How Does Your Company Rate?

Valuing a business involves, not only numbers, but also very important subjective factors. Here are some important subjective factors to consider.
How does your company rate?

• Stable market
• Stability of earnings historically
• Cost savings after purchase
• No significant capital expenditures required
• No significant competitive threats
• No significant alternative technologies
• Large market potential
• Reasonable market position
• Broad-based distribution channels
• Sound management willing to remain
• Product diversity
• Wide customer base
• Non-dependency on few suppliers

WHAT’S YOUR BUSINESS WORTH NOW?
How an Economic Recession Affects the Sale Price of a Business

There’s a very old, scientific method that many businesses owners believe may be used to value their own companies. It looks something like this: Business Value = MMM, or “Make Me a Millionaire.” Now, if there’s a partner, that’s a different story. The formula changes to “MMM times 2” so that so each guy can get a million…

How has today’s business environment changed the value of your business? Can a business owner still expect to get a million dollars for his or her efforts? What areas are buyers, banks and professionals focusing on to get deals done?

The first point to understand is that not every business is worth a million dollars. Some are sold for much more while many others are sold for much less, but no business value was ever based on “the owner needs a million dollars to retire” theory.

While most investors are familiar with the phrase “buy low, sell high,” the dramatic price swings we’ve seen in the financial markets are less pronounced with the sale of a privately owned business. In other words, while the Dow Jones Industrial Average may go from 14,000 to 8,000 to 10,500 over a period of 18 months, the multiple of earnings paid for private businesses fluctuates much less than multiples paid for publicly traded stocks.

The primary reason should be obvious: there is no organized marketplace to sell privately owned businesses. Small businesses are not traded every day like big, public companies and that’s why CBI was created: to provide a confidential market through our own network of ten company-owned offices. We are the only regional firm in the Northeast, with a presence stretching from Lake Placid to Halifax, Nova Scotia. Since prices do not change as much, a down economy and a down “market” actually have a much less pronounced affect on the value of a privately owned company. So, the economy may not have as much impact as you would think.

Will a Bad Year Decrease the Value of Your Business?

The simple answer should be, “No. One bad year does not decrease the value of your business.” As with most simple answers, however, there’s more to it than that! The ability to explain WHY there was a bad year to a buyer, a bank and their professional advisors is essential to completing a transaction in today’s environment.

To achieve full value, we must be able to create a detailed map showing the Company’s ability to generate increased cash flow in the future. FUTURE CASH FLOWS are the number one driver of business valuation. The ability to present those future cash flows to a buyer, a bank and their professional advisors is the number one service most business owners require to maximize their value. The second value driver that business owners should know is how INTEREST RATES affect value. Lower interest rates make a business more affordable for a buyer as lower rates mean lower monthly payments. No one expects interest rates to remain this low after the economy turns around, and that factor is completely out of your control.

HOW ARE BUYERS and BANKS LOOKING AT BUSINESS VALUE?
Are banks lending? How are they structuring deals?
Are there any real buyers out there, or just people looking for a good deal?

THE BANKER’S APPROACH
Banks have always looked for collateral and the ability to repay the loan! Basic underwriting standards have not changed, today’s environment just puts a premium on both factors.

Businesses with real estate are more desirable today because the collateral is easily identified, but banks may also rely on SBA guarantees to serve as collateral for those businesses without real estate.

One ‘bad year’ may be explained, but two bad years in a row begins looking like a trend. If business was ‘bad’ in 2008 and 2009, a full ‘good’ year for 2010 may be needed, and possibly even for 2011.

THE BUYER’S APPROACH
Buyers have always looked for a “good deal” and those buyers - whether companies or individuals - have two basic criteria for a good deal:
1.) Will this business be able to make the monthly payments
2.) Can this business generate enough annual income – after making those monthly payments – to meet their needs.

These factors have not changed in CBI’s 34 years of selling private companies. Today, interest rates remain at an all-time low, however, that is not expected to last. Interest rates have a pronounced impact on the monthly payments and how much a buyer can afford to borrow.

TODAY might just be the most opportune time to purchase a business in any of the past 5 years.

Selling a successful business is the culmination of years of hard work. The sale of your business should be a continuation of this success. Planning and implementing an exit strategy will enhance this final success.

Over and Above the Numbers

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

A close review of the financial statements is always in order when considering the acquisition or merger of a company. However, that is only part of what a buyer is acquiring. Other important assets are:

• Repeat customers or clients
• Patented product, government approvals, profitable copyrights
• Broad customer or client base (diverse & growing)
• Long-term contracts
• Recognizable brand or product name
• Experienced management team and trained work force
• Valuable intellectual property
• Proprietary products
• Profitable alliances
• Contracts/non-competes with valuable employees

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.