Adding Value to Your Business

If you’re looking to sell a business, 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.

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 be no hard assets at all. Instead, their value is based on intangibles like employees, business processes, customer lists, location and business relationships.

To maximize the fair market value of your business, it’s vital that you capitalize on those intangible assets.

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

• Document what you do. Be sure that job descriptions, operation processes, and strategic plans are documented. Documented records and plans give a buyer greater comfort that he or she will be able to emulate your successful growth and will help your buyer obtain financing. Also, be sure to keep business records like sales and expense reports, internal profit and loss statements/balance sheet, and tax returns clean and well-organized.

• Build relationships. Name recognition, customer awareness and your reputation are all part of your business value. Even if your company doesn’t have many hard assets, your relationships are key. Consider diversifying both supplier and customer accounts.

• Improve cash flows. A potential buyer wants to see the “true cash flow.” And, of course, in the business world cash is king. Be sure you are driving all income to the bottom line.

• 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.

• Find and build your niche. You don’t have to be everything to everyone. Buyers will pay a premium for a niche that has barriers to competitive entry.

• 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. Yet, in business, that’s rarely considered. 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 you’re looking to sell your business. They convey a value that financial statements alone do not. If you are looking to sell, make a plan. Start working on the intangibles well in advance of putting your 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 your focus right until the sale is complete.

Finally, when the time to put your business on the market arrives, consider lining up key specialists who will help you make the most of the sale – an attorney, an accountant, and a business intermediary to name a few. Remember, you only have one chance to sell your business, so you want to do it right.

Staying on After the Sale

Selling a business and walking away can be very difficult. But in many cases, there’s a transition (“training” and/or “consulting”) period dependent on the size of the company and the role of the owner. Transitions may be as short as a month or two or as long as a year. In most situations, the buyer wants the seller to remain on board to shorten the learning curve and help with the smooth transfer of key relationships.

In the typical business sale, a transition period of four to eight weeks is included, and sometimes a “telephone consulting period” is added (e.g., 6 months of telephone consulting not to exceed 5 hours per month). Also, the seller may additionally be retained as a consultant at a negotiated rate. In some instances, a long-term employment contract is negotiated and the seller maintains daily involvement for a much longer period of time.

For the owner who wants to sell the company and leave quickly, the focus should be on the development of a strong management team. Be sure to introduce key employees/managers to your major customers and vendors and look at ways to delegate responsibilities. The more the customers think they are interacting with “the company” versus the “owner” the easier the transition.

If you’ve established a good management team, less time will be required for the transition to the new owner. In addition, a well developed team usually adds value to the sale.

Occasionally there are owners who want to sell but just aren’t ready to quit working. They may be looking to sell early to get a premium price while the market is in their favor or to get away from unwanted or overwhelming administrative and management duties.

Either way, long-term employment contracts can be included in the sale agreement. The seller can stay on board and work with the business a few more years while still drawing an income and benefits.

If you’re selling your business, in most cases you won’t be able to walk away the day after the sale and in most cases you probably don’t want to. Talk to your business intermediary about the true timeline of the sale and transition. If you want to sell while the price is right, but you’re not quite ready to leave immediately, consider the options available to sell now and maintain a role with the company.

The International Business Brokers Association® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

©2007 International Business Brokers Association® (IBBA®) all rights reserved

Permission to reuse any or all of this material should be directed to the IBBA at 888-686-4442 and is restricted to IBBA members.

Creative Financing for Buyers with Limited Capital

A recent survey of members of the International Business Brokers Association (IBBA)

found that business intermediaries expect 2007 to be a busy year for buying and selling

businesses. Some of those transactions may need creative financing. With a busy year

ahead for small business transactions, there are a number of creative financing options to

consider.

1. - Seller Financing - Increasingly, buyers and lenders are looking to the seller for

financing as they try to put a transaction together. In such a scenario, the seller will hold

a note at an agreed upon interest rate for a specific term or amortization – generally

ranging from five to 10 years.

The terms of the sale may include a balloon payment three to five years after the purchase

date. It’s a way of giving the buyer time to get up and running and to establish a

successful track record with the business.

Seller financing makes the bank more comfortable with the transaction. Lenders know

they have a seller who has a vested interest in the success of the business rather than one

who will take their money and run.

2. - SBA Loans - In sales of a business, conventional loans usually aren’t available, so a

buyer may want to consider going to a Small Business Administration (SBA) lender,

which has a number of loan options.

The SBA guarantees a portion of the loan. The buyer pays an SBA loan fee that allows

them to get funding for a loan the bank couldn’t do conventionally. If an SBA

guaranteed loan goes into default, the SBA will pay the lending institution up to 75

percent of any deficit left after liquidating the collateral.

3. - Earnouts - Earnout financing involves a certain dollar amount agreed on by the

buyer and seller to be paid to the seller based on the performance of the company after

the transaction is completed.

Earnouts can be structured in a variety of ways and can be based on different financial

benchmarks such as a company’s revenues, gross profits or net income.

Earnout financing is often used for companies that are in a turn around situation or when

buyers are purchasing on potential, rather than on historical cash flow.

4. - Mezzanine Financing - In mergers and acquisitions, mezzanine financing is another

alternative for a buyer looking for capital where the financing package may include

interest rates of 20 to 30 percent.

The lenders in this situation are typically high net worth individuals who are expecting a

larger return on their investment. They are lending in a junior lien or a position behind

the bank and seller financing. The loans are typically made with limited sources of

collateral, thus the request for higher interest rates.

Again, this financing is often used in funding goodwill or reputation in an acquisition.

5. - Funding Scenario - In a million dollar transaction, the buyer would be expected to

have a 20 percent down payment. The seller may hold an additional 10 to 20 percent in

seller financing, and the lending institution would offer a combination of conventional or

SBA financing to cover the difference, depending on collateral available.

A buyer and the lending institution must evaluate a company’s cash flow and determine if

it is adequate to cover their debt service and provide a reasonable return on their

investment. Lending institutions will also be examining whether a buyer’s coverage

ratio, or excess cash flow after all debt is paid, is adequate to cover their needs.

Even if you’ve been affected by a downtown in the economy in some parts of the

country, don’t let that stop you from considering your acquisition options. Creative

financing tactics are becoming more common.

Talk with a business intermediary representing the company you are considering

purchasing. They’ll know if the owner is willing to consider seller financing, earnouts or

other creative financing ideas. Based on your available capital, the business broker

should be able to tell you whether you’ll be considered for the purchase and may also

provide you references to various lenders that are familiar with financing the purchase of

a business.

###

The International Business Brokers Association is the largest international, non-profit

association operating exclusively for the benefit of people and firms engaged in the

various aspects of a business brokerage and mergers and acquisitions. IBBA has 1,950

members worldwide, with corporate headquarters in Chicago, Illinois.

©2007 International Business Brokers Association (IBBA) all rights reserved

Permission to reuse any or all of this material should be directed to the IBBA at 888-

686-4442 and is restricted to IBBA members.

Valuing Your Business

As a business owner considers placing his or her company on the market, ascertaining the proper value for the company is critical. Too often the owner assigns an unrealistic and unachievable arbitrary value then proceeds into the sale process only to be disappointed with the market’s response. As a result, the asking price is reduced several times. During this unfortunate period buyer prospects and valuable time is lost.

In truth, a company’s value is determined by a compilation of factors such as the company’s sales, earnings, performance, market outlook, personnel, net book value and fair market replacement value of equivalent operating assets. But it can also be influenced by intangible assets like the company’s image, reputation and goodwill.

There are several approaches to valuing your business.

Balance Sheet Value

There are several balance sheet valuation methods, including adjusted book value, book value and liquidation value. The adjusted book value is determined by revising the asset’s book value to reflect the cost it would take to replace the assets in their current condition. This method requires the total values to be offset against the sum of the liabilities.

The book value considers the figures from the company’s financial records, as depreciated at the time of the sale. The book value can pose some difficulties for sellers, particularly if the seller has depreciated the assets too much to gain prior tax advantages.

The liquidation value is the amount that could be realized if all assets – equipment, furnishings and inventory – were sold separately. This value is typically much lower since it doesn’t consider a company’s intrinsic value.

Income Approach

The income approach takes into consideration the company’s level of earnings using a capitalization rate, discount rate or multiplier. Several income approach methods are frequently used. Each method requires a level of earnings and a conversion factor to translate the earnings into a company value. Selecting the proper level of earnings – after-tax, pretax, discretionary or cash flow – and matching it with the proper conversion factor – discount rate, cap rate or a multiplier – is critical to calculating a reasonable value.

Market Approach

The market approach sets a value based on the values of other businesses that have been sold. Setting the market value involves researching the sale prices for similar businesses in a geographic area. In some cases, however, finding a company that is similar in many ways to your company may be difficult.

Whatever your goal, you want a good advisor to help you assess the value of your company. Question your advisor on the effects of deal structure and how multiples are used. A business owner should never accept a computer-generated valuation or a one-size-fits-all approach when selling the business. And don't be impressed by the person who presents the highest value – you may only be setting yourself up for failure during the sale process.

The International Business Brokers Association ^® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA ^® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

©2008 International Business Brokers Association^® (IBBA^®) all rights reserved

Permission to reuse any or all of this material should be directed to the IBBA at 888-686-4442 and is restricted to IBBA members.

Keep the Process Moving to Keep the Deal Going

Many factors can bog down the sale of a business. In fact, more than purchase price or structure, time is the most likely reason that a business sale may fail.

Time can breed frustration and fatigue. As a potential sale drags on, the owner is left in an uncomfortable state of flux. The buyer may also become frustrated as fees mount. The deal can reach the point when one party declares…“It just wasn’t meant to be.”

National figures indicate that the average business sells in nine to 12 months from start to close. Once a letter of intent (LOI) has been signed, the final due diligence and closing process usually takes 30 to 90 days.

So how do you keep the sales process moving forward?

Attentive Intermediaries

Your business intermediary should be able to give you the time, attention, energy and resources necessary to focus on your deal.

Be sure to ask your business broker or intermediary about his or her organization’s work on closing details. You want to be sure that you are working with someone who can cover minute details, looking weeks and months ahead in the sale process.

Obtaining appraisals, ordering environmental investigations, transferring licenses, title work and many other details need to be handled properly and in a timely fashion to be able to close a transaction. For the best possible results, you want to work with someone who knows the proper sequence of events so there aren’t any unnecessary delays. There’s a lot to coordinate and missing just one detail can cause a delay in closing the deal.

Transition Specialists

From your business broker or intermediary to your attorney and accountant, you want to consider hiring specialists in business transitions.

Inexperienced advisors tend to be overly conservative to protect their liability. That can drag out the negotiation process and may cause frustration for the parties involved. If you are serious about selling your business, you really don't have the time or money to pay to educate your advisors on the mergers & acquisitions process.

Comprehensive Overviews

Your advisor should spend the time packaging the business up front. A comprehensive business review can be developed that answers 80 to 90 percent of the standard questions a potential buyer will have.