Will appear on Seller pages – RECENT SELLER ARTICLES

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

/in , , /by Al Statz

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

/in , , /by Al Statz

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.

Famed Investor: References to EBITDA make us shudder …

/in , , /by Al Statz

… 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

/in , /by Al Statz

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.

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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.