Sellers generally desire all-cash transactions; however, oftentimes partial seller financing is necessary in typical middle market company transactions. Furthermore, sellers who demand all-cash deals typically receive a lower purchase price than they would have if the deal were structured differently.
Although buyers may be able to pay all-cash at closing, they often want to structure a deal where the seller has left some portion of the price on the table, either in the form of a note or an earnout. Deferring some of the owner’s remuneration from the transaction will provide leverage in the event that the owner has misrepresented the business. An earnout is a mechanism to provide payment based on future performance. Acquirers like to suggest that, if the business is as it is represented, there should be no problem with this type of payout. The owner’s retort is that he or she knows the business is sound under his or her management but does not know whether the buyer will be as successful in operating the business.
Moreover, the owner has taken the business risk while owning the business; why would he or she continue to be at risk with someone else at the helm? Nevertheless, there are circumstances in which an earnout can be quite useful in recognizing full value and consummating a transaction. For example, suppose that a company had spent three years and vast sums developing a new product and had just launched the product at the time of a sale. A certain value could be arrived at for the current business, and an earnout could be structured to compensate the owner for the effort and expense of developing the new product if and when the sales of the new product materialize. Under this scenario, everyone wins.
The terms of the deal are extremely important to both parties involved in the transaction. Many times the buyers and sellers, and their advisors, are in agreement with all the terms of the transaction, except for the price. Although the variance on price may seem to be a “deal killer,” the price gap can often be resolved so that both parties can move forward to complete the transaction.
Listed below are some suggestions on how to bridge the price gap:
- If the real estate was originally included in the deal, the seller may choose to rent the premise to the acquirer rather than sell it outright. This will decrease the price of the transaction by the value of the real estate. The buyer might also choose to pay higher rent in order to decrease the “goodwill” portion of the sale. The seller may choose to retain the title to certain machinery and equipment and lease it back to the buyer.
- The purchaser can acquire less than 100% of the company initially and have the option to buy the remaining interest in the future. For example, a buyer could purchase 70% of the seller’s stock with an option to acquire an additional 10% a year for three years based on a predetermined formula. The seller will enjoy 30% of the profits plus a multiple of the earnings at the end of the period. The buyer will be able to complete the transaction in a two-step process, making the purchase easier to accomplish. The seller may also have a “put” which will force the buyer to purchase the remaining 30% at some future date.
- A subsidiary can be created for the fastest growing portion of the business being acquired. The buyer and seller can then share 50/50 in the part of the business that was “spun-off” until the original transaction is paid off.
- A royalty can be structured based on revenue, gross margins, EBIT, or EBITDA. This is usually easier to structure than an earnout.
- Certain assets, such as automobiles or non-business-related real estate, can be carved out of the sale to reduce the actual purchase price.
Although the above suggestions will not solve all of the pricing gap problems, they may lead the participants in the necessary direction to resolve them. The ability to structure successful transactions that satisfy both buyer and seller requires an immense amount of time, skill, experience, and most of all – imagination.
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The next 90 days could make or break the futures of business owners trying to navigate the choppy waters of the COVID-19 pandemic, according to Inc. contributor Brian Hamilton. In his April 2020 COVID-19 centered article, “6 Actions to Take in the Next 90 Days to Save Your Business,” Hamilton, Founder of the Brian Hamilton Foundation, outlines six things owners should do now to survive the economic fallout of the COVID-19 pandemic.
Tip #1 Vigorously Control What You Can
“Vigorously control what you can. Vigorously ignore what you can’t control.” You can’t control the economy; instead, you need to focus on what you can control, he says. His view is that there has never been a more important time to focus, “More than ever, you’ll need to go to war with things within your control.” Now is the time to exercise control.
Tip #2 Guard Employee Morale
During tough economic times, employee morale can be a real issue. Significant drops in employee morale can lead to serious problems with your business, which is exactly what you don’t want to see right now. Hamilton notes that you have to be the general that helps his or her troops rise above potential panic.
Tip #3 Preserve Cash
“Right now, your motto should be: Live to fight another day.” The pandemic means that you need to keep expenses down and watch every dollar. No one knows what the next few months, or the next couple of years, could have in store.
Tip #4 Be First in Line
Business owners should be the first in line for government assistance. SBA and other funds are likely to be limited.
Tip #5 Get Back to the Basics
Start with “monomaniacal customer service.” As always, customers, whether existing or new, are the lifeblood of your business. You can’t afford to lose customers now and that’s why you need to have a laser-like focus on customer service.
Tip #6 Pivot your Product or Service
Small changes to your business can open up new streams of revenue. Even if these streams of revenue are comparatively small, they could mean the difference between sink or swim! Try to step back and look at your business with fresh eyes and strive to find ways to offer something new to your customers. Whatever you offer should be based on your existing goods and services and not require a new, large expenditure.
The COVID-19 pandemic is obviously disruptive, but it won’t last forever. Hamilton’s advice of focusing intensely on the next 90 days is sound advice. You won’t regret looking for ways to safeguard your business for the next 3 months.
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The second round of the SBA’s Paycheck Protection Program funding, released Monday April 27, is being distributed by SBA lenders, and is expected to be depleted within just a few days, David Brindley, VP of Small Business Lending at Live Oak Bank, told the GABB in a Zoom meeting on April 28.
Brindley also said the new round of PPP funding is tied to the SBA’s 7(a) loan program, the SBA’s primary program for providing financial assistance to small businesses. The 7(a) program will also be depleted when the PPP runs out of funds, although he anticipated that Congress would approve additional funding in the near future, although “we don’t know when for sure.”
Hear what Brindley had to say at the meeting at this link.
Many other SBA lenders in the GABB told us that they were extremely busy working on PPP loan applications that had been submitted earlier. “For the last month, it has been all hands on deck as everyone in the bank jumped in to help process PPP loans,” Brindley said. Like many other banks, Brindley’s bank “took the approach that we would take care of existing customers first and then open up for new customers.”
His bank temporarily paused most other lending in March to focus on the relief lending through the CARES Act. When the 7A program resumes, Brindley says he expects the SBA to guarantee 90 percent of the loan, as opposed to the 75 percent they have covered in the past. Lenders are going to take a new approach to due diligence, he said. Live Oak looks favorably upon businesses with a strong cash flow and good management.
“We will also require projections from buyers,” Brindley said, to make sure they really understand the cash flow and working capital needs of the business. Also, as part of the CARES Act, the government will make the first 6 months of payments for new SBA loans that close before September 2th.
He ran down a list of potential questions for future SBA loan applicants, including whether the business closed during the quarantine, were customers and suppliers significantly impacted by the shutdown, what disaster funding did the business receive, and why does the buyer think it’s prudent to go forward with a business purchase in the midst of uncertainty.
“We’re going to do even more due diligence than we did before,” Brindley said. “We want to make sure there’s more working capital built into our projects.” Toward that end, his bank — the largest SBA lender in the country — will add additional working capital into loans so that businesses have adequate operating capital in reserve.
“We are open for business right now,” Brindley said. “for historically strong transactions and we are willing to use a common-sense approach to mitigate a Q2 Covid 19-related impact to the business. If we can see that a seller’s revenues are trending back to historic levels and there is sufficient working capital built into the deal structure, we will look at transactions today.”
Attorney and GABB Affiliate Lawrence Domenico, a partner in the law firm of Mozley, Finlayson & Loggins LLP, discussed potential liability as businesses prepare to reopen fully or partially. The Georgia Governor has issued specific guidelines for businesses to safely open, as has the CDC.
“I’ve never said ‘it’s not clear, or I don’t know” so many times in my practice of law as in the last couple of weeks.” Language within the gubernatorial order appears to exempt reopened businesses from liability, but it isn’t clear that will give businesses blanket immunity. If a business misses covering one of the safety items listed in the order, maybe you don’t get protection from liability. Traditional body of common law considers whether an entity acted reasonably, and there is varying advice on that front.
“Every business owner is going to have to decide for themselves what is reasonable,” said Domenico. “I think if you try to follow the CDC guidelines, try to follow the governor’s orders, you will have a pretty good defense, but I’m not going to be able to tell you you’re in the clear no matter what.”
The GABB plans to have weekly Zoom meetings on Tuesdays for updates on aid available during the COVID-19 crisis. Check our blog for information on joining future calls.
It’s anything but business as usual in today’s online meeting environment. Employers should keep in mind that the dynamic between you and your employees may be different when you use video conferencing.
A“business-as-usual” approach to the COVID-19 situation can make an employer look both unnecessarily cold and out of touch with reality, opined Rajshree Agarwal, who is a professor of Strategy and Entrepreneurship, in an April 20th, 2020 Forbes article, “Three Keys to Engaged, Productive Telework Teams.”
How you use telework and video conferencing is, in part, about developing the correct balance. On one hand, you’ll want to acknowledge that the situation is serious and must be addressed. But on the other hand, you don’t want to dwell on the pandemic. After all, not effectively handling the work at hand could undermine your business and cause other problems for both you and your employees.
It is in everyone’s best interest to be smart, safe, and acknowledge the bizarreness of the current situation while striving to achieve business goals. The keyword here is “balance.” Agarwal states that “The combination of empathy and purpose unifies individuals, allowing team members to channel their efforts towards shared objectives and values. This is the best antidote for anxiety.”
From Agarwal’s perspective, there are three keys to making telework effective: communication, socialization, and flexibility. First, there has to be good communication. For example, people can’t simply ignore one another’s emails because they are working virtually. She points out that real-time meetings via Zoom or Skype can eliminate some communication issues, but not all.
The second factor to consider is socialization. As Agarwal points out “Engaged, productive teams also take time to socialize.” Working from home alters the typical modes and methods of socialization, but virtual interactions can be used to help people form and develop their social networks.
In short, socialization doesn’t have to end once telework begins. Used judiciously, socializing, and the bonds it creates between co-workers can still continue.
Agarwal’s third key is flexibility. Flexibility is critical, as all team members must adjust to what, for some, may be a fairly radical restructuring of their day-to-day work experience. Those who haven’t worked virtually before may find adjusting to be quite a challenge. Management should strive to be more flexible during telework caused by the COVID-19 pandemic. Trying to maintain the same top-down approach could prove to be problematic.
It goes without saying that telework presents challenges. However, the challenges it represents are not insurmountable. There are benefits to teleworking, and teams can use it to generate solutions that they might have not reached in the typical work environment.
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Failure is rarely fun. But it is also a key ingredient in success. While painful, there is no doubting the fact that the lessons that come from failure can be powerful teachers that provide life-long lessons and even life-trajectory altering results. But on occasion, not failing could hurt more, especially in the long run.
In her Inc. article, “Why Tons of Failure Is the Key to Success, According to Seth Godin,” author Sonia Thompson, CEO of Thompson Media Group, points out that most people “avoid failure like the plague.” Instead, they spend their time trying to achieve perfection. In the process of adopting this approach, people miss all kinds of opportunities because they are afraid of damaging their egos. Embracing failure is a way to experience many “transformational benefits,” which would never be experienced without the lessons of failure.
Thompson points to the work of best-selling author Seth Godin who has written about how entrepreneurs who fail more often perform at a higher level. According to Godin, “The rule is simple. The person who fails the most will win. If I fail more than you do, I will win. Because in order to keep failing, you’ve got to be good enough to keep playing.” Godin says failure imparts a gift of sorts in that it teaches us how to distinguish between a good idea and a bad idea.
Research supports the notion that if you want a breakthrough idea, you will need to “produce an enormous volume of ideas,” Thompson notes. Obviously, most ideas won’t work, but that isn’t the point. When you work your way through the bad ideas, you get to the winners. Sure, it would be great to have nothing but winners. But life and reality don’t work that way. Failure should be seen more as a path forward than the end of the road.
Getting comfortable with failure, in Thompson’s view, is critically important. She believes entrepreneurs should take steps that make them more comfortable with failure, such as detaching oneself from the results.
It is vital to remember that you are not the work. In contrast, the work is part of an ongoing process. Getting good at something takes time, and there will be failures. For this reason, entrepreneurs simply must embrace a “growth mindset.” Don’t think of failure as failure, but instead as part of a learning process. There is no denying that this approach will make you calmer and that, in turn, may help you make better decisions.
There will be failure in life. There will be problems and there will be obstacles. Much will happen that you can’t predict, manage or control, such as the COVID-19 outbreak. The trick is to focus on what you can control and move forward without a paralyzing fear of failure. Because in the end, failure may be one of your best tools.
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