Will appear on Seller pages – RECENT SELLER ARTICLES

The Significance of Disclosure in a Business Transaction

/in , /by Don Ross
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

/in , /by Bob Altieri
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

/in , , /by Al Statz
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?

/in /by Louis Cionci
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.

Marketing a Business: The Need for Confidentiality

/in , /by Don Ross
Maintaining confidentiality during the M&A sale process is a critical factor in successful business transactions. 
At the onset, during the marketing phase of a business sale, you are walking a tightrope between those you want to inform and those you don’t.  Confidential information is shared only with qualified buyers who have evidenced professional and financial capacity.   Information is withheld from those, who by virtue of their relationship with the seller’s business, could prove detrimental to the ongoing operations or constituents of the business.  Constituents can include employees, competitors, vendors and lenders.
Buyers want to buy a stable businesses. If employees learn that their employer is for sale, they may seek other employment to protect their income. Customers may begin to favor other sources for the company’s products or services. Key suppliers may begin seeking alternate channels to the market. Any of these events can erode business performance and stability, which translates to reduced value and increased risk for the current and future owner.
Marketing pieces include “blind executive summaries” where company name and location are not disclosed.  Non disclosure agreements help to maintain confidentiality with buyers.
Information of a highly sensitive or competitive nature, such as customer lists and proprietary processes, should not be divulged prematurely.  As the transaction progresses and the parties agree to terms, such information is safeguarded and discretely released to the buyer late in the due diligence process or when the transaction closing is imminent.
Finally, after the transaction closing, details of the transaction remain private.  In 13 years of selling businesses, Exit Strategies has managed to keep the details of every private to private company transaction confidential.
It is the maintenance of confidentiality throughout the transaction that sustains the integrity and comfort of the business for both buyer and seller during the process and going forward.
For further information on maintaining confidentiality in a business sale process contact Don Ross.

What is a Recapitalization Exit Strategy?

/in , /by Al Statz

One of the exit strategies available to company owners is called a recapitalization, or “recap”.

In a recapitalization, an investor (usually a private equity firm) purchases an equity interest in your company using a combination of cash and debt financing. They expect to grow the company and earn an attractive return on their cash investment when they sell the company at a higher price in 3-7 years. Their value creation strategy usually involves initiatives to accelerate growth, increase profit margins, mitigate business risks, and professionalize the business to make it more attractive to future buyers.

Why Recapitalize?

A recapitalization gives an owner significant liquidity now AND gives them a second larger bite of the apple when the PE firm is ready to exit and sells the company to another PE firm or strategic acquirer. A recapitalization can also facilitate:
  1. a buyout of only specific shareholders,
  2. the transfer of partial ownership to the next generation, and
  3. equity participation for remaining management.

When they recapitalize a business, PE firms usually acquire a majority (controlling) interest and don’t play a role in day-to-day management. They bring financial acumen, systems and growth capital, sit on the board, and participate as a strategic advisor.  They prefer to retain the existing management team, which often includes the owner. Owners who recapitalize and stay on can achieve material liquidity and maintain control over day-to-day operations. Alignment with the investor is of course very important.

Exit Strategies Group maintains relationships with Private Equity groups and other types of financial buyers across the country and is experienced in both sourcing potential equity partners and negotiating recapitalization transactions that fit our clients’ goals.

Al Statz is the founder and president of Exit Strategies Group. He is based in Sonoma County California. For more information on selling or recapitalizing your company, or to discuss your strategic exit options, contact Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.

How Well Do You Know Your Exit Options?

/in , /by Exit Strategies

You have built a business that provides a strong income and comfortable lifestyle. However, if you are like most business owners you haven’t made the time to know the range of options you have to successfully exit the business and transfer your wealth. The tax, legal, valuation, deal structure, and insurance considerations are many. Even if you had the time, where do you begin?

Before you can evaluate any of these options, you must first decide what your goals are. Are there other owners to consider? If so, are their goals similar or different than yours? What personal and family issues do you want to consider? Are you strictly looking for the best price? Are you tax sensitive? Have charitable intent? Are you financially prepared? Mentally? The earlier you begin planning, the more options you will have at your disposal.

Once you have determined your goals, you can begin to narrow the list of exit options available to you. Do you intend on doing an internal transfer to a key employee or employees? Family member? Is an ESOP a viable alternative? Is your estate plan designed around your desired exit? Are contingencies planned for and protections in place?

Whether you plan to transfer your interest internally or to a third party, knowing how much your business is worth is a great starting point. Internal and external transfers can imply different valuation standards that can render very different values. You want to know these differences before you make a decision. A business valuation will also give you a good idea if the transfer can be financed.

What is your time horizon? More time is better, especially for external sales. Is the business saleable as is? Aspects of your operations may need improvement before you go to market. How do you select an M&A advisor?

The earlier you begin planning your exit, the more options you will have at your disposal.

Achieving a successful business transfer requires a process. An M&A broker/advisor can lead this process and guide and coordinate the professionals required to help you reach your goals. An owner can attempt to lead this process on their own, but it’s not easy. Your time is probably best spent running your business at peak performance. Still, it’s up to you to appoint a competent adviser to guide the process and ensure that your other professional advisors are on board and up to the task.

For a confidential conversation regarding your exit options, contact one of our senior advisors.  

Asset Appraisals May be Needed to Support a Business Valuation

/in , /by Jim Leonhard

I recently valued a number businesses that required the appraisal of certain tangible assets, such as real estate and equipment – in one case its was an extensive library of manuals and maintenance specifications for a service business.  At what point do we look for a appraisal specialist with particular expertise to value such assets?  

The simple answer is, it depends on materiality.  If it is clear that the business enterprise value is well above the net tangible asset value, as evidenced by the market and/or income valuation methods, we may be able to rely upon the owner’s estimates or rough calculations of the market value of tangible assets. The answer can also depend on the intended use and intended users of the business valuation.
When the asset(s) in question have very significant value  that will impact the market and/or income approaches to value, or if one of the asset approach methodologies, such as net book value or liquidation value will be relied upon, we will request that a client obtain a third party appraisal of the asset(s) in question that we can incorporate into our business valuation.
Typical  Situations Where Asset Appraisals are Recommended
  • Real Estate Appraisals
    • the business owns real estate, e.g. for agricultural enterprises or a real estate partnerships
    • the business leases real estate from a related party and we need to ensure the business is paying market rent
  • Equipment appraisals
    • the business is capital intensive
    • it has a large amount of used equipment – making rough value calculations unreliable
  • Unique assets
    • the business has a significant amount of unusual assets that are not common to most organizations
  • Non-operating assets
    • non-operating assets are items that can be removed from the business without affecting business operations, e.g. an airplane owned by a construction business, or a vacation home
For more information about how asset appraisals are used in business valuations, please contact Jim Leonhard, CVA, at 916-800-2716 or jhleonhard@exitstrategiesgroup.com. 

A Pyrrhic Victory

/in /by Don Ross
A Pyrrhic Victory is defined as a victory that is offset by staggering losses, to the extent that the victor incurs losses that are equal to or greater than those of the adversary.  Its origin dates back to Pyrrhus, the king of Epirus (now part of present day Greece) who defeated Roman armies at Asculum in 280 B.C. and suffered such heavy losses of troops and commanders that he was unable to amass new officers and troops to sustain the war effort.
Similarly, Pyrrhic Victories can disrupt and derail negotiations in a business transaction.   Buyers and sellers occasionally lose sight on the ultimate objective – consummation of the deal – and immerse themselves in any number of details. “Sweating the small stuff” can entail financing terms, exclusion of certain assets, retention of employees, seller training or consulting, inventory valuation, lease assignments, condition of leasehold improvements, prorating expenses, covenants not to compete, allocation of asset values: small negotiation battles that are waged and won (and lost), occasionally at the expense of losing the war.
Just as Pyrrhus lost sight of his ultimate objective, the defeat of Rome, so the parties of a business transaction need to vigilantly focus on their motivations and ultimate objectives for buying and selling and the prioritized values of what they expect to receive.  Sellers, for example, may be selling due to burnout, lack of capital, lack of successors, health or retirement. Buyers may be buying to gain greater independence, improve income, synergies, additional revenue streams, or tax avoidance.
Squeezing an extra dollar out of the transaction at every step, may be negotiation points conceded and small battles won, but ultimately may echo Pyrrhus’ famous lament, “one more such victory and we are lost”.

Avoid Seller Let Down

/in /by Don Ross
The “Let Down” is commonly a reflexive response to imminent success of a stated objective.
Recently, in an NBA playoff series between the Los Angeles Clippers and the Houston Rockets , Houston defied the odds by winning the last three games to take the series 4 games to 3.  The pivotal game was game 6 when Houston, down by 19 points with 14:30 remaining, outscored Los Angeles 49 – 18.
The final and deciding game 7 was anticlimactic.  Houston won on Los Angeles’ home court.
Game. Set. Match.  Penthouse for the Rockets; Outhouse for the Clippers.
And therein is a “Let Down”.
Business sellers are susceptible to the same dynamic.  Having resolved to sell and exit the business, and in some cases having progressed to negotiations and due diligence, many business owners prematurely visualize success.  They figuratively break out the champagne while the game still rages on.
They let down.
Sales efforts or service levels decline, the physical appearances of the facility and equipment atrophy, employee morale wanes, etc. The balance sheet and income statement predictably reflect the let down and the buyer’s optimistic view of future earnings becomes clouded.
The solution to this potential pitfall can be attributed to “It aint over til it’s over”, a common expression that owes its origins to:  (1) Kate Smith singing “God Bless America” at a 1969 Philadelphia Flyers Hockey Game, or more likely,  (2) the 10 minute solo sung by Brunnhilde in the closing act of Wagner’s fourteen hour Ring Cycle Opera.  It is a helpful mantra worth repeating throughout the stages of a business sale transaction. It will sustain the spirit and propel the daily work ethic. “Aint over” means eliminating non-performing assets that take up space, maintaining inventories that will sustain or grow sales, adding to the customer base, collecting on aged receivables, and keeping one’s head in the game.
Enterprise value, business marketability and buyer enthusiasm will be maintained and often elevated when the seller continues to operate at a high level. Play it out to the very end, avoid “let down”, and when it’s over and done, there is plenty of time to celebrate . . . off the court.
 
Using an experienced M&A broker to manage the sale process allows owners to focus on running the business at peak performance until the final buzzer. For more information contact Don Ross in our Petaluma, California office at 707-778-2040 or donross@exitstrategiesgroup.com.