Georgia has been ranked the top state in the nation for business for the past five years by at least two business ranking companies, according to Emily Poole, metro Atlanta project manager for the Georgia Department of Economic Development.
Poole spoke to the Georgia Association of Business Brokers on June 25 at their weekly meeting. Site Selection, an internationally circulated business publication covering corporate real estate and economic development, ranked Georgia tops in the nation for business from 2013 through 2018. Area Development, a leading executive magazine covering corporate site selection and relocation, ranked Georgia tops in the nation from 2014-2018, Poole said.
In her presentation “Georgia: A Profile in Economic Development,” Ms. Poole described how her department works to develop business in Georgia, how they track trends and how varying factors converge to make local projects happen. The GABB is the state’s largest association of professionals dedicated to buying and selling businesses and franchises.
Among the items that make the Peach State favorable for business:
- Unchanged 6% corporate income tax rate for over 50 years; lowered to 5.75% effective January 1, 2019.
- Consistent AAA credit rating from all three credit agencies for the past 20 years
- First Southeastern state to adopt single-factor apportionment
- Certain tax credits applicable to payroll withholding
- Top 10 for lowest effective tax rate
Georgia many economic incentive programs include job tax credits, a port tax credit bonus, a quality jobs tax credit and mega project tax credits. The state also has discretionary grants for land acquisition, site preparation, building construction and equipment costs. Community incentives include the potential for property tax abatement, buying land at a reduced cost, waivers of permitting fees, site preparation and cash grants.
The Georgia Association of Business Brokers meets at conference room hosted by the Georgia Association of Realtors at 6065 Barfield Road, Sandy Springs, GA, 30328. The monthly GABB meeting is free and open to the public and is preceded at 9:45 a.m. by a free light breakfast and networking session. Thanks to Christopher J. Cowart, CFP®, CTFA, CRPC®, Vice President, Private Wealth Management for SunTrust Bank for sponsoring the meeting. The meeting will last from about 10:30 to somewhere between 11:30 and noon. Please fill out the form below if you are not a GABB member but wish to attend our meeting.
Emily Poole serves as the Region 3 (Metro Atlanta) Project Manager for the Georgia Department of Economic Development. Prior to joining the Department, Emily worked for the City of Fayetteville as their Director of Economic Development, as well as the Fayette County Development Authority as Vice President of Economic Development.
Awarded Fayette County Young Professional of the Year for 2011, Emily has an impressive record of community service and partnership. The 2012-2013 President of Young Professionals of Fayette County, Emily has served on the board of the Fayette Chamber of Commerce and Main Street Fayetteville. Currently, she serves on the Board of Directors for Bloom, AV Pride, and Fayette Senior Services. Additionally, she is a 2013 graduate of the Atlanta Regional Commission’s Regional Leadership Institute, and a 2014 graduate of Leadership Fayette.
A native of Fayette County, she graduated from McIntosh High School in Peachtree City. She received a Bachelor’s degree in Psychology & Human Services and an MBA in International Business from Clayton State University where she was recognized with the “MBA Service & Leadership” Award for the Class of 2016.
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. 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.
Business Valuation Theory and Practice – Part Two: Hidden in Plain Sight – Determining Seller’s Discretionary Earnings
Disclaimer: This article and the accompanying slide deck are for educational purposes only. Nothing contained herein can be used against me in a litigation or other adversarial setting. Examples have been changed to protect the innocent (and not so innocent).
The precise definition of “Seller’s Discretionary Earnings” can vary from one database to another – and when I say “database” I’m talking about transaction databases, such as ValuSource (formerly IBA), BVR Stats (formerly Pratt’s), BizComps, etc. The very terms themselves can also vary, but the concept they’re after is similar – trying to determine the total economic benefits that flow to the owner of the business.
It’s also important to note that a business appraiser typically looks at “value” from the perspective of “fair market value,” which calls for the perspective of a “financial buyer” – a neutral party who’s just looking for a return on investment. This is actually rare in main street and small business deals – most of which involve owner-operators – but it’s the artificial way business appraisers have been taught to evaluate the fair market value of a business.
When it comes to small and midsize companies, financial statements have been known on occasion to stray a bit from standard accounting principles and practices. One of the more common areas where reported expenses tend to vary from actual ones (or, for that matter, from industry standards) is officers’ compensation. There are some legitimate reasons for these variations, but there are also some questionable ones. In either event, the shifting of corporate revenues to the compensation of owner-officers of a small company can significantly impact the cash flow numbers, and thus the perceived value of the company.
Often, owners will pay themselves a salary that’s lower than industry standards and take the rest of the revenues in pass-through income, which of course has the benefit of lowering personal taxes since they only pay ordinary income tax on the pass-through income, whereas the salary is also subject to Social Security and Medicare taxes.
Management usually determines compensation of owner-officers of a corporation from a tax-related standpoint. This means that if there are excess funds available at the end of the year, management might increase payouts in order to reduce the corporation’s taxable income to a very small figure. Also, management may conflate salaries with dividends, paying compensation as a return on the owner-officers’ initial investments in the company.
Other benefits could be considered to be part of a standard compensation package that might need to be offered to any candidate for the job, but they are still benefits that flow to the owner. Also, distributions or dividends may or may not need to be added back, depending on how they’re reported.
Owners can start getting a little testy when you push back against all the “benefits” they take out, so you have to approach this topic calmly and dispassionately, not accusatorily.
Practices that blur the line between legitimate and questionable compensation figures may include paying “salaries” of others, such as members of the owner’s family who contribute relatively little to the business in comparison to the compensation they receive (e.g., somehow Junior is on the payroll as a full-time employee even though he’s a sophomore at UGA). Other questionable practices include the payment of excessive compensation to related members of the board of directors, and corporate transactions with relatives of the owner-officer.
Owner’s perquisites in such forms as personal or family automobiles charged as a business expense (i.e., the “company Land Rovers”), travel and entertainment expenses that are at least partly personal (i.e., the “company board meeting in the Caribbean”), and personal insurance premiums charged to the business are also common tax-reducing aspects of income statements.
Once while out on a site inspection of a warehouse distribution facility, I asked the President whether there were any other significant assets that I had not seen. “Well,” replied the official, “there’s the boat around back.” Upon further inquiry, I discovered that this was a “company boat,” used by the boss/owner-officer to take his best clients out fishing in the Gulf of Mexico once a year. Fair enough, you might think. However, the owner’s family and friends also used this boat on a consistent basis for the other 51 weekends out of the year!
Audio of Dan Browning’s Presentation on Discretionay Earnings at the 2019 GABB Spring Conference
Dan Browning’s professional designations
- Master Analyst in Financial Forensics (MAFF) from the National Association of Certified Valuators and Analysts, originally awarded August 1999
- Accredited in Business Appraisal Review (ABAR) from the National Association of Certified Valuators and Analysts, originally awarded March 2010
- Georgia Association of Business Brokers (Affiliate Member)
- State Bar of Georgia (Active Member; Eminent Domain and Nonprofit Law Section Memberships)
- Editorial Board, Business Appraisal Practice (IBA Journal) 2013-2015
The IBBA and M&A Source Market Pulse Survey Report for the fourth quarter of 2018 has a range of interesting insights. The survey’s purpose is to provide an “accurate understanding of market conditions for businesses being sold in Main Street (values $0-$2MM) and the Lower Middle Market (values $2MM-$50MM). This national survey was designed as a tool for business owners and their advisors and has the support of both the Pepperdine Private Capital Markets Projects and the Pepperdine Graziadio Business School.
One of the most striking facts to leap out of the report is the fact that a full one-third of advisors fully expect the strong market to end this year. Overall, advisors are not optimistic that the current climate will continue through 2020. In fact, advisors are encouraging sellers to consider placing their businesses on the market now, while the market is still strong. This is according to Craig Everett, PhD and Assistant Professor of Finance and Director of the Pepperdine Private Capital Markets Project.
One fact from the report that could be overlooked is that only a mere 8% of advisors expect the current climate to last for 48 months or more. Additionally, only 9% believe that the current climate will last between 24 to 48 months. Perhaps most striking of all is the fact that 60% of advisors feel that the current climate will end within the next two years.
Business owners who are considering selling should be advised that almost two-thirds of advisors now feel that there will be a significant shift in the next two years. Considering that it can take a year or more to sell a business, business owners would be wise to consider this important fact.
The report sites Neal Isaacs, Owner of VR Business Brokers of the Triangle who states, “Deals are taking longer in due diligence as buyers work hard to validate their investment and make sure that what they’re buying is worth the premium price today’s sellers are commanding.”
So, is now the time to sell? Many experts feel that it is possible to lose a sizable amount of value if one waits too long to sell. Even just a few months can make a huge difference in terms of perceived value and the ultimate sales price. Working with a proven business broker is a key way to ensure that you are selling at the right time and secure the best possible price.
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Where your money is concerned, myths can do damage. Tammie Miller, Managing Director of TKO Miller, explored five big M&A myths that can get you in trouble in a recent Divestopedia article, Crazy M&A Myths You Need to Stop Believing Now. Miller, who has more than 20 years of investment banking experience, says many of these myths are believed by CEOs despite having zero basis in reality.
Myth 1: Negotiating is Done After You Sign the LOI
The letter of intention is, of course, important. However, this is by no means the end of the negotiations and it is potentially dangerous to think otherwise. The negotiations are not concluded until there is a purchasing agreement in place. As Miller points out, there is a great deal that can go wrong during the due diligence process. For this reason, it is important to not see the LOI as the “end of the road.”
Myth 2: You Must Assume Seller Debt
Yyou don’t have to take a company’s debt as part of the purchase price, Miller says. Miller says her clients only “take seller paper when that debt bridges a big discrepancy in valuation.” She and other business brokers often recommend against seller paper “because it rarely comes with the appropriate protections professional debt holders (like banks) require.”
Myth 3: Everyone Who Makes an Offer Can Afford To
The idea that everyone who makes an offer has the money to follow through is, unfortunately, simply not true. Often people will make offers without securing the money to actually buy the business. Not only does it waste everyone’s time, it can derail your progress in selling your business. If you are not careful, it could actually prevent you from finding a qualified buyer. Check out any offers with an investment banker or trusted advisor.
Myth 4: I Can Sell Without a Deal Team
Somet sellers think they don’t need a deal team in order to sell their business. While it may be possible to sell your business without the assistance of an experienced M&A attorney or business broker, the odds are excellent that doing so will come at a price. Miller says working with an investment banker or business broker can add, on average, 20% more transaction value!
Additionally, there are other dangers in not having a deal team in place. A business broker can handle many of the time-consuming aspects of selling a business, so that you can keep running your business. It is not uncommon for business owners to get stretched too thin while trying to both run and sell a business and this can ultimately harm its value.
Myth 5: You Must Sell Your Entire Business
True, most buyers will want to buy 100% of a business, but a minority ownership position is still an option. There are many reasons to consider selling a minority stake, so don’t assume that selling your business is an “all or nothing” affair.
Ultimately, Miller lays out an exceptional case for the importance of working with business brokers when selling or buying a business. Business brokers can help you avoid myths. In the end, they know the lay of the land. To find a list of Georgia business brokers, visit the GABB directory.
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ATLANTA–The U.S. economy is transitioning to a new growth path and production-level shocks in the system can derail its momentum, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s Robinson College of Business.
One shock, the indefinite grounding of all Boeing 737 MAX planes, is domestic in nature and bad news for parts suppliers, especially in the face of already weakened corporate capital expenditures over the past six months. The other shock, stress on the world oil supply from geopolitical issues (warlord activity in Libya, unrest in Venezuela, U.S. sanctions on Iranian oil exports), is global.
“Shocks become a problem when the economy transitions to a new equilibrium, as it is now,” Dhawan wrote in his “Forecast of the Nation” released May 22, 2019.
2018’s strong growth rate was set in motion with the Tax Cuts and Jobs Acts of 2017, which, Dhawan said, “provided a type of fiscal stimulus, a positive change in the investment climate and job growth one-third higher in the first half of 2018 than the normal monthly job creation pace of 2017.”
The boost to investment spending petered out in the second half of 2018 because of numerous factors, chiefly stock market volatility from trade skirmishes and softening global growth. But other factors changed as well. The Federal Reserve undertook four rate hikes in 2018 but has paused further action since December. The length of the pause, and whether the Fed’s next action is a hike or a cut, will depend on how uneventfully the economy transitions to its new growth path. So far, the transition has been more eventful than not.
Retail sales were hit hard by a steep decline in the stock market. After growing 6.1 percent in the second quarter of 2018, retail sales moderated to just 1.0 percent by the fourth quarter.
As a result, “the positive income effect from rising job growth got wiped out by negative wealth effects emanating from stock market carnage,” the forecaster said.
Dhawan expects the Fed to begin rate cuts in December 2019, with a total of three by mid-2020.
As for tariffs on China, Dhawan said “The immediate impact is minor. Future impacts, especially reduced corporate desire for investment, will not be apparent for some time.”
Highlights from the Economic Forecasting Center’s National Report
- GDP growth of 2.9 percent in 2018 will moderate to 2.6 percent in 2019, moderating further to 1.9 percent growth in 2020 and 2021.
- Investment growth will moderate from 6.9 percent in 2018 to 3.7 percent in 2019, then to 3.4 percent in 2020 and rise to 3.6 in 2021. Monthly job gains will moderate to 179,100 in 2019, drop to 121,000 in 2020 and gain a similar 129,900 jobs in 2021.
- Housing starts will average 1.221 million in 2019, 1.239 million in 2020 and 1.262 million in 2021. Vehicle sales will be 16.5 million in 2019, 16.0 million in 2020 and 15.9 million in 2021.
- Even in the face of expected Fed rate cuts, the 10-year bond rate will average 2.7 percent in 2019, rise to 2.9 percent in 2020 and rise further to average 3.3 percent in 2021.