BayState Business Brokers Blog

Don't Miss This Great Training for Business Brokers/Buyers/Sellers

On April 9th and 10th, in Woburn, MA, at the Holiday Inn Select, the New England Business Brokers Association is hosting a Conference titled "New Decade, New Opportunities." The conference offers IBBA classes and workshops and is open to the public. You can learn more about the Conference and sign up for the classes and workshops at the NEBBA website.

Many of the classes and workshops at the Conference can be of value to individuals interested in buying or selling a business. There is a workshop that covers the basics of business valuation. There are two workshops that cover different ways to finance the purchase of a business. Anne Hunt, the Lead Lender Relations Specialist at the Boston SBA office, will conduct a workshop on SBA financing. Larry Carnell, of Benetrends, will explain how to use IRA funds to buy a business.

Two workshops will help individuals interested in buying or selling a business understand the sales process better. Scott Loring will present a workshop on negotiating. Marc Gudema, the writer of this blog, is conducting a workshop on managing the closing process. This workshop will present some of the problems that arise during closing and how to handle them.

There are two workshops that cover lead generation. Although they are focused on business broker lead generation, the information would be useful to any business owner. Debra Murphy will conduct a workshop on how to drive visitors to your website and increase your visibility. Glen Cooper will present a seminar on how to use LinkedIn to generate leads.

Most of the workshops are of value to business owners, but there are two workshops in particular that owners thinking of selling their businesses shouldn't miss. Michael Coyle will present a workshop on Exit Planning. Ira Bryck, the Director of the University of Massachusetts Family Business Center, will conduct a workshop on the problems of selling a family business.

There are three IBBA courses being taught. Each is an all-day course. On Friday, Richard Mowrey is teaching course 301, Introduction to the M & A Process. In addition to business brokers, this course would be valuable to other advisors who are interested in learning more about what's involved in the process of mergers and acquisitions. Covering both days are courses 220 and 221, Pricing Businesses.

Three workshops are being offered specifically for business brokers. Ted Burbank, who wrote a book on the subject, will teach a workshop on how to obtain up-front retainers. Jeremy Poock, an attorney, is conducting a seminar on what business brokers should do avoid legal pitfalls. Phil Steckler is leading a workshop on the attributes of successful brokers.

The cost to attend the workshops and courses is very reasonable. If you live within driving distance of Boston, there is no cost for travel or overnight stay as there would be with attending an IBBA Conference where these classes and workshops are normally presented. Check out the NEBBA website for more information and to sign up. Registration for the workshops is by one day or both. This is a great opportunity to attend workshops and increase your understanding of the buying and selling process at a very reasonable price.

SDE: Know what it is when you buy a business or sell a business.

If you are going to sell a business or buy a business, it is important to understand Seller's Discretionary Earnings and how it is used to value a business.  In most small business sales, the seller is operating the business and the buyer plans to do likewise. Because of this, the best measure of the earning power of the business is the total income and benefits available to the owner, not the reported net profit of the business. In most small businesses, the owner is not trying to maximize net profit. The owner is trying to take out as much as possible in tax deductible salary and benefits. When buying or selling an owner-operated business, it is important to understand, and know, the Seller's Discretionary Earnings (SDE) of the business. This is the best measure of the earning power of a small business.

SDE Defined
Seller's Discretionary Earnings is defined as net income before deducting the primary owner's compensation and benefits, other discretionary, non-operating, or non-recurring income or expense, depreciation, interest, and taxes. This is also referred to as Owner's Cash Flow. This is the amount of money available to pay the buyer an income, pay off debt, and provide for capital to operate the business. In order to accurately calculate SDE, the broker will rely on tax returns, income statements, and other financial records.

SDE includes owner compensation. Discretionary expenses and perks, such as the owner's company automobile, personal travel, meals and entertainment, and the owner's health insurance, are also included. Interest expense is added back because the buyer is generally not assuming the debt of the business. Depreciation and amortization are added back because they are not cash expenses, however, if it is necessary to replace equipment within the next year that expense is deducted. Taxes are added back because a new owner may have a different tax expense. Additional adjustments are made for non-recurring expenses or income like one-time legal fees or the sale of a business asset. Non-operating income and expense are adjusted out also.

Discretionary Expenses
In order for an expense to be considered discretionary, it must meet certain criteria:

• The expense must be for the benefit of the owner (like health insurance)
• The expense cannot benefit the business or the employees
• The expense must be documented on tax returns and P&Ls
• The expense must be verifiable as discretionary by a potential buyer

Counting meals and entertainment that gain the business new clients or counting auto expenses when the automobile was used to conduct business are not allowed. To pass due diligence, it is important to count only verifiable discretionary expenses.

SDE and Business Valuation
The "Market Approach" is an accepted method of valuing a business. In this method, the appraiser estimates the selling price of the business. There are databases of actual business sales which show what comparable businesses have sold for as a multiple of revenue and SDE. These multiples are applied to the financials of the business being appraised to arrive at an estimated selling price.

Get a Free Business Valuation from BayState Business Brokers
BayState Business Brokers offers a free business appraisal using the market approach to an owner who is seriously considering selling their business. There is no cost or obligation. If you are considering selling your business, contact us today to schedule a free business valuation.

Buying a business? What a business broker should have told you.

Buying a business is different from buying anything else. Understanding how business brokers think and operate can help you to be a better buyer. Here are some truths that we operate from:

• At least 90% of the prospective buyers who contact us won't buy a business-from us or anyone else.

• On the average, a business has to be introduced to about 30 buyers to sell it.

• Having enough money to buy a business does not set you apart. Many buyers have the money to buy a business.
• It takes a lot of time to work with a buyer to sell a business. So we try very hard to be sure the buyers we work with are serious.

• Business brokers believe that a good business, priced reasonably, with a good seller will sell. Understanding what a "good" business is could be a topic for a whole blog, but at the very least, it means a business in a desirable industry, at a reasonable price, with available financing, with real numbers that demonstrate that the business will generate an adequate income to a buyer.

What all of this means is that it is important to our success to figure out, as quickly as possible, which buyers are in the 10% group that are actually likely to buy a business and which are in the 90% group that won't. Otherwise, we will waste a lot of our time working with tire kickers. Here are the things we look for to figure out which group you belong in:

"You show me yours and I'll show you mine" You are asking to see a lot of highly confidential financial information about a business. If you won't give us similar information about yourself, you won't be shown information about the seller's business. If you own a business, that, by itself, does not tell us anything about your financial situation.

It takes reasonable, and flexible, people to get a deal done. If your attitude is "it's my way or the highway", we are likely to let you hit the road. What do we look for? Do you give us information about yourself easily? Do you make a federal case out of the language in our confidentiality agreement? How do you treat us? We are not interested in introducing our seller to difficult, unpleasant people who are not likely to buy a business.

How can you stand out from the crowd? Take actions to show us you are serious. Come into our office and meet with us. Visit businesses you are interested in. Give us a phone call to remind us that you are still looking for a business to buy. This may not be what buyers normally do, but buying a business is not like buying anything else.

If you are serious about buying a business, you need to communicate. Respond to communication from us. If you look at a business, let us know what your interest is. Think about the broker's point of view: if we have to chase you to communicate, how likely is it that you have the drive to complete the purchase of a business?

Unless you have all of the purchase price in cash, you will need a loan to buy a business. Whether the lender is a bank or the seller, they will want to see business experience that relates to the business you want to buy. We do this screening right up front so we don't waste anyone's time working with an unqualified buyer.

Your personal situation reflects how motivated you really are. There is not much you can do about these issues, but we look at them. Do you have a corporate job that pays $150,000 a year? We question whether you are going to leave it, particularly in this economy, to take the risk of owning a business. On the other hand, if you are unemployed, come right in.

Finally, keep these things in mind, because they are extremely important:

Be honest. If you have a skeleton in the closet that could affect your buying a business, let us know about it. We want to sell businesses and may have a solution to your problem.

Maintain Confidentiality. This is the top concern for most sellers. If you ever violate confidentiality, that will be the end of our showing you any businesses. Don't tell your friends and relatives, who do not have a need to know, that you are looking at a particular business.

As a buyer, I hope these insights help you understand how brokers think so that you can be more successful in working with a broker to find the business you are seeking. We look forward to working with you, so contact us to schedule a meeting with one of our professional brokers.

Are you running Martha’s campaign or Scott’s?

Don't get your dander up. This blog is not about politics; it's about marketing - all the networking, blogging, tweeting, advertising - that we do to get customers.

Unless you've been asleep for a month or don't own a TV, you've heard about the Senate race we had in Massachusetts, Martha Coakley vs. Scott Brown. Despite Democrats having 25 percentage points more of the electorate registered, Brown, the Republican, won. Political analysts will point to the economy, healthcare reform and other factors that affected the race, but what I'm writing about - and what impacted who won and who did not - is the campaigns each of them ran. Scott Brown ran harder and connected with the voters as someone who understood them and their problems, and he came across as a likable guy. On the other side, Martha Coakley didn't run very hard (she had several days where she did not do any campaigning), apparently didn't know much about the Red Sox, a Massachusetts icon, and acted entitled to the seat. Brown won.

Brown won in much the same way that Obama did: he connected continually and positively with his audience. Doesn't this sound a lot like basic salesmanship? Work hard, be likable, and earn trust. This approach will win customer loyalty more than product features and benefits almost every time. In fact, you can take this idea one step further. Each of us talks to or emails many people every day. Many of these people already know us. Every one of these interactions sends a message about who we are. I don't care how competent you are, if others don't like or trust you, it is unlikely they will use your service, buy your products, or refer you to other people.

Like other professionals, we are on Facebook and LinkdIn; we tweet and we blog. We are doing this to connect better with the people we already know and find new people to network with. But there is an easier and cheaper marketing that we all do every day, whether we are conscious of it or not, and that is through the interactions that we have with all the people we already know and come into contact with in the course of our daily lives. Remember, you are marketing yourself in each one of these interactions in one way or another. Make sure that these interactions are ones that make you welcome and that would encourage people to recommend you to the people they know.

What your accountant can do to help you buy a business.

In the process of buying, and owning, a business, a good accountant can help you significantly. Here are some specific ways in which an accountant should help you buy a business.

Analyzing financial statements. An accountant can compare the target company's financial ratios to industry averages. This can put the target's financial statements into perspective and show you how well the company is doing. An accountant can also show you the trends in the financial statements over time to give you a perspective on the direction the business is going financially.

Be sure to look not only at the income statement, but also the balance sheet and the cash flow statement. Many small businesses won't have a cash flow statement, but your accountant should be able to prepare it from the other statements. Ultimately, a good business should generate cash and the cash flow statement will show you if it is, how much, and how the cash is being generated.

Business valuation: An accountant may be able to prepare a valuation for you or help you analyze a business valuation prepared by another appraiser. Just because someone is an accountant doesn't mean they are qualified to prepare business valuations. Check their credentials.

Due Diligence. When you get the business under agreement, your accountant should help with the due diligence by checking the documents that verify the financial information. An expert in the particular type of business you are buying, such as a former business owner, can be very helpful in doing the due diligence. They can streamline the process by knowing what to look for and they should be able to spot problems more quickly.

Tax advice. Part of the sale process is deciding on the asset allocation. This affects your future taxes and how quickly you can write off the purchase. A tax accountant can recommend an asset allocation and advise you on how a proposed allocation will affect you.

Financing and Business Plans. An accountant can help you prepare the business plan which you need for loan applications to buy the business.

Your accountant is a key business advisor. Choosing the right one is important. But, remember, you should be making the decisions.

For additional help in finding or buying a small business, contact us -- 617-562-5700 or info@mabusinessbrokers.com.  

Due Diligence – It’s not how much you get, but what you get.

When a deal is reached to buy a business, one of the contingencies is due diligence. This is when the buyer examines the books and records of the business being sold to verify the information that was presented and to look for any other problems that might cause the buyer to terminate the deal or seek to revise the price or terms. The typical period for due diligence in the sale of a small business is two to four weeks. It is important that the buyer use this time wisely.

Sometimes a buyer sends a laundry list of information that they want in the belief that if they ask for lots of information, they are more likely to find any problems. The problem with this approach is that because the buyer receives so much information, they may miss what is important. It can also take a while for the seller to put together the information and for the buyer to review it, using up more of the due diligence time.

Here are a few thoughts on how to approach due diligence more effectively. Keep in mind these are the author's thoughts. You should get the advice of your lawyer, accountant, and other advisors on how to handle due diligence.

Separate the due diligence into three broad areas - verifying the financial information, checking for other deal-breakers, and crossing the t's and dotting the i's. The first priority is confirming that the financial information is accurate. If it isn't, you may terminate the deal or seek to revise the price or terms. If this is verified, the next step would be to check on other issues that could be deal-breakers. This could be undisclosed liens, contingent liabilities, or other problems. The final group, "crossing the t's and dotting the i's" may be items needed by the attorneys to close the transaction, but are not typically problem areas.

One way to reduce the time it takes to review the material is to use sampling. Let's say you would like to look at all the invoices and expenses for the past three years. But, you don't have the time to do so. You could ask the seller for monthly income statements for the past three years and look at all the information for a few months. If the transactions in the chosen months are confirmed, you may decide that it is likely that the rest of the information doesn't need as much review. You may look at less data to confirm the rest of the information.

Here are some other tips. You can verify the seller's tax returns by getting copies directly from the IRS. The seller needs to fill out a 4506 form authorizing you to receive the copies. Speaking of the IRS, you may want to check out their "Audit Technique Guides". These manuals are guides for auditors on how to examine particular businesses. There is one that covers retail businesses. These can be found on the IRS website.

Buying or Selling a Business? Business for sale market returning to 2008 price levels.

If you are thinking of selling your business or in the market to buy a business, you should know how the market is doing.  BizBuySell recently issued a report on the market for business sales in the fourth quarter of 2009.  BizBuySell.com is the Internet's largest marketplace for buying or selling a small business.

Here are some comments from the report:

"Many business owners delayed plans to exit their businesses and retire in 2009," says Mike Handelsman, General Manager of BizBuySell.com. "In the latter part of 2009, we started to see clear signs of recovery, and 2010 is now shaping up to be a much more productive year for selling and buying businesses."

"Business-for-sale transaction pricing is returning to levels not seen since mid-2008, due to increased demand for small businesses as a result of higher unemployment as well as the slow return of capital available to business buyers."

"The median closed-transaction sale price rose 1.4 percent year-over-year in the Fourth Quarter of 2009"

"While manufacturing businesses and many retail businesses remain less active categories for business-for-sale transactions, the recovery in the industry has been led largely by service businesses and restaurants."

"BizBuySell.com projects that 2010 will show slow but consistent recovery in the business-for-sale market, citing the following industry drivers:

* Latent Supply. For the past 12-15 months, small business owners have focused on keeping their businesses afloat, and finding ways to earn a living, rather than focusing on a potential exit. That latent supply will begin to hit the for-sale market as the economy and prospects for finding motivated and qualified buyers improves.

* Unemployed Workers Seeking Jobs. With unemployment hovering above 10 percent in most markets, laid off workers will increasingly look to "buy a job" by finding a small business to provide income.

* Easing Credit. With both supply and demand for small business transactions increasing, the remaining key ingredient to return the market to full health is the availability of purchase capital. The Federal Government and the SBA have been focused on helping banks ease their lending restrictions to provide necessary capital to the small business market.

* Baby Boomer Retirees. In addition to the improving market dynamics of supply and demand there is an ongoing macro trend of the U.S. baby boomer population reaching retirement age. As increasing numbers of small business owners near retirement, this trend will continue to bring above average numbers of small businesses to the sale market"

 

Distressed Business Sale: Avoid bankruptcy and end up with money.

We may be able to sell your business even if it is distressed and not making much money.  A business that is close to business bankruptcy may still have a significant value - above the value of the hard assets. In many situations, the most valuable asset of the business is the customer base. And, there are many companies that will buy the business at a good price, particularly in a recession when even good companies are suffering from lower sales and it is hard to grow sales. We call these types of sales "fold-in acquisitions" since the acquiring company normally merges the business being sold into their existing business. There are two types of fold-in acquisitions - synergistic and/or strategic.

The most common fold-in acquisition is synergistic. Another company in the same industry buys the business and by combining the operations eliminates costs. These purchases are usually very profitable for the acquirer. A strategic acquisition is one where the increased profits are the result of the acquirer using an advantage of the acquired company. This could be entry into a new market or the acquisition of intellectual property that the acquirer can use to increase their sales or profits.

BayState Business Brokers has done a number of these types of business sales and usually there is a good market for the business being sold. It is not unusual to get multiple offers - at very different prices -- and close a deal quickly - within a few months. It is typical to get a payment at the closing, an earnout based on future sales, and employment for the seller.

These are also the type of business sale where a competent business broker, experienced in this type of sale, is needed. A FSBO (for sale by owner) can be disastrous. Here's why:

Confidentiality is even more important. If employees, customers, or suppliers learn that a company, in financial trouble, may be sold, they may leave. It is very difficult for an owner dealing directly with potential buyers, to keep the situation confidential.

To get the best deal in a business sale, it's important to introduce the business to the most potential buyers in order to get multiple offers. This requires a targeted search for buyers since most of the potential buyers are not actively looking for a business to buy. A business broker can do this search while maintaining the confidentiality of the business being sold.

Typically, if the business is in trouble, the owner is busy just trying to keep the business going. It is very difficult for the owner to deal with multiple buyers.  They are usually dealing with only one. And, that buyer, knowing the situation, may take advantage of it to force the seller into a bad deal.

In order to show a buyer the value of the business, a good written presentation, with recast financials based on the value to a strategic or synergistic buyer, is needed to get the best deal. A business broker can prepare this presentation.

Hopefully, your business is not close to business bankruptcy. But, if you are, contact us. We may be able to sell your business and avoid business bankruptcy.

Want to buy or sell a business? The market is getting better.

If you are in the market to buy a business or sell a business, you want to know what the market is for business sales and the end of the year is a good time to review the current situation. I'm writing about the market for businesses with revenues under $5,000,000 located in the greater Eastern Massachusetts area.

A third-quarter report from BizBuySell - the leading website for businesses-for-sale -- shows the year over year comparison in number of sales improving, but still lower than the same period in 2008. Also, the multiples of sales price to cash flow and sales price to revenue were down about 12% and 11%, respectively in the quarter, versus the same period in 2008. The report can be read at http://www.bizbuysell.com/news/article064.html.

This is national data; we saw a better market locally. We saw a drop in number of sales versus 2008 primarily in the first half of the year. The last half of the year has been active with a number of business sales. We have several businesses under agreement. We are not seeing a drop in selling price multiples. A business that has not experienced a drop in revenue and profits during the recession should sell for the same price as prior to the recession.

Another trend that we are seeing, which is also reported by an ACG/Thomson Reuters survey, is more strategic deals. According to this report: "Overall, strategic merger activity accounts for 94% of total announced M&A this year, the highest percentage since 2001." For us, these are deals where the seller's business is making little or no income, but has a valuable customer base. We are seeing a strong market for these deals with multiple offers, frequently including employment for the seller.

We are not finding financing to be an impediment to getting deals done. There are many healthy community banks in this area and many offer SBA loans. Part of the stimulus plan was a waiver of upfront fees and raising the SBA guarantee to 90%. This has been extended to the end of February, 2010. The vast majority of our deals have involved little or no seller financing.

If you are thinking of selling  your business and wondering whether to wait, you should also consider the change in tax rates which are likely to go into effect at the end of 2010. The Bush tax cuts will expire and normal income and capital gains rates will go up unless Congress extends them. Indications are that they are likely to go up after this year.

If you are thinking of selling your business, contact us. We will not charge you to discuss your situation. We will normally provide a free estimate of the likely selling price. Of course, any discussion or information you give us will be kept confidential.