bbpadmin No Comments

Fairness Opinions

Since one often hears the term “fair value” or “fair market value,” it would be easy to assume that “fairness opinion” means the same thing.  A fairness opinion may be based to some degree on fair market value, but there the similarities end.  Assume that you are president of a family business and the other members are not active in the business, but are stockholders; or you are president of a privately held company that has several investors/stockholders.  The decision is made to sell the company; and you as president are charged with that responsibility.  A buyer is found; the deal is set; it is ready to close — and, then, one of the minority stockholders comes out of the woodwork and claims the price is too low.  Or, worse, the deal closes, then the minority stockholder decides to sue the president, which is you, claiming the selling price was too low.  A fairness opinion may avoid this or protect you, the president, from any litigation.

A fairness opinion is a letter, usually only two to four pages, containing the factors or items considered, and a conclusion on the fairness of the selling price along with the usual caveats or limitations. These limitations usually cite that all the information on which the letter is based has been provided by others, the actual assets of the business have not been valued, and that the expert relied on information furnished by management.

This letter can be prepared by an expert in business valuation such, as a business appraiser or business intermediary.  The content of the fairness opinion letter is limited to establishing a fair price based on the opinion of the expert.  It does not provide any comment or opinion on the deal itself or how it is structured; nor does it contain any recommendations on whether the deal should be accepted or rejected.

Fairness opinions are often used in the sale of public companies by the board of directors.  It helps support the fact that the board is protecting the interests of the stockholders, at least as far as the selling price is concerned. In privately held companies, the fairness opinion will serve the same purpose if there are minority shareholders or family members who may elect to challenge the price the company is being sold for.

bbpadmin No Comments

Learn the Dynamics and Save the Deal

Many business owners are unfamiliar with the dynamics of selling a company, because they have never done so. There are numerous possible “deal breakers.”  Being aware of the following pitfalls and their remedies should help prevent the possibility of an aborted transaction.

Neglecting the  Running of Your Business
A major reason companies with sales under $20 million become derailed during the selling process is that the owner becomes consumed with the pending transaction and neglects the day to day operation of the business.  At some time during the selling process, which can take six to twelve months from beginning to end, the CEO/owner typically takes his or her eye off the ball.  Since the CEO/owner is the key to all aspects of the business, his lack of attention to the business invariably affects sales, costs and profits.  A potential buyer could become concerned if the business flattens out or falls off.

Solution:  For most CEOs/owners, selling their company is one of the most dramatic and important phases in the company’s history.  This is no time to be overly cost conscious.  The owner should retain, within reason, the best intermediary, transaction lawyer and other advisors to alleviate the pressure so that he or she can devote the time necessary for effectively running the business.

Placing Too High a Price on the Business
Obviously, many owners want to maximize the selling price on the company that has often been their life’s work, or in fact, the life’s work of their multi-generation family.  The problem with an irrational and indiscriminate pricing of the business is that the mergers and acquisition market is sophisticated; professional acquirers will not be fooled.

Solution:  By retaining an expert intermediary and/or appraiser, an owner should be able to arrive at a price that is justifiable and defensible. If you set too high a price, you may end up with an undesirable buyer who fails to meet the purchase price payments and/or destroys the desirable corporate culture that the seller has created.

Breaching the Confidentiality of the Impending Sale
In many situations, the selling process involves too many parties, and due to so many participants in the information loop, confidentiality is breached.  It happens, perhaps more frequently than not.  The results can change the course of the transaction and in some cases; the owner—out of frustration—calls off the deal.

Solution:  Using intermediaries in a transaction certainly helps reduce a confidentiality breach. Working with only a few buyers at a time can also help eliminate a breach.  Involving senior management can also prevent information leaks.

Not Preparing for Sale Far Enough in Advance
Most business owners decide to sell their business somewhat impulsively.  According to a survey of business sellers nationwide, the major reason for selling is boredom and burnout. Further down the list of reasons reported by survey respondents is retirement or lack of successor heirs.  With these factors in mind, unless the owner takes several years of preparation, chances are the business will not be in top condition to sell.

Solution:  Having well-prepared and well-documented financial statements for several years in advance of the company being sold is worth all the extra money, and then some.   Buying out minority stockholders, cleaning up the balance sheet, settling outstanding lawsuits and sprucing up the housekeeping are all-important.  If the business is a “one-man-band,” then building management infrastructure will give the company value and credibility.

Not Anticipating the Buyer’s Request
A buyer usually has to obtain bank financing to complete the transaction.  Therefore, he needs appraisals on the property, machinery and equipment, as well as other assets.  If the owner is selling real estate, an environmental study is necessary.  If a seller has been properly advised, he will realize that closing costs will amount to five to seven percent of the purchase price; i.e., $250,000-$350,000 for a $5 million transaction.  These costs are well worth the expense, because the seller is more apt to receive a higher price if he can provide the buyer with all the necessary information to do a deal.

Solution:  The owner should have appraisals completed before he tries to sell the business, but if the appraisals are more than two years old, they may have to be updated.
Seller Desiring To Retire After Business Is Sold
It is a natural instinct for the burnt-out owner to take his cash and run.  However, buyers are very concerned with the integration process after the sale is completed, as well as discovering whether or not the customer and vendor relationships are going to be easily transferable.

Solution:  If the owner were to become a director for one year after the company is sold, the chances are that the buyer would feel a lot more secure that the all-important integration would be smoother and the various relationships would be successfully transferable.

Negotiating Every Item
Being boss of one’s own company for the past ten to twenty years will accustom one to having his or her own way… just about all the time.  The potential buyer probably will have a similar set of expectations.

Solution:  Decide ahead of the negotiation which are the very important items and which ones are not critical.  In the ensuing negotiating process, the owner will have a better chance to “horse trade” knowing the negotiatiable and non-negotiable items.

Allocating Too Much Time for Selling Process
Owners are often told that it will take six to twelve months to sell a company from the very beginning to the very end.  For the up-front phase, when the seller must strategize, set a range of values, and identify potential buyers, etc., it is all right to take one’s time.  It is also acceptable for the buyer to take two or three months to close the deal after the Letter of Intent is signed by both parties.  What is not acceptable is an extended delay during which the company is “put in play” (the time between identifying buyers, visiting the business and negotiating). This phase should not take more than three months.  If it does, this means that the deal is dragging and is unlikely to close.  The pressure on the owner becomes emotionally exhausting, and he tires of the process quickly.

Solution:  Again, the seller needs to have a professional orchestrate the process to keep the potential buyers on a time schedule, and move the offers along so the momentum is not lost.  The merger and acquisition advisor or intermediary plays the role of coach, and the player (seller) either wins or loses the game depending on how well those two work together.

bbpadmin No Comments

Expediting Change Post-Closing

The deal is done and you have completed the closing.  Now what do you do?  You help the new owner because chances are that you have some vested interest in the new entity, and it is in your best interest that the new owner is successful.

For example:
– there may be an escrow account due you.
– the buyer may have given you a note.
– you may be the landlord, and the buyer the tenant.
– your name remains on the company letterhead, and your personal reputation continues to be associated with the business.
– your former employees depend on you to have made the right decision in selling to the particular buyer, thus preserving their jobs.

bbpadmin No Comments

Selling: What Does An Intermediary Expect From You

If you are seriously considering selling your company, you have no doubt considered using the services of an intermediary.  You probably have wondered what you could expect from him or her.  It works both ways.  To do their job, which is selling your company; maximizing the selling price, terms and net proceeds; plus handling the details effectively; there are some things intermediaries will expect from you.  By understanding these expectations, you will greatly improve the chances of a successful sale. Here are just a few:

• Next to continuing to run the business, working with your intermediary in helping to sell the company is a close second.  It takes this kind of partnering to get the job done.  You have to return all of his or her telephone calls promptly and be available to handle any other requests.  You, other key executives, and primary advisors have to be readily available to your intermediary.

• Selling a company is a group effort that will involve you, key executives, and your financial and legal advisors all working in a coordinated manner with the intermediary.  Beginning with the gathering of information, through the transaction closing, you need input about all aspects of the sale.  Only they can provide the necessary information.

• Keep in mind that the selling process can take anywhere from six months to a year — or even a bit longer.  An intermediary needs to know what is happening — and changing — within the company, the competition, customers, etc.  The lines of communication must be kept open.

• The intermediary will need key management’s cooperation in preparation for the future visits from prospective acquirers.  They will need to know just what is required, and expected, from such visits.

• You will rightfully expect the intermediary to develop a list of possible acquirers.  You can help in several ways.  First, you could offer the names of possible candidates who might be interested in acquiring your business.  Second, supplying the intermediary with industry publications, magazines and directories will help in increasing the number of possible purchasers, and will help in educating the intermediary in the nature of your business.

• Keep your intermediary in the loop.  Hopefully, at some point, a letter of intent will be signed and the deal turned over to the lawyers for the drafting of the final documents.  Now is not the time to assume that the intermediary’s job is done.  It may just be beginning as the details of financing are completed and final deal points are resolved.  The intermediary knows the buyer, the seller, and what they really agreed on.  You may be keeping the deal from falling apart by keeping the intermediary involved in the negotiations.

• Be open to all suggestions.  You may feel that you only want one type of buyer to look at your business.  For example, you may think that only a foreign company will pay you what you want for the company.  Your intermediary may have some other prospects.  Sometimes you have to be willing to change directions.

The time to call a business intermediary professional is when you are considering the sale of your company.  He or she is a major member of your team.  Selling a company can be a long-term proposition.  Make sure you are willing to be involved in the process until the job is done.  Maintain open communications with the intermediary.  And, most of all – listen. He or she is the expert.

bbpadmin No Comments

Surveying the Business Scene: How Many Sell?

One of the most frequently-asked questions by those looking at the independent business scene is: “How many are for sale?” Right on the heels of that question comes another: “How many actually sell?”

To determine how many of these businesses are for sale at any one time, and what percentage of these get sold, it is necessary first to define terms by business category. The industry groups that account for the majority of small to mid-sized business sales are: manufacturing, wholesale trade, retail trade, business and personal services, and household/miscellaneous services. Using these categories as components, the total number of businesses that apply to our “survey” is approximately 6.3 million.

Of this total, businesses that are for sale at any one time account for roughly 20 percent. There is naturally going to be a higher percentage of businesses for sale that employ four or less workers, but some independent business experts feel that fewer of these businesses–at least percentage-wise–sell than do the larger ones. Of those businesses with four or less employees, one expert’s estimate is that one out of six actually sells; with five to nine employees, about one out of five sells; and the trend continues.

Why is the actual-sale percentage lower for very small businesses? Many factors operate to affect this tendency. For example, the much smaller business may suffer more from unsubstantiated income or inaccurate financial information. Some owners may not be realistic in their pricing or simply aren’t serious about selling (problems that can threaten the sale of a business at any level). Still others may simply pay the bills and close the doors.

However, no matter what the percentages show, a business owner considering putting a company on the market should remember this: most businesses are salable if the seller is realistic in assessing value and is aware that the marketplace is the final arbiter of the selling price.

bbpadmin No Comments

Rating Buyer Seriousness

Use the following criteria to separate the serious buyers from window-shoppers. (Add up plus points, subtract minus points. The serious buyer will rate a 6 or above.)

Minus Point Factors

  • -4 needs outside financing (excluding home equity)
  • -4 been looking for 6 months or more
  • -3 no available cash
  • -3 still working in corporate world
  • -2 spouse not supportive of buying a business
  • -2 uses a legal pad or clipboard and takes too many notes
  • -2 feels leisurely about finding the “just-right” business
  • -1 now renting (although has lived in area for some time)
  • -1 under 25 or over 62

Plus Point Factors

  • +3 does not have a job or has just resigned
  • +3 understands that books and records are not the only indicators of value
  • +2 has enough money to buy a business
  • +2 no dependents
  • +2 family member or close relative has been a business owner
  • +2 willing to take the time to look without a lot of notice
  • +1 location is not a prime consideration
  • +1 age 25 to 62
  • +1 skilled worker or professional
bbpadmin No Comments

Family-Owned Businesses Do Have Choices

Family-owned businesses do have some options when it comes time to sell.  Selling the entire business may not be the best choice when there are no other family members involved.  Here are some choices to be considered:

Internal Transactions

  • Hire a CEO – This approach is a management exit strategy in which the owner retires, lives off the company’s dividends and possibly sells the company many years later.
  • Transition ownership within the family – Keeping the business in the family is a noble endeavor, but the parent seldom liquefies his investment in the short-term, and the son or daughter may run the company into the ground.
  • Recapitalization – By recapitalizing the company by increasing the debt to as much as 70 percent of the capitalization, the owner(s) is/are able to liquefy most of their investment now with the intent to pay down the debt and sell the company later on.
  • Employee Stock Ownership Plan (ESOP) – Many types of companies such as construction, engineering, and architectural are difficult to sell to a third party, because the employees are the major asset.  ESOPs are a useful vehicle in this regard, but are usually sold in stages over a time period as long as ten years.

External Transactions

  • Third party sale – The process could take six months to a year to complete.  This method should produce a high valuation, sometimes all cash at closing and often the ability of the owner to walk away right after the closing.
  • Complete sale over time – The owner can sell a minority interest now with the balance sold after maybe five years.  Such an approach allows the owner to liquefy some of his investment now, continue to run the company, and hopefully receive a higher valuation for the company years later.
  • Management buy-outs (MBOs) – Selling to the owners’ key employee(s) is an easy transaction and a way to reward them for years of hard work.  Often the owner does not maximize the selling price, and usually the owner participates in the financing.
  • Initial public offering (IPO) – In today’s marketplace, a company should have revenues of $100+ million to become a viable candidate.  IPOs receive the highest valuation, but management must remain to run the company.

Source: “Buying & Selling Companies,” a presentation by Russ Robb, Editor, M&A Today

bbpadmin No Comments

Who Is Today’s Buyer?

It has always been the American Dream to be independent and in control of one’s own destiny. Owning your own business is the best way to meet that goal.  Many people dream about owning their own business, but when it gets right down to it, they just can’t make that leap of faith that is necessary to actually own one’s own business.  Business brokers know from their experience that out of fifteen or so people who inquire about buying a business, only one will become an owner of a business.

Today’s buyer is most likely from the corporate world and well-educated, but not experienced in the business-buying process.  These buyers are very number-conscious and detail-oriented.  They require supporting documents for almost everything and will either use outside advisors or will do the verification themselves, but verify they will.  A person who is realistic and understands that he or she can’t buy a business with a profit of millions for $10 down is probably serious.  They must be able to make decisions and not depend on outside parties to do it for them.  They must also have the financial resources available, have an open mind, and understand that owning one’s own business means being the proverbial chief cook and bottle washer.

Today’s buyers are usually what might be termed “event” driven.  This means that the desire to own their own business is coupled with a need or reason.  Maybe they have been downsized out of a job, they don’t want to be transferred, they travel too much, they see no future in their current position, etc.  Many people have the desire, but not the reason.  Most people don’t have the courage to quit a job and the paycheck to venture out on their own.

There are the perennial lookers.  Those people who dream about owning their own business, are constantly looking, but will never leave the job to fulfill the dream.  In fact, perspective business buyers who have been looking for over six months would probably fit into this category.

Business brokers spend a lot of time interviewing buyers.  Here are just a few of the questions they will ask. The answers they receive will determine whether or not the prospective buyer is serious and qualified.

  • Why is the person considering buying a business?
  • Has the person ever owned their own business?
  • How long has the person been looking?
  • Is the person currently employed?
  • What kind of business is the person looking for?
  • Is he or she flexible in the kind of business?
  • What are the most important considerations?
  • How much money is available?
  • What is the person’s timeframe?
  • Does the person’s experience match the type of business under consideration?
  • Who else is involved in the purchase decision?
  • Is the person’s spouse positive about owning a business?

There are other questions and considerations, but those cited above reveal the depth of a buyer interview.  Business brokers want to work only with buyers who are serious about purchasing a business.  They don’t want to show a business to anyone who is not qualified, which is simply a waste of their time and the seller’s time.

bbpadmin No Comments

Why Deals Fall Apart — Loss of Momentum

Deals fall apart for many reasons – some reasonable, others unreasonable.

For example:

• The seller doesn’t have all his financials up to date.
• The seller doesn’t have his legal/environmental/administrative affairs up to date.
• The buyer can’t come up with the necessary financing.
• The well known “surprise” surfaces causing the deal to fall apart.

The list could go on and on and this subject has been covered many times. However, there are more hidden reasons that threaten to end a deal usually half to three-quarters of the way to closing. These hidden reasons silently lead to a lack of or loss of momentum.

This essentially means a lack of forward progress. No one notices at first. Even the advisors who are busy doing the necessary due diligence and paperwork don’t notice the waning or missing momentum.  Even though a slow-down in momentum may not be noticeable at first, an experienced business intermediary will catch it.

Let’s say a buyer can’t get through to the seller.  The buyer leaves repeated messages, but the calls are not returned.  (The reverse can also happen, but for our example we’ll assume the seller is unresponsive.) The buyer then calls the intermediary.  The intermediary assures the buyer that he or she will call the seller and have him or her get in touch.  The intermediary calls the seller and receives the same response. Calls are not returned.  Even if calls are returned the seller may fail to provide documents, financial information, etc.

To the experienced intermediary the “red flag” goes up. Something is wrong. If not resolved immediately, the deal will lose its momentum and things can fall apart quite rapidly. What is this hidden element that causes a loss of momentum? It is generally not price or anything concrete.

It often boils down to an emotional issue. The buyer or seller gets what we call “cold feet.” Often it is the seller who has decided that he really doesn’t want to sell and doesn’t know what to do.  It may also be that the buyer has discovered something that is quite concerning and doesn’t know how to handle it. Maybe the chemistry between buyer and seller is just not there for one or the other of them. Whatever the reason, the reluctant party just tries to ignore the proceedings and lack of momentum occurs.

The sooner this loss of momentum is addressed, the better the chance for the deal to continue to closing. Because the root of the problem is often an emotional issue, it has to be faced directly. An advisor, the intermediary or someone close to the person should immediately make a personal visit. Another suggestion is to get the buyer and seller together for lunch or dinner, preferably the latter. Regardless of how it happens, the loss of momentum should be addressed if the sale has any chance of closing.

bbpadmin No Comments

How’s Your Corporate Social Responsibility (CSR)?

Your first question may be, “Just what is Corporate Social Responsibility (CSR)?” We see CSR demonstrated in a variety of ways in areas such as:

o Contributing to local community programs through financial support and personal involvement

o Using packaging and containers that are environmentally-friendly
o Recycling
o Using low-emission and high mileage vehicles where possible
o Seeking more efficient manufacturing processes, etc.

o Utilizing responsible advertising, public relations and business conduct
o Exercising fair treatment of suppliers/vendors, contractors and shareholder

o Implementing fair and equitable treatment of employees
o Upholding workplace safety, equal opportunity employment and labor standards

Actions such as these not only uphold today’s business standards, but they also pave the way for future generations. In years past, many of these elements were considered almost anti-business and some had to be enforced by governmental regulation.

Successful companies such as Tom’s of Maine (producer of natural personal care products) and Newman’s Own have practically been built on CSR. More and more companies – public and private – are following the elements of CSR. Google is a desired workplace because of the way they treat their employees: great benefits, great food in the employee cafeteria, exercise equipment – you name it, Google provides it.

Recognizing CSR in today’s business climate not only increases shareholder/investor interest, but also increases value. Socially-conscious companies are considered sound investments.  They attract buyer interest and acquire higher selling prices when it comes time to sell. After all, most buyers want to find a business with the following attributes:

• Good relations with the local community
• Products and/or services that are meeting the current trends in the marketplace and are positioned to meet future trends
• Positive relations with employees and low-turn-over
• Excellent customer loyalty
• Good relationships with suppliers and vendors
• No “skeletons” in the company closet

In addition, good environmental practices reduce costs, create efficiencies and provide excellent public relations. Good employee relations make for happy workers, which translates to higher productivity and lower absenteeism. Good relationships with customers and suppliers eliminate, or greatly reduce, the possibility of legal entanglements.

All in all, Corporate Social Responsibility not only creates additional value and helps in creating a higher selling price when that time comes – it is also very good business for now and in the future.