“As shocking as it may sound, I believe that most owners of middle market private companies do not really know the value of their company and what it takes to create greater value in their company … Oh sure, the owner tracks sales and earnings on a regular basis, but there is much more to creating company value than just sales and earnings”
Russ Robb, Editor, M&A Today
Creating value in the privately held company makes sense whether the owner is considering selling the business, plans on continuing to operate the business, or hopes to have the company remain in the family. (It is interesting to note that, of the businesses held within the family, only about 30 percent survive the second generation, 11 percent survive the third generation and only 3 percent survive the fourth generation and beyond).
Building value in a company should focus on the following six components:
- the industry
- the management
- products or services
- comparative benchmarks
The Industry – It is difficult, if not impossible, to build value if the business is in a stagnating industry. One advantage of privately held firms is their ability to shift gears and go into a different direction. One firm, for example, that made high-volume, low-end canoes shifted to low-volume, high-end lightweight canoes and kayaks to meet new market demands. This saved the company.
The Management – Building depth in management and creating a succession plan also builds value. Key employees should have employment contracts and sign non-compete agreements. In situations where there are partners, “buy-sell” agreements should be executed. These arrangements contribute to value.
Products or Services– A single product or service does not build value. However, if additional or companion products or services can be created, especially if they are non-competitive in price with the primary product or service – then value can be created.
Customers – A broad customer base that is national or international is the key to increasing value. Localized distribution focused on one or two customers will subtract from value.
Competitors – Being a market leader adds significantly to value, as does a lack of competition.
Comparative Benchmarks – Benchmarks can be used to measure a company against its peers. The better the results, the greater the value of the company.
Three keys to adding value to a company are: building a top management team coupled with a loyal work force; strategies that are flexible and therefore can be changed in mid-stream; and surrounding the owner/CEO with top advisors and professionals.
10 Things a Business Broker Needs to Know
Presented by Susan Kite, VP, SBA Business Development Officer
6065 Roswell Road, Suite 600
Atlanta GA 30328
1. We can’t process your deal until we have:
1. Last 3 years Business Tax Returns
2. Signed 4506 T
3. Recent Interim Business Financial Statement (not > 45 days old)
4. Aging of Accounts Receivable
5. Aging of Accounts Payable
6. List of Assets being sold with Serial Numbers for items valued > $5K
1. Last 3 years Personal Tax Returns for all 20% or more owners
2. Last 3 years Business Tax Returns for all affiliate businesses
3. Personal Financial Statements
4. Business Plan with Financial Projections
5. SBA Application Form
2. Your buyer needs cash in the deal
• Amount needed is up to the lender (typically 10% minimum)
• 25% is required if amount of goodwill financed is over $500K
• Can be shared with Seller in form of Standby Note
• Equity can be buyer’s cash on hand, a gift supported by a gift letter, personal loan or heloc, or assets other than cash
• Equity must be supported by 2 months of statements, or outside appraisal
3. Your buyer needs a well thought out Business Plan
A good resource is the U.S. Small Business Administration’s guide to writing a business plan.
The SBA also provides a good template for writing a business plan.
4. The Business Plan must include financial projections
• On a monthly basis for the first year, and
• On an annual basis for years 1 – 3
• Must include Notes as to how the numbers were arrived
5. Your buyer must clearly articulate how their background and experience will directly translate into successful ownership of the particular business they are buying.
6. Buyer cannot be incarcerated, on probation, parole, under indictment for a felony or a crime of moral turpitude, or who are presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction.
7. Buyers must be lawfully in the U.S.
8. For loans in excess of $350,000, SBA requires that the lender collateralize the loan to the maximum extent possible up to the loan amount. If fixed assets do not fully secure the loan, the lender must take available equity in the personal real estate of the principals as collateral.
9. Seller should be prepared to take back a Note
• Generally strengthens the deal
• Helps compensate for collateral shortfall
• May be needed for equity; if so, SBA counts it as equity if it is a
* Standby Note with no payments for the life of the SBA loan
* Standby Note with interest-only payments IF the historic business cash flow shows debt service coverage
* Standby Note with no payments for the first 2 years IF used as part of the 25% equity required when goodwill is over $500K
10. If the amount of goodwill financed by lender and seller is over $250K, a professional business valuation must be performed.
VP, SBA Business Development Officer
6065 Roswell Road, Suite 600
Atlanta GA 30328
Visit us at: www.sbaloansatlanta.com
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