flow. The average revenue multiple grew nearly 6 percent this quarter compared to last year, now up to .62. At the same time, the average cash flow multiple jumped even higher, up nearly 9 percent to 2.38.
While buyers are still receiving good value for their investments, rising multiples show that sellers are now successfully translating their financial growth into higher sales prices. It's a sentiment we also saw sellers express themselves in BizBuySell's recently released Buyer & Seller Confidence Survey. The study revealed sellers are more confident they will receive an acceptable sales price this year than they were last year. In fact, 21.2 percent of sellers said they were "very confident" they could sell at an acceptable price, a 20 percent increase from those who felt the same in the 2013 survey. Nearly 47 percent of those that were more confident this year credited improving business financials as the primary reason, a feeling that is reflected in the rising revenue and cash flow data this quarter.
"After hearing sellers voice their confidence in the survey and now seeing this transaction data support their claim, it certainly appears some momentum is shifting back towards a balanced market," House said. "The supply of small businesses being listed is still growing and we believe it will continue to be a great time for both buyers and sellers to enter the business-for-sale market."
Even with increased seller confidence, buyers also remain generally confident with 78.6 percent believing they can buy at an acceptable price, according to the same survey. Improving lending conditions and the overall growth of the economy are helping buyers meet the higher demands of sellers. Buyers are also benefiting from the increasing number of sellers willing to offer seller financing in order to push deals through. In the BizBuySell Confidence Survey, nearly 30 percent more sellers planned to take on part of the financial burden through seller financing than planned to in 2013.
More Manufacturing, Service, & Restaurant Businesses on Market
In addition to an increasing number of closed sales in Q3, there were also a growing number of businesses listed for sale. Total listings were up 2.2 percent from the same time last year, with the most notable growth in manufacturing businesses (up 4.1 percent), service-industry businesses (up 3.9 percent) and restaurants (up 3.5 percent).
These sectors also saw an increase in the number of closed transactions. Service-related businesses led the way with a 17 percent increase while manufacturing was up 16.2 percent and restaurants up 13.3 percent compared to last year. The overall mix of sold businesses remained consistent with last quarter.
High Transaction Activity Likely To Continue Through End of 2014, Into 2015
As mentioned above, 2014 remains on pace to record the highest number of closed transactions reported since the BizBuySell Insight Report inception in 2007. There is increasing supply and demand in the market, and if this continues as expected, both buyers and sellers will be confident enough to enter the market. In fact, in our recent Buyer & Seller Confidence Survey, 95 percent of buyers and 75 percent of sellers hope to close a deal in the next 1-2 years.
"It's an exciting time in the business-for-sale market as conditions continue improving and that growth is being reflected in both the financial and total transaction data of small businesses," House added. "We're excited to see what 2015 brings to the market."
By, Kevin Freeman, CBI, Managing Partner, Stony Hill Business Brokers
As an M&A Intermediary and Business Broker, I speak to hundreds of business owners every year, and it never ceases to amaze me that 80% of them have absolutely no idea what their business is worth nor any concept of their exit plan.
“Failing to plan is planning to fail…”
Business Owners spend incredible amounts of time, resources and finances growing their business, however, in many cases have no focus on the end goal of the company. They do not plan for an eventual exit and therefore leave hundreds of thousands of dollars or more on the table because they simply did not have an exit strategy. That strategy can change over time, as life throws curveballs and personal factors come into play.
“Your company is worth what someone or another company is willing to pay for it…”
A solid exit plan begins with a business valuation. As I said, I am amazed on a daily basis how many business owners have no clue what their company is worth. They may have a few preconceived notions about multiples of revenue or profits based on another deal they heard about, but no real idea on value.
Ultimately, the final “value” of a company is what someone or another company is willing to pay for it. Understanding that value is a key element of successful business growth. Factors that we look at in determining a company’s value are: Industry trends, Industry Comps, Revenue, Cash Flow (net profit), EBITDA (earnings before interest, taxes, depreciation and amortization), customer concentration, contracts and employees amongst other things. We determine what a business will sell for and why, NOT what it is worth to the owner…this is crucial data that will help in all phases of business growth.
Contact Stony Hill Business Brokers today to begin your exit plan with a Business Valuation.
When selling your business, you have two options:
- Sell your business yourself
- Hire a business broker
While it’s possible to successfully sell your business on your own, hiring a business broker often guarantees a quick and painless sale.
Unlike many small business owners, brokers have years of experience in selling small businesses. They know what works and what doesn’t, making them extremely helpful when handling tasks such as business valuation, advertising or marketing, prospect interviews, negotiation, due diligence, and other critical aspects of the sale.
Hiring a broker also allows you, the owner, to focus on running the business and increasing its value while the broker handles the details of the complex transaction.
If and when you decide to hire a broker, make sure you properly vet your options, as having a quality broker can mean the different between a successful business exit and a long and costly sale.
Whether you are choosing a new broker or deciding if your current broker is right for your upcoming sale, here are six key areas you should address: