Fair market value can be used as a way for business owners to “bridge the gap between the valuation they feel they deserve and that which they’re likely to receive.” In an October 2018 Divestopedia article, Dave Kauppi says this increases the chances of a deal actually taking place. Let’s turn our attention to some of the key points in Kauppi’s informative article.
Understanding the Reality of Selling a Business
Few businesses actually sell on their first attempt. Just 10% of businesses that are for sale are actually sold three years later, according to the article. This low percentage underscores the value of working with a business broker. Selling a business can be difficult under even the best of circumstances. The process is complex, and most sellers have never actually sold a business before.
Business owners should have realistic expectations regarding valuation. The market doesn’t care “how much money you need for retirement,” or how much you’ve invested.
Four Points to Consider
Business owners should understand the few business characteristics that will ultimately drive the sale. The four key factors to consider: contractually recurring revenue, durable competitive advantage, growth rate and customer concentration.
There is a lot packed into these four points, but here are a couple of big takeaways. In terms of customer growth, if a large percentage of your business is derived from a single customer, then that is going to be seen as a problem. As Divestopedia points out, if your company is dependent and partially dependent on a single customer, then you can expect a lot of pressure for you, as the business owner, to stick around a lot longer to ensure that this key customer isn’t lost. If intellectual property, such as software, is involved, then things can get even more complex. In the end, determining value in technology-based companies can be more challenging.
In the end, working with a seasoned business broker, one that understands valuation and how best to get there, is a must. You want to receive the best possible price for your business. An experienced business broker will help you understand how to navigate the complex process of determining a price. However, and most importantly, a business broker will help you achieve a fair market value, so that your business doesn’t remain unsold for years.
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Just before retirement is not the best time to prepare your business to sell for an attractive price. Savvy business owners spend years thoughtfully preparing to transition out of business ownership.
UGA Small Business Development Center consultant Daniel McCoy discussed ways that small businesses can prepare for the day when they want to sell their business.
Here’s a link to an audio recording of Mr. McCoy’s remarks.
His PowerPoint Presentation is here. How to Prepare a Business to Sell
The Tuesday, Feb. 26 meeting was preceded by a free networking breakfast sponsored by GABB Board member Kim Eells, Vice President of SBA Lending at Renasant Bank and Susan Kite, Vice President of SBA Lending at Renasant Bank.
Mr. McCoy was an SBA Lender from 2014 to 2017. He joined the University of Georgia Small Business Development Center (SBDC) in September of 2017, after starting his own business of tax preparation and loan packaging. His business experience consists of several years in retail upper management, 19 years in commercial lending, three years in insurance, and four yuears as a small business owner. He holds an MBA in Accounting from Benedictine University, a B.S. in Organizational Management from Covenant College and an Associates degree in Arts from Reinhardt University. His specialties include human resources, financial management, customer service, and business planning and forecasting.
The GABB is the state’s largest and oldest association of professionals who specialize in brokering the purchase and sale of businesses and franchises. Broker members help owners determine the asking price of their business, create marketing plans and strategies for selling their business, identify and qualify buyers, and have the knowledge, experience and skills needed to help maintain the confidential nature of the process. The professionals of GABB relentlessly pursue professional development so they can provide superior, ethical services for all customers and clients. Affiliate members include bankers, lawyers, appraisers, insurers and other professionals who work closely with brokers to help owners and buyers get to the closing table.
For more information about GABB, please contact GABB President Dean Burnette at 912-247-3209 or firstname.lastname@example.org, or GABB Executive Director Diane Loupe at email@example.com or 404-374-3990.Read More
If you want to sell your business, be sure to check the items on this list prepared by Loren Schmerler, CPC, APC the founder and president of Bottom Line Management. Loren is a founding member of the Georgia Association of Business Brokers as well as an experienced business broker.
1. Do you really WANT to sell?. Make sure you really “want” to sell. Ask yourself if you are bored, burned out, ill, have a new child, have aging parents that need your assistance, etc. Or are you simply unhappy with how much money you are making? If this is the case, you do not “need” to sell. All you need is some guidance getting back on the right track.
An experienced business broker can help you refocus and see the forest for the trees. You might find out that once you start making enough money, you do not want to sell after all. But if you conclude that selling is what you want to do regardless of how much money you are making, then you need to proceed to the next step.
2. Fix all exterior problems. After you are 100% sure that you want to sell your business, I suggest that you drive up to your business and determine the following if they apply to you. Are there any holes in your parking lot? If so, fix them before a buyer shows up. Is any of the shrubbery dead or out of control? If so, replace the dead with live shrubbery and make sure that all of them are properly trimmed.
Are the windows clean? If not, get them washed. Is the building exterior clean? If not, get it pressure washed. Does the roof look old or damaged? If so, either get a new roof or replace the bad shingles. Does the building need to be painted? If so, do it. In brief, make sure the “curb appeal” of your business has no obvious and easily correctable issues.
3. Fix interior problems. After you have fixed the exterior issues, it is now time to examine the interior of your business from top to bottom. Start with the ceilings. Are there any water stains from roof leaks? If so, fix the leaks and replace the tiles. Are there any light bulbs that need to be replaced? If so, get on a ladder and put in new and shiny bulbs. Does any of the furniture look ratty? If so, either repair it or replace it.
Are there scrape marks on the walls? If so, have them repainted. How about your employees’ desks? Do they look organized or out of control? Insist that your employees maintain neat and orderly working areas. Are the rest rooms an embarrassment? If so, clean them up and keep them clean. Are they handicap accessible? If not, make arrangements to bring them up to code. Look at your office with a keen eye. Remember that when the buyer tours your business, you want them to visualize becoming the owner and being proud to do so.
4. Update job descriptions. After you have fixed the interior “physical” issues, it is now time to look at job descriptions, policies and procedures. First and foremost, you need to draft your own job description that covers what you do daily, weekly, monthly, quarterly, semi-annually and annually. It should be very detailed, and I recommend having an assistant help you prepare this. Make certain you have someone proof read the job description and correct any grammar or spelling errors.
After you are satisfied with your job description, ask all your employees to do the same. This process has several benefits. First, your employees will see how much they actually do. Second, it will give you a chance to see if they are doing what you think they are doing. Third, it will tell you whether they are doing what they should be doing. When all the job descriptions are complete and typed, you will place them in a 3-hole binder labeled “Job Descriptions.” Then you will move on to policies and procedures.
5. Update policies, procedures and controls. Now that you know what you do and what all your employees do, it’s time for policies, procedures and controls. With regard to employees, you need to cover hiring, evaluations, probations, vacation, sick days, holidays, etc. If your company has positions where employees must have background checks, drug tests, reference checks, etc., you need to speak with a labor attorney to dot all your i’s and cross all your t’s.
When asking a prospective employee to complete an application, it is best to stay away from questions that deal with pregnancy, military status, race, national origin, etc. If you decide to hire an employee, make sure they complete a W-4 form, an I-9 form and the appropriate state form. Should your labor pool have a large number of workers who are not citizens, you will need to consult with a labor attorney to insure you do not hire undocumented immigrants. Severe penalties can result. With regard to vacations and sick pay, it is best to let them accrue a day or less for each month worked.
6. Update Employee Evaluations It is very important to stay current with all employee evaluations. Employee morale can be devastated if reviews are delayed or not given at all. Plus, it is grossly unfair to ask a new owner to review employees with whom he or she has never interacted. A prospective owner will most certainly ask about employee turnover and employee tenure. But one question that is rarely or ever asked is whether you have any “problem” employees.
That brings up the issue of probation. Probation can be a way to successfully rehabilitate a wayward employee, or it can be the final process to document a termination in such a manner that a legal challenge to the termination will not prevail. When an employee is put on probation, the leash should be very short. The employee must know exactly what behavior will be tolerated and what behavior will lead to immediate termination. Interestingly enough, putting a person on probation sometimes leads to an outstanding employee.
7. Update Financial Statements. Nothing frustrates a prospective purchaser more than asking for current financial statements and tax returns and being told that they are not available. Worse yet is being told that a date cannot given for when they will become available. Talk about red flags. How can you run a successful business without current and accurate financial statements? The short answer is that you can’t. As a business owner, you must anticipate the purchaser’s questions regarding all financial matters and have current statements to defend your answers.
When I say financial statements, most people think of a profit and loss statement (also called the income statement.) But the balance sheet is equally important. The combination of these statements tells you whether a business is losing money and gives you a picture of the company’s financial health. There are certain subtleties to keep in mind. For instance, a high level of inventory can indicate several different things. Maybe much of it is obsolete or slow moving. It can be a purchasing mistake that will hurt a business or a brilliant purchase at a great cost. Only with thorough investigation will you determine the true answer.
8. Put Tax Documents in Order. Have you filed all your tax returns? Specifically, I mean monthly sales tax, monthly state withholding, quarterly payroll taxes, quarterly state unemployment insurance, annual unemployment insurance, annual ad valorem, annual corporate tax, annual state tax and any local, county, city or other special taxes. It is absolutely critical that you are current with all these returns to instill confidence in the prospective purchaser. But when it comes to sales tax, if you have not filed and paid all returns, there are very negative consequences. The penalties and interest are exorbitant, but in addition, unpaid sales taxes become the responsibility of the new owner. I was once at the closing table waiting for the checks to be written when the Georgia Department of Revenue called and told the closing attorney that the seller had not paid sales tax for the last 3 years. Upon hearing this, the buyer stood up and left the closing. Needless to say, the company was not sold and eventually shut its doors.
While we are on the subject of taxes, you need to have a heart to heart talk with your CPA regarding taxes when you sell your business. Should the sale be an asset sale? Should the sale be a stock sale? There are bona fide reasons for each type sale. An asset sale limits your exposure for past liabilities, errors and omissions. An example would be a product liability claim for a structure or machine that becomes faulty. A stock sale allows for ease of transferring contracts presently in force. A stock sale is also critical in the medical industry when a Medicare number might be involved. But there is another angle. The stock sale allows for the company to be sold for less money while still letting the owner realize the same or greater after tax position.
9. Prepare for Due Diligence. What is due diligence and how do you prepare for it? Due diligence is the process where the buyer tries to validate everything you have represented both verbally and in writing. The buyer will scrutinize your financial records, your legal records, your employment records, etc. With financial records the process starts with the tax returns, goes backwards to the financial statements, goes backwards to the general ledger, goes backwards to all source documents that include bank statements, deposit slips, check stubs, cancelled checks, vendor invoices, client/customer statements, etc.
To prepare for the financial side of due diligence you should assemble tax returns, financial statements, general ledgers, bank statements, deposit slips, check stubs, cancelled checks, vendor invoices, client/customer statements, etc. for the last 3 years. Tax returns, financial statements and related items should be in date order from the most current to the oldest. Vendor invoices and client/customer statements should be in alphabetical order first and then in date order for each vendor or client/customer. Employment records should be filed alphabetically, but you better make sure you have a W-4 form, an I-9 form and a state form (G-4 for Georgia) for every employee.
10. Update all Legal Documents. There is a legal side to the due diligence process as well. Are you a valid legal entity such as a partnership, corporation or LLC? Is your annual filing of officers and registered agent current? Have you maintained your Corporate Minutes and held annual Board of Directors and Shareholders meetings? Do you have outstanding liens for debts that have been paid off? If so, you need to contact the creditor and ask them to remove them. If this is not done, the closing attorney will have to withhold funds in escrow until the actual status can be determined.
Have you paid all payroll taxes? If not, you may have undermined a possible sale. Have you paid all sales tax that is due? If not, I can tell you from personal experience that this can demolish a probable sale. Is there any outstanding litigation that affects you as either a plaintiff or a defendant? Are all your employees legal, and do you have proof? Are there any patents, trademarks or service marks that need to be protected? If real estate is involved, do you have a deed to prove ownership? Do you have a plat that clearly shows boundaries of the property? Do you have any contracts with vendors or clients/customers? Is your company minority owned, and if so, how would a change in ownership affect your business?
We have covered quite a lot of ground in these ten tips. I wish you well when you pursue an exit strategy.
This post was by Loren Marc Schmerler, CPC, APC the founder and president of Bottom Line Management.
Business appraisals are not one-dimensional. In fact, a good business appraisal is one that factors in a wide range of variables in order to achieve an accurate result. Indisputable records ranging from comparables and projections to EBITDA multiples, discount rates and a good deal more are all factored in.
While an appraiser may feel that he or she has all the information necessary, it is still possible they have overlooked key information. Business appraisers must understand the purpose of their appraisal before beginning the process. All too often appraisers are unaware of important additional factors and considerations that could enhance or even devalue a business’s worth.
There Can Be Unwritten Value
Value isn’t always “black and white.” Instead, many factors can determine value. Prospective buyers may be looking at such variables as profitability, depth of management and market share, but there may be more that determine value.
Some other factors to consider when determining value: How much market competition is there? Does the business have potential beyond its current niche? Are there a variety of vendors? Does the company have easy access to its target audience? What is the company’s competitive advantage? Is pricing in line with the demographic served? These are just some of the key questions that you’ll want to consider when evaluating a company.
There are Ways to Increase Both Valuation and Success
Successful businesses didn’t get that way by accident. A successful business is one that is customer focused and has company-wide values. Brian Tracy’s excellent book The 100 Absolutely Unbreakable Laws of Business notes that it is critical for businesses to have a company-wide focus on three key pillars: marketing, sales and revenue generation. Tracy also points out that trends can be seen as the single most vital factor and bottom-line contributor to any company’s success and, ultimately, valuation. For 2018 and beyond, projected trends include an increase in video marketing, the use of crowdfunding as a means of product validation, the increasing use of diverse payment options, increasing use of Artificial Intelligence, the influence of the gig economy, and more.
No Replacement for Understanding Trends
If a company doesn’t understand trends, then it can’t understand both the market as it stands and as it may be tomorrow. Savvy business owners understand today’s trends and strive to capitalize on the mistakes of their competitors while simultaneously learning from their competitors’ successes.
Tracy accurately states that while there are many variables in determining value, finding and retaining the best people is absolutely essential. One of the greatest assets that any company has is, in the end, its people.
Professional business brokers understand the nuances of business valuation and can help a business owner find value where they might not realize it existed.
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Business Buyers and Sellers and their Brokers may face an unusual stall on closing their deals due to the federal government shut down.
GABB President Dean Burnette says, “I’m in the final stages of closing a deal right now. Fortunately, our SBA Lender got an authorization number the night before the shut down so we will receive our funds.”
The Small Business Administration halted its program supporting 7(a) loans for working capital and 504 loans for commercial properties on December 22, the day the government shutdown began, The Washington Post reports. Usually, the SBA manages about 200 loans for working capital and 120 loans for commercial properties per day, amounting to roughly $200 million worth of loans every day for small and midsize businesses, according to a report on Inc. Currently, only funds for disaster-related loans remain active. The Post also reported that Linda McMahon, head of the Small Business Administration, has plans in place to expedite loans as soon as the government opens again, citing and unnamed source.
SBA Loans usually take at least four weeks to process, Burnette said. “Chances are if you are just at the stage of applying for the loan, and you’re working with a Preferred SBA Lender, you may not experience any delay.”
Susan J. Kite, vice president and SBA Business Development Officer of Renasant Bank, said an experienced Preferred Lender (PLP) does not need to go to the SBA until just prior to closing to get a loan number. Most lenders went ahead and got the loan numbers for their approved loans prior to the shutdown, so those loans will not be affected, said Kite, a GABB affiliate member. It is not unusual to take 60 to 90 days for an SBA request to be processed and closed. Depending on where your deal is on that spectrum, you may or may not be delayed, Kite said.
Claudia Wilson, Senior Vice President of SBA Lending for First Landmark Bank, said it’s “business as usual, unless you need a SBA loan number (SBA approval) to close a loan. We are accepting applications, can process them and prepare them for closing.”
Suggestions from Kite for Business Brokers during the shutdown:
- Work with an experienced PLP lender.
- Set realistic expectations with the Buyer and Seller as to when their deal would normally close and the implications if the shutdown drags on past that date.
- Let Sellers and Buyers know that they will need to keep their financial information updated, especially in regards to Seller and Buyer’s Affiliate interim business financials and Buyer personal financials.
- If a short-term loan is mandatory, work with your lender on the best alternative – since this changes the SBA loan to a debt refinance with different rules.
GABB member Leigh Milton, senior vice president of CenterState Bank, said brokers should “treat this shutdown like you still have a hard closing date. Moving towards the goal of getting all the docs ready to close always seems to preserve momentum. Be ready to go when this turns around.”
- prepare the buyer and seller to get updates sent dated within the last 60-90 days if possible to give yourself some cushion.
- While you can close with an SBA loan number issued prior to the shutdown, if there are any changes or corrections to the authorization, you will probably have to wait until the shutdown ends to get these changes approved and close. PLP changes made under the guidance of the “loan matrix” are allowed.
- Don’t forget to finalize items like life insurance during the delay as these items can hold up closings and but having them in place takes them off the checklist. Work your checklist and it should pay off when things finally get back to “normal”!
Wilson said a “bridge” or “interim” loan may be made available by PLP lenders only but it is up to the lender’s discretion. “I think this would be permitted under limited circumstances since the loan would be made at the lender’s risk of not receiving the SBA guaranty. The lender would have 90 days from approval of the interim loan to obtain a SBA loan number,” Wilson said.
“Although the Government shutdown is certainly not ideal, for those of us who have been in SBA lending for a while, we have weathered this storm before,” said David K. Brindley, Vice President, Business Development Officer of SBA Lending at United Community Bank. “So my advice to lenders, Brokers, Buyers and Sellers is to stay calm, don’t panic, hang in there and keep moving forward with business as usual.”