Free webinar on December 14
What's your exit strategy? Or is running your business taking up all of your time, leaving no time to prepare for your exit? Learn how successful entrepreneurs do it the "right" way each time they build a business - and profit from their experience -- even if you don't have immediate plans to leave your business.
Unless your business is a hobby and you aren't worried about your financial security, it's critical for owners to know why building your business as though you're going to sell it someday is the right way to do it. Regardless of where your business is in its life cycle, you have nothing to lose and much to gain from learning more about planning your exit.
Date: 12/14/2011 (Wed.)
Time: 11 AM to 12 PM CST
Target Audience: Business Owners
Click to register, seating is limited.
|
| | |
Business-for-Sale Marketplace Shows Slight Increase in Transactions
The number of closed business-for-sale transactions reported in Q3 2011 rose 3.5% year over year, fueled by lower business valuations, according to bizbuysell.com, the Internet's largest marketplace for buying or selling a small business. This number is down from the 8% year-over-year increase reported in Q2 of 2011. Most businesses included in the survey had selling prices well under $1M.
While closed transactions showed a slight increase, the average multiple of annual cash flow that a business sold for was 2.42, a decrease of 4.7% vs. the same quarter a year ago. According to Mike Handelsman, Group General Manager, this decrease in valuation multiples is likely a result of sellers becoming more realistic about their asking and selling prices. "The trend toward more realistic expectations regarding valuations is a primary driver of the increase in closed transactions," said Handelsman. "Business owners who may have been holding out for an economic recovery or waiting for their business to recover are now opting instead to exit their businesses, even if that means accepting a lower sale price." |
|
|
|
|
Beginning with the End in Mind
There is an old adage that says the time to begin planning the sale of your business is the day you buy or start it. But does that make sense? After all, the enthusiasm for your new business shouldn't be ruined by thoughts about leaving your business, right? The truth is, starting from the very beginning to run your business with its future sale in mind and to maintain the information that a future buyer would expect makes good business sense. Whether it's your first day of business or closer to your last day, the time to start planning the sale of your business is now. Here are some suggestions to get you started.
Take a Look at the Balance Sheet
Prospective buyers will take a hard look at the company's balance sheet. Further, a buyer will be concerned if there are drastic changes in it from initial inspection to due diligence. A prospective seller should go through the balance sheet with his or her accountant prior to taking the business to market.
For example, there may be a surplus of assets that have built up on the balance sheet over the years. Such items could include excess cash, automobiles, real estate, stocks and bonds, life insurance policies, etc. What about loans due from officers? Has a reserve been set up for past-due receivables from customers?
What About the Management Team
Many owners started their business from scratch and continue to function as a one-man band. The CFO, VP Sales, and head of manufacturing are all wrapped up in one person -- the owner. A prospective buyer will want a management team commensurate with the size of the company. This should be addressed before putting the business on the market.
Review Long-Term Agreements
Favorable agreements should be extended, if possible, prior to beginning the selling process. Unfavorable agreements, litigation, or potential problems should be resolved prior to going to market.
Tax Issues
The time to be concerned with tax planning is prior to going to market. Changing the transaction from an asset sale to a stock sale in the middle of the deal is not good tax planning. Get your tax and legal issues resolved prior to putting the company on the market.
Get a Business Valuation before Selling
Find out what your business is worth prior to selling. Paying for a professional valuation will more than pay for itself. You may discover that the business is not worth what you thought and decide to continue building the business, to cut costs, or to make an acquisition to increase profits.
It is also possible that you will be pleasantly surprised by the value of your hard work. But keep in mind that the business is only worth what the market will actually pay.
The Transaction Team
Probably the most important ingredient in selling a company is for the owner to be surrounded by the best transaction team possible. This means hiring the best transaction attorney possible (the buyer certainly will), hiring a competent transaction accountant, and hiring an experienced M&A transaction intermediary.
|
|
Cleaning Up Your Balance Sheet
Whether it is a "stock" sale or an "asset" sale, a crucial reason for cleaning up the balance sheet is that the buyer will want to peg the purchase price to the selling company's book value or working capital.
As an example, let's say that the buyer and seller agree on a price of $5 million for the company on July 1, with a closing date of September 1. A lot can happen in sixty days, good or bad. If the book value was $2.5 million on July 1, then the purchase price is two times book value. If by September 1 the book value is only $2.3 million, then the purchase price is readjusted to $4.6 million.
Conversely, if the book value is higher, the purchase price is higher as well. If the buyer is not assuming 100 percent of the balance sheet, then both parties have to agree on a pro forma balance sheet that will address the adjustments at closing.
Cleaning up the balance sheet will ultimately help the seller because the deal to sell a company often unravels when either the quality of assets or the quality of earnings are not verifiable.
|
|
Selling: It Starts with a Selling Memorandum
A good selling memorandum or Confidential Business Review (CBR) addresses the functional areas of marketing, operations and finances. It should show a potential acquirer the business in the best possible light. A well-done selling memorandum will also separate the interested acquirers from the "lookers."
A good CBR should answer many of the questions a possible purchaser would want answered and allow the buyer and seller to deal with the important issues. It should also point out company weaknesses so they don't turn out to be issues later. These issues can be explained in a positive way, but explained in such a way that the seller can use them as bargaining chips during negotiations.
The memorandum should also address the industry and marketplace. It should cover the company's customer base and the company's competitive advantages. It should also cover the highlights of the financial statements, include projections for the future of the business, and point out how the business can grow.
|
|
Table of Contents for Sample Selling Memorandum
1. Conditions of Acceptance
2. The Proposed Transaction
3. Executive Summary/Company Profile
4. The Company
a. History
b. Market
c. Products
d. Competition
e. Distribution
f. Plant
g. Management
5. Financials
6. Growth Strategies
7. Conclusion
8. Appendices
Balance Sheet (July 31, 2011)
Balance Sheets (2009 -- 2011)
Statement of Operations (July 31, 2011)
Statements of Operations (2008 -- 2010)
Business Plan - Projected Income (2009 -- 2011)
Organization Chart
Equipment List
Product Flyer
|
|
What Is Your Company Really Worth?
The first thing a prospective seller should do is to find out what the business may be worth in the marketplace. Business valuation is more of an art than a science, but if done properly, it can provide a good starting point. There are three factors that a buyer will usually consider: 1. quality of earnings, 2. sustainability of earnings post acquisition and 3. the verification of the information.
1. Quality of Earnings
"Add-backs" are the bane of valuations. They are selected by the appraiser and can include a non-recurring item, for example the sale of real estate, which is not a reflection of the earning power of the business. Such expenses as the cost of a big law suit, a write-down of inventory or just painting the office building are just a few examples of what may be considered as add-backs because they are one-time-only items. But middle market businesses almost always have such one-time-only items, so adding them back to income is unrealistic. Buyers will not pay for unrealistic add-backs which create unrealistic earnings.
2. Sustainability of Earnings after Acquisition
The all-important question for a buyer is if the company's earnings are on the increase or if they are at their peak. Also, if earnings are increasing, will they continue to grow at the same rate?
3. Verification of Information
Is the information presented up-to-date, accurate and unbiased? Is there something missing such as uncollectable receivables, etc? Most importantly, are there any skeletons in the closet and is the seller playing it straight?
Prospective sellers should make sure that the valuation of their business is current and based on current data and information. An annual valuation makes sense for some businesses.
|
|
|
|
|
Welcome to our last newsletter of 2011. We had the opportunity to speak about M&A opportunities at the IT Alliance Fall Conference last week. We met some great people and we're excited to be associated with that fine organization. Soon our thoughts will turn to the joyous holiday season, and family and friends. So we say thank you to our clients and associates, and wish you a Merry Christmas and a healthy and prosperous 2012.
