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Don’t be a Victim of Seller’s Remorse

/in , /by Jim Leonhard
More business owners than you’d think second-guess themselves within a year of selling the business.  In my experience as an M&A advisor and business valuation expert, the main reason for the failure of business exits is the seller’s lack of planning on how and when to exit.  Too many owners never plan and simply wait until something happens that essentially forces them to sell, such as health issues, marital stresses, poor business conditions, or when “burnout” becomes unbearable. This is usually the worst time to sell — and the results are usually disappointing.
If you are approaching retirement, start proactively planning for it well ahead of time (3-5 years) while things are going well and while you have time to make and reap the benefits of course corrections.  Have the business professionally valued when you start to plan.  This will give you a sound basis for knowing what your business is worth, and understanding its strengths and weaknesses from strategic and financial investor perspectives.  If the value of the company is equal to or greater than you need or want, you can take steps to keep it that way and protect against contingencies.  If the value is less than you need or want, you have time to construct and implement a plan to increase value and reduce investor risk.
Your plan can then ensure that you exit on your time frame, maximize value regardless of the situation, minimize taxes, and reach your personal goals.
For more information about preparing to sell and exiting your business successfully, please contact Jim Leonhard at 916-800-2716 or jhleonhard@exitstrategiesgroup.com. 

Ingredients of a Successful Business Sale

/in , /by Al Statz
Going to market when you and your business are ready to sell and market conditions are right provides the best opportunity to maximize results. Let’s look at how these three ingredients combine:
  1. You, the Owner
  2. The Business itself
  3. The Market
Having these ingredients come together at the same time requires planning. You can prepare personally and you can prepare your company for sale.  You can’t control the market, but you can choose market timing. So, basically, it’s up to you to prepare yourself and your business so that you can initiate the sale process when market conditions are favorable.

Are you and your business prepared to sell?   

In complex business deals, we achieve more in the end when we use great advisors from the very beginning. Most business transition teams include an experienced M&A broker, valuation expert(s), an accountant with a strong tax background, a business transaction attorney, and a financial planner. Depending on the nature of the business and the type of transaction, other specialists may be needed. An experienced M&A broker can help you form a great ensemble.
Some of the questions that a transition team can help you answer include:
  • What is the company’s probable selling price in today’s market?
  • Are value drivers and detractors clearly identified?
  • How do marketability, goodwill transferability, due diligence survivability, and deal finance-ability measure up?
  • Who are the most likely buyers and what deal terms are you likely to see?
  • Is cash flow being optimized at this time?
  • Does management have good visibility and a clear runway?
  • Are you on top of major industry and market trends?
  • Will net sale proceeds be sufficient to support your (family’s) desired life style?
  • How will your proceeds be reinvested?
  • Are you ready for life after business? What are your personal plans?
  • Are you prepared to assist in a smooth ownership transition?
  • What steps can be taken now to minimize taxes and reduce risk at deal time?
  • Is the management team sufficiently committed to the future success of the company?
  • Are key employee incentives in place to support a sale?
  • Are leases and contracts assignable and attractive to a buyer?
  • Is intellectual property properly titled, protected and transferable?
  • Are all books and records in good order?

Plan ahead, or plan for less

There are so many potential obstacles to a successful sale that planning is a must.  Unless you have substantial training in this area and deal experience, its hard to see the obstacles, let alone overcome them.  A transition team will more than pay for itself as its insights and  recommendations help remove obstacles and add value, sometimes substantially, while you focus on running the business at peak performance and maintaining strong relationships with key stakeholders during the sale process.
 
If you have questions about preparing to for a business sale or forming a transition team, call Al Statz at 707-781-8580 or email Al to arrange a confidential consultation.

Is your company an add-on candidate?

/in , /by Al Statz
Most business acquisitions by private equity firms have been “add-on” deals lately.
In private equity jargon, a large company acquisition is usually a platform acquisition, and a smaller company acquistion is most often an add-on  (or “bolt-on”, or “tuck-in”) acquisition. Add-on acquisitions are complementary to and synergistic with an existing platform company held by a private equity firm. Platform acquisitions dominate the headlines and represent most of the dollar volume, but add-ons now represent the majority of deals.
The trend toward a higher percentage of smaller private equity transactions is continuing this year, as private equity groups have shifted their attention to add-on opportunities. This upward trend in add-ons is occurring across all industries and regions of the U.S. according to Pitchbook, a private equity and venture capital market research firm. Pitchbook focuses on the higher end of the middle market (over $50M transactions), however we’re seeing increased interest in add-ons at the very low end (transactions under $10M) as well.  Click here for a copy of the Pitchbook Q4 2014 U.S. Private Equity Breakdown report.
According to Pitchbook, high valuations are at least partially responsible for the continuing increase in add-ons, which generallydon’t attract as much competition on the buy-side as large platform deals.
This is great news for company owners looking to sell. If you are considering selling a $5M+ revenue business, chances are good that one or more private equity firms would be interested in adding your business on to one of their platform companies. If you are looking to divest all or part of a company, now is the time to learn what it takes to properly position your company for a successful exit.
Understanding what sophisticated investors are looking for is key to ensuring that you don’t leave money on the table when you sell your business. For a discussion about whether your company is a candidate for selling to a private equity backed company, or to explore how you can develop your company into an acquisition target for this type of investor, Email or call Al Statz, 707-778-2040, in total confidence.

How Big of a Concern is Confidentiality in Business Sales?

/in /by Jim Leonhard
All sellers are rightly concerned about confidentiality of the potential sale of their business during the marketing and due diligence processes.  Such concerns, while important, should not deter sellers from casting a wide net in pursuit of selling to the right buyer at the highest price.  Having more quality buyer prospects means increasing the likelihood of achieving that goal.
Professional business brokers (intermediaries, investment bankers, M&A advisors) have rigorous processes and strict procedures for maintaining confidentiality,   and are equipped to advise on damage control in those rare instances when a confidentiality breach has occurred. In my experience, when there is a breach of confidentiality, in all honesty, it is usually because  the seller mentioned  something to someone (e.g., spouse, friend, landlord, banker, etc.), not the business broker/intermediary.
For suggestions for minimizing the risk of a confidentiality breach, see this article by Tom West: The Myth of Confidentiality.
Greater confidentiality is one of the many benefits of using a professional M&A broker to sell a privately-held business. For more information about selling your California-based business successfully, please contact Jim Leonhard at 916-800-2716 or jhleonhard@exitstrategiesgroup.com.

Small Business Transactions Up 18%, Sellers Earn Higher Sale Prices – According to Industry Report

/in , /by Al Statz
It’s a very good time to be a seller.
According to a report released on October 16, 2014, U.S. small business sale transaction levels are on pace for a record-breaking year. And while the post-recession market has generally favored buyers, a shift appears underway, with sellers now receiving higher selling prices, higher percentage of asking prices and improved cash flow multiples.  The full results are included in BizBuySell’s Q3 2014 Insight Report, which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide.
Report Highlights
  • The number of closed transactions in Q3 represented both a 17.9 percent increase from last year and the highest number of small business sales recorded in a third quarter since BizBuySell began tracking data in 2007.
  • The median sale price for businesses sold in Q3 rose 5 percent compared to last year.
  • The average cash flow multiple jumped nearly 9 percent.
  • Service-related businesses led the way with a 17 percent increase in closed transactions, while manufacturing was up 16.2 percent and restaurants were up 13.3 percent compared to last year
  • In addition to an increased number of closed sales in Q3, there was also a growing number of businesses offered for sale.
  • 2014 remains on pace to record the highest number of closed transactions reported since the BizBuySell Insight Report’s inception in 2007.
Our View
Without a doubt, as business financial results and the economy continue to grow, and as buyer liquidity and acquisition financing options continue to improve, Exit Strategies is seeing more buyers and sellers entering the market here in California, at both the main street and middle-market levels.  Set amidst the backdrop of an aging baby boomer business owner population, low interest rates, plenty of private equity dry powder, and the potential for future tax rate hikes, we expect this trend to continue into 2015.
Business owners without a successor who have an eye toward retirement should look closely at entering the market. The sale process takes 9 months on average. Add time on the front end to evaluate and prepare the business, and on the back end for management transition, and a full year or more is not uncommon.
For more information about current market conditions or to understand how your business is likely to be received by prospective buyers, investors and lenders, feel free to contact us, in total confidence.

A Sample Acquisition Due Diligence Checklist

/in , /by Al Statz

In privately-held business acquisition transactions, as soon as a letter of intent or contingent purchase agreement has been negotiated, the buyer’s in-depth due diligence begins.  To kick-start this phase of the transaction, the buyer requests from the seller all of the information that they need to conduct their investigations. Once the buyer is satisfied, the transaction proceeds to the closing phase.

Due diligence document requests vary greatly in length and content, depending on the type and complexity of the business, the structure of the transaction, and the buyer’s plans for the business.

Download Sample Small Business Acquisition Due Diligence Request List

This sample buyer due diligence checklist is a generic list for the acquisition of a small privately-held business. It is for information purposes only. Some of the items listed will not apply to your specific business acquisition and other critical requests will be missing. Please do not use this as an actual request list!

I can’t overstate how important it is to obtain competent legal, financial, tax and other specialized counsel to assist with your due diligence investigations and requests for information. A skilled M&A broker can organize and manage the due diligence process to keep the transaction participants in sync and the deal on track. Often, the broker sets up a virtual data room to which the seller team can upload due diligence documents and from which the buyer team can view and download.

Due diligence is a critical step in every business acquisition. For more information about the due diligence process when selling, merging or acquiring a California business, you can reach Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.

You’re ready to sell. Is your business?

/in /by Jim Leonhard
A recent article in the NY Times caught my attention: “Why Many Small Businesses Cannot Be Sold”, by Josh Patrick.
The article cites a statistic that only about 4 to 5% of businesses recently listed on BizBuySell (a popular website that lists businesses for sale) actually sell. That’s an alarming statistic.
According to the article there are three fundamental issues business owners need to address if they really want to sell their business:
  1. Create a recurring revenue model.  Businesses that have a recurring revenue model are easier to sell than those where new revenue sources (i.e., customers) must continuously be found. I agree completely.
  2. Become a passive owner. Get yourself out of the day-to-day operations as much as possible to increase value to potential buyers.  If you are no longer deemed essential to the success of the business, a buyer can more easily see themselves being successful after the sale. In my experience, becoming entirely passive is a lofty goal for most small businesses, but you can make yourself less critical if you focus on this years ahead of a sale.
  3. Consider who the right type of buyer might be.  Is it a competitor, an individual investor/operator, a private equity group, a public company, etc. You will need to produce all the information needed by potential buyers.  Different types of buyers need more of certain types of information. You also need to determine what information is truly “sensitive” and develop ways to protect it in the sale process, especially when the buyer is a competitor. Experienced business brokers and M&A advisers are expert at this.
For more information about preparing to sell and selling your California business successfully, please Email or call Jim Leonhard at 916-800-2716 or jhleonhard@exitstrategiesgroup.com.

Escrows in California Business Sale Transactions

/in , /by Al Statz

Business “Transaction Escrows” protect the interests of buyers and sellers, and are used extensively by transaction attorneys and brokers in California. Then there is what’s called a “Holdback Escrow” which secures post-closing obligations and adjustments. This blog introduces you to both types of escrows and how they facilitate business deals.

What is a Business Transaction Escrow? 

In California, for business sale-purchase transactions of all sizes and shapes, it is common to have an escrow agent serve as a neutral holder of funds and documents, communications link and closing facilitator. The escrow agent also deals with regulatory compliance, prepares routine transaction documents and closing statements, and handles administrative details in a cost-effective manner.

Business escrow companies in California are either attorneys (acting in a neutral capacity) or they are licensed by the California Department of Corporations. Due to the specialized nature of business escrows, the number of providers is considerably smaller than those serving real estate transactions.

How it Works

Escrow starts with a written agreement between the buyer, seller and escrow holder. The escrow holder prepares written escrow instructions* that reflect the terms of the purchase agreement and all conditions of the transaction.  The buyer and seller will sign the escrow instructions, and make any necessary earnest money deposits.  The escrow holder will process the escrow in accordance with the instructions. When all conditions are met or achieved, the escrow will be “closed”. The escrow holder provides a concise accounting of all funds, and arranges for the safe delivery of all funds and documents to their proper recipients.

* When applicable, these instructions will include a Notice to Creditors of Bulk Sale. California’s Bulk Sale law is contained in Commercial Code Section 6101-6111.

The typical duties of an escrow holder in a business asset sale/purchase transaction include:

  1. Requesting publication, recording and UCC lien searches for state and county
  2. Complying with Bulk Sale statutes (publication), as applicable
  3. Notifying the county tax collector
  4. Requesting a beneficiary’s statement if debt or financial obligations are to be taken over by the Buyer
  5. Requesting demands from existing lien-holders, receiving claims
  6. Notifying and obtaining clearances from County, State and Federal agencies as required
  7. Complying with lender’s requirements, securing loan documents and receiving funds
  8. Obtaining and holding purchase funds from the buyer
  9. Prorating taxes, interest, rents, security deposits, etc., as instructed
  10. Preparing routine legal and financial documents such as notes, security agreements, personal guarantees, amortization schedules, deeds of trust, UCC-1 financing statements, bill of sale, corporate resolution authorizing the transaction, etc.
  11. Can prepare fictitious business name statements
  12. May prepare routine amendments to agreements
  13. Securing releases of all contingencies or other conditions imposed on the particular escrow
  14. Preparing estimated closing statements prior to close of escrow
  15. Consultation regarding problems that arise
  16. Preparing final closing statements for the parties, accounting for the disposition of all funds deposited in escrow
  17. Obtaining appropriate signatures on all documents
  18. Close escrow when all instructions of buyer and seller have been carried out
  19. Disbursing funds as authorized by instructions, including commissions and payoff liens
  20. Preparing and recording UCC-1, UCC-3 and deeds of trust, as needed
  21. Securing tax clearances
  22. Distributing final transaction documents to all parties

The above list is a generic set of escrow tasks in a sale of business assets. The escrow tasks performed in an actual transaction will depend on the transaction type and circumstances, and will be listed in the instructions prepared by the escrow holder. Stock sale escrows look a lot different, and are typically simpler.

The Holdback Escrow and How it Works

No. In some Merger and Acquisitions (“M&A”) transactions, the buyer and seller agree to place a portion of the purchase price in a third party escrow account for a specified period of time after closing. These funds are intended to secure payment to indemnify the buyer against losses caused by a breach of the seller’s representations, warranties or covenants; for payment of post-closing working capital or balance sheet adjustments; to guaranty payment of an earn out (where part of the purchase price is based on post-closing performance of the business), as collateral to insure the performance of some other event by the seller; or some combination of these. Holdback escrows go by other names, such as “retention escrow”, “indemnity escrow” and “holding escrow”.

Both buyers and sellers can benefit from holding back funds in escrow.  Holdback provisions should be carefully thought out and negotiated early in the M&A negotiation process. Understanding the typical approaches and common pitfalls is extremely helpful, which only comes with experience.

Holdback escrows are often completely separate from the transaction escrow. The escrow holder may be a bank, trust company, or other professional service provider. Typically, funds from the transaction escrow roll over into the holdback escrow immediately after a transaction closing. A holdback escrow requires a separate agreement between the escrow agent, buyer and seller, which includes, among other things, conditions for releasing funds and procedures for resolving any disputes. This can take some time to negotiate.

If you have questions regarding this blog post or need help selling or acquiring a California company, you can Email Al Statz or call him at 707-778-2040. And if we don’t know the answer we would be happy to direct you to someone who does!

Please don’t tell me liquidation is my best exit option!

/in , /by Jim Leonhard
While the typical premise of value in valuing an operating business for a sale/acquisition or exit planning is as a going concern, occasionally, facts and circumstances indicate that an owner would be better off liquidating his or her business.  Unfortunately, this often comes as a shock to an owner who has spent years working in and building a business with the expectation that it can be sold for enough to provide a significant nest egg for retirement.
When and why is liquidation the best course of action?
Fundamentally, liquidation is the best option for an owner-operator when the assets can be sold off or liquidated in an orderly fashion for more money than a rational, well informed buyer would likely pay for the company as an operating business. This is usually the result of the business, as structured, not being profitable enough to pay a new working owner adequate compensation for their labor and yield a reasonable return on their investment (down payment, working capital injection, and closing costs). It can also be the result of exceptionally high risk inherent in the business.
The failure of a business to afford a fair wage to the working owner is an immediate red flag.  Why is the owner willing to be under compensated?  In theory, he or she would be better off liquidating the business and working for someone else.
Sometimes a lack of profitability manifests itself as the business paying no rent or below-market rent on a facility that the business owner or his family owns.  If the business were suddenly burdened with a market rent, as would be the case for a new business owner, the business becomes much less profitable or unprofitable. The owner might be better off liquidating the business and renting the real property to another company.
An example of exceptional business risk is the inability to secure a long-term lease for a location-dependent business.  This problem is particularly acute for retail businesses whose sales can suffer dramatically from relocation, or a business with a very high investment in tenant improvements or equipment installation, such as car washes and food processing businesses.
We frequently uncover these issues and many others in our business valuation and M&A brokerage work, particularly with mature family-owned businesses. Fortunately, with sound business/exit planning, orderly liquidation can often be avoided.
For more information about preparing to sell and exiting your California-based business successfully, please contact Jim Leonhard at 916-800-2716 or jhleonhard@exitstrategiesgroup.com. 

Be Prepared!

/in , /by Don Ross
“Be Prepared” is the Boy Scout Motto that has served young individuals and their character development in over two hundred countries since 1907. It can also be an effective mantra for a business owner who will engage in marketing and selling a business.  A well prepared business owner plays a vital role on the transaction team and helps ensure maximum value to the shareholders and a smooth transition of ownership.
Critical components of “Be Prepared” for a business owner are the following:
● Sustain.  Continue to operate the business effectively.  Having made the commitment to sell, don’t allow your mind and spirit to “go on vacation”.  Maintain business as usual and meet or exceed your sales/profit projections.  Buyers want to invest in businesses that are running smoothly.
● Demote.  This may seem counter-intuitive to “Be Prepared”; however, it is important that you develop a management team that can operate efficiently in your absence.  The more replaceable you become in the daily affairs of the business, the more you eliminate buyer risk.
● Disclose.  Total transparency empowers the prospective buyer to make informed decisions, eliminates suspicion, and obviates potential “landmines” during negotiation and due diligence.
● Diversify. “One trick ponies” are difficult to market and sell.  You don’t want to be indispensable to the future success of the business, nor do you want to be overly reliant upon one or two customers or suppliers.  Buyers will perceive less risk when they see a well-diversified portfolio of customers and suppliers.
● Coordinate.  Your transaction team can include a business broker, accountant, attorney and escrow officer.  Work closely with them.  Make yourself available and responsive to their requests.
● Update. Current monthly financials and any significant changes in the business must be updated and forwarded to your business broker.  Remember that during marketing and negotiations, your business continues to be dynamic:  it can’t stop.  Buyers attribute greater value to a business that can provide timely, accurate reports.
● Improve and Maintain. A freshly detailed and serviced car is generally easier to market and sell.  Examine the physical attributes of your business.  Put a “fresh coat of paint” on the business: repair and replace furniture, fixtures and equipment that are integral to the business and remove those items that are inoperative or unproductive.
● Organize.  Among the intangible assets of your business that bring added value and goodwill are your company’s records.  Employment records, supplier lists, customer lists, procedural documentation, handbooks, contracts, licenses and permits, et al, should be organized and updated.  It is reasonable for a buyer to expect company records to be current, accurate and complete before the change of ownership.
To paraphrase a popular quote, “An ounce of preparation is worth a pound of cure”.  You don’t climb a mountain by starting at the top . . . you prepare, plan and perform and hopefully enjoy the trek along the way.
 
Don Ross is a business broker with Exit Strategies. He can be reached at donross@exitstrategiesgroup.com or 707-778-0210.