Austin Dale Group
In This Issue
Changes in Middle-Market Transactions
Mistakes Sellers Make
Subjective Components of Privately Held Companies
Exit Strategy -- A Start
Tick-Tock...Avoid a Shock
Austin Dale Group
 
Austin Dale Group
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Welcome to the mid-October edition of the Austin Dale Group newsletter.  We're always looking for ways to help our clients enhance the value of their businesses.  Therefore we're pleased to announce our new web-based financial dashboard, plus coaching services and industry benchmarking to help our clients stand out in the crowd.  This software tool is optimized for information technology companies and other business-to-business service companies.  By improving their financial performance and learning and adjusting quickly to best practices and industry economics, company owners can increase their company value and hence their likely selling price when and if they decide to sell their company.

leading indicators and evolving trends

If you wish to learn more, we sponsor a monthly webinar that addresses one or more specific issues facing business owners.

Next event:  Thursday, November 4, 11:00 AM CT

Topic:  "Managing Your Service Business with a Financial Dashboard"

Length:  55 minutes

Cost:  no charge

Contact us at info@austindalegroup.com if you would like to attend.

Sincerely,

rjd and jwa signatures

Bob Dale & John Austin
Changes in Middle-Market Transactions

A survey was recently conducted in 2009 by graduate students at the Olin School of Business at Babson College, Wellesley, MA, in conjunction with Exit Planning Exchange (exitplanningexchange.com). The survey was conducted under the guidance of Professor Kevin J. Mulvaney of Babson.

The survey results revealed, among other things, that the "market for M&A deals in the middle-market has changed significantly." Business owners are aware, if they hadn't been before, that EBITDA multiples for their businesses have reduced and may reduce even further. Interestingly, the survey pointed out that: "In a ten-year context the current multiples are at the average but have dropped from the highs of the past years."

It also pointed out that business owners can't "time the market," but rather must plan an exit strategy. Too many business owners wait until a critical event occurs, forcing an untimely sale.

In addition, many business owners who may be considering selling their company are electing to wait until they can get the EBITDA multiple that they perhaps could have received a year or so ago. The survey suggested that business owners are "selling only out of necessity and are waiting too long."

It raises the question: "Will more businesses be for sale under adverse conditions in coming years." This is certainly a question that business owners have to ask themselves. Austin Dale Group can assist in planning a solid exit strategy for these turbulent times.
Mistakes Sellers Make
 
Neglecting to run the business                                    
Using a professional intermediary can assist in this area. By providing experience and assistance in all of the areas that are listed below, the business intermediary frees up an owner's time and energy to focus on running the business.

Placing too high a price on the business                    
Many sellers place a premium on the value of their business - it's only natural, but buyers won't pay for it. An intermediary will work with the business owner to arrive at a price that the marketplace will accept.

Failing to remind the buyer of the confidentiality requirement 
Buyers should sign a Confidentiality Agreement (CA) prior to  even finding out the name of the company that is for sale.  And, buyers should be reminded constantly of the significance of this agreement.

Selling impulsively                  
The business owner finally has had it - "burnout." Now, without any thought or preparation, the owner wants out. Big mistake! Take the time to prepare the business for sale.

Not anticipating the requests of buyers
Scurrying around to find documentation or figures the buyer wants to review can cause the buyer to question if the owner has a clue what is going on in the business.
 
Negotiating with only one buyer
It may be easier to deal with one buyer at a time, but competition can increase the price and create better terms.

Not wanting to stick around post closing 
Sellers generally receive a higher price by agreeing to stick around to allow for an orderly transition. Walking away from the business as soon as the deal closes will discourage a lot of possible buyers.
 
Being inflexible with the deal structure
Almost all sellers want all cash, but most deals are not that simple. Creative deal structuring can be more important than the price.

Being a nitpicky negotiator  
Sellers that have to win every negotiation on every point will never sell their business. Know what is important and what is negotiable.

Allowing the deal to drag out 
Experienced intermediaries know that the longer it takes to close the deal, the more likely it will not close. Both sides want to be careful, but time is the enemy in closing a deal successfully.

Not conducting proper due diligence on the buyer
While the buyer is doing his or her due diligence, it is important that sellers do theirs on the buyer. This is an often-neglected part of the transaction.
Not using experienced professional advisors
Too many sellers select the attorney that did their estate planning to be their transaction attorney. Big mistake. A seller should use the very best transaction attorney he or she can find - the buyer will. The same is true for any other outside advisors.
Subjective Components of Privately Held Companies
 
There are many purported surveys attempting to tell buyers and sellers how and why it is so difficult to place a price on a business. One survey that we think comes about as close as one can on this subject explains the seller's dilemma.
  • Approximately 65 percent of business owners do not know what their company is worth.
  • Approximately 85 percent of business owners have no exit strategy.
  • Approximately 75 percent of a business owner's net worth is tied up in his or her business.
What separates valuing public companies from valuing privately-held ones is that there is no free-trading marketplace for the stock of the latter. There is a lot more subjectivity involved in developing a valuation for the privately-held company.

For example, following is a list of just a few of the questions that the valuation of a privately-held might involve. If the owner of a privately-held company can answer yes to most of the first nine questions, and no to the last three, the valuation should be positively affected.
  • Is it a stable market?
  • Does the company have a history of stability of earnings?
  • Are there cost savings after a purchase?
  • Is there the potential of market increase?
  • Does the company have a reasonable market share currently?
  • Does the company have a broad-based distribution system?
  • Will key management stay with the company?
  • Does the company have product diversity?
  • Does the company have good product diversity?
  • Is the company dependent on just a few suppliers?
  • Are there any pending significant capital expenditures?
  • Are there any significant competitive threats?
These are the types of questions that buyers and business appraisers will want to analyze when working on a valuation. However, the marketplace ultimately sets the price, which usually means the seller sells for a lower price than originally desired, and the buyer pays more than originally expected.

A professional business intermediary is familiar with the marketplace and can be of assistance in the proper pricing of a privately-held business.
Exit Strategy -- A Start 
 
There is an often-used statement that a business owner should plan his or her exit strategy the day the business opens its doors. That might be rushing it a bit, but the point is that one should plan ahead.

In addition, planning an exit strategy is also good business. For example, if the owner gets hit by a truck, what happens to the business? The owner should be thinking about the proverbial truck example from day one. This is the beginning of an exit strategy. Maintaining current financial information is also good business planning, plus good exit strategy. Paying for an annual valuation of the business will reveal what could be done to increase the value of the business for the coming year. Knowing what your business might sell for is good motivation to make the changes necessary to increase value.

Here are a few other things to consider that are just plain good business, but are also part of a good exit strategy. How about setting up employee files with any agreements with employees, such as non-competes, etc? The same can be done for any agreements with suppliers and vendors -- and don't forget the customers.  

The idea is to continually tie up the loose ends. These could include unfinished tasks as small as getting the sign repaired or more important tasks such as getting the lease extended or resolving a legal or governmental issue. Staying on top of all of this is not only good business practice, but it also helps to keep the exit strategy intact. Oh, and don't forget the housekeeping.  As one very successful intermediary pointed out: Sloppiness portrays a poor attitude.
Tick-Tock
Avoid a Shock
 
Avoid selling just before major leases or other key contracts are due to expire.   Prospective purchasers will want to be able to predict what they'll need to spend for rent, labor, materials, supplies, and other big-ticket items.

If the owner must sell right before a contract is scheduled to expire, try to renegotiate it early so that the owner will get a favorable rate locked in for your purchaser.  At the same time, have the seller's lawyer make sure the contract can be assumed by a new owner.

Source: "Selling Middle Market Businesses" by Russell Robb, published by Business Brokerage Press