Selling Your Business For Maximum Value

WHAT TO EXPECT IF YOU ARE ONE OF THE BABY BOOMER BUSINESS OWNER POPULATION

2009-09-01T18:56:00.000-07:00

Valuations of everything have declined…the stock market is 40% off from record highs…real estate values are down 25% or more throughout the country….business values have declined 20%-30% and it is uncertain when the economy will reverse this alarming trend.
The path to retirement and financial stability for the boomer business owners is murky at best. Many have seen a deterioration of the business equity and enterprise value which requires them to facilitate a rebuilding plan in order to have an attractive value proposition for the marketplace.

Many baby boomer business owners have been caught by surprise, experiencing huge losses in business value arise directly from a lack of exit or succession planning and the failure to maximize profits. They are left with the dilemma of what to do with their most valuable asset, their business. Selling to existing management takes preparation, time and requires financial concessions. Selling to a financial or independent buyer takes steady profits, good projected revenue growth and a fairly long transition period. Unfortunately, many business owners never take the time to plan an appropriate exit. At times this results in them closing their doors instead of benefiting from their years of hard work.

The key for baby boomer business owners is to engineer their escape, early and skillfully. Most need to move the business toward operating on “auto pilot.” Although the owner will still be the main cog and engineer the direction of the company, a reduction in personal time working in the business is the order of the day. Instead work on the growth of the business with an eye toward a successful transition. Most strategies that maximize the business value actually reduce your personal time investment in your business. The paradox is that the less time you spend in the business, the more time you have to work toward retirement.
Your improving profitability will be attractive to third party buyers as well as those with synergistic motives. Now is the time, even with depressed values throughout the country for the baby boomer business owner to keep his/her eye on the ball. Now is the time for the “man in a van” type business owner, one who runs the entire business, supervises, controls, packs, ships and washes the floors to assign these duties and begin working to grow the top and bottom line of the business. A two to three year period of time should put you on the path to cashing out on your terms.

Adding Value to Your Business (Before Selling)

2008-10-31T11:19:00.000-07:00

Adding Value to Your Business
By Anthony J. Citrolo, CPA, CVA, CBI

Anyone looking to sell their business must realize that it’s critical to look at the value of the business. But a typical business really has two values. The “academic” value is the one determined by a professional business valuation. The other is the “true market” value. The academic value is arrived at with a formula based on the firms’ hard assets, cash flow, industry averages and multiples. The fair market value also takes those items into consideration, but then considers what buyers are really willing to pay. It evaluates the business in the context of how that particular entity stacks up against the competitors in the marketplace. It also looks at comparable sales, where available, in that particular industry, evaluating relative margins, Ebita, discretionary cash flow, working capital and growth potential with owner initiatives which are identifiable.

For many small and mid-sized businesses hard assets like equipment, vehicles, land, buildings, and inventory may be limited. For some small businesses there may few, if any, hard assets which have worth. Instead, their value is based on intangibles such as the talent or employees who are in place and preferably under contract or some form of agreement in the case of “key” employees, business processes, customer lists, location and its relative condition, and business relationships.

To maximize the fair market value of your business, it’s vital that your clients capitalize on the intangible assets. Here are some simple recommendations for your clients:

Develop key employees. Buyers generally aren’t interested in paying a premium if the business relies on exclusively on the owner(s) for its success. Remember to delegate responsibility to key employees and involve the key staff members in the decision making process. Demonstrating that a company’s success is reliant on capable, well-trained employees – not just the owner – and will pay off handsomely at the time of sale.

Document Job Functions. Be sure that job descriptions, operation processes, and strategic plans are documented. It is vital to have a SOP (Standard Operating Procedures) manual for the business. Documented records and plans give a buyer greater comfort that he or she will be able to emulate successful growth and will help a buyer obtain financing. Most lenders, especially SBA backed loans required a detailed business plan along with an SOP manual.

Financial Records. The business must make sure to keep business copious records including sales and expense reports, internal profit and loss statements/balance sheet, and tax returns clean, well-organized and readily available. They need to be segmented by fiscal or calendar year and have quarterly or monthly breakdowns including three year comparisons. These financial records are in addition to those that the CPA prepares. Audited financial statements are always a benefit and result in a greater enterprise value when presenting the business to the marketplace.

Build relationships. Name recognition, customer awareness and the business reputation are all part of the overall business value. Even if the company doesn’t have many hard assets, your relationships are essential is proving “staying power” of the entity. Consider diversifying both supplier and customer accounts. It is important not to have a disproportionate amount of business with any one supplier or customer. Make certain that the contacts at the respective vendors and clients are kept current and that you have an ongoing dialogue with them on a regular basis (preferably monthly at a minimum).

Improve cash flows. A potential buyer wants to see the “true cash flow.” Be sure that all income is being driven to the bottom line. Take other steps to assure positive cash flow and good working capital. It is a good time to make certain that the business is running lean and efficient. It is easier to make these corrections prior to offering the business for sale, rather than explaining the merits of how a new owner may come to the forefront, make changes not made by the current owner and realize increased net income.

Review your assets. Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any assets that are primarily for your personal use. Have only the assets that will be transferred with the business on the balance sheet.

Find and build your niche. The business doesn’t have to be everything to everyone. Buyers will pay a premium for a niche that has barriers to competitive entry. Making sure that niche is identified and there are no distractions is important to providing real value to a buyer.

Remodel, clean, and organize. What’s the first thing anyone does when they put their home on the market? They spruce things up and make sure everything is in its right place. Selling a business requires the same consideration. A well-maintained facility will get the best price. Even businesses that lease space can benefit from a thorough cleaning and organization to convey a feeling of quality and efficiency.

Keep these important intangible assets in mind if when selling any business. They convey a value that financial statements alone do not. If it is nearing the time to sell, crafting a plan, especially with the assistance of a professional team of experts, including the CPA, attorney, estate or financial planner and Certified Business Intermediary. The plan should include working on the intangibles well in advance of putting the business on the market. For many business owners, they reach a point where they burn out and psychologically retire early, before a sale is made. It’s important to work to keep focused right until the sale is complete. Remember, this is typically the largest liquidity event or sale of a lifetime for most owners. It must be done properly to realize the greatest value.

Anthony J. Citrolo is a principal of
New York Business Brokerage, Inc.,
specializing in the sale of privately held companies
. He is a Certified Valuation Analyst
(National Association of Certified Valuation Analyst
designation) and a Certified Business Intermediary
(International Business Brokers Association designation)
in addition to a member of the AICPA, NYSSCPA,
NCCPAP, NYABB, NACVA, IBBA and M&A Source.
To contact Anthony, please call 1-631-390-9650.

Succession Planning – It’s Never Too Early

2008-08-20T18:00:00.000-07:00

There are more than 15 million family businesses in the United States, ranging from giants like Wrigley and Marriott to the local corner grocery store. Yet, history tells us that less than one-third of family owned companies will make it to a second generation. One reason for the disheartening statistic may be that business owners tend to forget
about succession planning. It’s often not a priority and it definitely can be an emotional issue. Many owners just can’t imagine the business succeeding if they aren’t involved or they may be too busy with day-to-day operations to take the time to adequately plan for someone else to take the reigns when it’s time to step aside. But as more and more baby boomers approach retirement age, the time for succession
planning is today. Tomorrow may bring a serious illness, disability or even death. Having a well thought out plan is critical to the continuation of a business, particularly for a small, family-run operation.
Plan early. Developing a succession plan early will help to smooth the transition. You may think the plan won’t be implemented for years, but unexpected factors may move up the timeline. Bring in outside experts. As you’ve grown the business, you no doubt have had some help along the way. Hiring the right professionals – attorneys, accountants, financial advisors and business intermediaries – will help you ensure you have the best possible succession plan when it is needed. Their expertise will be invaluable as you develop and plan while continuing your every day tasks in running the company. They will look more objectively at the business and the goals you’ve set and help you ensure that everything is in place. Involve family members in the planning process. Developing a succession plan and simply announcing it to the family will only bring discontent when you unveil the plan. You may come up with the same plan, but bringing the family into the process will certainly create goodwill and support. Train your successors and work with them. Take the time to work with the person you’ve selected to take over so he or she knows and understands what it takes to run the business and keep it successful. Help your successor understand the big picture in running the entire operation, not just the duties he or she is currently handling. Look at all options. Pay particular attention to three areas when putting your financial plan together; management, ownership and taxes. As you work on your succession plan, consider that management and ownership aren’t necessarily one and the same. You may look to one family member for the management of the company, but transfer ownership of the firm equally to several members of the family. Look carefully at the financial impact. Be sure to develop a financial plan as part of the overall succession plan. You don’t want your heirs hit by heavy gift taxes that they cannot bear. And no matter who takes over the business, be sure the valuation of the firm is accurate. Be realistic. Of course you want to turn the business over to your eldest son or daughter so they can follow in your footsteps. But it’s important to carefully consider whether he or she is really the right person to take over the operations of the company. Consider another family member, or someone else within the company, if that person is the best qualified and has the business skills and desire to run the firm. Ultimately, selling to an outside party may be the best option. A business intermediary can guide you through that process, identifying potential buyers and advising you on options for structuring a transaction. The time for succession planning is now. Don’t delay starting the planning process. It is one important way for you to ensure that you have the funds you will need in retirement, while helping to ensure that your company will continue on after you leave.

One Prospective Buyer=No Sale

2008-08-06T09:34:00.000-07:00

To get the maximum value for your business, you need to have more than one potential purchaser bidding and making offers for the company. If there is only one intetested party, the seller has virtually no leverage or negotiating power and it is likely that the deal will never be consummated. Most sellers who mention to me that "they have theee guy" to buy their company, find themselves sitting and waiting for months, if not years....and by the time the deal gets done, they find that they have forfeited a substantial portion of the value they would have otherwise received had they had multiple potential buyers bidding on their business. Don't fool yourself into thinking that one is enough....One is never enough to ensure that you, the business owner realizes the right value for your years of hard work and sweat equity.