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Build, Transfer, or Protect

Research indicates that most business owners have 60-80% of their wealth tied up in their businesses. Yet in our experience few owners have a clear idea about the value of their business and few have done much thinking or strategizing about how to build, transfer, or protect years of hard-earned wealth. Let’s examine these options.

Build means to invest for growth.

This involves time and money. As you near retirement, it may be less prudent to invest in the business and time to think about diversifying assets to lessen your overall risk. Personal considerations are often in play so they must also be assessed. This transition period requires a shift in mindset. Owners often have a hard time distinguishing between accumulation (growth) and distribution (preservation) years. Failure to recognize this transition can leave you exposed to untimely risks that have real consequences for your lifestyle and how long your money may last.

Transfer options depend on several factors — some within your control, some not.

A few considerations include the marketability of the business; the current market for privately held businesses; is there a key employee(s) or family member(s) with the skills, motivation, and capital to be successors? A third party buyer, if an option, may allow for a larger payout with more cash down in the deal structure, or perhaps a full payout. Each of these options involve different risk, return, and timing. Getting your tax and legal advisers involved early is always advised so more proceeds remain in your pocket.

Protect means preserving what you have built so that it can fund your lifestyle or next venture.

The question is will it be enough? De-risking may involve altering the business model or operations. Examining the various contingent risks that could destroy years of wealth accumulation is something every owner needs to be aware of. The potential for high liability, low probability events needs to be examined.

These strategies aren’t mutually exclusive. They require deliberate thought and a process to ensure that you strike the right balance so you can meet your goals without undue risk. We can help you quantify the tradeoffs and design an effective long-term strategy consistent with your goals.


To confidentially discuss your business valuation needs or exit strategy, please contact one of Exit Strategies’ senior advisors. 

Good Exit Planning: First and Foremost, A Valuation of the Company

With the baby boomer generation retirement rush beginning to take hold, many business owners lack sufficient information about the value of their business for retirement planning purposes and don’t foresee the deal killers that await them.  A Deal Killer is a condition that, if undetected and unresolved before the sale of a business, will kill the transaction. The purpose of pre-sale planning is to maximize sale proceeds (as well as to achieve other non-financial goals), and it includes efforts to neutralize these Deal Killers.
The most common and avoidable Deal Killers are:
  1. Owners’ long-held belief that they can automatically one day sell their businesses for enough money to satisfy their financial independence needs and wants.
  2. Owners’ failure to reconcile their need for value with the market’s perspective of value before going to market.
  3. Owners’ exclusive focus on top-line sale price.
Owners are usually optimistic about the value of their businesses. Many of them dwell on the efforts and sacrifices they made from the onset of the venture. As a former entrepreneur, I know this well; however, optimism can result in owners consistently and often dramatically overvaluing their businesses.
In addition to company valuation, owners must factor into the likely sales price such factors as deductions for IRS taxes on the sale, debts that the company owns, transaction fees (escrow) and advisor fees (legal, CPA, Broker, and etc.). Business owners who jump into the sale process blinded by sale price optimism, or without consideration of the reductions to sale price, spend considerable time, money and energy only to find their glass half empty, if not shattered altogether.
At Exit Strategies, our job is to incorporate an understanding of marketplace reality into an owner’s pre-sale planning. We know that successful exits can require years of value-building efforts, but owners who insist that their businesses are worth far more than buyers do, either don’t realize this or are unwilling to face reality.
It is critical to the ultimate success of your exit that you get help to understand likely sale price and after tax proceeds and address deal killers well before your planned departure date. For further information contact Bob Altieri.

Why M&A Deals Fail

Companies that make multiple acquisitions are much more likely to have successful merger and acquisition (M&A) transactions than companies that have made one or less acquisitions in the past five years, according to a recent Boston Consulting Group (BCG) article. In fact, over 50 percent of all M&A transactions result in negative shareholder returns.
The main culprits appear to be related to post-merger integration, especially:
  • Poor integration of the target organization
  • Higher complexity than anticipated
  • Difficult cultural fit
  • Synergies that fail to materialize
Other notable figures from the article:
  • Chance favors the well-prepared acquirer. Over 35% of acquisitions stem from a “window of opportunity” when a specific target becomes available.
  • Nearly 50% of M&A transactions result from a focused review of internal strategic portfolios or target search process.
  • Almost 60% of all opportunities are immediately rejected, with only 14 % getting to due diligence.
M&A can create growth and value—but only when deals are well designed and effectively executed and integrated. If you need help with or have questions about increasing the success of a business sale, merger or acquisition, please contact Jim Leonhard at 916-800-2716 or jhleonhard@exitstrategiesgroup.com.

– See more at: https://exitstrategiesgroup.com/blog.html?bpid=4539#sthash.BTWMyFtt.dpuf

2016 Promises to be a Banner Year for Mergers and Acquisitions

Deciding how and when to retire is one of the toughest decisions in a business owner’s life. Selling to a strategic buyer, investment group or management team represents the culmination of years of hard work and investment. Going to market when the owner is personally prepared, and the business is ready, and market conditions are conducive offers the best opportunity to maximize results.
M&A activity in 2015 has been strong and 2016 market conditions look promising.  Here’s why:
  • Economy – Expectations are for a continuation of the recovery that began in 2009. Buyers make acquisitions and pay more when they can reliably forecast future earnings growth.
  • Strong public stock market – Public companies with high valuations enjoy a lower cost of capital with which to make acquisitions, and many are on a buying spree.
  • Abundant cash – Corporations have strong balance sheets and private equity groups have cash to deploy. They are competing for acquisitions.
  • Debt financing – Debt is used in most acquisitions. Commercial banks are lending, debt ratios have returned to pre-recession levels, and even though the Fed may raise interest rates this month, rates are should remain attractive.
  • Valuation multiples – Multiple studies and databases confirm that private company earnings multiples are at pre-recession levels.
  • Moderate tax rates – Individual capital gains tax rates are still only 20% compared to 28-35% for most of the past 50 years. Government spending is at all-time highs and a recent budget deal removed the Federal debt limit. Sellers can expect higher taxes in the future.
Businesses offered for sale by Exit Strategies in 2015 received the best response we’ve seen in years, resulting in:
  1. more buyers looking at each deal,
  2. multiple offers per deal,
  3. more offers in the upper valuation range,
  4. higher percentage in cash,
  5. more seller-friendly terms,
  6. shorter time-on-market, and
  7. buyers that did not win these deals hounding us for more opportunities.
How long the good times will last is anyone’s guess. At 78 months, the current economic expansion is already longer than 29 of the 33 expansions in the U.S. economy since 1854.
Al Statz is CEO of Exit Strategies Group, Inc., which provides M&A brokerage and business valuation services to companies in the Western U.S. He can be reached at alstatz@exitstrategiesgroup.com or 707-778-2040.

Defending Your Price

A critical component in any business transaction, whether it be a simple sale of a used car or a complex transfer of ownership of a business, is usually PRICE. The art of “the deal” is dependent upon the two parties arriving at a price they can both live with.  In both cases, each party must persuasively defend their price.
Market valuations are often based upon a multiple of past and future earnings. Multiples usually fall within a market-tested range for a particular type of business. Many factors influence the multiple and ultimately the price that both parties will accept for a specific business. Here are several common factors:
  1. The nature of the owner’s involvement.  Can the owner easily be replaced or is the business a “one trick pony”?  In cases where the owner IS the business, the indispensability will negatively influence the future performance of business and the fair market price. The same holds true for the staff that may or may not be transferring with the change of ownership.  Are there certain key employees that would be a challenge to replace?
  2. Consistency of Performance.  Does the business have consistent monthly revenue and cost margins or are there seasonal peaks and valleys where negative cash flows obligate the owner to take on large lines of credit?
  3. Processes in Place.  Does the business have a time tested modus operandi that can easily transfer to a new owner and staff?  Intuitive management and loose organization may have served the present owner well but it doesn’t transfer well.
  4. Client and Supplier Concentration.  Limited sources of supply or a small client base can be problematical.  When you have all of your eggs in one or two baskets, you really have to watch those baskets.
  5. Capital Expenditures.  Businesses that generate a lot of revenue and profits with minimal capital assets requirements sell for higher multiples.  Conversely, businesses that have consistently high outlays for new equipment, rolling stock, and other capital assets, sell for lower multiples.  Take a close look at the depreciation schedules to determine the future ‘life expectancy” of the assets and the costs to replace them.
  6. Regulations.  Businesses that require new licensing, background checks, certifications, prior industry experience can present a hurdle to a new owner.
Just as in selling/purchasing a used car, once you have consulted the “Kelly Blue Book” and arrived at a price range, further examination into the drivers of value and risk of the business will serve you well when it comes time to defend your price.

Where’s the Seller Tsunami?

The Wall Street Journal published an article this month titled “The Missing Boom in Small-Business Sales — An expected rush in sales of small firms by the baby boomer generation has yet to materialize.”
The article points out that despite predictions that a flood of private businesses would be coming up for sale as baby boomers reach retirement age, many of these owners are holding on longer than expected. We’re seeing the same thing here at Exit Strategies. We’re experiencing steadily rising deal flow, but not the massive seller tsunami that’s been predicted for the past ten years.
The article posits several reasons, all of which we agree with:
  • The recent recession hit retirement asset values hard, causing many owners to invest additional personal funds in their businesses; therefore postponing retirement for those who plan to live off of their assets in retirement
  • People are living longer and enjoy the challenge of working later in life
  • Younger people seem to be less interested in taking over the family business (particularly when good jobs are plentiful)
We are definitely seeing more interest in selling (and stronger demand for) companies valued over $2.0 million dollars. Owners of smaller businesses seem to be holding on longer, perhaps because they also have fewer retirement assets to rely on.
So, the tide of exiting baby boomer owners is rising, but the crest of the wave is still approaching.
Being personally prepared to sell is a key element of a successful business sale. Owners who are personally ready should seriously consider going to market now, while business performance is strong and market conditions are conducive. For help determining if the time is right for you and your company, feel free to contact Al Statz.

The Significance of Disclosure in a Business Transaction

Full disclosure by buyer and seller is a vital component in any successful business sale/purchase transaction.  In a small business transaction, buyer and seller disclosure statements are customarily exchanged and reviewed before or during the due diligence process. Hopefully there are no significant surprises at that point and the transaction proceeds smoothly.
When the buyer is an individual, the buyer’s disclosure statement generally focuses on the buyer’s personal, professional, and financial background and reorganization plans.  However, the seller’s disclosure statement is broader and is often organized into these categories:
  1. Business Conditions
  2. Regulations
  3. Other Considerations
  4. General
Business Conditions encompass internal aspects of the business.  Any financially adverse conditions such as prior bankruptcy, undeclared income or expense, client or vendor concentration, future promises to current employees or independent contractors, current or anticipated conflicts with landlord(s), deferred maintenance issues, unpermitted work performed on premises, equipment in need of repair, anticipated increases in worker’s compensation insurance due to recent claims, and existence of hazardous materials must be disclosed and addressed should they exist.
Regulations focuses on required licenses and permits, zoning, tax compliance, and local, county, state or federal law violations or investigations of any kind.
Other Considerations may include union or employment agreements, employee stock ownership plans, underfunded pension liabilities, accrued back wages, vacation pay or sick leave, equipment leases, pending or threatened litigation, unresolved insurance claims, unpaid local, state or federal tax, etc.
The General category raises one all-encompassing question: is the seller aware of any other facts or conditions not disclosed in the three prior categories that may adversely affect the operation of the business, a buyer’s decision to purchase it, or the price that a buyer might pay for it?
Should any of the aforementioned conditions exist, it is critical that they be acknowledged and explained to the buyer before they buy. A significant business weakness or risk revealed early in the discovery phase is usually a manageable hurdle or a point to negotiate around. That same information revealed during due diligence becomes a catalyst for buyers to reexamine other data, lower their price, or walk away. In our experience, appropriately exposing warts early in the M&A process builds trust and credibility with buyers, which is an advantage in negotiations, and helps ensure that sellers avoid disputes and keep all of their proceeds after the sale.
Ultimately, the best advice is: Disclose, Disclose, Disclose.
For further information on disclosures in the business sale process contact Don Ross.

SBA Loans: Capital for Small Business Acquisitions

So you’re thinking of selling your business and prefer to be cashed out rather than be paid in installments over time. Uncle Sam wants to see your business continue as a job creator, and hence, works with lenders to make attractive loan terms available to business buyers, on loans up to $5 million.
US Small Business Administration (SBA) loans come in two types: business loans – type 7(a), and real estate loans – type 504. According to Bob Porter of Plumas Bank in Auburn, CA, who has been in the SBA lending business for a very long time, the “lending formula is complicated,” but here are typical loan terms:
7(a) Loans [Business]
  • Loan-to-value ratio is typically 70-85% of the business purchase price.
  • Term is typically 10 years.
  • Interest rates are typically Prime rate plus 2.0-2.75%. Prime as of this writing is 3.25%, so interest rates are currently 5.25% to 6%. Interest typically adjusts quarterly.
  • Banks may loan up to $5 million under the 7(a) program.
  • Terms are competitive among banks and vary with perceived business risk and the creditworthiness, outside collateral and business experience of the borrower.
  • Loans over $250,000 (and smaller loans when the business is being transferred between related parties) require a fair market value appraisal by a certified business valuation expert.
  • To help offset risk, banks typically like to see a 4 times debt-equity ratio (80% debt; 20%cash [equity]) to the appraised value of the business, because if the business is priced at fair market value it should have the ability to service the SBA debt payments. If the buyer is paying more than appraised value, the loan amount will be reduced accordingly.
504 Loans [Real Estate]
  • Loan-to-value ratios are typically 90% for general purpose properties like office and warehouse buildings, and 85% for specialized/dedicated properties such as restaurants, bowling alleys and gas stations.
  • Two loans are actually made: a 50% First Trust Deed held by the bank with a term of 20 to 25-years and a fixed or variable interest rate (currently around 5%), and a Second Trust Deed from the SBA with a 20-year term and a fixed rate (currently 4.9%).
  • Although rare, SBA 504 loans can also be used to purchase equipment such as printing presses, tractors, or machining equipment.
In cases where a business is being purchased with real estate, banks may offer the borrower a blended term 7a loan, or break the transaction into both a 7(a) loan for the business purchase and 504 loan for the real estate purchase.
 

Bob Altieri, Certified Business Appraiser (CBA), regularly conducts business valuations for SBA business acquisition loans and serves lenders throughout California. For further information on this topic call or Email Bob Altieri in our Roseville, California office.

Event: Helping Business Owner Clients Achieve More Valuable Exits

When: September 22, 2015
Where: San Rafael, California
Host: CalCPA San Francisco-Marin Discussion Group
As baby boomer owners and shareholders of privately-held businesses reach retirement age and get serious about exiting ownership, they face many new questions and challenges and turn to their professional advisors, often their CPA, for solutions. Based on his experience helping over 100 companies successfully sell or transfer ownership to partners, management or the next generation, Exit Strategies’ founder Al Statz will discuss the following topics in this presentation to CalCPA members and guests:
  • What exit options do owners have?
  • What factors affect the value of a company?
  • Does the preferred exit option have value implications?
  • What is an exit plan comprised of?
  • Marketability and other considerations
  • Services CPA’s can provide to help clients optimize their exits

Why use a professional M&A advisor when selling your business?

Business owners contemplating a sale of their business sometimes wonder why they should use a professional M&A advisor.  Owners may ask themselves: Why do I need an M&A advisor to sell my business? Can’t I just do it myself and save a significant amount of money in fees?
Owners can frame the decision to use a professional M&A advisor in terms of a cost-benefit analysis. What are the benefits to me? What are the costs to me?
The list of benefits of not using a professional advisor is short.  Avoidance of advisory fees. Advisory fees can run from 2% to 10% of the purchase price depending upon the size of the deal. Some owners find this a big hurdle and feel they can do it themselves and avoid the fees.
Representing yourself in the sale of your business carries direct costs and risk. Owners contemplating selling their business themselves should expect to spend approx. 500 – 1,000 hours of dedicated professional time to the sale process over the course of approximately 6-12 months, while still running their business. They will need to master the techniques and processes of the M&A game, while avoiding the traps and pitfalls that can derail a transaction. Professional M&A advisors have experience from many deal transactions, while most business owners do not. Achieving a successful business sale transaction is not an easy process.
One of the roles experienced M&A advisors play in a successful sale process is the buffer or the intermediary role between buyer and seller. During the sale process, and right up through closing, there will be points of contentious negotiations. These contentious episodes can derail a sale. M&A advisors act as a buffer between the buyer and seller, keeping the sale on track during contentious negotiations.
M&A advisors also drive the transaction to close. The majority of professional M&A fees are earned as success fees. M&A advisors are incentivized to keep the transaction on track and take the lead in driving the deal to a close.
So if you are contemplating selling your business, and considering doing it yourself to avoid the professional advisory fees, be aware that there are direct and indirect costs that can far outweigh the M&A advisor’s fees.
For more information contact Louis Cionci in our Sonoma County, California office.