Considering Selling? What's YOur Objective?

The following is an excerpt from CBI's Privately Held Company Newsletter:

While every seller wants the highest possible price for his or her business, there are other factors that will vary in importnance from seller to seller. What's your objective in selling?

Highest Possible Price
This is the submarine commander who directs the crew to "Damn the torpedoes, full steam ahead." The seller wants the top price - regardless of employees, moving of the business etc.

High Price, but with Other Considerations
One example of an "other" consideration is that the business not be moved. Whatever the other considerations may be, the seller only has one or two, and beyond those, the top price is the main consideration.

Good Price, but Only Willing to Accept Some Risk
A large competitor would most likely overlook weak or retiring management along with a fair price. The downside is that the competitor will learn a lot about the business, which creates problems if the deal subsequently craters.

Good Buyer, even if Lower Price
A financial buyer, for example, may not pay the highest price, but will focus on increasing profitability. The intent is to build the business, then sell it, hopefully, for a substantial profit. The owner and management may also profit from this new sale.

Management Buy-Out
This may not bring top value to the owner(s), but if there is significant customer concentration or dependence on management, this might be the safest and easiest way to sell the company. In many cases, the seller will have to finance a portion of the selling price, but the opportunity for additional funds as a result of an earn-out or dividends is possible.

Seller Wants to Remain with the Company OR is Ready to Retire Completely from the Company
The seller may receive a top price by agreeing to remain with the company for an extended period of time. Many sellers want to take the money and run. Many buyers want the seller to remain with the firm and, in some cases, even maintain equity in it.

Some "To-Dos" Prior to Selling

The following is an excerpt from Privately Held Company Newsletter.

• A decision to sell is not set in concrete, but should be awfully close to it. If the business is a family business, all of the family members should be in agreement. The same is true for all of the stockholders.
• The decision on who is going to be the ultimate manager of the selling process shoul db emade prior to going to market. It may be the largest stockholder or the CEO, but a single person should be appointed.
• Timeframes should be established prior to selling and milestones set for creating/completing items such as the selling memorandum, list of buyer contacts, letter of intent, closing etc.Deals that drag don't close.
• Recognize "on and off" balance sheet items such as work-in-progress billing, customer or client prepayments, contractual obligations, legal threats, etc.
• Negotiate key employee agreements or stay agreements. Stay agreements should be at least two to six months.
• Create a special place for all of the relevant documents and information a buyer or due diligence team would need to see.
• Keep in mind that complexity is a deal killer. The more complicated the deal, the less likely it is to work.
• And, finally, don't negotiate directly. Use an intermediary who can mediate, act as a buffer, and carry on "sidebar" conversations. Don't let time elapse between meetings with an interested buyer. Once the process starts, do all you can to keep it moving, or the process may lose its momentum and affect the business-as well as the morale of the employees. These are additional reasons to have an intermediary involved from beginning to end.

Thinking of Selling?

The following is from The Privately Held Company Newsletter



Thinking of selling now or in the not-too-distant future? Here are a few things to do that will definitely help - and, if you decide not to sell, they are items you should do anyway.

• Develop an Operations Manual and an Organizational Chart.


• Remove personal assets and expenses from the business.


• Resolve any pending litigation or regulatory issues.


• Finalize any copyrights, patents or trademark issues.


• Sell off any non-producing assets or equipment.


• Make sure financial records are clear, concise and current.


• Get Employment Agreements and Non-Disclosure Agreements with key employees.


• Build a detailed customer/client list and obtain contracts with them if possible.


• Formalize agreements with suppliers and vendors if possible.


• Make sure your website is current and really impressive.

Family-Owned Businesses Do Have Choices

The following is from "Buying & Selling Companies," a presentation by Russ Rob, Editor, M&A Today.

Family-owned businesses do have some options when it comes time to sell. Selling the entire business may not be the best choice when there are no other family members involved. Here are some choices to be considered:

Internal Transactions

• Hire a CEO-This approach is a management exit strategy in which the owner retires, lives off the company's dividends and possibly sells the company many years later.
• Transition ownership within the family-Keeping the business in the family is a noble endeavor, but the parent seldom liquefies his investment in the short-term, and the son or daughter may run the company into the ground.
• Recapitalization-By recapitalizing the company by increasing the debt to as much as 70 percent of the capitalization, the owner(s) is/are able to liquefy most of their investment now with the intent to pay down the debt and sell the company later on.
• Employee Stock Ownership Plan (ESOP)-Many types of companies such as construction, engineering, and architectural are difficult to sell to a third party, because the employees are the major asset. ESOPs are a useful vehicle in this regard, but are usually sold in stages over a time period as long as ten years.

External Transactions

• Third party sale-The process could take six months to a year to complete. This method should produce a high valuation, sometimes all cash at closing and often the ability of the owner to walk away right after closing.
• Complete sale over time-The owner can sell a minority interest now with the balance sold after like five years. Such an approach allows the owner to liquefy some of his investment now, continue to run the company, and hopefully receive a higher valuation for the company years later.
• Management buy-outs (MBOs)-Selling to the owners' key employee(s) is an easy transaction and a way to reward them for years of hard work. Often the owner does not maximize the selling price, and usuallly the owner participates in the financing.
• Initial public offering (IPO)-In today's marketplace, a company should have revenues of $100+ million to become a viable candidate. IPO's receive the highest valuation, but management must remain to run the company.

Does Your Company Have Pricing Power?

The following is an excerpt from The Privately Held Company Newsletter

If Starbucks raised the price of a cappuccino, sales most likely would not be affected. If your attorney raised his or her hourly rate, would you switch law firms? If a company or service firm does not have pricing power, then its value is less than it should be. Here are a few ways to develop or increase pricing power:

• producing a discernible branded product or service


• innovating with patent production such as Apple's i-Pod


• provinding such exceptional service that competitors are not able to replicate it

An interesting question for company management is - how should they set their prices? Sometimes the answer is that management figures out at what price the item can be sold and then works their costs backword. The more traditional way is to add up the cost of labor, material, and overhead plus an acceptable profit. But times have changed, and in many cases, the power of pricing has moved from the producer to the customer. Today, Wal-Mart tells most of their vendors what they will pay for certain items, and Ford tells their suppliers the same. On that basis, many companies are beholden to the Wal-Marts and the Fords of the world and do not have the benefit of pricing power.

Improving Your Prospects for Selling

According to a Price Waterhouse survey of more than 300 privately held U.S. businesses that have been sold or transferred, the most common steps companies take to improve their prospects for a sale, prior to taking the company to market, include:

• Improving profitability by cutting costs
• Restructuring debt
• Limiting owners' compensation
• Fully funding the company pension plan
• Seeking the advice of a consultant or intermediary
• Improvign the management team
• Upgrading computer systems/processes

What Are Your Company's Weaknesses?

The Following is an excerpt from Privately Held Company Newsletter

Every company has weaknesses; the trick is to fix them. There is a saying that the test of a good company president or CEO us what happens to the company when he or she leaves. Some companies on paper may look the same, but one may be much more valuable, due to weaknesses in the other.
Not all problems or weaknesses can be resolved or fixed, but most can be improved. Fixing or improving comapny weaknesses can not only significantly improve the value, but also increase the chances of finding the right buyer.
Here are some common weaknesses that could cause concern for acquirers and lead them to look elsewhere for an acquisition.

"The One-Man Band"
Many small companies were founded by the current president who has made all of the major decisions. He has not developed a succession plan and has no one in place to take over if he gets hit by the proverbial truck. He is the typical one-man band and, as a result, the company is not an attractive target for acquisition.

Declining Industry
Companies in a declining industry have to be smart enough to see it and make changes. One successful example was a company that made ties; somebody within the company was smart enough to see the decline in this apparel item and switched their business to making personalized polo shirts. A company can still make ties but has to have forsight-and ability-to move into new product(s) as well.

Customer Concentration
This area is a major concern to most buyers. It is not unusual for the one-man band to focus on what made the company successful - one or two major customers. The relationships with these customers have been built over many years and are seldom transferable. Finding new customers may take time and money, but it is absolutely necessary if the owner wants to sell.

The One Product
Many one-man band run companies were based, and still are, on the manufacture and sale of one product; or hte creation and development of a single service. Henry Ford made a wonderful car - the Model A- but that's all he made. General Motors decided that many people would liek something different and were willing to pay for it. Fortunately, for Ford, he caught on quickly, but Ford almost went out of business with the thinking that one model fit everyone.

Aging Workforce/Decaying Culture
Young people are not entering the trades, leaving many jobs such as tool and die positions filled with "old hands" who will soon be retiring. Technology may be able to replace these workers, but that decision has to be made and implemented. No one wants a business that will ahve idle machines with no one trained to operate them.

There are many other areas that could be considered company weaknesses. If there is a Board of Directors or an Advisory Board, perhaps they can help the one-man band create a succession plan and, just as importantly, a successor. Certainly, the time to do all of this is before the decision to sell is made. Whether current ownership plans on staying the course, or eventually selling the company, the good news is that resolving company weaknesses is a win-win situation.

Skeletons in the Closet-What an Acquirer May Really Be Looking For

The following is an excerpt from Privately Held Company Newsletter.



The due diligence process involves the acquirer's financial team, the legal team, and may also include other experts used to review additional areas of the target acquisition. Since this process includes a thorough examination of the details of the business, it is important that prospective sellers become aware of any "skeletons in the closet" due diligence may uncover. While some questions follow that may help identify the skeletons lurking within, a business intermediary professional is an excellent person to help a seller become aware of other potential issues and how to deal with them.



Management

• Is the owner/president/CEO constantly interrupted by telephone call, emails or other diversions that require immediate attention? These interruptions may indicate a business in crisis or a general failure of management to control the business.


• Do employees seem to take pride in what they do and also in their company? Are they happy?


• Does the business experience a lot of turnover in either management or at the general employee level?

Marketing

• Is the company experiencing loss of market share, especially when compared to competitors? Price increases may increase dollar sales, but the important measure is unit sales.


• Is the company introducing new or improved products or services? A firm's ability to do this is a critical part of the operation, affecting its success and potential for growth.


• Does the company participate in trade shows? Is the interest level high, or is the activity over at a competitor's booth?


• Does the company have an excellent Web site and is it technologically above the competition?

Finance

• Does the firm produce monthly financial statements? Are the annual financials produced on a timely basis?
• Does the company take advantage of trade discounts, or is it late on paying its bills? These practices could be a sign that the company has poor cash-management policies.
• Are the margins and benchmarks better than industry standards?
• Has the company used its entire credit lines and, if so, how (and why) have they been used? Is the firm on any kind of credit watch?

General Business

• Is the firm in a stagnant or even dying market, and can it shift gears quickly enough to make changes or enter new markets?
• Does the company have too many suppliers - or not enough? Is the inventory turnover better or worse than the competition or industry standars?

These are just a few of the business areas that an astute acquirer would investigate, but these areas may be outside the scope of the general due diligence procedures.

The due diligence on the financials and the legal aspects are obviously very important, but the answers to the above questions may ultimately determine whether the offered price is held firm or even if the sale is finalized.

Selling a Company in Turbulent Times

The following is from The Privately Held Company Newsletter.

Many owners of small to large businesses were recently side-swiped. Very few saw it coming, but turbulent times are here. Some of these owners put off selling their businesses or, for the time being, put off even thinking about it, much less beginning the process. Now, with the economy in the tank, is it too late to sell or to put the business on the market?

Some business owners will decide to sell despite the times due to illness, personal issues, or because they have already put off retirement. All is not lost! It may not be the best time to sell, but those who elect to go to market may be pleasantly surprised. There are still some compelling reasons why now may be a good time to sell one's business.

First, if many business owners put off selling their businesses due to the current economy, there will be a shortage of companies for sale. And, while the old adage that there is always a market for good companies may be trite, it is also true. If there are fewer companies for sale, then pricing shouldn't be hampered too much. If an acquirer is in the market, they will have to pay what the market will bear. Supply and demand will work for sellers.

Second, the jury is still out on what will happen to the capital gains tax. It is the lowest in many years. There are those who say that it will be raised to pre-Bush times and others who say that there won't be any new taxes for quite a while. Why take chances? What we do know is that the capital gains tax is low now, which could make it a good time to sell. After all, it is the after-tax proceeds that really count.

The newspapers, the Internet, and the television are full of bad news about the economy: car dealers are folding, big box stores are filing for bankruptcy and the stock market is in the doldrums. There is always a demand for good businesses and there are still buyers who want to buy. So, if you are serious about selling, why not call a business intermediary professional to find out what is really happening in the marketplace?

Preparing the Business For Sale

The following is an excerpt form our Privately Held Company Newsletter:

For sellers to receive top dollar for their businesses, planning is critical! It is not something to put off just prior to the decision to sell. Following are some factors to consider, both long-term and short-term.

Long-Term Considerations
Ideally, the seller will start planning a full year in advance of a sale, because numerous elements will take considerable time and expense to execute. Most small private companies, for example, have their financial documents "reviewed" or "compiled" but rarely audited. Auditing statements involves conducting an actual physical inventory, with each accounts receivable and all other financial details verified in the process. While audited statements are mandatory for public companies, many private companies opt not to pay the extra cost of auditing, which can range from $10,000 to $40,000. However, an audited statement, which is a verification of the reported numbers in the financials, may result in a higher offer by the buyer.

Other items to address in preparation for selling a company include cleaning up the balance sheet of old debts and writing off uncollectable accounts receivable and old inventory. This ensures that the buyer is not deterred by a less than pristine fianncial statement.

Settle outstanding lawsuits and engage top management in non-competitive and stay agreements.

Further, make sure the plant is in excellent physical shape; spruce it up if need be. If the facility does not show well, it will very quickly turn off buyers.

Short-Term Considerations
In addition to the long-term issues discussed above, certain elements need to be considered in the short term. Prior to going to market with the sale of a company, sellers need to allocate about two to four months for organizational purposes. A critical element in organizing a business sale is to assemble a team of advisors, including a mergers and acquisition (M&A) intermediary. This representative will partner with the seller during the entire selling process and will probably be in contact with the seller almost daily for the next six to twelve months. The Intermediary will also orchestrate the process and asct as "quarterback" for the team of advisors. A transaction attorney, an accountant, and most likely a tax attorney who will be knowledgeable about the company's personal affairs should also be by the seller's side.

Next, it is advisable to have a valuation of the business that not only determines the "anchor" price but also supports the seller's reasoning in the negotiating process. Along with the business appraisal, sellers should consider obtaining a machinery/equipment appraisal and a real estate appraisal. The buyer will need theses separate appraisals to know what will be required in order to finance some of the hard assets.

Finally, the preparation of the selling memorandum by the intermediary is the major selling tool in the entire process. This document describes in detail the industry, the company, the financials, and investment considerations.

Along with this document, a seller should have a "war room" of various documents pertaining to the business: lease agreements, bank agreements, a sales representative agreement, and corporate minutes. The war room would be the single place where all of the necessary secured files are kept. Theses file contain all the pertinent facts of the company, which buyers will want to review as part of their due diligence process.

There is an old saying that the right time to prepare to sell your company is the day you start the company or purchase it.

The M&A Counsel: It's A Great Time To Sell A Business....

It's A Great Time To Sell A Business...If You Can Find The Best Buyer And The Buyer Can Get The Deal Financed.
Thomas K. Warburton
Warburton Capital Management

The Following is an excerpt from the Bluestem Resources Affiliated Group, LLC

Supply and Demand-The basic forces of economic nature. Many of us studied these concepts decades ago in entry-level economics courses at universities where we were distracted by the opposite sex and intoxicated by the freddoms afforded while pursuing a college degree. We may have considered that we woul done day own a business, but did we ever consider that we would sell a business.

Well, now its 2009. Many of us captured the spouse of our dreams and have parented college student sof our own. Over the years, we built a business thorugh hard work, determination and unadultersted stubbornness. Now we are getting in touch with our own mortality. We realize that somebody else is going to own our business someday and we intend to exercise maximum control over that transaction.

Let's revisit our college days and the lessons of our Economics Professors. Specifically, How Supply And Demand Impact Selling A Business From The Buyer's Perspective.

The Supply/Demand relationship between business Sellers/Buyers has remained constant through the ages. Business owners "Supply" enterprises that generate "Free Cash Flow" and business buyers "Demand" that "Free Cash Flow" at prices (multiples) that make sense. Prices (multiples) expand and contract for a variety of reasons beyond the scope of this article, however, I would like to focus on one phenomena that impacts a Buyer's decision of "how much to pay" = Access To Capital.

Business Buyers require Access To Capital because they generally utilize Borrowed Funds to finance a transaction. When access to capital is plentiful...buyers willingly pay more to acquire Free Cash Flow Because The Can. Likewise, when access to capital is low buyers pay less because they can't fiannce transactions.

At the risk of being obvious, "The Current Credit Market Is Having A Huge Impact On All Things Economic". Loans are viewed as "edgy" today that were "a laydown" only 12-18 months ago.

The grid below presents the universe of possibilities for Bankers (Supplying Capital) and Business Buyers (Demanding Capital):


The Merger & Acquisition Industry (which matches Willing Buyers with Willing Sellers at Reasonable Prices) is confronted with a Credit Market bogged down in box "C". This makes transactions difficult.

THE BANKERS PERSPECTIVE - I have many friends who are Commercial Lenders with prominent local, regional and national Banks. The temperature of these Lenders is consistent and characterized by comments like " we are not making many loans today", "our credit committee is reluctant to loan money" and the tour de force of negativity "we can't even get a good loan through a committee".

THE BUSINESS BUYER'S PERSPECTIVE - Business Buyers are enjoying an overwhelming supply of opportunities to consider. Aging Baby Boomers have spent the last 30-40 years of their lives building businesses that they now want to sell to finance their retirements. There are more privately owned businesses for sale today than there have ever been and the credit markets are frustrating Business Buyer's efforts to fiannce transactions.

So, the logical question is, "How Can I, The Business Owner, Hoping To Sell My Business At An Attractive Price, Get A Deal Done?" I have only one suggestion = Engage An Experienced And Professional Merger And Acquisition Firm.

A Professional Merger and Acquisition Firm will perform many valuable service:

• They will tell you "if your business is ready to sell". Taking your company to market with shoddy financials or poorly capitalized is an invitation to frustration for a seller.


• They will tell you "what your business is really worth". Forget about the emotions and all the years you've invested. Your business is worth "a number".


• They will "approach and pre-screen prospective buyers". Finding a willing buyer is useful only if that buyer can close the deal. Recently a buddy of mine invested 9 months of his life attempting to sell his business only to have the deal blow-up at the closing table because the buyer couldn't get financing and wanted him to "carry back" a substantial portion of the purchase price subordinated to senior debt.


• The will "negotiate deal terms". The price you will get for your business is important, but the negotiation of the employment agreement, the representations/warranties and other terms could come back to haunt the seller if not handled appropriately.


• The will "get the deal to the closing table". The complexity of events and emotions that occur between "the offer" and "the closing" will inspire frustration and rage that require more than a little of the objectivity provided by A Professional Advisor.

In closing, supply and demand will affect your ability to sell your business. If you want to sell your business today there is some good news and some bad news. The bad news = Supply Of Capital. Credit Markets are making it tough to get deals done. The good news = Demand For Businesses. There are an enormous number of qualified buyers anxious to buy good businesses if you get to them...and they can get the deal financed.

Economic Impact on Business Brokerage

The following article was published by Business Brokerage Press.

A recent survey (September 2008) conducted by businessforsale.com - a leading international listing site - revealed the following about the current economic situation and its impact on business brokerage.
Seller financing is not the only issue to have come out of the economic slowdown. Brokers reported the following common issues:

• Sales are harder to complete when there is no real estate attached to the business.
• There are more corporate buyers investing in smaller businesses.
• Buyers are using lack of financing as an excuse to make lower offers.
• There is a lot more caution in the marketplace.
• Sellers have nowhere to re-invest the money from a sale.
• It's generally harder to find financing, particularly to get an SBA loan. Application processes are longer and credit is tightened.
• Smaller deals are not completing.

Overall Market Activity

Businesses are still being sold; however, 50% of brokers beliwve the process is taking longer than it did last year. On average it takes 12 months for a buyer to be found and a deal to complete - 3 months longer than this time last year. 12.7% of brokers believe there has been no change in the length of the business sales cycle.

Comment:In addition, at the recent International Business Brokers Association conference, we heard quite a few stories of deals that fell apart primarily due to financing. The loans couldn't be obtained, the business didn't pass muster with the bank, or the bank just plain wouldn't even consider the loan. Most of these were SBA loans. On the flip side, quite a few attendees said they were making deals, especially on smaller businesses.

Some of the common issues listed above are fairly obvious, but others deserve some discussion. We suspect that the deals with real estate involved are easier to get financed than those without it. Real estate always has intrinsic value, so banks and SBA (7a) loans are much easier to obtain with real estate included as security.

We also think that corporate buyers (by this we mean buyers who worked in the corporate world who we assume have been let go) are looking at smaller or less expensive businesses because they can't get home equity loans or they can't get them for nearly as much as they had hoped. This is then coupled with the lack of available financing mentioned previously.

We find it interesting that buyers are making lower offers using the lack of financing as an excuse. We would have thought that the opposite would happen. Sellers generally look for a higher price if they are financing the sale. Outside financing usually results in an all-cash sale or pretty close to it. Cash generally commands a lower price than one that is seller financed. As an aside, we feel that the current economic situation will create a lot of first-time buyers due to the layoffs and downsizing being done by corporate America.

Today's buyer is probably a lot more cautious due to the current economic times. Money is tight and there is a lack of available financing, forcing buyers to use their own capital or what they can borrow on their home equity. Since the majority of them are first-timers, they are cautious - and scared. Business brokers have to take this into consideration when working with them.

Now, more than ever, there is no such thing as too much information. Not only as much financial data as possible is necessary, but seller training, operations manuals, key employees who will stay, and seller financing are critical. Remember, seller financing is also a big confidence builder. Buyers feel that if the seller is financing the sale, he or she must be confident that the business can afford the payments, but also provide a livelihood for a buyer. It's alos importnant the landlord is agreeable to the sale; that a franchisor is reasonable about transferring the franchise to a new buyer, etc. In other words, the preparation is all important. A snag, such as an uncooperative seller, landlord, or note holder, can scare off a first-time buyer who is already petrified about depending on a small business to support his or her family.

It is also very important that we brokers well the small business lifestyle; the fact that an owner can't be fired, there is always cash flow, and that most businesses have a great upside with new management. Numbers are important, but lifestyle and owning your own business are key selling points today!

Smaller deals are probably not closing because the buyer is afraid to make the leap of faith necessary to become a small business owner. In today's environment, business brokers must spend time with a buyer and delve into whether he or she has what it takes to make that leap of faith. Sellers also have to be educated on how serious they are about selling. Many sellers back out of a sale when it dawns on them that they now not only won't have anything to do, but they won't have an income - unless they are providing seller financing. There is a very old and trite adage: A successful sale of a business requires a willing seller and a willing buyer. That is more necessary today than ever.