The New Year is when we often take the time to plan for the year ahead. If you are thinking of transitioning your business sometime in the next 1-5 years, the New Year is also a great time to start making some changes that could result in your company selling at a higher price. While there are no guarantees, the following three resolutions have shown themselves to have positive results with our past clients:
Put Your Energy Into the Business
Many people as they are considering retirement have a tendency to start a little early and let the business coast. One thing about coasting – it is always downhill. Putting in the effort your company needs to grow should produce higher revenues which in turn can lead to a higher sales price. If you know your purchasing can use a little tweaking to reduce the COGS percentage, do it now. The more profitable your company, the more valuable it will appear to potential acquirers.
There is one caveat: Do not make long-term commitments at this stage. The new owner might have a different vision for the company and needs the freedom to grow the business to fit their goals.
Run Everything Through the Books
Of course we are all IRS Tax Law abiding citizens, but occasionally a cash job might accidentally slip one’s mind when it comes time to complete the company’s tax return. It is vital in the run up to a sale that all revenue is categorized accurately. The improvement in profitability will be reflected in the sales price. SBA lenders and Buyers work exclusively off of tax returns. Any reputable business broker will therefore use only those figures in marketing your business. An added benefit is that this is an easy way to help increase your revenues and lower your COGS percentage.
Train Someone Else to Do at Least Part of Your Job
One of the hardest parts of selling a business is for the owner to truly accept that someone else can run their company. A way to help ease that transition is to start building your staff to take on more responsibility. This is a case of training them well and managing your people. This might seem it contradicts Resolution #1, but it doesn’t. It doesn’t mean spending less time in the business, rather it is putting the owner in a more administrative and less hands-on position.
The businesses that are the most difficult to sell are where the buyers perceive the seller to be “superman” or “superwoman”. Think of it this way: If you do everything from concept design to pricing to supervising employees, are working 80+ hours a week, and personally cultivate all the vendor and client relationships, what buyer could replace you? The new owner will probably not have your exact same skill set. If you can reduce your direct area of responsibility to one or two, the odds of a successful transition increase dramatically.
Adopting some (or all) of these resolutions could potentially increase the value of your business when it is time to sell.
Have a safe, happy, and profitable New Year.
Thursday, December 27, 2007
New Year’s Resolutions for Business Owners
Thursday, December 20, 2007
When is the right time to sell my business?
It is amazing how often we hear this question. What is also amazing is that there is more than one meaning behind it. Owners typically mean one of two things when they ask that question:
What is the best time of year for selling a business?
For a company whose revenues come in pretty consistently throughout the year, timing is not that important. There is the dead zone that seems to occur between Thanksgiving and the New Year, but other than that, timing based on a calendar is immaterial.
If the company is seasonal in nature, however, the timing for coming to market is much more important. Who wants to buy a company that has already realized the majority of its profits for the year, particularly if that event occurs mid-summer? For seasonal companies, it is best to have the transaction completed at least a month before the busy period to allow for a smooth transition to occur before the desired selling frenzy begins. Keep in mind that selling a business does not happen overnight: on average it takes 4-6 months from the time the marketing process begins until a deal closes. That means if the summer or fall is your busy season, it is best to start the process at the beginning of the year.
In terms of my company’s growth, when is the best time to sell?
As you would have a guessed, a company with consistently growing revenues and an expanding bottom line will sell for a higher premium than one in decline. People like to buy companies that are doing well. If a company is doing well, and has a track record of 3-5 years of doing well, it is a great time to sell. Does that mean if a company hasn’t fared as well that it shouldn’t go on the market? Not at all, but the understanding has to be that the amount the owner will receive will be reduced based on the acquirers perceived risk involved in the transaction.
If a company has not had an ideal track record but can show growth over the last year and current financials demonstrate that the trend is continuing, it helps to allay the fears in the minds of potential buyers. Because of this fact we often recommend to sellers to hold on for one more year or so to improve the financial situation of the company. Many times the owners have let the business coast while they were dreaming of retirement. Only by building the steam back up can the full earning potential of the company be realized.
There are times when personal situations mean that waiting is simply not possible. Most businesses can be sold, but keep in mind, distressed businesses produce distressed sales prices. Depending upon the severity of the decline, it might mean a fire sale (selling off all the assets to the highest bidder and closing the doors). Often in those cases, being out from under the company responsibility has its own intrinsic rewards.
If you want to know if now is a good time to sell your business, give us a call. We can give you a free valuation range of your company’s current worth. If that fits in with what you need to move on with your life, it is a great time to sell. If it doesn’t, perhaps we can offer some suggestions on getting that number into your desired range.
What is the best time of year for selling a business?
For a company whose revenues come in pretty consistently throughout the year, timing is not that important. There is the dead zone that seems to occur between Thanksgiving and the New Year, but other than that, timing based on a calendar is immaterial.
If the company is seasonal in nature, however, the timing for coming to market is much more important. Who wants to buy a company that has already realized the majority of its profits for the year, particularly if that event occurs mid-summer? For seasonal companies, it is best to have the transaction completed at least a month before the busy period to allow for a smooth transition to occur before the desired selling frenzy begins. Keep in mind that selling a business does not happen overnight: on average it takes 4-6 months from the time the marketing process begins until a deal closes. That means if the summer or fall is your busy season, it is best to start the process at the beginning of the year.
In terms of my company’s growth, when is the best time to sell?
As you would have a guessed, a company with consistently growing revenues and an expanding bottom line will sell for a higher premium than one in decline. People like to buy companies that are doing well. If a company is doing well, and has a track record of 3-5 years of doing well, it is a great time to sell. Does that mean if a company hasn’t fared as well that it shouldn’t go on the market? Not at all, but the understanding has to be that the amount the owner will receive will be reduced based on the acquirers perceived risk involved in the transaction.
If a company has not had an ideal track record but can show growth over the last year and current financials demonstrate that the trend is continuing, it helps to allay the fears in the minds of potential buyers. Because of this fact we often recommend to sellers to hold on for one more year or so to improve the financial situation of the company. Many times the owners have let the business coast while they were dreaming of retirement. Only by building the steam back up can the full earning potential of the company be realized.
There are times when personal situations mean that waiting is simply not possible. Most businesses can be sold, but keep in mind, distressed businesses produce distressed sales prices. Depending upon the severity of the decline, it might mean a fire sale (selling off all the assets to the highest bidder and closing the doors). Often in those cases, being out from under the company responsibility has its own intrinsic rewards.
If you want to know if now is a good time to sell your business, give us a call. We can give you a free valuation range of your company’s current worth. If that fits in with what you need to move on with your life, it is a great time to sell. If it doesn’t, perhaps we can offer some suggestions on getting that number into your desired range.
Friday, September 28, 2007
SBA Loans - An Overview
The SBA is many things to many people, and the one that is most user friendly and available to both existing and prospective business owners is the 7a program. The 7a program is the program that is available to qualifying individuals who wish to purchase a privately owned business or to an existing business owner who wishes to buy out an existing partner or expand operations, etc.
It should also be noted that while people talk about ‘SBA financing’ the reality is that the SBA does not make loans; however, the SBA under certain circumstances will guarantee 75% of the amount that lenders loan on SBA approved loans. This means that if an approved SBA guaranteed loan becomes a total 100% loss then the SBA will reimburse the lender 75% of the original loan amount. Why does the SBA make loans? It is one of the government’s efforts to {a} stimulate the economy, {b} provide some financial liquidity where none would otherwise exist, and {c} other reasons best known to those who dole out government sponsorship and/or funds. The SBA charges points – which vary with loan size but generally in the 2% to 3% range – on all loans that they guarantee, and those funds are intended to cover both SBA operating expenses and provide loss reserves for bad loans.
Many years ago a prospective borrower had to interface directly with the SBA, and it was a time-consuming, bureaucratic nightmare of complicated government forms, busy and harried SBA clerks and a real zoo to maintain any sanity or timelines during the process. The procedures have since been streamlined with the SBA designating ‘preferred lenders’ {most banks} who do all of the application, screening and processing work and make the actual loans. This has dramatically improved the process; however, not all preferred lenders are as efficient and expedient as others - some specialize and have good departments that know what they are doing, and others seem to have difficulty in functioning in an efficient manner. You will find that virtually all banks proudly proclaim their preferred status.
As you are most probably aware, virtually all lenders are asset based lenders in the sense that they approve or disapprove of loans based upon the estimated liquidation value of the assets (collateral) that can be pledged to secure the loan. ‘Assets’ can range from equity in real estate to ownership of stocks and bonds, equipment, accounts receivable, etc. You will also find that some businesses that you might be interested in buying have lots of assets and others have very few assets. While either category does not make one or the other a good or a bad business, it clearly impacts how a lender will view a prospective loan. Thus, if you want to buy a business with lots of hard assets {machinery, rolling stock, inventory), then the lender will probably be less concerned with having you pledge other additional assets. If the business has few assets {perhaps a service business}, the lender will be highly motivated to have you pledge other assets.
The SBA 7a program is unique in that it is not asset based, but they lend based upon a proven and established cash flow within a business. In other words, if a business has had ‘x’ level of profitability for a number of years, an applicant and the business can basically pledge that future cash flow to get an SBA guaranteed loan. While that seems simple enough, the applicant must be able to {a} demonstrate an ability to operate the business, {b}make a suitable cash down payment, {c} be paying a reasonable price so that ‘cash flows’, and {d} also have a reasonably clean personal and/or business credit rating.
So while an SBA guaranteed loan might be a cash flow loan, the SBA requirements are such that if the borrower has other additional collateral, the lender is obligated to place liens as additional security on those other assets.
The maximum guarantee under a 7a loan is 75% of a $2,000,000 loan, and thus it is extremely rare to see 7a loans in excess of two million. With the purchase of businesses, the typical down payment is 20%; however, it can be as low as 10% under certain types of circumstances. Interest rates are variable and generally range from a low {with strong outside collateral} of about 1.5% over prime to somewhere around 2% to 2.5% over prime on most 7a loans.
Amortization periods can vary from 7 to 10 years and do not have prepayment penalties. The loans are almost always in first position on all of the assets being acquired {i.e. existing debt typically has to be paid off},and liens of outside collateral can either be in a first/second/third position, subject to the nature of the asset and the equity involved.
The amount of time to get an SBA loan approved and then the timelines necessary for funding vary tremendously from lender to lender, regardless of what they say at the outset. In our involvement with referring buyers to SBA financing, we have just two lenders who we believe are worth the time of day, and both give us very rapid turn around times and can close transactions in less than 30 days. Over the years we have tried many other lenders and have always regretted straying from the two tried and true lenders with whom we have worked for years.
In summary, SBA guaranteed loans are ‘the only game in town’ if you are looking to buy a privately owned business. They are the ‘cash flow’ loans, as opposed to typical banks loans that require that your pledged collateral be equal to or exceed the amount of money that is borrowed.
It should also be noted that while people talk about ‘SBA financing’ the reality is that the SBA does not make loans; however, the SBA under certain circumstances will guarantee 75% of the amount that lenders loan on SBA approved loans. This means that if an approved SBA guaranteed loan becomes a total 100% loss then the SBA will reimburse the lender 75% of the original loan amount. Why does the SBA make loans? It is one of the government’s efforts to {a} stimulate the economy, {b} provide some financial liquidity where none would otherwise exist, and {c} other reasons best known to those who dole out government sponsorship and/or funds. The SBA charges points – which vary with loan size but generally in the 2% to 3% range – on all loans that they guarantee, and those funds are intended to cover both SBA operating expenses and provide loss reserves for bad loans.
Many years ago a prospective borrower had to interface directly with the SBA, and it was a time-consuming, bureaucratic nightmare of complicated government forms, busy and harried SBA clerks and a real zoo to maintain any sanity or timelines during the process. The procedures have since been streamlined with the SBA designating ‘preferred lenders’ {most banks} who do all of the application, screening and processing work and make the actual loans. This has dramatically improved the process; however, not all preferred lenders are as efficient and expedient as others - some specialize and have good departments that know what they are doing, and others seem to have difficulty in functioning in an efficient manner. You will find that virtually all banks proudly proclaim their preferred status.
As you are most probably aware, virtually all lenders are asset based lenders in the sense that they approve or disapprove of loans based upon the estimated liquidation value of the assets (collateral) that can be pledged to secure the loan. ‘Assets’ can range from equity in real estate to ownership of stocks and bonds, equipment, accounts receivable, etc. You will also find that some businesses that you might be interested in buying have lots of assets and others have very few assets. While either category does not make one or the other a good or a bad business, it clearly impacts how a lender will view a prospective loan. Thus, if you want to buy a business with lots of hard assets {machinery, rolling stock, inventory), then the lender will probably be less concerned with having you pledge other additional assets. If the business has few assets {perhaps a service business}, the lender will be highly motivated to have you pledge other assets.
The SBA 7a program is unique in that it is not asset based, but they lend based upon a proven and established cash flow within a business. In other words, if a business has had ‘x’ level of profitability for a number of years, an applicant and the business can basically pledge that future cash flow to get an SBA guaranteed loan. While that seems simple enough, the applicant must be able to {a} demonstrate an ability to operate the business, {b}make a suitable cash down payment, {c} be paying a reasonable price so that ‘cash flows’, and {d} also have a reasonably clean personal and/or business credit rating.
So while an SBA guaranteed loan might be a cash flow loan, the SBA requirements are such that if the borrower has other additional collateral, the lender is obligated to place liens as additional security on those other assets.
The maximum guarantee under a 7a loan is 75% of a $2,000,000 loan, and thus it is extremely rare to see 7a loans in excess of two million. With the purchase of businesses, the typical down payment is 20%; however, it can be as low as 10% under certain types of circumstances. Interest rates are variable and generally range from a low {with strong outside collateral} of about 1.5% over prime to somewhere around 2% to 2.5% over prime on most 7a loans.
Amortization periods can vary from 7 to 10 years and do not have prepayment penalties. The loans are almost always in first position on all of the assets being acquired {i.e. existing debt typically has to be paid off},and liens of outside collateral can either be in a first/second/third position, subject to the nature of the asset and the equity involved.
The amount of time to get an SBA loan approved and then the timelines necessary for funding vary tremendously from lender to lender, regardless of what they say at the outset. In our involvement with referring buyers to SBA financing, we have just two lenders who we believe are worth the time of day, and both give us very rapid turn around times and can close transactions in less than 30 days. Over the years we have tried many other lenders and have always regretted straying from the two tried and true lenders with whom we have worked for years.
In summary, SBA guaranteed loans are ‘the only game in town’ if you are looking to buy a privately owned business. They are the ‘cash flow’ loans, as opposed to typical banks loans that require that your pledged collateral be equal to or exceed the amount of money that is borrowed.
Friday, September 21, 2007
10 Worst Mistakes When Selling Your Business
Thinking about selling your business? You are not alone. CNN Money reports that 35 million baby boomers are expected to retire between 2000 and 2020.
If you are approaching retirement or soon will be, chances are you've considered putting your business on the market for one of the following reasons:
- You feel burned out;
- Industry conditions have changed;
- You are facing health issues;
- Your business has matured and plateaued;
- Your business is doing well;
- It's a good market for the sale of a business.
In the end, no matter what your scenario or reason for selling, your objective is to get the most money for your blood, sweat, and tears. Here are ten mistakes not to make when selling your privately owned small business:
- Not knowing your business' true market value. Different buyers will have different perceptions of value and some will pay far more than others. Unless you know your business' range of value, you are handicapped in the process. Knowing value is always the best starting point when you plan to sell your business.
- Having customers, employees and others know you are planning to sell. Keeping the entire process confidential is essential, otherwise you create the risk of losing employees, customers, and vendors. This will negatively impact both value and marketability.
- Stating an asking price. Putting a price on a business creates a ceiling. If you are able to find that "value added" buyer who will pay a premium for your business, a stated price may result in a lot of money left on the table.
- Provide Seller Financing. There are a number of lenders who will finance buyers wishing to purchase privately owned businesses. Your objective should be to get cashed out. If you do provide any financing, it should be a small percentage of the sales price.
- Allowing the buyer to control the process. If you allow interested buyers to dictate the "what' and "when", you will find that you end up going through lots of processes (such as due diligence) numberous times rather than only once, which should be done solely with your prevailing buyer.
- Not having mulitple buyers involved in the process. There is an old saying in the mergers and acquisitions industry: One buyer is no buyer. This simply means that with three or four buyers competing for your business, you are more likely to end up with the best possible transaction regarding price, tax structuring, getting cashed out, and having a low litigation risk profile.
- Not understanding essential tax issues. After-tax dollars in the sale of a corporation can vary between 45% and 85% of the sales price based solely upon tax structuring issues. This means that you need to understand the ramifications before you start the process.
- Neglecting your business while trying to sell it. Psychologically, once you decide to sell your business there is an inclination to slow down or spend time on the selling process to the detriment of the business. If you do this, earnings will suffer, and it will lower your business' value, negatively influencing marketability.
- Handling the process without professional help. If you are struggling with the decision to hire a professional to help sell your business, consider these gruesome war stories about people who have traveled this path alone and ended up:
· Paying more in taxes than they might otherwise have had to;
· Sold far below their true range of value;
· Financed the buyers and ended up not getting paid;
· Spent time and money during the process and still did not get their business sold;
· Ended up with poor legal documents resulting in litigation issues.
Typically, the sale of a privately owned business involves a large percentage of the seller’s net worth. Don’t begin your learning curve at ground zero.
10. Paying front end fees to merger and acquisition firms or brokers. If you elect to get professional assistance, you are advised not to pay brokers and others front end fees other than the necessary fees to close the transaction. Many firms in recent years have collected substantial sums of money from clients without ever selling their business.
Ultimately, how you sell your business is just as important as how you run it. Do your research and carefully consider engaging the services of an experienced, proven professional with a stellar reputation.
Thursday, September 13, 2007
Handling Unsolicited Offers for Your Business
Things You Need to Know About Unsolicited Offer to Buy Your Privately Owned Business
While it represents a compliment to you that someone wants to buy your business, you need to proceed with a wary eye and a questioning mind. I say this based upon a lot of years in the business of representing people in the sale of their privately owned businesses and for the following specific reasons:
* It is very rare for the owner of a privately owned business to have a realistic idea as to the true range of value of their business. Thus, an offer out of the blue almost by definition means that the owner is not able to intelligently deal with the situation unless they take the right steps to first understand the true value of their business and then to carefully and intelligently move forward from there.
* Most one buyer transactions are driven by the buyer ‘wanting to see this, that and the other’ key documents and information about a business. If everything that is asked for is given without thought, judgment and some filtering, the seller can end up in a very difficult and high risk situation of having inadvertently disclosed highly confidential information and even more importantly, disclosed information that does not portray their business in the best light.
* Virtually all unsolicited offers involve the buyer wanting the seller to finance some or a large part of the proposed transaction. However, the reality of the matter is that the seller’s best interests are to either get 100% cashed out or to get very close to 100% cashed out. If you wish to sell, doesn’t it make a great deal of sense to have some financing commitments already in place?
* One of the most fundamental issues to understand in the sale of a privately owned business is that virtually no privately owned businesses are operated in a manner to maximize the taxes that they, or their stockholders, pay. This being the case, all financial information, prior to being given to a potentially interested buyer, needs to be ‘recast’ by someone who is highly experienced and knows what they are doing, otherwise you simply put yourself ‘behind the 8 ball’, or worse, reduce to writing the fact that you have ‘fudged’ on paying taxes.
* If you accept the basic fact that your business has a ‘range of value’ {as opposed to just a single number representing value} and that the difference between the high and low values can be as much as 50%, or more --- then what are the chances of the unsolicited offer ‘magically’ being at the upper end of your ‘range of value’?
* If you understand the simple fact that most tax decisions related to the sale of businesses are ‘win-lose’ {one party pays less in taxes and the party pays more in taxes) do you really believe that your unsolicited buyer is going to voluntarily give you half, or more, of the tax benefits? Do you realize that ‘tax structuring’ can cut in half or double your net after tax dollars?
* Put yourself in the buyer’s position --- are you going to get the best deal if you are the only interested buyer, or if there is competition among multiple buyers? You don’t have to be a rocket scientist to know that intelligent packaging and marketing can generate multiple buyers, multiple offers and the high probability of greater numbers of ‘net after tax dollars’.
While the above bullet points cover a wide swath of advice and many years of experience, the best thing to do when presented with an unsolicited offer is to:
(1) Decide whether or not you wish to sell, regardless of price --- i.e. life style issues should be the order of the day;
(2) If the lifestyle decision is ‘yes’ --- then get some professional help in determining if timing is in your favor or against you, and then make a timing decision as to when to go to market;
(3) When it is time to go to market, get some professional guidance to value, package, market and represent your business --- from many years of experience I can assure you that the ‘extra dollars’ that their efforts will generate will be many fold what you have to pay them;
(4) When retaining that professional assistance DO NOT pay them any fees prior to them getting your business sold and also make certain that the representation agreement gives you the right to terminate future representation (in the event they end up not doing a good job); and
(5) Once you have other interested buyers, sit down with the ‘unsolicited buyer’ and you will then be able to do so with a ‘level playing field’.
While it represents a compliment to you that someone wants to buy your business, you need to proceed with a wary eye and a questioning mind. I say this based upon a lot of years in the business of representing people in the sale of their privately owned businesses and for the following specific reasons:
* It is very rare for the owner of a privately owned business to have a realistic idea as to the true range of value of their business. Thus, an offer out of the blue almost by definition means that the owner is not able to intelligently deal with the situation unless they take the right steps to first understand the true value of their business and then to carefully and intelligently move forward from there.
* Most one buyer transactions are driven by the buyer ‘wanting to see this, that and the other’ key documents and information about a business. If everything that is asked for is given without thought, judgment and some filtering, the seller can end up in a very difficult and high risk situation of having inadvertently disclosed highly confidential information and even more importantly, disclosed information that does not portray their business in the best light.
* Virtually all unsolicited offers involve the buyer wanting the seller to finance some or a large part of the proposed transaction. However, the reality of the matter is that the seller’s best interests are to either get 100% cashed out or to get very close to 100% cashed out. If you wish to sell, doesn’t it make a great deal of sense to have some financing commitments already in place?
* One of the most fundamental issues to understand in the sale of a privately owned business is that virtually no privately owned businesses are operated in a manner to maximize the taxes that they, or their stockholders, pay. This being the case, all financial information, prior to being given to a potentially interested buyer, needs to be ‘recast’ by someone who is highly experienced and knows what they are doing, otherwise you simply put yourself ‘behind the 8 ball’, or worse, reduce to writing the fact that you have ‘fudged’ on paying taxes.
* If you accept the basic fact that your business has a ‘range of value’ {as opposed to just a single number representing value} and that the difference between the high and low values can be as much as 50%, or more --- then what are the chances of the unsolicited offer ‘magically’ being at the upper end of your ‘range of value’?
* If you understand the simple fact that most tax decisions related to the sale of businesses are ‘win-lose’ {one party pays less in taxes and the party pays more in taxes) do you really believe that your unsolicited buyer is going to voluntarily give you half, or more, of the tax benefits? Do you realize that ‘tax structuring’ can cut in half or double your net after tax dollars?
* Put yourself in the buyer’s position --- are you going to get the best deal if you are the only interested buyer, or if there is competition among multiple buyers? You don’t have to be a rocket scientist to know that intelligent packaging and marketing can generate multiple buyers, multiple offers and the high probability of greater numbers of ‘net after tax dollars’.
While the above bullet points cover a wide swath of advice and many years of experience, the best thing to do when presented with an unsolicited offer is to:
(1) Decide whether or not you wish to sell, regardless of price --- i.e. life style issues should be the order of the day;
(2) If the lifestyle decision is ‘yes’ --- then get some professional help in determining if timing is in your favor or against you, and then make a timing decision as to when to go to market;
(3) When it is time to go to market, get some professional guidance to value, package, market and represent your business --- from many years of experience I can assure you that the ‘extra dollars’ that their efforts will generate will be many fold what you have to pay them;
(4) When retaining that professional assistance DO NOT pay them any fees prior to them getting your business sold and also make certain that the representation agreement gives you the right to terminate future representation (in the event they end up not doing a good job); and
(5) Once you have other interested buyers, sit down with the ‘unsolicited buyer’ and you will then be able to do so with a ‘level playing field’.
Thursday, September 6, 2007
Selling A Franchised Business
What is Involved in Selling a Franchised Business?
The best answer is, ‘It depends!’ By that I mean it depends upon what your franchise agreement and any amendments state with respect to your rights and obligations relative to a potential transfer of ownership. Some of the things that you are likely to find are:
First Right of Refusal: In many cases the franchisor has a ‘first right of refusal’ to buy your franchise upon whatever terms and conditions you have negotiated with an independent party. The existence of such a clause means that few buyers will be interested in pursuing your business, as they run the risk of doing all the investigation and review and then being left on out of the picture. Anyway, you need to know whether or not the franchisor has such a right and, if they do, whether or not they intent to exercise it.
Right of Approval: Most franchisors have the right to approve a successor franchisee with respect to their financial, business and other qualifications, etc. These ‘rights to approve’ typically have teeth in them to the extent that the agreements state that any unauthorized transfers of ownership terminate the franchise agreement. In many cases, the approval is also accompanied by additional conditions, such as obligation to enlarge, upgrade, open an additional location, etc.
Transfer Fee: Most franchise agreements require an ‘approved successor owner’ to pay a transfer fee to the franchisor. In most cases, it is not a large amount and is generally considerably less than the fee paid by the original franchisee.
Training or Other Requirements: The backbone of most franchises is ‘standardized methods of operation’, and therefore many franchisors require that new inexperienced operators agree to attend and complete franchisor sponsored training before they are permitted to assume ownership.
Term of the Franchise Agreement: Few franchise agreements are in place forever, and therefore most have expiration dates, some have options for renewal, etc. --- and therefore it is very important to have either a relatively long term left on your franchise agreement when you go to sell or already have renewal options negotiated and in place.
The foregoing are the primary issues that you will have to understand and possibly have to deal with in the sale of your franchised business. You should also find out if your franchisor actively resells franchise locations and what their track record is in so doing. Some franchisors have good programs in that they are typically always advertising for brand new franchisees and thus have prospects for existing franchises; however, the reality is that most franchisors are far more interested in the sale of a new location (with large front end and real estate related fees and profit potentials) than they are in the resale of an existing location.
Hopefully the foregoing gives you a good head start in understanding the process that you are about to undertake.
The best answer is, ‘It depends!’ By that I mean it depends upon what your franchise agreement and any amendments state with respect to your rights and obligations relative to a potential transfer of ownership. Some of the things that you are likely to find are:
First Right of Refusal: In many cases the franchisor has a ‘first right of refusal’ to buy your franchise upon whatever terms and conditions you have negotiated with an independent party. The existence of such a clause means that few buyers will be interested in pursuing your business, as they run the risk of doing all the investigation and review and then being left on out of the picture. Anyway, you need to know whether or not the franchisor has such a right and, if they do, whether or not they intent to exercise it.
Right of Approval: Most franchisors have the right to approve a successor franchisee with respect to their financial, business and other qualifications, etc. These ‘rights to approve’ typically have teeth in them to the extent that the agreements state that any unauthorized transfers of ownership terminate the franchise agreement. In many cases, the approval is also accompanied by additional conditions, such as obligation to enlarge, upgrade, open an additional location, etc.
Transfer Fee: Most franchise agreements require an ‘approved successor owner’ to pay a transfer fee to the franchisor. In most cases, it is not a large amount and is generally considerably less than the fee paid by the original franchisee.
Training or Other Requirements: The backbone of most franchises is ‘standardized methods of operation’, and therefore many franchisors require that new inexperienced operators agree to attend and complete franchisor sponsored training before they are permitted to assume ownership.
Term of the Franchise Agreement: Few franchise agreements are in place forever, and therefore most have expiration dates, some have options for renewal, etc. --- and therefore it is very important to have either a relatively long term left on your franchise agreement when you go to sell or already have renewal options negotiated and in place.
The foregoing are the primary issues that you will have to understand and possibly have to deal with in the sale of your franchised business. You should also find out if your franchisor actively resells franchise locations and what their track record is in so doing. Some franchisors have good programs in that they are typically always advertising for brand new franchisees and thus have prospects for existing franchises; however, the reality is that most franchisors are far more interested in the sale of a new location (with large front end and real estate related fees and profit potentials) than they are in the resale of an existing location.
Hopefully the foregoing gives you a good head start in understanding the process that you are about to undertake.
Thursday, August 30, 2007
How Privately Owned Businesses Are Valued by Buyers and Lendors
In your taking the time to read this, the last thing I want to do is waste your time or mislead you, so I’m going to give you the disclaimer right up front --- there is no one single formula that applies to all types, sizes and businesses in all areas across the US. So, after that initial disappointment, read on and you will start to have an understanding of the many different, very subjective issues that are involved in valuing a privately owned business.
In the vast majority of cases, a Buyer will come to a decision as to the value of a business they are interested in buying based upon six primary issues: {a} the business’ demonstrated and historic earning power, {b} what the buyer believes that they can generate in the way of future earnings with their efforts, talent, drive, capital, etc., {c} the value of the assets, minus any liabilities that are assumed, that come with the business as part of the purchase price, {d} the tax benefits, or lack thereof, that are part of the structuring of the business, {e} the type and nature of financing that is available, and {f} the buyer’s perception of the risks involved in the particular business, its industry and the anticipated economic environment.
While some of the above are simply mathematical computations, the others are highly subjective issues that vary from one buyer to another. Thus, the first understanding of business valuation is to be aware that it is not a single number to designate value but, more appropriately, it will be expressed as a range of value. Why a range? Simply because different buyers view the above 6 factors quite differently and therefore come to very different assessments of value.
Other than a buyer’s evaluation of the degree of the risk involved, a buyer’s perception of future earnings will drive their Return on Investment (ROI) calculation. Simply stated, all buyers tend to have minimum ROI expectations, and those expectations vary from buyer to buyer. The ROI calculation is made by determining the business’ recast stabilized earnings (typically expressed as EBITDA --- Earnings Before Interest, Taxes, Depreciation and Amortization), which is after a reasonable rate of Owner Compensation. EBITDA is then computed as a percentage of the total Purchase Price to determine the projected ROI for someone acquiring the business at that purchase price, regardless of whether they pay cash or finance the purchase.
In the preceding paragraph I refer to the word ‘recast’, and it simply means that few privately owned businesses operate in such a manner as to maximize their earnings (and taxes) on their tax returns. Therefore, a vital and necessary step in the valuation process is to recast the tax return numbers so as to eliminate the influence of owner discretionary and non-cash items.
The degree of risk, high or low, that is anticipated in a given business will be reflected by the buyer demanding either a higher ROI or a willingness to accept a lower ROI. Thus, as a buyer’s ROI expectation goes up, the purchase price goes down and vice versa. To further add to the variability of value conclusions is the fact that different buyers will assess risk differently, and an issue that might really concern one buyer might be of little concern to another. An extension of this axiom is that the same earning power in two businesses that are in two different industries will have very different market values, just as two ‘identical businesses’ located in different parts of the US can sell for significantly different prices as there are regional differences in both supply and demand.
The reality of ‘the range of value’ in valuing privately owned businesses underscores the critical importance of effectively and confidentially marketing a business. By logic and reason, a minimal marketing effort, or simply waiting for an unsolicited buyer, does little to assure your business being exposed to enough different buyers to come across those who will consider paying the upper end of your range of value.
While I know that you have heard of people who sold their businesses at ‘x’ times revenue or ‘y’ times earnings or some other shortcut abbreviation of valuation, please don’t make the mistake of assuming that the same shortcut formula applies to your business. Whether a business sells at 3 times revenue, 1 times revenue or 50% of annual revenue, those numbers are an incidental and meaningless relationship as, most assuredly, that is not how the buyer determined a price that they were willing to pay. To prove the point, two businesses with identical revenues but with very different levels of profitability will obviously have different market values.
Another key aspect of selling a business is to make certain that you get paid for it, as agreed. ‘Seller provided financing’ is a very high risk approach, and thus getting either cashed out or substantially cashed out is invariably in your best interests. The fact of the matter is that, unless the value of your business is a very low dollar amount, few buyers will have all the cash necessary for the purchase and will need to have an outside lender involved. While it will vary by the value and type of your business, you will find that conventional bank loans are ‘collateral based’ --- they will only lend a small percentage of the purchase price of a given business --- and are therefore are not an attractive resource.
If your business has a market value of less than about $2.5 million, you will find that SBA guaranteed financing can provide your buyer with a high percentage of the funds needed to get you either completely of very nearly fully cashed out. Above that value range, the SBA is not meaningful source; however, the nature of the buyers tends to change so that they tend to have access to greater funds, etc. You should also be aware that out of all of the SBA ‘preferred lenders’, only a small percentage are highly responsive to and effective in expediently approving, processing and closing transactions.
So much for lender background. Let’s look at how lenders approach the issue of valuation of a business. Non-SBA lenders will generally loan about 60% to 80% of the liquidation value of the assets or collateral provided to secure the loan. On the other hand, SBA guaranteed lenders are ‘cash flow lenders’ who look at the last two years for which tax returns have been filed and recast the reported earnings, from which they deduct a reasonable owner salary and determine the ‘available pre-tax cash flow’. This dollar amount is then compared to the annual debt service necessary to amortize the loan (generally over 10 years), and a reasonable ratio between the two is required. In practical experience over a number of years, the SBA valuations tend to be higher than most buyers will agree to pay for a given business.
Hopefully the foregoing will have been of assistance in understanding that in valuing a privately owned business ‘one size does not fit all’ and that the process is highly subjective and best approached by an honest and experienced individual who is actively involved in the sale of privately owned businesses.
In the vast majority of cases, a Buyer will come to a decision as to the value of a business they are interested in buying based upon six primary issues: {a} the business’ demonstrated and historic earning power, {b} what the buyer believes that they can generate in the way of future earnings with their efforts, talent, drive, capital, etc., {c} the value of the assets, minus any liabilities that are assumed, that come with the business as part of the purchase price, {d} the tax benefits, or lack thereof, that are part of the structuring of the business, {e} the type and nature of financing that is available, and {f} the buyer’s perception of the risks involved in the particular business, its industry and the anticipated economic environment.
While some of the above are simply mathematical computations, the others are highly subjective issues that vary from one buyer to another. Thus, the first understanding of business valuation is to be aware that it is not a single number to designate value but, more appropriately, it will be expressed as a range of value. Why a range? Simply because different buyers view the above 6 factors quite differently and therefore come to very different assessments of value.
Other than a buyer’s evaluation of the degree of the risk involved, a buyer’s perception of future earnings will drive their Return on Investment (ROI) calculation. Simply stated, all buyers tend to have minimum ROI expectations, and those expectations vary from buyer to buyer. The ROI calculation is made by determining the business’ recast stabilized earnings (typically expressed as EBITDA --- Earnings Before Interest, Taxes, Depreciation and Amortization), which is after a reasonable rate of Owner Compensation. EBITDA is then computed as a percentage of the total Purchase Price to determine the projected ROI for someone acquiring the business at that purchase price, regardless of whether they pay cash or finance the purchase.
In the preceding paragraph I refer to the word ‘recast’, and it simply means that few privately owned businesses operate in such a manner as to maximize their earnings (and taxes) on their tax returns. Therefore, a vital and necessary step in the valuation process is to recast the tax return numbers so as to eliminate the influence of owner discretionary and non-cash items.
The degree of risk, high or low, that is anticipated in a given business will be reflected by the buyer demanding either a higher ROI or a willingness to accept a lower ROI. Thus, as a buyer’s ROI expectation goes up, the purchase price goes down and vice versa. To further add to the variability of value conclusions is the fact that different buyers will assess risk differently, and an issue that might really concern one buyer might be of little concern to another. An extension of this axiom is that the same earning power in two businesses that are in two different industries will have very different market values, just as two ‘identical businesses’ located in different parts of the US can sell for significantly different prices as there are regional differences in both supply and demand.
The reality of ‘the range of value’ in valuing privately owned businesses underscores the critical importance of effectively and confidentially marketing a business. By logic and reason, a minimal marketing effort, or simply waiting for an unsolicited buyer, does little to assure your business being exposed to enough different buyers to come across those who will consider paying the upper end of your range of value.
While I know that you have heard of people who sold their businesses at ‘x’ times revenue or ‘y’ times earnings or some other shortcut abbreviation of valuation, please don’t make the mistake of assuming that the same shortcut formula applies to your business. Whether a business sells at 3 times revenue, 1 times revenue or 50% of annual revenue, those numbers are an incidental and meaningless relationship as, most assuredly, that is not how the buyer determined a price that they were willing to pay. To prove the point, two businesses with identical revenues but with very different levels of profitability will obviously have different market values.
Another key aspect of selling a business is to make certain that you get paid for it, as agreed. ‘Seller provided financing’ is a very high risk approach, and thus getting either cashed out or substantially cashed out is invariably in your best interests. The fact of the matter is that, unless the value of your business is a very low dollar amount, few buyers will have all the cash necessary for the purchase and will need to have an outside lender involved. While it will vary by the value and type of your business, you will find that conventional bank loans are ‘collateral based’ --- they will only lend a small percentage of the purchase price of a given business --- and are therefore are not an attractive resource.
If your business has a market value of less than about $2.5 million, you will find that SBA guaranteed financing can provide your buyer with a high percentage of the funds needed to get you either completely of very nearly fully cashed out. Above that value range, the SBA is not meaningful source; however, the nature of the buyers tends to change so that they tend to have access to greater funds, etc. You should also be aware that out of all of the SBA ‘preferred lenders’, only a small percentage are highly responsive to and effective in expediently approving, processing and closing transactions.
So much for lender background. Let’s look at how lenders approach the issue of valuation of a business. Non-SBA lenders will generally loan about 60% to 80% of the liquidation value of the assets or collateral provided to secure the loan. On the other hand, SBA guaranteed lenders are ‘cash flow lenders’ who look at the last two years for which tax returns have been filed and recast the reported earnings, from which they deduct a reasonable owner salary and determine the ‘available pre-tax cash flow’. This dollar amount is then compared to the annual debt service necessary to amortize the loan (generally over 10 years), and a reasonable ratio between the two is required. In practical experience over a number of years, the SBA valuations tend to be higher than most buyers will agree to pay for a given business.
Hopefully the foregoing will have been of assistance in understanding that in valuing a privately owned business ‘one size does not fit all’ and that the process is highly subjective and best approached by an honest and experienced individual who is actively involved in the sale of privately owned businesses.
Thursday, August 23, 2007
Sub-Prime Borrowers, the Credit Crunch and What it Means to Your Business
Isn’t it amazing that those folks with bad or marginal credit (sub-prime borrowers) who had taken out 95%, or higher, percentage home loans with variable interest rates are now falling behind in their payments! Who would have ever expected that? Isn’t it somewhat akin to when ‘junk bonds’ collapsed and sank in value? Hello?? They didn’t call them sub-prime for any other reason that to put the world on notice that they were ‘highly marginal borrowers’, and they called them junk bonds because that is basically what they were … JUNK.
Who are the folks who ended up holding all these sub-prime loans and mortgages? They are: {a}investors who bought the ‘securitized’ real estate loans {loans ‘bundled’ into a package as backing for securities that were then sold}, {b} banks and other lenders who provided the mortgage/loan brokers with the ‘front money’ necessary to make and then inventory loans before they were ‘securitized’ or ‘bundled’ and sold to others, and {c} hedge funds who bought portfolios of sub-prime loans with borrowed money to leverage their investments.
The game has been to buy a $100 million sub-prime portfolio yielding a higher interest rate than the cost of the interest on the money that they borrowed to buy the ‘bundle’, thus enabling them to pocket the ‘spread’ in interest. Why were all these folks attracted to the sub-prime market? GREED. The interest rates paid by the not so bright and/or credit worthy borrowers were higher than those available on real estate loans made to more creditworthy borrowers. The age old practice of investment leveraging works only as long as {a} the money (interest) keeps coming in, {b} the underlying collateral remains solid, and {c} everyone ‘keeps the faith’.
How did all these sub-prime loans get made? You would have to have been living in a cave for the last several years to have not been aware of the non-stop radio, TV, newspaper and internet advertising directed at homeowners. Virtually all of these mortgage/loan hucksters have been offering ‘savings’ by offering home refinancing, or getting marginal borrowers into a home purchase, or providing money to buy real estate that was supposed to rapidly go up in value. Hello?? --- If you refinance and borrow more on your house and make variable interest-only payments for a longer term to lower your monthly payments --- exactly what are you saving? Further, if you refinance to pay off accumulated credit card debt, and then run up more credit card debt, isn’t all of this a self ordained death spiral?
What happened over the last 12 to 24 months is that the rapid escalation in real estate values cooled, prices have come down, while interest rates have been going up, and the inevitable and predictable is taking place. Those who bought speculative properties now owe more on them than they are worth. They can’t even rent them for enough to cover the debt service. Compounding this is the fact that the public fell in love with the lower initial interest rates offered by variable rates and gobbled them up by the billions. As interest rates have risen, so have their payments, and now they are having to ‘pay the piper’. Another part of this mix is the creativity of loan brokers who created ‘no doc’ loans --- meaning borrowers did not have to document their income, finances, or other debt and merely had to fill out loan papers. A final measure of crisis was then added with recent revelations of aggressive loan brokers altering borrower applications in order to ‘ram them through the system’ to earn commissions.
Now just about everyone has lost faith in the system and is starting to realize that the real estate loan collateral behind the securities that have been issued, and the loan portfolios that have been pledged as collateral, are worth a lot less than everyone was told, chose to believe, or expected. The house of cards is imploding and banks, hedge funds, investors and other lenders will no longer lend on, or purchase, these ‘less than prime’ real estate loan portfolios. This means loan brokers’ employees are being fired at a high rate as loan processing grinds to a halt, and many of the industry’s players look at bail out acquirers, bankruptcy or dramatically downsized operations as a means of either liquidation or survival.
You know that things are tough (and getting closer to the end of a cycle) when you read and hear about pleas for the government to bail out the idiots who have been trapped by their own GREED and STUPIDITY --- referring to virtually all of the players, including the borrowers, the loan brokers and those who chose to believe that there really was a free lunch!
What does all of this mean to you and I as the owners of privately owned businesses? It means that money is tightening and credit standards are going to be more restrictive for all types of loans, financing and leases --- not just for real estate loans. The CYA phase of the sub-prime aftermath will be litigation, some firings and everyone in the credit world requiring more documentation and perhaps a tad higher rate of interest. It also means that the Fed will most probably reluctantly have to lower the cost of money, earlier than otherwise might have been the case.
If you happen to own a well financed and managed business, there is a silver lining to all this madness. These events will most probably not negatively impact the economy in the intermediate or long run, but will make life much more difficult for our under capitalized and poorly managed competitors! You will also find that if you are about to implement an exit strategy, both the value you receive from your business and the financing for your buyer will probably be unaffected by the interim sub-prime fiasco. Further, if you have prudently accumulated capital, you will find that the coming months will provide you with some outstanding opportunities to add to or start a portfolio of residential rental properties that can be acquired at very favorable prices and accommodating financing from the banks who will be doing the foreclosing.
Who are the folks who ended up holding all these sub-prime loans and mortgages? They are: {a}investors who bought the ‘securitized’ real estate loans {loans ‘bundled’ into a package as backing for securities that were then sold}, {b} banks and other lenders who provided the mortgage/loan brokers with the ‘front money’ necessary to make and then inventory loans before they were ‘securitized’ or ‘bundled’ and sold to others, and {c} hedge funds who bought portfolios of sub-prime loans with borrowed money to leverage their investments.
The game has been to buy a $100 million sub-prime portfolio yielding a higher interest rate than the cost of the interest on the money that they borrowed to buy the ‘bundle’, thus enabling them to pocket the ‘spread’ in interest. Why were all these folks attracted to the sub-prime market? GREED. The interest rates paid by the not so bright and/or credit worthy borrowers were higher than those available on real estate loans made to more creditworthy borrowers. The age old practice of investment leveraging works only as long as {a} the money (interest) keeps coming in, {b} the underlying collateral remains solid, and {c} everyone ‘keeps the faith’.
How did all these sub-prime loans get made? You would have to have been living in a cave for the last several years to have not been aware of the non-stop radio, TV, newspaper and internet advertising directed at homeowners. Virtually all of these mortgage/loan hucksters have been offering ‘savings’ by offering home refinancing, or getting marginal borrowers into a home purchase, or providing money to buy real estate that was supposed to rapidly go up in value. Hello?? --- If you refinance and borrow more on your house and make variable interest-only payments for a longer term to lower your monthly payments --- exactly what are you saving? Further, if you refinance to pay off accumulated credit card debt, and then run up more credit card debt, isn’t all of this a self ordained death spiral?
What happened over the last 12 to 24 months is that the rapid escalation in real estate values cooled, prices have come down, while interest rates have been going up, and the inevitable and predictable is taking place. Those who bought speculative properties now owe more on them than they are worth. They can’t even rent them for enough to cover the debt service. Compounding this is the fact that the public fell in love with the lower initial interest rates offered by variable rates and gobbled them up by the billions. As interest rates have risen, so have their payments, and now they are having to ‘pay the piper’. Another part of this mix is the creativity of loan brokers who created ‘no doc’ loans --- meaning borrowers did not have to document their income, finances, or other debt and merely had to fill out loan papers. A final measure of crisis was then added with recent revelations of aggressive loan brokers altering borrower applications in order to ‘ram them through the system’ to earn commissions.
Now just about everyone has lost faith in the system and is starting to realize that the real estate loan collateral behind the securities that have been issued, and the loan portfolios that have been pledged as collateral, are worth a lot less than everyone was told, chose to believe, or expected. The house of cards is imploding and banks, hedge funds, investors and other lenders will no longer lend on, or purchase, these ‘less than prime’ real estate loan portfolios. This means loan brokers’ employees are being fired at a high rate as loan processing grinds to a halt, and many of the industry’s players look at bail out acquirers, bankruptcy or dramatically downsized operations as a means of either liquidation or survival.
You know that things are tough (and getting closer to the end of a cycle) when you read and hear about pleas for the government to bail out the idiots who have been trapped by their own GREED and STUPIDITY --- referring to virtually all of the players, including the borrowers, the loan brokers and those who chose to believe that there really was a free lunch!
What does all of this mean to you and I as the owners of privately owned businesses? It means that money is tightening and credit standards are going to be more restrictive for all types of loans, financing and leases --- not just for real estate loans. The CYA phase of the sub-prime aftermath will be litigation, some firings and everyone in the credit world requiring more documentation and perhaps a tad higher rate of interest. It also means that the Fed will most probably reluctantly have to lower the cost of money, earlier than otherwise might have been the case.
If you happen to own a well financed and managed business, there is a silver lining to all this madness. These events will most probably not negatively impact the economy in the intermediate or long run, but will make life much more difficult for our under capitalized and poorly managed competitors! You will also find that if you are about to implement an exit strategy, both the value you receive from your business and the financing for your buyer will probably be unaffected by the interim sub-prime fiasco. Further, if you have prudently accumulated capital, you will find that the coming months will provide you with some outstanding opportunities to add to or start a portfolio of residential rental properties that can be acquired at very favorable prices and accommodating financing from the banks who will be doing the foreclosing.
Thursday, August 16, 2007
7 Ways to Get More from the Sale of Your Business
Thinking about selling your business? You are not alone. CNN Money report that 35 million baby boomers are expecting to retire between 2000 and 2020.
The value of your business represents a significant percentage of your total net worth. If you wish to adequately fund the retirement lifestyle you have earned, you must get every last after-tax dollar and get paid in cash when selling your business. Here are seven proven strategies for receiving the most value for your blood, sweat and tears:
Preplan the sale of your business. This should not be a spur of the moment decision. Rather, it should be well planned in advance. It is much the same as a home which will sell rapidly and bring top dollar with the benefits of a strong market, good financing options, a new coat of paint, and flowers in the yard.
Maintain complete confidentiality. It is vitally important that your employees, competitors and customers not be aware of your plans. The loss of employees or customers can rapidly decrease both the value and marketability of your business.
Do not put a price on your business. Once you put a price on your business, you create a ceiling, and you miss the opportunity to find the ideal buyer who would have otherwise paid top dollar.
Recognize the importance of finding the right buyer. Most businesses don’t have a value that is set in stone. Rather, they have a range of value. This means that different buyers will have different perceptions of the same business’ value. Thus, it becomes important to pre-plan your confidential marketing effort to gain exposure to multiple buyers, especially synergistic buyers – those buyers who because of their location, complementary customer base, financial resources, or market position, can profit more from owning your business and are therefore willing to pay more.
Recognize the risks in financing the buyer. Your objective should be to get “cashed out”, as the risks involved in financing buyers are very considerable. A default can have a major negative impact on your retirement plans.
Get professional help. Unless you have a background in taxes, legal issues and merger and acquisition work, you will probably unknowingly make a multitude of costly mistakes by trying to sell your business yourself. In fact, those mistakes, when combined with money lost from a transaction that doesn’t yield the best possible value, will typically cost you substantially more than any professional and competent assistance would require.
Do not pay advance fees. While you ultimately will need help in determining the value of your business and will need the right merger & acquisition firm to take you to market, what you don’t want to do is pay for their services in advance. Their fees should be earned and not paid until they have achieved the results that you want.
If you follow this advice and use good judgment, you will be well on your way to getting the maximum value for your business and moving forward with a well-earned retirement.
The value of your business represents a significant percentage of your total net worth. If you wish to adequately fund the retirement lifestyle you have earned, you must get every last after-tax dollar and get paid in cash when selling your business. Here are seven proven strategies for receiving the most value for your blood, sweat and tears:
Preplan the sale of your business. This should not be a spur of the moment decision. Rather, it should be well planned in advance. It is much the same as a home which will sell rapidly and bring top dollar with the benefits of a strong market, good financing options, a new coat of paint, and flowers in the yard.
Maintain complete confidentiality. It is vitally important that your employees, competitors and customers not be aware of your plans. The loss of employees or customers can rapidly decrease both the value and marketability of your business.
Do not put a price on your business. Once you put a price on your business, you create a ceiling, and you miss the opportunity to find the ideal buyer who would have otherwise paid top dollar.
Recognize the importance of finding the right buyer. Most businesses don’t have a value that is set in stone. Rather, they have a range of value. This means that different buyers will have different perceptions of the same business’ value. Thus, it becomes important to pre-plan your confidential marketing effort to gain exposure to multiple buyers, especially synergistic buyers – those buyers who because of their location, complementary customer base, financial resources, or market position, can profit more from owning your business and are therefore willing to pay more.
Recognize the risks in financing the buyer. Your objective should be to get “cashed out”, as the risks involved in financing buyers are very considerable. A default can have a major negative impact on your retirement plans.
Get professional help. Unless you have a background in taxes, legal issues and merger and acquisition work, you will probably unknowingly make a multitude of costly mistakes by trying to sell your business yourself. In fact, those mistakes, when combined with money lost from a transaction that doesn’t yield the best possible value, will typically cost you substantially more than any professional and competent assistance would require.
Do not pay advance fees. While you ultimately will need help in determining the value of your business and will need the right merger & acquisition firm to take you to market, what you don’t want to do is pay for their services in advance. Their fees should be earned and not paid until they have achieved the results that you want.
If you follow this advice and use good judgment, you will be well on your way to getting the maximum value for your business and moving forward with a well-earned retirement.
Thursday, August 9, 2007
When is the Best Time to Sell My Business?
Question: When is the best time to sell my business?
Answer: The best time to sell your business is determined through a careful consideration of the factors that can and cannot be controlled to maximize the amount of cash you receive. These factors include:
Environmental/External Issues- Beyond our Control
Low interest rates and a low inflation environment with plenty of liquidity and a buoyant economy create an ideal scenario for mergers and acquisitions. Clearly, we have enjoyed this scenario in the United States over the last few years. As a consequence, there has been a flurry of activity in corporate America as well as small business America . Well-run, sound businesses are selling relatively easily for nice multiples. Yet, as we all know, the economy goes in cycles. If the sale of your business is on the immediate horizon, then perhaps consideration should be given to bring the “sell” decision forward in order to take advantage of these robust conditions.
Internal Issues-Within our Control
A potential buyer is going to pay significantly more for a business that demonstrates a consistent track record of growing revenues and profitability. However, all too often a business is allowed to stagnate or even decline because the owners have taken their foot off the accelerator. Getting “burned out” and other health issues are probably the most often cited reason for a small business owner wanting to sell. This is understandable, but also often controllable. Recognize the warning signs and take whatever corrective action possible. Again, choosing to sell for a good price while the business is buoyant is far superior to forcing a sale because of health or other issues that have impacted revenues and reduced the business's value.
Above all, think with the head and not with the heart. A decision to sell can be very difficult for a host of good reasons. Most small businesses don't have boards of directors holding management accountable. However, sometimes it is prudent to seek outside objective advice from respected confidantes or professionals. These individuals bring a fresh perspective and insight that will assist you in making good strategic decisions for the future of your business.
Answer: The best time to sell your business is determined through a careful consideration of the factors that can and cannot be controlled to maximize the amount of cash you receive. These factors include:
Environmental/External Issues- Beyond our Control
Low interest rates and a low inflation environment with plenty of liquidity and a buoyant economy create an ideal scenario for mergers and acquisitions. Clearly, we have enjoyed this scenario in the United States over the last few years. As a consequence, there has been a flurry of activity in corporate America as well as small business America . Well-run, sound businesses are selling relatively easily for nice multiples. Yet, as we all know, the economy goes in cycles. If the sale of your business is on the immediate horizon, then perhaps consideration should be given to bring the “sell” decision forward in order to take advantage of these robust conditions.
Internal Issues-Within our Control
A potential buyer is going to pay significantly more for a business that demonstrates a consistent track record of growing revenues and profitability. However, all too often a business is allowed to stagnate or even decline because the owners have taken their foot off the accelerator. Getting “burned out” and other health issues are probably the most often cited reason for a small business owner wanting to sell. This is understandable, but also often controllable. Recognize the warning signs and take whatever corrective action possible. Again, choosing to sell for a good price while the business is buoyant is far superior to forcing a sale because of health or other issues that have impacted revenues and reduced the business's value.
Above all, think with the head and not with the heart. A decision to sell can be very difficult for a host of good reasons. Most small businesses don't have boards of directors holding management accountable. However, sometimes it is prudent to seek outside objective advice from respected confidantes or professionals. These individuals bring a fresh perspective and insight that will assist you in making good strategic decisions for the future of your business.
Thursday, August 2, 2007
Minimize Your Tax Obligations When Selling Your Business
Question: How do I legitimately minimize my tax obligations when I sell my business?
Answer: Plan well in advance by reviewing your corporate structure on an ongoing basis. This will enable you to maximize the amount of proceeds you retain from your business's eventual sale.
As one would expect, the tax rules make it difficult for any quick fixes that give rise to immediate benefits. Consider changes to structure now that may result in more favorable tax treatment when the business is sold in five or ten years.
Start by getting up to speed on recent developments in the tax code. Chances are the code is very different today than when you bought or started your business. So sit down with your professional advisor and review your current business structure and its appropriateness for your business's eventual sale. For example, if you are structured as a corporation, the substantial difference to your after tax dollars on sale depends on whether you proceed with an “asset” sale or a “stock” sale. Selling the corporation's assets can result in proceeds being taxed at the corporate level as well as the individual level when the remaining proceeds are distributed to the stockholders. However, if the stockholders sell their stock, it is likely that capital gains provisions would apply. The difference this makes to retained proceeds can be enormous.
Paying our share of taxes in the United States is an economic reality of life. Yet after tax dollars in the sale of a corporation can vary between 45 percent and 85 percent of the sales price based solely on tax structuring issues. The earlier you start planning for the sale of your business, the more likely you will be to minimize tax obligations.
Answer: Plan well in advance by reviewing your corporate structure on an ongoing basis. This will enable you to maximize the amount of proceeds you retain from your business's eventual sale.
As one would expect, the tax rules make it difficult for any quick fixes that give rise to immediate benefits. Consider changes to structure now that may result in more favorable tax treatment when the business is sold in five or ten years.
Start by getting up to speed on recent developments in the tax code. Chances are the code is very different today than when you bought or started your business. So sit down with your professional advisor and review your current business structure and its appropriateness for your business's eventual sale. For example, if you are structured as a corporation, the substantial difference to your after tax dollars on sale depends on whether you proceed with an “asset” sale or a “stock” sale. Selling the corporation's assets can result in proceeds being taxed at the corporate level as well as the individual level when the remaining proceeds are distributed to the stockholders. However, if the stockholders sell their stock, it is likely that capital gains provisions would apply. The difference this makes to retained proceeds can be enormous.
Paying our share of taxes in the United States is an economic reality of life. Yet after tax dollars in the sale of a corporation can vary between 45 percent and 85 percent of the sales price based solely on tax structuring issues. The earlier you start planning for the sale of your business, the more likely you will be to minimize tax obligations.
Thursday, July 26, 2007
Getting More After-Tax Money When Selling Your Business
Question: How can I maximize the amount of cash I receive when I sell my business?
Answer: Acquire every last after tax dollar and get paid in cash . Also, follow three critical steps before proceeding:
Answer: Acquire every last after tax dollar and get paid in cash . Also, follow three critical steps before proceeding:
- Preplan the sale of your business. This should not be a spur of the moment decision. Rather, it should be well planned in advance. Though it is not possible to control the external environment, such as interest rates and strength of the economy, it is possible to plan for an orderly transition. Start thinking about some obvious sources for a potential buyer. For example, should an employee be groomed for possible succession? Might a good customer be interested in acquiring your business in the event of its sale?
- Recognize the importance of finding the right buyer. Most businesses don't have a value that is set in stone. Instead they have a range of value. This means that different buyers will have different perceptions of the same business' value. It becomes important to pre-plan your confidential marketing effort to gain exposure to multiple buyers, especially synergistic buyers. Synergistic buyers are those individuals who, because of their location, complimentary customer base, financial resources or market position, can profit more from owning your business and are therefore willing to pay more.
- Consider getting professional help. Unless you have a background in taxes, legal issues and merger and acquisition work, you will probably unknowingly make a multitude of costly mistakes by trying to sell your business yourself. Those mistakes may cost you substantially more than any fees paid for competent professional assistance. Do some homework on various alternatives. Become informed by attending seminars regarding tax issues, estate planning, and so on. Ask your CPA or lawyer to recommend “general knowledge” seminars that might assist your learning curve.
Thursday, July 19, 2007
Liabilities and Obligations in Selling a Business
Question: When a business is sold, what liabilities are the buyer responsible for and which remain the obligation of the seller?
Answer: In general, whether it is as an asset sale or a stock sale, just remember sellers are obligated to provide “lien free” assets to the buyer. While all transactions are unique, buyers will typically assume liability for the following:
1. Leaseholds related to real estate, unless they are relocating the business
2. Accounts Payable (and if they do they will also get the accounts receivable)
3. Advertising commitments such as Yellow Page contracts
4. Customer deposits, provided seller relays to buyer a like amount of cash
5. Any other liabilities that are agreed upon in writing.
Sellers will typically be obligated to pay off out of the sale proceeds the following:
1. Lines of credit
2. Installment debt and/or leases related to vehicles, computers, equipment
3. All obligations to employees up to the date of closing
4. All tax related matters
5. All other debt that has any claim against any of the assets that are being transferred to the buyer.
There is another issue related to liabilities. The seller is obligated to give the buyer strong “warranties and representations” (guarantees) that there are no undisclosed or unknown liabilities that might create claims against the assets being sold. The California Bulk Sales Law essentially states that a buyer can be held liable for goods transferred to him or her that have not been paid for by the seller. Obviously, all buyers want and are entitled to protection from having to pay for the same goods twice.
In summary, it is essential that both buyer and seller commit to having everything in writing (i.e. no verbal agreements) and that both sides be represented by competent legal advice before signing on the dotted line.
Answer: In general, whether it is as an asset sale or a stock sale, just remember sellers are obligated to provide “lien free” assets to the buyer. While all transactions are unique, buyers will typically assume liability for the following:
1. Leaseholds related to real estate, unless they are relocating the business
2. Accounts Payable (and if they do they will also get the accounts receivable)
3. Advertising commitments such as Yellow Page contracts
4. Customer deposits, provided seller relays to buyer a like amount of cash
5. Any other liabilities that are agreed upon in writing.
Sellers will typically be obligated to pay off out of the sale proceeds the following:
1. Lines of credit
2. Installment debt and/or leases related to vehicles, computers, equipment
3. All obligations to employees up to the date of closing
4. All tax related matters
5. All other debt that has any claim against any of the assets that are being transferred to the buyer.
There is another issue related to liabilities. The seller is obligated to give the buyer strong “warranties and representations” (guarantees) that there are no undisclosed or unknown liabilities that might create claims against the assets being sold. The California Bulk Sales Law essentially states that a buyer can be held liable for goods transferred to him or her that have not been paid for by the seller. Obviously, all buyers want and are entitled to protection from having to pay for the same goods twice.
In summary, it is essential that both buyer and seller commit to having everything in writing (i.e. no verbal agreements) and that both sides be represented by competent legal advice before signing on the dotted line.
Thursday, July 12, 2007
Plan Your Business Exit the Day You Launch
You start your business with dreams of making millions. At selling time, you want to keep as many of those after tax millions as you can in exchange for your blood, sweat and tears. Advance planning can make a big difference in the amount you pocket after the sale.
Consider this: Under prevailing tax rates, Owner A sells a business for $1 million in cash and receives $800,000 in after-tax proceeds while Owner B sells a business for $1 million in cash and receives $500,000 or less in after-tax proceeds. The difference in the cash you keep has everything to do with the form of ownership, the nature of the transaction, and the tax structuring.
San Diego County is home to approximately 145,000 privately owned businesses that cover a wide range of industries including manufacturing, retail, distribution, professional services and just about everything in between. These businesses range in size from one owner with no employees to those with hundreds of employees. Most are quite profitable and have been growing in conjunction with San Diego County 's population and economic growth for many years.
One hundred percent of these businesses will experience a change of ownership. In some cases, this change will be involuntary and take the form of a bankruptcy or closure. However, in the vast majority of cases, it will result in the owners receiving significant amounts of money as they transfer the earning power and goodwill of their businesses to others.
Because there is not a centralized database that tracks all forms of transfers of business ownership interests, the annual rate of transitions of ownership can only be estimated. However, from prior research on the topic and from 25 years of experience in providing representation to those who sell their privately owned businesses, I estimate that between 6% and 7% of all privately-owned businesses change ownership during each year. This means the average period of ownership is approximately 13 years. The vast majority of these transitions will involve the sale and transfer of all prior ownership to new ownership.
In most cases, the owners will have spent years running their businesses on a day-to-day basis to generate both personal income and profits. Yet surprisingly few business owners have assembled the necessary plans for (a) when they elect to sell, or (b) how to be positioned to maximize their after tax dollars when it comes time to transition the ownership of their businesses.
Though an exit strategy should ideally be part of an original business plan, it is never too late to become informed about all aspects of how to unlock the hidden value of your business and convert it to cash when the time comes to sell. In the above $1 million illustration of the sale of a business, the tax savings are obvious, but what is not obvious is a true understanding of getting a buyer to pay you what your business is really worth. The process of profitably transitioning business ownership involves a series of steps that include the following:
Consider this: Under prevailing tax rates, Owner A sells a business for $1 million in cash and receives $800,000 in after-tax proceeds while Owner B sells a business for $1 million in cash and receives $500,000 or less in after-tax proceeds. The difference in the cash you keep has everything to do with the form of ownership, the nature of the transaction, and the tax structuring.
San Diego County is home to approximately 145,000 privately owned businesses that cover a wide range of industries including manufacturing, retail, distribution, professional services and just about everything in between. These businesses range in size from one owner with no employees to those with hundreds of employees. Most are quite profitable and have been growing in conjunction with San Diego County 's population and economic growth for many years.
One hundred percent of these businesses will experience a change of ownership. In some cases, this change will be involuntary and take the form of a bankruptcy or closure. However, in the vast majority of cases, it will result in the owners receiving significant amounts of money as they transfer the earning power and goodwill of their businesses to others.
Because there is not a centralized database that tracks all forms of transfers of business ownership interests, the annual rate of transitions of ownership can only be estimated. However, from prior research on the topic and from 25 years of experience in providing representation to those who sell their privately owned businesses, I estimate that between 6% and 7% of all privately-owned businesses change ownership during each year. This means the average period of ownership is approximately 13 years. The vast majority of these transitions will involve the sale and transfer of all prior ownership to new ownership.
In most cases, the owners will have spent years running their businesses on a day-to-day basis to generate both personal income and profits. Yet surprisingly few business owners have assembled the necessary plans for (a) when they elect to sell, or (b) how to be positioned to maximize their after tax dollars when it comes time to transition the ownership of their businesses.
Though an exit strategy should ideally be part of an original business plan, it is never too late to become informed about all aspects of how to unlock the hidden value of your business and convert it to cash when the time comes to sell. In the above $1 million illustration of the sale of a business, the tax savings are obvious, but what is not obvious is a true understanding of getting a buyer to pay you what your business is really worth. The process of profitably transitioning business ownership involves a series of steps that include the following:
- Understanding your personal objectives and financial needs
- Realistically determining the present value of your business
- Understanding what can and will influence its future value
- Determining the best time to move forward
- Correctly “packaging” your business
- Developing strategies to proceed with total confidentiality
- Entering into totally confidential negotiations
- Knowing how to find the best possible buyers
- Financially qualifying buyers
- Finding a lender for your buyer so you can get cashed out
- Reaching agreement on the negotiation of details
- Preparing appropriate legal documents in a time- and cost-effective manner
- Coordinating prorations and closing needs
- Realistically assessing your post-closing obligations, such as training or transition consulting
- Actually closing the transaction
- Knowing how to best inform employees, customers, vendors and others after the transaction has closed.
In most cases, business owners only go through the sale process once and thus cannot develop expertise through successive transactions. Whether you started your business with an original exit strategy or are just beginning to develop one, the concepts are not difficult to either grasp or implement, and the effort can be very profitable.
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