The biggest mistake made by buyers is not seeking professional representation and guidance before closing the purchase transaction. Without an experienced broker or attorney on their side, a buyer is prone to making numerous mistakes, some of which can jeopardize the viability of the business.
Even in those transactions that involved a business escrow and SBA financing, I have seen disputes and even litigation between buyers and sellers result from the buyer and seller leaving significant terms “to be determined” after closing, or failing to address significant legal issues prior to closing. For example, buyers and sellers often agree that the seller will providing consulting services to the buyer after closing, but some buyers and sellers close escrow before agreeing to the details of such an arrangement.
Once the seller has pocketed the sales proceeds, he has little reason to negotiate such an arrangement on terms favorable to the buyer. With respect to legal issues, buyers also occasionally fail to obtain an assignment of all of the seller’s rights under important contracts, including leases, prior to closing. Landlords, vendors, or customers operating under contracts with the seller may, under some circumstances, refuse to do business with the buyer, and this can be fatal to a business.
I asked other business brokers, advisors and intermediaries what they thought about this, and here are some of their responses:Read More
Accountants routinely assist business owners to help accomplish the goal of minimizing taxes. But, to truly understand the value of the business and accurately project future cash flow, it is important to look beyond the tax returns to realize how the money is being spent.
The COVID-19 pandemic is going to affect the valuation of businesses, and professionals are likely to take into account a wider number of factors when determining the fair market value of a business.
That’s what two business valuation experts told the Georgia Association of Business Brokers in a conference call on Tuesday, May 26. Dan Browning is the founder and President of DB Consulting, Inc. and David H. Hern, CPA/ABV, ASA, CEPA, a financial analyst with Sofer Advisors spoke to the GABB online. View the conference online here.
“The biggest issue is uncertainty, which heightens the risk, and higher risk leads to lower value,” Browning said. People who assign values to businesses are, by their nature, trying to predict future business conditions, which is tricky anytime, but particularly now. While many businesses have suffered, some businesses “have gone gangbusters,” Browning said. The cost of capital has actually gone down for some businesses, specifically those that have been able to obtain SBA-backed assistance in the form of grants or low-interest loans.
However, some valuation clients are “taking advantage of uncertainty,” Hern said. Some clients are using this time to “do tricky estate planning, issue equity grants, possibly get values frozen below normal,” he said.
If a business valuation was triggered before the onset of the pandemic in the US, some will argue it’s a subsequent event, and should not affect the pre-crisis value. Browning said he has started including an appendix, a disclaimer, calling COVID-19 a subsequent event, which didn’t affect value as of the valuation date.
Browning shared a timeline from respected business valuation expert Jim Hitchner who tracks the impact of the virus on various markets.
Hern shared a Sofer analysis of the mobility of the U.S. Market Mobility of US Market Sofer document
Restaurants have been seriously impacted by the crisis, and many are trying to decide whether it’s worth reopening. Some, like pizza restaurants, have adapted better to a takeout model.
Restaurant broker Dominique Maddox said many of his clients are opting not to reopen and are trying to sell their assets and get out from a multi-year lease. Pizza concepts were able to keep going strong, Maddox said.
Hern cited three approaches to business valuation: Cost Approach, in which the value of the business is equal to their assets minus liabilities. The Market Approach determines the value of a business based on a multiple and a financial metric. The Income Approach sets the value at cash flow divided by risk.
The methods skew towards tangible values during a recession, and during bull economy tends to more intangible values. Hern says he’s been running a variety of scenarios taking into account whether the economic recovery may be V-shaped, U-shaped or something else. Browning predicted a W-shaped recovery, with ups and downs.
Businesses may be getting valuations that specify a range of values instead of a single value, Browning said.
“It’s important not to get too negative,” Browning said. “There is a going to be a recovery, there is going to be coming out of all of this.” The recovery may be bumpy, but it will come.
Hern is recommending that business owners prepare their businesses to be in the best shape for the future, fixing problems. You can amplify value by reducing the customer concentration, reducing debt, improving their competitive position, improving staff depth and retention, etc.
“Companies that have fixed these types of issues will sell for better value,” Hern said.
Hern said he will be looking at vendor concentration in the future when valuing a business.
“Doing business is going to be more expensive going forward,” said Browning. Businesses are going to have to buy extra cleaning supplies, extra protective gear, more training of employees.
Hern’s presentation: GABB Sofer
Dan Browning is the founder and President of DB Consulting, Inc. His credentials include:
- 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
- University of Notre Dame, Master of Arts (Government), January 1995
- Emory University School of Law, Juris Doctor, May 1992
- Emory University, Bachelor of Arts, May 1985; Phi Beta Kappa
David H. Hern, CPA/ABV, ASA, CEPA, is a highly qualified financial analyst with Sofer Advisors.He has exceptional credentials in determining the true, comprehensive value of an organization. In addition, he has something even more rare: a proven ability to simply and clearly communicate analysis to boards of directors, legal and financial advisors, Company management (CEOs, CFOs, controllers, etc.) and private equity portfolio managers. Mr. Hern offers litigation assistance, estate and tax planning, and business enterprise valuations for various privately-held and public companies. He has been recognized for enabling organizations to determine their enterprise and equity value for a variety of situations
- Georgia Institute of Technology, Scheller College of Business, Atlanta GA. Masters of Business Administration, Finance emphasis.
- Georgia Institute of Technology, Scheller College of Business, Atlanta, GA. Bachelors of Science, Management with Accounting emphasis.
- Certified Public Accountant (CPA) — State of Georgia
- Accredited in Business Valuation (ABV)
- Accredited Senior Appraiser (ASA)
- Certified Exit Planning Advisor (CEPA)
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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