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.

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.