Will appear on Buy-Side pages – RECENT BUYER ARTICLES

Do Strategic Buyers Share Synergies with Sellers?

In successful M&A deals involving substantial synergies, the deal price usually falls in the range between the standalone fair market value of the target business and that value plus the full value of potential synergies.

Value of potential synergies?
Increased value (over and above fair market value) to a strategic buyer, involves synergies between the acquired and acquiring firm and the additional financial returns and therefore value created by those synergies . There is a “1+1=3” effect in the acquisition process. Synergies come in various forms, including an ability to increase revenues of the target firm, cost savings by eliminating redundancies or achieving economies of scale through combining of business units; and the reduction of risk through, for example, increased size and stability, greater management depth or vertical integration.

How much of this synergistic value component is paid in practice?strategic value_2

Buyers pay, on average, 31% of the average capitalized value of expected synergies to sellers, according to recent research by the Boston Consulting Group. The March 2013 BCG article, titled “How Successful M&A Deals Split the Synergies”, can be viewed here.

From an acquirer perspective, why pay for synergies at all?

Because sellers usually anticipate buyers’ synergies and demand to be paid something for them, particularly when multiple strategic buyers are present. In addition, when the buyer is a public company , markets usually react favorably and boost the value of the acquirer when a strategic acquisition is announced. Of course, this increase in value may vanish if the synergies don’t actually materialize! When paying more than fair market value, strategic acquirers must be certain that there will be synergies in the combination. They do not randomly shell out big bucks. The owners of firms that appeal to strategic buyers have a greater opportunity to maximize value in an M&A sale process.

However, not every firm is a strong candidate for a strategic sale.

Most willing buyers for small companies are financial buyers who will operate the business similarly to the way it is operating now, and are normally willing to acquire a company for fair market value. Individual owner-operators, management employees and private equity buyers are examples of financial buyers.

We are always happy to discuss how buyers would typically value of your company. Valuations play a part in all strategic transactions, tax, and many litigation matters. For additional information or advice on a current situation, please do not hesitate to call.

– See more at: https://exitstrategiesgroup.com/blog.html?bpid=3676#sthash.rrhDOJwx.dpuf

Goodwill Part II: Goodwill vs. Goodwill Value

All businesses have goodwill; however, not all businesses have goodwill value!

Goodwill, which is usually the largest portion of the purchase price of a business, is the sum of intangibles such as having a good location and trade dress, a negotiated lease in place, trained employees, a website, customers, etc. Not all businesses have goodwill value, which is measured by the amount of earnings the business produces adjusted for the risk of earnings continuing to flow into the future, since all value is in anticipation of future economic benefit.

IRS Revenue Ruling 68-6091  defines this very well. The Ruling states that goodwill value is that component of the earnings stream that is in excess of a reasonable rate of return on the investment made in the Tangible Assets (furniture, fixtures, equipment and vehicles) that the business owns, AND after paying the owner a reasonable market wage for his/her services in the business. The latter is often referred to as a “return on labor,” which has nothing to do with the value of the business since a prospective buyer can get a management job in the same industry and obtain a market rate of compensation without investing a dime in a business opportunity. If there are earnings in excess of these two requirements it must be attributable to goodwill value.

[1] During prohibition, this was the formula designed by our government to fairly compensate owners of spirit, wine, or beer producers before closing them down. It might be the only good thing that came out of prohibition!

Goodwill Part I: Personal versus Enterprise Goodwill

Goodwill can exist in two different forms: Personal Goodwill, which is defined as an intangible asset that is attached to a person; and enterprise Goodwill, also an intangible asset that is attached to the business enterprise.

If goodwill is attached to an individual, it is non-severable since the person to which it is attached is not being sold. This also implies that the asset is non-transferrable. Of course brokers often make contractual arrangements between the parties to lessen the non-transferrable portion of personal goodwill to some degree depending on the nature of the business being transferred. Smaller businesses tend to have some amount of the personal goodwill component due to the owner’s personal contact with customers, or channel partners, or special chef in a restaurant operation, etc.

Similarly, with enterprise goodwill being attached to the enterprise, this asset is indeed transferrable because it is a part of the business being sold. So it may be obvious that enterprise goodwill usually transfers to the buyer without special arrangements. Personal goodwill, on the other hand, requires much deeper analysis to determine how, and how much of this intangible asset is reasonably transferrable to a willing buyer.

Without proper analysis of goodwill value, whether or not it is related to an individual (usually the owner), and thoughtful strategies for the transfer of the personal goodwill component, the value of a business can be significantly distorted (diminished).

Should we use a business sale escrow? What does an escrow holder do?

A client recently asked me these questions, and I thought the answers would make a good blog post …

A business sale/purchase escrow holder protects the interests of buyers and sellers of small businesses by acting as a neutral independent fiduciary, communications link and closing facilitator. Escrows are used extensively by business transaction attorneys and intermediaries throughout California since regulatory compliance, routine closing documents and administrative details are handled in an efficient, cost-effective manner.  Business escrows are used in both asset and stock sale/purchase transactions.

These are the typical duties of an escrow holder in an asset transaction:

  1. Preparing escrow instructions reflecting the terms of the purchase agreement and describing the duties of the escrow holder
  2. Obtaining and holding purchase funds from the buyer
  3. Complying with Bulk Sale statutes (public notice to creditors), when applicable
  4. Obtaining UCC lien searches for state and county
  5. Notifying the county tax collector
  6. Requesting a beneficiary’s statement if debt or financial obligations are to be taken over by the Buyer
  7. Requesting pay off demands from existing lien holders, receiving claims
  8. Notifying and obtaining clearances from county, state and federal agencies as required
  9. Routine consultation regarding questions and problems that arise
  10. Complying with lender requirements, securing loan documents, signing and receiving funds
  11. Prorating expenses and income (taxes, interest, rents, security deposits, etc.), as instructed
  12. Preparing/filing fictitious business name statements
  13. Preparing routine transaction documents and amendments
  14. Preparing estimated closing statements prior to close of escrow
  15. Securing releases of all contingencies and conditions imposed on the particular escrow
  16. Obtaining appropriate signatures on all documents
  17. Preparing final closing statements for the parties, accounting for the disposition of all funds deposited in escrow
  18. Closing escrow when all instructions of the buyer and seller have been carried out
  19. Disbursing funds as authorized by instructions
  20. Recording UCC-1, UCC-3 and deeds of trust, as needed
  21. Securing tax clearances
  22. Distributing final transaction documents to all parties

This list is generic. Escrow duties in an actual business asset sale / acquisition in California depend on circumstances and are spelled out in instructions prepared by the escrow holder. The duties performed in stock transfers are quite different.

•    •    •

Al Statz is President of Exit Strategies Group, Inc., a business brokerage, mergers, acquisitions and valuation firm serving closely-held businesses in California. He can be reached at 707-781-8580. EXIT STRATEGIES GROUP DOES NOT PROVIDE ESCROW SERVICES.

See You on the Other Side

Is a smooth transition possible when acquiring a business? I was was recently interviewed on this subject for the May 2011 issue of Entrepreneur Magazine …
Entrepreneur_1

Q:    I’ve started talks with a company’s owner to acquire her business. How do I make sure my first days as the new owner go … well, is smoothly asking too much?

A:    Ah, the first-time buyer. After talks get going, there’s always that day when you wake up and say, “Oh yeah, I’ll need to run this place.” A smooth transition isn’t too much to ask for–as long as you start working toward it early in the acquisition process. Your most important tools for a better Day One? A strong transition plan and the wisdom of the company’s original owner.

“In successful transactions, the principals have time, after the negotiating is done, to sit on the same side of the table and focus on the transition plan,” says Al Statz, president of Exit Strategies Group, a business brokerage, merger and acquisitions and valuation firm in Petaluma, Calif.

 Click here to see the full Entrepreneur Magazine article.