Production vs. Value: Does it matter?

I’m Sorry, Tell Me Again When You Want That Delivered??


“If there is any one secret of success, it lies in the ability to get the other person’s point of view and see things from that person’s angle as well as from your own.”

- Henry Ford

 

Production.  Every business has it.  Every owner worries about it.  If you’re a manufacturer, distributor, contractor or even a service company, your livelihood and success depends on your production capabilities. And, if you’re thinking about selling your business, prospective buyers will be very interested in your “productivity.” It’s a key “metric”.

 

The point is, this is where the sales and acquisitions of manufacturing and contracting companies differ from sales and acquisitions of companies in other industries. Smart buyers (the ones you want to work with) will “dive deep” into your “productivity” during their due diligence. There are times during the “deal” process when it helps if you, the seller, think like your buyer and this is one of those times. Buyers of manufacturing and construction companies are very focused on:

• the operational and production aspects of your business 
• the “output” or “throughput” with an emphasis on both actual and maximum capabilities 
• the forward looking capabilities (note: less time analyzing historic numbers) 
• the production process, i.e. “what, how, when, why and results”  
• the deal price - what buyers see or think becomes a significant part of the deal price whereby pricing discounts and/or premiums are based on old, outdated, maxed-out production capabilities vs. new, efficient, growth potential…your business is priced accordingly

  

In particular, buyers will spend time analyzing and reviewing:

 

  

1. Capacity capabilities – are you maxed out or is there room for growth? Be careful when discussing real output and potential output. There is a theoretical number and a number that’s reality, so be clear about what is being represented.

 

2. Material and warehouse “work flow” – is the manufacturing area, assembly line, warehouse area operating efficiently or are there weaknesses causing unpredictable work completion, missed delivery and lost sales?

 

3. Parts and components design - what are the weaknesses and strengths of your design work and through-put? What impact is that having on finishing the order and generating the bill?

 

4. Continuous improvement – is there an active, ongoing plan involving improvements/solutions to the process, production, delivery and sale? How long have these processes been in place and what are the results?

  

5. Key suppliers - is the relationship strong or weak? Is the supplier a dependable, reliable source? Is there potential disruption in their delivery? Look at the auto industry…no demand, no production, no parts, suppliers folded.

  

6. Industry status – turmoil or stability? Contractors and banks are fighting to recover and health care is in a perpetual state of change. Running a business today is more dynamic than ever; change isn’t an option. It’s inevitable. Buyers want to know what your plans include.

 

7. Forward looking - historical data is interesting but for manufacturers and production businesses, it’s all about the forward-looking numbers. Buyers don’t expect sellers to make the future happen, but buyers do want to “know what they don’t know”. Sellers need to show them the way and not make the future a mystery that the buyer has to solve.

  

8. Reality check - what are the real issues and challenges? Is equipment replaced regularly and recently? How much capital needs to be invested in the ‘hard assets”? Is working capital sufficient for ongoing and growth needs? What’s going on with the customer base and how stable is key management?

 

9. Technical aspects – the buyer might not understand or appreciate the technical aspects of your operation. Put on your “sales hat” and explain it to them in non-technical terms including how your operations compare with the industry and your competitors.

 

In preparing and then presenting your production capabilities for ownership transitions, keep it simple, keep it relevant. If not, you might lose the right buyer who “opts out” early in the process. Hateful, but it happens.

  

If you’re like most business owners we work with, you’re probably curious about how your company would be “ranked” by prospective buyers. Email Greg Caruso (gcaruso@harvestbusiness.com) or Ed Davis (eddavis04@gmail.com) or call us at 443-334-8000 to find out about our “Value Builder Assessment”. This Assessment provides an estimate of your business value AND shows you where you should invest your time and resources to enhance the value of your business

 

                                                  by Ed Davis, Partner

Announcing a new website - SBA Business Valuation

The partners at Harvest Business Advisers are pleased to announce that in order to support our SBA Business Valuation services we have created the new website www.sba-businessvaluation.com. The purpose of the site is to make it easy to find us and order SBA business valuations for SBA lenders throughout the United States. 

Exit Planning in the 2012 Deal Market: Value Added Commitment

   “It’s not whether you get knocked down … it’s whether you get up”

  Vince Lombardi on Commitment

We know it’s been a rough and tough market to get deals done:  

• Values are down
• Buyers are interested, but worried
• Deal terms and conditions are different in today’s “new normal”
•  Financing remains uncertain, though improving

Yet, deals are getting done.  In the past 12-months, we’ve successfully settled 3 transactions (not bragging, just letting you know we’re persistent and active!). 

A recent survey (*) of the middle market “deal makers (i.e., buyers)” regarding their 2012 plans had some interesting findings:  

• 86% planned to complete 0-3 deals
• 79% planned to complete the same or more deals compared to 2011
• 51% reported that bank lending remains “tight’; 49% felt opportunities were improving
• 76% felt that the biggest challenge of getting a deal done was the purchase price (i.e., too pricey) and economic uncertainty
• The “hot markets” are technology, financial services and healthcare that combined represent 55% of the buyers interest
• 51% expect to finance their deals with a combination of cash, equity (stock of the buyer) and debt (bank, seller)

In our experience: the deal market is improving -- call it bubbling, but not yet boiling.  

So in a tough market, what’s the plan?  What are you going to do to add value to your company?  We’re all adjusting to the “new normal” as it is now called. To be honest, in our role as exit planning advisors, there is no magic plan; there are no new tricks.  It’s about remembering and emphasizing the good habits you had in the beginning that, over time, might be forgotten or overlooked.  Here is your opportunity to restart your business with a goal to increase the business value and prepare for your “exit”.  It’s basic business 101:

• Define your “brand”: narrow the market if needed, expand if there is an opportunity.  Revisit, reset, repeat as needed
• Diversify your customer base: right or wrong, buyers are “squeamish” when a handful of customers represent a large part of the business,
•  Customer contracts – are they “assignable”? Is that in writing?
•  Profit margins – “run your business” to improve (not minimize) profit margins.  The “profit is good enough” attitude needs to go away.  Even if you’re in a commoditized industry, you don’t have to be the cheapest in town (note:  revisit #1 above -- brand does matter)
• Recurring revenue/cash flow – if you have an opportunity to convert from single billing to repetitive monthly cash flow, consider making the change (e.g., HVAC contractors who have both preventive maintenance contracts vs. time and material). Buyers like balanced, recurring revenue streams even when it’s the same dollars
• Refresh, recharge the marketing look.  You’ve heard the expression you only get one time to make your first impression … website, tweets, social media advertising.  It’s predicted that by the end of 2012, 60% of the Fortune 500 companies will actively engage customers via Facebook marketing efforts.  Where are you?  What’s it look like?
• Management team – we get it. You’re the decision maker about everything.  Loosen the reins a little.  Your key people are most likely staying with the new owner.  Give them the flexibility and authority to make decisions you‘ve been making.  Remember, you’re creating value for your company and key people are just that … valuable!
• Management compensation plans, incentive plan:  Critical to buyers, and to your successful exit, is the ability to retain key management.  Take a fresh look at various incentive plans you could use now to retain the key staff in the event of a change in ownership.
• Debt – credit lines and other forms of debt.  Do you use them just because they are convenient?  Or is the debt really needed to provide working capital? If not needed, make it go away. 

There you go. We hope we triggered some “Aha” moments for some.  We spend a lot of time with owners and their advisors helping them plan for a successful exit. As always, if we can help you, just give a call.     

           

 by Ed Davis, Partner

 

* The Deal magazine and Merrill DataSite

Exit Planning for Privately-owned Businesses … The Beat Goes On (and On and On)

We admit we’ve been writing about exit and estate planning issues a lot recently. But we’re passionate about it and one of our goals is to keep this topic in front of you. Here’s why:

Based on a recent IRS study of estate tax returns that were filed (meaning that at the time of death the personal net worth, including the value of your privately owned business, was $600k or more) the wealthiest taxpayers held significant ownership in closely held, privately owned businesses of which:

• 80% were corporations and
• 20% were partnership type entities (this excludes the other 20 million of unincorporated, i.e., sole proprietors)

The SBA reports that there are 6.6 million small and mid-size businesses…the “economic engine of the American economy.” These businesses are responsible for 58% of all private-sector jobs, 43% of domestic sales and 51% of our private gross domestic product (that’s a mouthful).

Taking a deeper look at these 6.6 million companies:

• 55% employ less than 5 staff members
• the next 20% employ less than 10 staff members
• the top 25% employ 10 or more staff members

Further research shows that companies with 10 or more employees are often worth $1 million or more.  Another rule-of-thumb is that companies with $2 million in gross revenues are often valued at $1 million or more.

This isn’t an issue for Mark Zuckerberg to think about: you and I need to plan too. 

You ask…who are these business owners? Have you read a book called The “Millionaire Next Door”? It’s been around, but here’s what’s interesting. Statistically, you might think that the millionaire next door is the family doctor or lawyer. Not true. It’s the person who owns the local dry cleaning business, etc.

Here’s the scary part - some surveys conclude that as few as 20% of business owners have actually prepared for their exit. That, folks, is why we are vigilant about working with you now to help you prepare your exit plans. These are your goals -- think through them on your time, not someone else’s.

You’ve worked awfully hard to accumulate your worth. We want you to be as thoughtful and mindful with your exit plan. That’s our goal.

To find out how we can help you with estate and exit planning, give us a call.

              by Ed Davis, Partner



Accountable? Yes, But to Whom??

In this month's post, we discuss Accountable Care Organizations (ACOs) and their implications for owners of businesses in the health care and medical fields.

But first, we have good news to share for small business owners contemplating selling their businesses.   According to BizBuySell's Insight Reports for first quarter 2012, business-for-sale transactions jumped nearly 4% over Q1 2011.  Read the full report here.

We also see an improving market, albeit slowly.  If you have been thinking about selling your business, now is the time to plan for a successful transition.  We can assist you with an assessment of your current position, provide you with recommendations to create/improve value, and guide you through the sales process when you are ready.

Accountable Care Organizations (ACOs)

Healthcare, or rather its costs, is an ongoing and hotly debated topic likely to dominate much of this season’s Presidential debates.  And, it is an important concern as Medicare’s bank account becomes increasingly strained under rising healthcare costs coupled with an aging population.

Washington’s latest answer to solve this burgeoning spending crisis:   Accountable Care Organizations (ACOs). Although information about ACOs fills only seven pages of the massive 1,990 page health care law (2009), it has become one of the most discussed provisions and often touted as a possible solution to America’s health care woes. 

What is an ACO?  Accountable Care Organizations are groups of doctors, hospitals, and other health care providers who come together voluntarily to provide coordinated care to Medicare patients.  The goal is to ensure that patients, and especially the chronically ill, receive the correct care at the correct time, while avoiding unnecessary duplication of services while preventing medical errors. 

Under the current system, Medicare providers are paid a fee for services rendered.  Increased patient populations are given more tests leading to increased procedures driving rising Medicare costs.  Under an ACO environment, providers would be held jointly accountable for the health of their patients, giving them strong incentive to cooperate and save money by avoiding unnecessary tests and procedures.  ACOs that save money while also meeting quality targets would receive a portion of the savings while those missing the targets would be at risk for losing reimbursement dollars.  Yes, an ACO smells a lot like a re-branded HMO of the 1990s.  The notable difference is that an ACO patient is not required to stay in- network which mitigates the consumer backlash created by the in-network provider limitations of an HMO.

So who’s in charge?  Hospitals, doctors, and insurers are all vying to develop ACOs.  The smart bet is on the sector with the most available capital to finance an ACOs initial investment and maintain its ongoing operations:  large hospital systems and large health insurers.

As key players race to form ACOs, hospital mergers and provider consolidation will continue to proliferate and likely accelerate leaving fewer and fewer independent hospitals, health centers, and doctors.  Greater market share provides these mega health systems leverage in negotiations with insurers and suppliers further challenging the remaining independents’ operational profitability and perhaps, relevance.

Like it or not, agree with it or not, ACOs are here and growing and will likely create greater and greater impact on health care delivery systems -- especially true in more densely populated regions. The rise of ACOs may mean disruption and potentially, dissolution, for those medical groups unwilling or unable to adapt. That’s why physicians should not delay in beginning the process of understanding and accommodating the changes that ACOs will inevitably bring. Taking a proactive stance in dealing with the issues your practice will likely face will leave you far better positioned to weather the tumultuous times ahead.  

So who’s accountable?  You are:  to yourself, your family, your practice, and the patients you serve.  The choices are to: 1) remain independent and hope for the best, 2) to expand, 3) to merge, or 4) to be acquired.  Other than those clinging to the first choice, opportunities exist and the professional business advisors at CI Harvest are poised to assist in helping capture those opportunities, beginning with deeply incisive strategic practice and market analysis based on your personal situation and goals, all the way through to its successful implementation. 

There’s a saying around the Firm, “you don’t know what you don’t know”… and that could be quite costly.  We know, let us help you find out…

  by Glenn Molin, Senior Business Intermediary

Dr. Glenn Molin is a doctor of chiropractic who also holds an executive MBA. He has been involved in the healthcare sector throughout his 20 year career and as Senior Business Intermediary for Harvest Associates specializes in business transactions in the healthcare and medical fields.

Gift and Estate Tax Changes.....Are You Ready?

Recall the conversation between Robert Hayes and Leslie Nielsen in the movie Airplane?

   Robert Hayes ... "Surely, you can't be serious?"

   Leslie Nielsen .. "I am serious...and don't call me Shirley."

That pretty much sets the stage for this month's newsletter about exit planning:   The "Are you serious?" state of confusion regarding gift and estate taxes.  Arguably, no other area of tax planning has been in such a state of flux. 

One of the most common question business owners ask us is:  

"I am thinking about giving my children an interest in our family business but I'm confused about changes in the gift and estate taxes. For tax purposes should I start gifting my ownership in 2012 or wait until 2013?"  

  

Fair disclosure:   Current thinking is a bit of "Who knows?" but most feel there will be changes to both the amount of the exemption and the estate tax rates that will result in added tax to the current owner.  In a world of no guarantees, it certainly appears that in most circumstances now is the time to gift.

  

Issues regarding gift and estate taxes focus on two key parts:  

  

The Lifetime Exemption Amount

and

Gift and Estate Tax Rates

  

Here's a summary of what we know:

Exemption Amount:

• 2001 - 2010: The lifetime tax free exemption for gifts increased to the current amount of $5M
• 2010 - 2012: The above exemption, $5M, was extended though 2012 (with inflation, $5.12M)
• 2013:  The lifetime exemption will return to the 2001 level of $1M

Tax Rates:

For 2013, the tax rate applied to the portion of gifts that exceed the amount of the lifetime exemption is scheduled to increase from 35% to 55%.

There you have it.  A perfect storm! The amount of the lifetime gift that is exempt will be sharply reduced and the tax rates applied to the amount exceeding the exemption will increase.

Of course there is speculation, and thus confusion, regarding everything from continuing extensions of the current rates to a retroactive adjustment of future rates on gifts given now.  Recent experience indicates that these types of changes are just not predictable.

Our opinion is that the current combination of historially high exemptions and historically low rates make it an ideal time to start the transition planning now while there is still time to implement your plan in a more tax friendly environment.  Waiting until 2013 to start your plan will likely cost you more in taxes.

If you're ready to move forward, one of the first steps is to make sure you have an up-to-date value for the business.

Using the valuation and working with your advisory team, you can determine the best way to structure the ownership transfer. Finally, complete the transfer. Lastly, Happy New Year...smart move!

If you have questions about gift and estate tax planning, feel free to give us a call.  We're happy to assist you in determining a plan that's best for you!

-by Ed Davis, Partner

Private Equity Groups - Potential Buyers for Your Business?

It's February - the month of groundhogs, love and presidents.  If you're a business owner, you've probably got more on your mind, especially if you are thinking about buying, selling, or a succession plan for your business.

Recently, we've been talking about the different types of buyers we work with and how the buyer market has changed during the past few years; some good and some "to be determined".  In this issue we talk about the private equity group (aka PEG) of buyers and what that means to sellers of smaller privately owned businesses like yours.  There's been a lot of news recently about PEGs, mostly in a political and tax related context (e.g., Mitt Romney's success as a partner with Bain Capital and the income tax rate he pays). We'll stay away from that.  That's a whole other discussion!
So what is a PEG?

They've been around since the 70s starting as larger, "mega" buyout firms (Bain, etc.)

• They are investors who have private funds (a combination of personal funds and investor funds) to invest and are seeking alternative investment opportunities (i.e., privately owned businesses) where financial returns can "beat the market"
• They buy companies across all industries and usually want a 100% ownership, or at least a majority ownership (51%) in the companies they buy
• They typically buy mature, established companies - not early-stage or startup businesses
• The goal of the PEG is to improve and grow the company with a goal to "exit" their investment in the next 5-10 years, at which time they return the gains to their investors and "close the fund".

What's this mean to you? Here's the change that's going on. In the last 3 years, we've talked with numerous nationally based PEGs who are investing in smaller privately owned businesses. A typical investment opportunity is a company with:

• gross revenues of $2-$20M
• a stable management team
• a growing industry and
• an opportunity to either grow or combine a new opportunity with a similar business they already own

Specifically, the PEGs we've talked to and met with are interested in businesses we represent in the following markets:

• Health care services
• Construction (Homeland Security, IT and General)
• Environmental Analysis
• Engineering
• Distribution
• Food Service

If you are considering selling your business, especially in one of these industries, we believe that, in the right circumstances, PEGs are a legitimate pool of potential buyers that should be considered.

As we've pointed out, the buyer pool is constantly changing and much more diverse than it was 3 years ago. Today's business seller needs to be more aware than ever of how the pool is changing and what impact this has on potential sales opportunities.


If you'd like more information sbout PEGs and how they might be a prospective buyer of your business, please contact me or Ed. Either of us would be happy to talk more about this with you!