How to Hire or Retain a Business Broker Including Business Broker Fees and Terms

Gregory Caruso, Esq., CPA, CVA

www.harvestbusiness.com

gcaruso@harvestbusiness.com

Business Brokers go by many names, Business Brokers, Investment Bankers, Intermediaries, Acquisition and Merger Specialists.  Business broker’s success fees or brokerage fees can be structured multiple ways but most are in the form of a back end commission.  Business brokers work to sell your business while you work to maintain outstanding profitability during the sales period.  This combination will result in the highest price.  These people perform a variety of functions, usually anything not being done by another specialist. 

Business broker’s primary goal is to increase the sales value and shorten the time on market of the business by determining the best buyer and be creating a large market of those buyers generating an auction environment when possible.  The International Business Brokers Association estimates that Business Brokers on average add 15-20% to the value of a transaction.  www.ibba.org. 

Business brokerage fees tend to be a percentage of the transaction value and tend to fall as the transaction gets larger.  Often there is also a minimum business brokerage fee.  A common business brokerage fee structure for a small transaction might be the higher of a $15,000 minimum fee or 10% of the sales value.  Sales value tends to include cash, liabilities assumed, non-competes, owner’s compensation.  In effect, every way the seller is making money from the transaction.  Commissions tend to be collected in full on notes taken back by the seller at settlement.  If an earn-out is involved the commission will typically be paid as the money is received since it is speculative.  In many cases the broker will barter a reduced fee on earn-outs for payment at settlement to simplify everyone’s accounting. 

On larger transactions around $1,000,000 or more the minimum business brokerage fee might be $75,000 and a fee schedule of 10% on the first million, 8% on the second million, 6% on the third million, and 4% above that.  This is known as the double Lehman.  Very large transactions over $10,000,000 in sales value are completely negotiable.    Just remember the important question is not what does the service cost you, it is who can help you make or keep the most money after paying all expenses. 

Retainer or other up-front fees – On smaller transactions the broker might ask for $500 to $1,500 as a non-refundable retainer.  We have never bothered on small deals but many brokers do.  We generally figure we can give about 6 hours of time to understanding a prospective transaction i.e.  understanding owner needs, a quick and dirty valuation, and a snap-shot market review. 

Remember, even if the business broker does not charge an up-front fee they will request a six month to a year minimum sales period (we always ask for at least a year or more on transactions.) This is a lot of your time if you are stuck with an incompetent broker.  Therefore, even though it is “free” if they don’t sell the business, make your choice wisely.  For more complex businesses a retainer in the range of $15,000 for a valuation and business write-up is reasonable.  We know several brokers who obtain between 10-20% of the total estimated fee as retainer either at the time of the listing or paid over the first six months. 

For larger businesses with revenues over $20,000,000 it may cost $15,000 to $30,000 or more for the brokerage firm to really break apart the financials and understand what is going on with the business and the market.  We know a quality broker that charges $5,000 per month for the first 6 months for his larger clients.  If you are being asked to pay a large fee make sure you talk to satisfied clients.  Do not let a broker use the cloak of confidentiality to tell you his clients are not accessible.  Good business brokers have plenty of clients willing to talk to you.  If they will not let you talk to past clients run, do not walk to the next broker.  If the story is too good to be true, be careful also, stories of European (Asian this year) buyers for small local companies with limited internal management are just not plausible, (if you can’t take a vacation, how are they going to run it from half way around the world) especially at a value of two to three times current market value.

Depending on the transaction you are planning and the size and complexity of your business it may make sense to pay a large upfront fee.  Unfortunately there are several firms, some backed by very well-known public companies that essentially take very large up-front fees, provide a great package, and then provide very little brokerage services while tying up the Seller.  Bigger is often not better in business brokerage and intermediary services.  Do your homework and hire the right broker at the right fee for your business sale.

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!

New Estate Tax Laws, Time to Plan

“One difference between death and taxes is that death doesn't get worse every time Congress meets”.


Will Rogers

Confused about the federal estate rules and regulations? Wonder what the tax rules are? Did George Steinbrenner (owner of the New York Yankees) get it right when he died in 2010…should he have waited? We thought we would recap the current estate and gift tax rules. Note, they only apply for 2011 and 2012 and will change again, maybe. Here you go:



1. The minimum federal estate and gift tax rate is 35%,

2. The “unified tax credit exemption equivalent” is $5m … a fancy way to say that up to $5m in assets can be passed on to heirs either during your lifetime and at death (hence the term unified) without federal taxation,

3. The generation-skipping transfer tax rate is 35% with a $5m generation skipping transfer tax exemption. Many individuals (grantors) who might otherwise leave their entire estates outright to their children will instead allocate their generation-skipping exemptions to “generation-skipping transfer tax exempt trusts” for their children and grandchildren. Potential benefits include:

a. the trust will escape all transfer taxes when the children die and will pass tax-free to the grandchildren,

b. the trust may be protected from the claims of creditors and, to some degree, from claims of ex-spouses. Had the trust property been left to the children outright, the property would be subject to such claims. In some states, property acquired by gift or inheritance from a third party is not subject to division in divorce proceedings and therefore, would not be subject to claims by an ex-spouse,

4. The maximum estate tax unified credit between spouses is now “portable” meaning that a surviving spouse can elect to use any unused portion of the estate tax credit of the predeceased spouse (currently $5m). so, with the right planning, married couples can effectively shield up to $10m in assets from federal estate and gift tax,

5. Estate tax deferral – payments of estate tax attributable to the value of a closely-held business can be deferred for up to 5-years.



Remember, these rules only apply for planning during 2011 and 2012. After that, the rules “sunset” (we think that’s a cute phrase) and revert to the 2001 rules.

Article Authored by Ed Davis.  edavis@ciharvest.com
U.S Treasury Circular 230: Any tax advice included in this written or electronic communication was not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency, nor can this be used for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed herein.

Year to Date Commercial Construction Contracts are Down

Commercial Construction contracts for future work through May 31, 2011 are down about 10% from this time in 2010 per McGraw Hill Construction.  More info http://tiny.cc/pzgb5. 

Lending Update in 2011

By John Gibson, Partner

We are hearing that banks say they have money and want to lend it but they can't find enough qualified borrowers. At the same time, borrowers who are looking for loans say their banks are just paying lip service, looking for a way to turn them down.

Who is right? In a way, both are.

Uncertainty and fear have produced cautious bankers. 2011 is a little better than 2010 and much better than 2009. Banks are tip-towing back in, but they are fearful. They are afraid for many reasons. Fear of the unknown. Fear of loss. Fear of federal and state regulators glaring over their shoulders and writing down loans. Even Fear of losing their jobs.

What can you do to improve your chances in this environment?

It's back to basics. Start with the 3 C's; Character, Credit, and Collateral. It takes all three legs for the stool to stand. You have one first impression to win over the banker. Don't give them an excuse to turn you down. You must have a complete loan package. If you don't it will be set aside and you lose critical momentum. Point out the positives and explain the negatives. Answer before asked. All loan proposals have negatives. Letting them know that you aware of yours, not trying to hide them and what you are doing to correct them scores big character points with the lender.

In short, be prepared, stay positive but realistic and don't forget the three C's.

Exit Planning Facts: The Reality of Leaving Your Business

By Carol Coughlin, President, BottomLine Growth Strategies

Exit Planning Facts:


The Reality of Leaving Your Business

Of the approximately 22 million businesses operating in the U.S. today, only a very small percentage will ever go public. In fact, only a fraction of one percent.
For business owners in that fraction, the future is clear. An IPO will enable the owner's exit from the business, secure retirement or next venture.

But for the rest of us, the statistical truth is this: No matter how successful your business becomes, an IPO will not likely be in the cards.

The vast majority of business owners need a concrete Exit Plan. And this is where another surprising fact comes into play: Most business owners equate their exit from their business with their death. Therefore, owners typically seek insurance solutions to address the issue.

While we advocate purchasing insurance in a number of scenarios, the problem is that just purchasing insurance to address a handful of issues that will arise in the event of your death is NOT exit planning. It's business contingency planning. And there's a difference.

While contingency planning puts stop-gap measures in place for "What if" scenarios, Exit Planning puts long-term action steps in place for "What IS" your desired result - not various scenarios, but what you actually want and need to leave your business in a conscious and fully planned manner.

So, how do you plan your exit? What do you need to do to exit consciously, seamlessly and with greater personal wealth?

Quite simply, you need to increase the value of your business and position it to sell. Interestingly, the best way to do that is to:

Run your business like you might sell it at any moment.

Here are just a few ways to keep your business's financial picture in sell-ready condition:

BottomLine's Run Your Business to Sell Strategies:

#1: Close your books and records on a timely basis. Close your books no later than the 15th day following the end of the month so you have timely feedback on trends. Guard against errors like duplicate recording. Compare actuals to budget, taking time to understand variances.

#2: Keep books and records in generally accepted accounting principles (GAAP), as well as on a cash basis. Many companies only review financial reports on a cash or tax basis. This can be deceiving in companies where deposits are paid in advance, for example. GAAP accounting matches revenue with work effort and is understood by everyone, including bankers and investors.

#3: One-time expenses and expenses for start-up programs and businesses should be separately identified. Let's say that instead of buying into a new territory, you grow organically. You will need to hire consultants and employees and have other expenses before you make your first dollar. These costs should be isolated in your internal reporting so that you can tell how the underlying business is doing without these non-repeatable costs.

#4: Compare each year's performance to the prior year's. Explain the variances because this increases the probability that you'll remember the specifics when you sell.

#5: Regularly compare your company's performance. Many privately held companies fly blind. But to sell your company, you must know where it stands against other opportunities your buyers might have.

#6: Know your business financials inside and out. If you wait until a due diligence process prior to a sale to review your financials, you may learn that your business is not attractive enough to fetch a good price. Know financials in advance to avoid unpleasant surprises.

#7: Don't be satisfied with mediocre results.

Buyers will not pay top dollar for mediocre financials and you shouldn't tolerate sub-par results either. Make sure your company is attractive by regularly evaluating results and adjusting how you operate.

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Do you run your business like you're going to sell? Do you know how you plan to exit your business? BottomLine Growth Strategies CFO Guides have 20+ years of experience in corporate turnarounds, growth strategies and helping companies acquire and sell successfully.  For more Information on Carol and BottomLine Growth Click Here

Construction & the M&A Market (under $25 million revenues)

This is the 1^st in a series of short articles and updates about the construction and housing markets that we will be writing. We have two goals: 1/ provide a summary of industry happenings and 2/ describe the impact these changes have had/are having on business owners who are selling or “exiting” their businesses. We would love to hear your thoughts, comments or questions. We want this to be both light and informative, and we appreciate your feedback. Thanks.

Let’s get started. Our top-10 comments and observations are as follows:

1. The housing market is (still) “stuck.” New starts for 2011 are 44% below the 2000 levels;
2. 1^st Qtr 2011 sales are flat, and housing inventory, expressed in number of months on hand, has increased;
3. Regional/small builders face fierce competition from national builders;
4. Homeowners have less cash to spend on home improvements and expect contractors to “do the same work for less money;”
5. Contractors saw signs of recovery during the 1^st Qtr of 2011, but are concerned with some leading indicators showing the momentum could fade by the 4^th Qtr;
6. Some optimism that new regulations for “green” applications could drive a large part of the recovery;
7. Acquisition Advisors Outlook reported that business owners selling their businesses during 2008-2010 got caught in a “sluggish” market (some of the owners we talked to described it differently…). Deal activity in 2009 was less than 2008's results with some uptick in activity noted during the 4^th Qtr of 2009;
8. For the 6 months ranging from 11/10 – 4/11, stats published by MergerNetwork indicated that, based on the number of active buyers and sellers looking for deals, we could be returning to a more stable buy/sell market;
9. A survey of construction owners reported that 40% believed there would be an increase in buy/sell activity in 2010 and 2011; and
10. Buyers with capital (i.e., “financial buyers”) are aggressively hunting for acquisition opportunities.

Harvest Time: The construction industry is still “quirky,” and “quirky” translates into market uncertainty. It’s just like any other market: When there is market stability, good things happen. There are some very encouraging signs…let’s see where they go. Stay tuned …