Will appear on Seller pages – RECENT SELLER ARTICLES

Why 2012 May be the Year to Sell Your Business

Article Published January 3, 2012 — North Bay Business Journal

Historically, business transactions escalate when taxes are expected to change, as sellers and buyers try to capitalize on favorable rates. It is safe to assume that the U.S. will soon have to raise taxes on businesses and individuals, so retirement-age business owners looking to maximize value should look closely at selling in 2012. Since it typically takes a year to prepare, find a buyer, negotiate, work through due diligence and close a deal, now is the time to get started.  This article outlines a handful of the expected tax changes and how they will affect sellers.

Capital Gains Tax Rate Increase

Given our massive federal budget deficit, most experts believe that the Bush tax cuts will not be extended again at the end of 2012. The current maximum Federal long-term capital gains income tax rate is 15%. The top long-term capital gains tax rate is expected to revert to the pre Bush tax cuts rate of 20% on January 1, 2013.  The 20% rate was effective from 1997 to 2003, and some expect it to could go even higher.  Note that from 1987 to 1997 the maximum capital gains tax rate was 28%.

Ordinary Income Tax Rate Increase

The current top individual ordinary income tax rate is 35%.  This rate applies through 2012 due to the Bush tax cut extension. Again, expectations are that the Bush tax cuts will not be extended beyond 2012.  What will the new maximum tax rate be?  Consider our tax rate history:

PeriodTop Tax Rates
1944 to 196382% to 94%
1964 to 198269% to 77%
1982 to 198650%
1986 to 199231% to 38.5%
1993 to 200238.6% to 39.6%
2003 to 201235%

Special 15% Qualified Dividend Tax Rate may be Eliminated

The qualified dividend maximum tax rate remains at 15% through the end of 2012. Before the Bush tax cuts, dividends were taxed at ordinary income tax rates. C corporation business owners could be faced with a 100% or more increase in this tax if they don’t distribute dividends before the end of 2012.

Patient Protection Act

Starting in 2013, there is an additional 3.8% Medicare tax for individuals with adjusted gross income (AGI) above $200,000, joint filers with AGI above $250,000 and married taxpayers filing separate with AGI above $125,000.  This tax is generally levied on interest, dividends, annuities, royalties, rents and capital gains.

Also beginning in 2013, the Patient Protection Act imposes a 0.9% additional Medicare tax on earned income in excess of $200,000 for individuals, $250,000 for joint returns and $125,000 for married taxpayers filing separate.

Section 179 Deductions

Decreases in Section 179 deduction limits from $500,000 in 2011 to $25,000 in 2013 and the elimination of bonus depreciation in 2013 will result in higher taxes as well as lower business valuations from buyers. Businesses with recurring capital equipment needs will be especially hard hit.

Cumulative Effect

Business owners who are approaching retirement are encouraged to consult with their tax advisor immediately to understand what the cumulative tax effect will be if they exit in 2012, set against waiting another year or two. The savings could be substantial. Because tax practitioners are so inundated at tax time, these exit planning conversations often don’t happen. Be proactive here to maximize proceeds and avoid surprises.

Al Statz, CBA, CBI, is President of Exit Strategies Group, Inc., a business brokerage, merger, acquisition and valuation firm serving private businesses in Northern California. Al can be reached at 707-778-2040 or alstatz@exitstrategiesgroup.com. Dave Fisher also contributed to this article. Dave is a Bay Area CPA who focuses on business, personal, trust and estate taxes. Dave can be reached at 707-588-9700 or dave@dfishercpa.com.

The  North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper that covers the North Bay area of San Francisco – from the Golden Gate bridge north, including Marin, Sonoma and Napa Counties.

Small Business Acquisition Financing: What Lenders Want

In ten years of selling private businesses, financial leverage has consistently been one of the key success factors in expanding the pool of buyers and closing deals. Fortunately for business owners, the SBA loan guaranty program is an excellent funding source for deals up to $5MM. And, lenders are lending now. A lender analyzes both the buyer (borrower) and the business being purchased.  Here are 10 things lenders look for when evaluating a loan request for a small business sale/acquisition:

1. Down Payment.  Lenders want a buyer to inject 15%-25% of the total project in cash, depending on several factors including whether real estate is included in the sale. Common down payment sources are retained earnings, savings, retirement plan funds and gifts from family members. Your cash injection cannot be borrowed.

2. Creditworthiness.  Lenders investigate a buyer’s credit at the outset of the approval process. A bankruptcy, foreclosure or judgment usually nullifies their chances, no matter how good other criteria look. Remove blemishes from your credit history before you apply.

3. Track Record.  Individual buyers must have experience in the type of business and/or industry they are buying into. Lenders look for management experience, and they prefer to see prior business ownership. Tailor your resume to highlight your management and applicable industry experience.

4. Cash Flow is King.  Business cash flows must service the loan and provide adequate income for the owners. Lenders analyze the historical tax returns of the business—allowing reasonable adjustments for owner perquisites and non-recurring costs. The quality of financial records comes into play here. Your business plan also comes into play. Synergistic benefits, increases in working capital and capital expenditure needs are considered in the cash flow calculation.

5. Collateral.  Buyers with real property to pledge as collateral may compensate for weaknesses in debt service coverage, business assets, experience, credit, or liquidity. Generally, if you have equity in real property, the SBA requires that it be used to secure your business acquisition loan.

6. Positive Trend.  Nothing scares lenders more than negative sales and earnings trends in a business or its industry. Conversely, a pronounced positive trend is a thing of beauty to a lender. They often look back several years to see how the business performed through past economic cycles.

7. Business Plan.  Buyers have to submit a basic business plan for the business they are acquiring. Lenders want to see an intimate understanding of the business and industry. In most cases a plan calling for modest growth and incremental change is your safest bet.

8. Continuity.  Commitments by existing managers, key personnel, suppliers and customers to continue with the new owner represents reduced risk to a lender.

9. Seller Training.  Lenders want to see a well thought-out management transition plan. The training/transition period can be anywhere from 1-12 months, depending on circumstances. Be sure you negotiate this point up front and clearly spell it out in the purchase agreement.

10. Seller Financing.  When a seller finances even 10-15% of a deal, subordinated to the bank note, it shows the lender that the seller is confident in the business under the buyer’s leadership. This deal point is commonly imposed by lenders.

Finally, for loans over $350,000, or whenever a buyer and seller have a close (non-arm’s length) relationship, SBA lenders require a fair market value appraisal from an accredited business appraiser to validate the borrower’s purchase price. The deal can’t exceed the appraised value. Sellers are advised to prepare months or years in advance, to increase their odds of cashing out when they are ready to exit. Ask yourself, does my business qualify?

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Al Statz, CBA, CBI, is President of Exit Strategies Group, Inc., a business brokerage, merger, acquisition and valuation firm serving owners of closely-held businesses in Northern California. He can be reached at 707-778-2040 or alstatz@exitstrategiesgroup.com.

The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which covers the North Bay area of San Francisco – from the Golden Gate bridge north, including Marin and the wine country of Sonoma and Napa counties.

October 27th “Maximize the Value of Your Business” Seminar Announced

Exit Strategies announces the next in its series of executive briefings for business owners. At this candid, fast-paced workshop, business owners will learn …

  1. Valuation basics & 20 ways to build enterprise value
  2. Preparing a successful exit strategy
  3. Market conditions and trends
  4. Tax advantages of selling in the next 15 months
  5. Steps in a successful M&A sale process
  6. Answers to common questions

When:    Thursday, October 27th, 5:00 to 7:30 pm

Where:   Petaluma, California

Cost:      Free of charge to private business owners

Presenters:   Al Statz, President, Exit Strategies Group, Inc., and David Fisher CPA

Registration Required:  Call 707-778-2040, or Email info@exitstrategiesgroup.com. Space is limited. We will confirm attendance.

This is essential information for private business owners who intend to sell in the next 3-5 years.  It is never too early to plan ahead to achieve the successful exit that you, your family and partners deserve, and avoid unnecessary surprises.

•    •    •

Exit Strategies’ executive briefings are free or nearly free workshops on essential topics for private business owners. These topics originate from years spent guiding clients through successful exits, mergers and acquisitions. The sessions are presented by our knowledgeable staff and subject matter experts within our professional network, in a private, small group setting. For confidentiality, we strictly limit attendance to one business owner per business type and pre-register all participants.

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 …

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.

Famed Investor: References to EBITDA make us shudder …

… does management think the tooth fairy pays for capital expenditures?

Article Published December 6, 2010 — North Bay Business Journal

This title is a quote from Warren Buffett’s letter to shareholders in Berkshire Hathaway’s 2000 annual report. EBITDA (earnings before interest, taxes, depreciation and amortization) is a good financial metric to use in analyzing, comparing and valuing companies, but, as business owners and investors, we need to understand its limitations.

EBITDA is one of several measures of economic benefit to which a multiple can be applied to estimate value for a company. A multiple is the inverse of a capitalization or ‘cap’ rate. When used properly, multiples are applied to an investor’s forward looking cash flows and adjusted for risk.

EBITDA is a popular proxy for Cash Flow because we can easily calculate it from the P&L — no balance sheet required. However, EBITDA ignores capital investment, working capital changes, taxes, borrowing, debt repayment and financing costs, which all affect a company’s cash flow and ability to pay dividends to its owners. The focus of this article is the “D” in EBITDA, or Depreciation, which results from owning capital assets.

Depreciation Matters

Don’t let anyone tell you depreciation doesn’t matter because it is a non-cash item. I have yet to sell or appraise a company that owns fixed assets that never need replacement. Not only do capital assets deteriorate, they are also subject to functional obsolescence caused by technology advancements (faster, cheaper, better) and sometimes new environmental regulations.

Here’s how Warren Buffet put it in his 2002 letter to shareholders, “Trumpeting EBITDA is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash” charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if you will, that at the beginning of this year a company paid all of its employees for the next ten years of their service (in the way they would lay out cash for a fixed asset to be useful for ten years). In the following nine years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset established this year. Would anyone care to argue that the recording of the expense in years two through ten would be simply a bookkeeping formality?”

Let’s imagine we’re in the drilling business, looking to grow through acquisition, and there are two companies in equally desirable markets available to us. Both companies operate the same number and type of drill rigs. Both generate $5 million in sales and $1 million EBITDA annually. Same EBITDA, same value, right? It’s a trick question. Company A’s rigs are 4 years old on average, while B’s rigs average 13 years old. We estimate that B will need $300,000 more in annual capital outlays to maintain its fleet and revenues going forward. Even though EBITDA is the same, Company A will generate substantially higher cash flows for us, and is more valuable to us.

Now say there’s a Company C available. It also shows $1 million EBITDA and is equivalent to A and B in all other respects except that it sub-contracts drilling to several independent operators. It owns no rigs and has no capital expenditures or depreciation. (Since there are no assets to depreciate or replace, EBITDA is a better approximation of free cash flow.) From a cash flow perspective, C tops A and B.

In general, projected cash flow should be our metric for evaluating companies. Cash flow assumes adequate reinvestment in the business, as opposed to the unsustainable reinvestment shortfall represented by EBITDA.

EBITDA is a good starting point for sale, merger and acquisition discussions. Just don’t rely on it for making a major decision; unless you would buy a car knowing only the model and year, or propose marriage on the first date. There are more EBITDA hazards to avoid, but the depreciation trap is a key one. When one of Warren Buffet protégés comes calling, we’ll be ready.

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Al Statz is President of Exit Strategies Group, Inc., a business brokerage, mergers, acquisitions and valuation firm serving closely-held businesses in Northern California. He can be reached confidentially at 707-778-2040 or alstatz@exitstrategiesgroup.com.

The  North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which covers the North Bay area of San Francisco – from the Golden Gate bridge north, including Marin County and the wine country of Sonoma and Napa Counties.

Five Phases of the Business Sale Process

Article originally published on August 21, 2010 — North Bay Business Journal

Remember the story about the chicken and pig that walk past a diner advertising “bacon and eggs” for breakfast? The chicken enthusiastically endorses the menu. The pig replies, “For you it’s all in a day’s work. For me it’s total commitment!”

Most company owners already understand that selling a business on their terms requires commitment to a cohesive process. Others try and fail to sell, and learn the hard way that selling is more complex and fraught with pitfalls than they realized. A systematic business sale process improves your price, terms and probability of sale, and reduces your time, stress and financial risk. Here is a brief outline:

Phase 1. Evaluation & Planning

Commit to having the business objectively evaluated by a valuation expert. A reliable opinion requires significant due diligence, research and analysis of financials, assets, markets, relationships, contracts, systems, and more. The expert acts in concert with your legal and financial advisors to provide essential answers that allow you make the best decisions. This phase is critical to deciding the right time to sell — whether today or 1-5 years from now.

You’ll have answers regarding:
1. Most probable selling price
2. Likely deal structures
3. Target buyers
4. Marketability and potential obstacles
5. Strengths and weaknesses, value drivers and detractors
6. Financial gaps, wealth preservation and maximizing after-tax yield
7. Specific ways to build value, short and long term

Phase 2. Marketing Preparation

When the time is right to sell, commit to presenting your business to prospective buyers convincingly, in writing, with supportable facts. Since confused minds always say “no”, a thorough deal book allows buyers to grasp your business opportunity, affirm their interest and make strong offers. A “blind” summary will be extracted for initial contact with target buyers. While your M&A Advisor produces the book and develops a list of buyers with strong potential synergies, you’ll wrap up recommended business preparations that enhance value, marketability and transferability.

Phase 3. Confidential, Strategic Marketing

A direct marketing campaign is aimed at target buyers, using multiple communication methods. A net is cast deep and/or wide to produce buyers, based on for your business type and circumstances. Deal books are released to candidates that demonstrate financial ability and sign a confidentiality agreement. Your Advisor schedules site visits for a short list of finalists, where you get to know each other and ask in-depth questions.

Phase 4. Negotiations & Deal Structuring

Now comes the interesting part, and this is not a one-size-fits all process. Every transaction is unique. Your Advisor endeavors to obtain multiple offers, possibly through a controlled auction process, discusses their pros and cons with you and helps you select the lead horse. The Advisor guides you through negotiations, in concert with your tax and legal advisors. Experience is critical.

Phase 5. Due Diligence & Closing

With the deal points are settled, buyer and seller due diligence commence, while financing and third-party consents are arranged, and definitive agreements and closing documents are prepared. This is where phases 1 and 2 pay off. In today’s business environment, expect a financial audit, and expect the buyer’s experts to investigate government compliance, environmental issues, insurance claims, key relationships, contracts, equipment, intellectual property rights, and more. Your Advisor coordinates work flow and keeps the deal on track.
Selling a business is often a business owner’s largest financial transaction. To realize the reward you deserve for your years of hard work and sacrifice, be prepared, commit to a cohesive selling process and engage professionals that allow you to focus on business performance at a time when it matters most.

•    •    •

Al Statz is President of Exit Strategies Group, Inc., a business brokerage and valuation firm based in Sonoma County. He can be reached at 707-781-8580 or alstatz@exitstrategiesgroup.com.

The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which covers the North Bay area of San Francisco – from the Golden Gate bridge north, including Marin and the wine country of Sonoma and Napa counties.