Sunday, November 29, 2009

Eight Steps to Prepare Your Business for 2010

Anyone who works with a business knows that the first 100 days of owning a business is crucial to its success. What the owner does from the word "go" can change the entire future outlook. However, it's important not to lose sight of those all important initial steps. Whether you're a long-time business owner or just starting out with your first business, getting back to the basics can help you boost productivity and efficiency in your operations.

Here are eight critical steps to gain an introspective look into your store and help determine what to do as 2010 approaches.

1. Meet with your key employees. Indeed, meet with everyone on your payroll, but prioritize those who are most important to the success of your business. Your employees are the front line of your organization. As such, they can sometimes be more closely tied to how the business is doing and where there is room for improvement than you may be.For new business owners, this step is crucial for easing anxiety over an ownership transition. For owners that have been at this a long time, reconnecting with your employees will give you great insight into where your business is going, what your customers are saying and how frontline operations can be improved.

2. Meet with key customers. A business doesn't survive without customers. That's true for the small family-run business, to the franchise chain, to the Fortune 500 company. Prioritize your most valuable customers. Who are the largest and most profitable clients? Who buys the most products or services? Ask what you can do better to retain their trust. Try to meet with customers your business may have lost recently and ask what you can do to earn their business again. Don't forget the smaller customers. With proper care and nurturing, they can become your biggest spenders - and your biggest advocates. If it makes sense for your business, consider appointing a go-getter employee with a new task: customer service rep for small and mid-sized accounts. Perhaps add an incentive for that employee if he or she brings in more business from those existing customers.

3. Meet with key suppliers. If suppliers ran into payment issues with the previous owner of the business, they'll probably be relieved to find out it's under new ownership. On the other hand, if things went smoothly in the past, they might suddenly become nervous about your ability to continue this positive relationship. The key is to assure them by meeting with them right away and clearly spelling out how you plan to work with them. They are your partners. Listen to them. Consult with them. They can help you succeed - or fail. Of course, there could be big issues that need to be addressed. Perhaps one key supplier doesn't understand the concept of a deadline, or the products you have been receiving are of dubious quality. Manage these issues, and, if necessary, be prepared to make a change before you meet with problem suppliers.

4. Get on top of the accounting. Organize, organize, organize. Know who you are paying and why. Know how much you are spending and why. Who's paying you on time and who's not? These are all concerns you need to examine routinely. You need to identify problems, but more important, you need to make sure you understand the process of how your records are kept.You may want to change how the books are done if you're not satisfied with the process. If you have a knack for numbers, consider bringing the basic accounting in-house. If you don't, use your network to find a trusted accountant. Typically, a new owner can save money through a simple financial review. Multiple small savings can really add up and drop immediate dollars to the bottom line.

5. Get hands-on experience with the business. If you're running a small business, this is probably the first thing you will do simply because cash flow dictates you do much of the work. But if the business is larger than a storefront, you want to get hands-on experience in all aspects of the business. This won't make you an expert in marketing or customer service, for example, but it will give you a better understanding of the processes involved. Also, if you detect a problem in marketing, for example, you will have better understanding of what you should be asking to fix that problem. Also, having your employees seeing you on the job accomplishes two critical functions: First, it can be a morale booster to see the boss in the trenches. Second, it puts employees on alert that you're paying attention to what they are doing. That can reduce laziness and theft.

6. Create an issues list. This is an ongoing task. As you work your way around the business - talking to your employees, customers, suppliers and understanding how each department works - you'll start to encounter issues that need to be addressed. Rank these by importance. For example, if you know you have waste in the manufacturing process, you will want to put that high on your list. Does a key supplier deliver substandard products? As you rank your issues, you can develop an action plan. That will help with the final step.

7. Refine your business plan. Now it's time to take everything you have learned and determine how to optimize your opportunities. What needs the most attention? Where can your unique skills be most useful to growth? What aspects of the business can you trust to certain employees?It is typically not a good idea to refine your business plan until you carefully and critically look at the business you just bought. Don't rush into changes on Day 1; waiting 100 days will lead to wiser decisions.Your patience will pay off in the long run.

8. Create an advisory board. It can be lonely at the top of a small to mid-sized business. All of the decisions ultimately land on your shoulders and you need to be well-versed in most functional disciplines to make the best decision possible. Business owners who are continually seeking out the "best" business practices will be well-prepared for the ongoing challenges. It would be smart to assemble a small group of trusted advisors who you can meet with on a regular basis. These meetings should be strategic and have a strong emphasis on reality-based issue resolution. If you cannot put the right group together there are advisory groups you can join that will serve as a "kitchen cabinet" One such service provider is The Inner Circle, which has operated peer-to-peer advisory groups across the country for over 30 years. The Inner Circle facilitates monthly meetings with eight to 12 business owners from non-competitive businesses helping each other think through their most pressing issues. When you get that many smart entrepreneurs together on a monthly basis, you are certain to gain a better perspective on how to run and maximize processes for your own business.

Running a business is hard work and having a plan is critical to ensuring your success. Most psychologists will tell you that one of the distinguishing traits of successful entrepreneurs is the willingness and ability to commit their plans to writing and executing those plans. Proactively manage your business and it will return you with many rewards both financially and personally.

Monday, November 9, 2009

Interview with Jeff Smiejek

We recently met with Jeff Smiejek, a partner with the accounting firm of Porte Brown, to discuss the current transaction market and what business owners should be doing to navigate these turbulent times.

Jeff Smiejek is a Partner with Porte Brown LLC. He is the Partner-in-Charge of Porte Brown’s Valuation and Transition Planning Practice Group. Mr. Smiejek specializes in financial valuations of business enterprises. Mr. Smiejek has provided valuation opinions for acquisition analysis, gift, estate and income taxation, marital dissolution purposes and dissenting shareholder disputes. Mr. Smiejek graduated with a Bachelor of Science in Business Administration, including a double major in Accounting and Finance from the University of Colorado in May of 1994. He is a licensed Certified Public Accountant, and became a Certified Valuation Analyst in November of 1998. He is a member of the Illinois CPA Society, American Institute of Certified Public Accountants, the National Association of Certified Valuation Analysts, Midwest Business Brokers and Intermediaries and the Entrepreneurial Armada.

Jeff, thanks for taking time to visit with us. Please tell us a little about Porte Brown and your range of services?
Porte Brown is a 60 person, full service public accounting firm based in Elk Grove Village that provides services for privately-held business up through the middle market and its owners. Porte Brown is known for its value driven, efficient business processes, no extensions for tax return filing policies and our on-site client visits, which include same day financial statement preparation and related discussions. Porte Brown believes that it is critical for business owners and their advisors to receive financial reports and related information on a timely basis so that decisions can be made now, that positively impact the business today and create value in the future.
Porte Brown offers financial statement and income tax preparation services for privately-held businesses and their owners. We also offer computer consulting, pension administration, valuation and transition planning, financial advisory and government audit representation services.

What have you seen this past year with business sale transactions?
We are still seeing deals getting done. However, it depends on what the business owner is trying to achieve. We have several clients that have purchased add-on companies that were aligned with their specific strategic business plan for their platform business. They have been able to purchase business assets at discounted values that will help them expand their market and operate more efficiently to hopefully take advantage of the future upturn in the economy. In regards to our clients that are considering selling, it depends on the specific goal that the owner is trying to accomplish. If they can still get what they deem to be a fair price from the transaction, then some have decided to still pursue selling their business in these tough economic times because of their personal time lines. However, several or our clients are holding off putting their business on the market, riding through the current economic storm, and focusing on creating value in their business now, so that they can achieve their financial goals related to selling the business in the future when the economy turns around.
On the other hand, the current market has allowed certain business owners who were considering selling or transferring their ownership interests to the next generation to transfer their business at lower values that help them achieve their estate planning goals. In these situations, it is a very good time to consider transferring the business.

Do you have a checklist or guideline for owners to follow when considering the sale of their business?
We typically sit down with a client that is considering selling their business to discuss the steps that they should follow when preparing their business for sale. There are many areas related to running a business that require an owner’s attention. However, to make sure the business is ready to be sold, I recommend focusing in on certain key areas so that they leave as few questions as possible for a potential buyer. Following are some of the areas that we focus on when preparing our client’s business to be marketed, to be sold:
• Accuracy and availability of the business’s financial records
• Maintenance and current condition of the business’s physical assets
• Status of litigation or potential litigation
• Review of the business operations and competitive advantages
• Review of the business various leases
• Condition and completeness of other business records
• Review of the various intangible assets and protection related to these assets
• Organizational chart that supports and identifies the existence of mid-level management and other employees
• Receivables collections
• Related party receivables and payables
• Regulatory compliance
• Selling memorandum and plan that confirms the owners desires and needs related to the sale of the business
Obviously, this is not a complete list and depending on the type of business, some of these areas may not be applicable. The key is to identify those areas that would “bog down” a potential buyer during his or her investigation and due diligence, and try to clean up those areas before putting the business up for sale.

Could you elaborate more on the planning steps an owner should take leading up to a third-party sale?
I will highlight a few areas that I feel will have an impact on the value of the business and ultimately, the deal closing. Business owners should consider these when preparing to sell their business to help maximize the proceeds from the sale of the business.
1.Financial Records. should consider having an audit or review of the business financial statements. Audited financial statements are generally not needed by small businesses, but some buyers might insist on having them. While more costly, audited financial statements provide the highest level of assurance to a potential buyer.
2. Business Identity. Business owners need to work on transferring the identity of the business from the owner to the business. In many small businesses, the owner is the business. He has the relationships with the customers and he is critical to the successful operations of the business. A business owner should make sure that he has a well trained work force that will continue to operate efficiently after the sale. The more relationships and management responsibilities that can be transferred to employees that will remain in place with the transfer of the business, the greater the probability that the business will continue to operate as it has historically.
3. Status of Litigation. Existing or potential litigation can create difficulties in selling the business and can often become "deal-breakers". This includes all forms of litigation, from product-related claims, to employee relation issues, to environmental issues. If the potential buyer cannot obtain a good understanding of the risk and exposure related to the litigation, he may decide to walk away from the deal of significantly reduce the price he was willing to offer. Thus, it is normally in the best interest of the owner to try to settle any existing litigation, and prevent any potential litigation from occurring, before offering the business for sale.
4. Invest in Income Taxes. The owner should consider reducing or eliminating any excess compensation and fringe benefits that the owner receives from the business. This help will prove to the buyer the true earnings power of the business and show that business can operate successfully without incurring these expenses.

How important is a formal valuation for a business owner? If important, why?
In my opinion, an independent business valuation will help increase the probability that a business sale transaction will be successfully completed. First, it will help create reasonable and realistic expectations for the seller of the business. The business valuation should be completed early on in the process that a business owner goes through when he is considering selling his business. More importantly, it will allow the owner to determine if the estimated value of the business and the sale proceeds will satisfy the owner’s financial needs related to the transaction. If the proceeds will not, then hopefully the valuation process will have identified the most important value drivers that the owner can focus on to increase the value of the business, so that in the future the sales proceeds will meet their financial needs. A valuation will also create additional confidence for potential buyers or investors, that the value has been prepared independently and without bias. The more confidence that the buyer and seller have that the number is fair, the greater chance there is of closing the deal.

There has been a lot of talk about an increase in the Capital Gains tax. What is your perspective on the current administrations plans for Capital Gains and how it will impact the business transaction market?
I think most people agree that the current administration will raise long-term Capital Gains tax rates. My personal opinion is that they will increase to either 20 or 25 percent, up from the current long-term capital gains tax rate of 15 percent. Obviously, this will negatively impact what ends up in the seller’s pocket, in most cases. It means that the sellers will have to sell their business at a premium of 5 -10 percent to receive similar after-tax proceeds when compared to today’s lower tax rates. You would assume this would motivate business owners to consider selling their business before the Capital Gains rates increase. However, the current state of the economy has still had more of an influence on a business owner’s decision to sell his/her business. The most important factor is still that the gross proceeds from the sale of the business have to be high enough, while taking advantage of the current low capital gains rates, so the owner’s financial needs are met.

We really appreciate Jeff's time and perspective on the current market. This interview confirms that planning is the key to a successful transaction.

Monday, October 26, 2009

Interview with Mark Goodman of e-Conversation

We are continually asked by owners how they can enhance their businesses prior to pursuing a third party sale. This is a complex question and requires a indepth understanding of the business and its operations. However, ensuring that your top line sales are growing and that you have solid brand awareness are critical to attracting potential buyers to your business.

We recently had the opportunity to interview Mark Goodman who has created a platform to help companies leverage the internet in a unique way to enhance their online presence.

Mark is the CEO of e-Conversation a consulting based business focused around using video and social media to create client awareness and loyalty. Mark has a varied work experience. He was an educational television producer/director and a film buyer for a national theatre chain. Following that experience, Mark spent many years working for Motorola. He was one of the first business people in the cell phone group, rising to positions in distribution, marketing, and business management. Mark also developed and implemented internet strategies. Then he went on to manage service, parts and major account business opportunities. Subsequent to his experience at Motorola, Mark worked in sales management for a Silicon Valley company.

Mark has an MBA and an MA in Radio/TV/Film.

Mark, you are an expert in attracting and maintaining customers using new Web 2.0 internet tools, before we talk about how to use the tools, tell me how this creates value for a business.
There is a traditional value and a non traditional value to taking advantage of the new tools. First, let’s talk about the traditional one. Using the tools and the processes below, you can dramatically lower your costs of selling and customer support. Customers and users are looking to get answers on line. Below, you will find a process that allows for the creation of answer bits in multiple media. Lower sales and support costs translate into greater profits.

Now, let’s look at the non traditional value. The size of your social media audience can increase the value of your company. If you were supporting hundreds of users through Twitter or YouTube, that would be part of your valuation. Recently, companies have been hiring individuals based on their internet following. Companies like Twitter are totally valued on number of participants. Being a “recognized” expert for Google or YouTube, creates value beyond the ordinary.

How does a company need to change how they are creating content to attract Web 2.0 customers and users?
The content creation plan for a small business used to be pretty simple. When you rolled out a new product, you did a brochure and maybe a press release. Perhaps you ran a small ad. You trained your sales force, then got going. When it came to customer support, your technical people trained phone support.

What has changed in the last 10 years. First, your brochure went on line. Then, you decided rather than running ads, you would have buyers come to you using pay per click and search engine optimization. More and more, your buyers and customers did not want to see a sales person, but wanted to find the answers to their questions on line.

How has that changed how you create content?
When searching on line, your users want to find the answer to their individual question(s). The typical searcher is typing in four or five words. In a “decision engine” perhaps even asking a question. So rather than a brochure, white paper or FAQ list, you need to create an “answer bit”.

Also, realize that your buyers or users looking for service want to find the content in the media that they are comfortable with. Some buyers want to find it in a blog. Others, are YouTube viewers, some are searchers of Google or Bing. You can maximize the reach of your content by representing it in various media, if you plan for it in advance.

Our content creation process is based on the “interview” model. The content creation starts with a TV show. This is a 25 minute show that runs once a week. We have found that with the interview process, subject matter experts are more engaging, and answer length is more manageable.

The show is posted in its entirety on BLIP.TV. The show is then edited into clips and put on YouTube. The clips are also turned into blog postings. You can also reference the content in an email campaign. Content is then embedded on your website in the appropriate portions of the website.

Isn’t that a pretty complex and expensive process?
The key to keeping the costs down is designing the interview up front. The interview questions are created so that they can easily be cut into segments. Additionally, the dialogue during the interview focuses on topical issues that can be reconfigured into a blog posting. Lastly, we watch the length and complexity of the answers to insure that the clip will play well in the YouTube environment. Each question is its own answer bit. An answer has to be complete enough to answer a question, but not so complex as to lose the viewer.

The weekly show allows for the creation of continual content. Both users and search engines like the creation of continual content. The more users and viewers that you have in you channel or blog, the more Web 2.0 referrers will route people to you. When you reach a volume on a YouTube channel, you start to get more people finding you. It is not a linear increase, more of a quantum leap.

Mark, can you cite an example of a company you have worked with that deployed these services and experienced an increase in sales?
Absolutely. One local organization that we worked with recently has seen an increase in two of their offerings. Sales of one product line were up over 50% for the last 6 months, as compared to the 6 months prior. In addition, the volume through their local facility was up 30% in September as compared to September 2008.

This client understood the value of our services and the fact that they are most effective when used as part of a total marketing plan. We worked with the client to develop web content and that became the perfect complement to optimized search and pay per click.

How does someone get started?
The first step is making an inventory of what questions prospects, customers, and users are asking. If you are doing search engine optimization, that’s a good place to start.

You can do a couple of segments to try it out, but, just doing one or two segments, won’t help draw traffic. On the other hand, a regular program can have significant value on your sales, costs and valuation.

Chances are your customers are looking for products and services online and your ability to deliver relevant content can easily separate you from the competition. You can reach Mark at to learn more about the above services.

Tuesday, October 13, 2009

Interview with SCORE Chapter Chair Eshwar Noojibal

ESHWAR NOOJIBAIL is the chapter chair of SCORE Chicago which provides free business counseling and management consulting for people who already own a business or for those who are thinking about starting or buying a business. At the heart of SCORE are a group of experienced counselors who volunteer their time to help existing or budding entrepreneurs. The Chicago chapter has more than 25 locations in the greater Chicagoland area.

Eshwar has over 40 years of professional and business experiences in academic, manufacturing, environmental and construction industries, as a college professor, Chief Industrial Engineer, Production Control Manager, and as CEO. Most of the key experiences were in the area of corporate management; financing; specialty construction; marketing; new business start-ups; new product development and introduction; manufacturing; production management; warehousing and distribution systems; plant layouts; new plant start-ups. In 1980 he started a specialty contracting company specializing in process piping and Design Build Engineered Energy Management Systems. His education background includes, B.S, I.E, from University of Michigan, Physics and M.E. from universities in India, and M.S.I.E from Illinois Institute of Technology. He is a licensed Professional Engineer of Illinois and Certified Energy Manager, Member of American Association of Energy Engineers, American Production and Inventory Control Society, American Institute of Industrial engineers.

We recently caught up with Eshwar for one of our BizBrokerJournal interviews.

Eshwar, thank you for taking the time. Can you tell our audience how SCORE can help someone who is planning to purchase a business?
For an entrepreneur, buying a business is very exciting, yet it can be a daunting task. It is very easy to overlook the need for a detailed evaluation of the potential transaction. Often they think that they can avoid the necessary and arduous tasks, such as writing s business plan, going through the whole start up process, securing financing, etc. This is far from the reality. Of course, to some extent, buying an existing business shortens the new business start up time line. Yes, it has an advantage of having an existing organization in operation. That includes, customer base, supplier chain, may be even the bank relationship. More than anything, the lure of an existing cash flow stream blinds the entrepreneur rushing into completing the transaction as soon as possible. Here is where a SCORE counselor can be of an immense help. He doesn’t have the interests of broker, nor of the seller. His interest is solely on his client.

The counselor starts by helping the entrepreneur in evaluating his personal background including his experience, goals, and financial status. Then, the counselor would take the important steps of guiding his client through the detailed tasks of due diligence, market value, business plan formation, financing and deal consummation.

How can SCORE help an existing business owner improve their operation?
Every existing business wants to improve; there is no surprise in that. The question is what areas they need improving. More often than not, businesses have a difficult time determining what specific area (s) they need help. Needless to say, all businesses want to fatten their bottom line. How can they do this?

The SCORE counselor working closely with his client analyzes the entire business, starting from the owner to shipping clerk; from sales to delivery; from marketing to financing, from operation to personnel management. The goal is to treat the very decease, not just the symptom. The counselor knows that every segment of the business contributes to profit. Then, what particular areas the business should improve? How can they accomplish that? What are the alternate solutions? What resources the business needs? Can they afford to do that? What is the expected return on investment? These are some of the questions the counselor would help the business to address.

How has SCORE Chicago changed in the last few years to keep up with the changing business world?
SCORE counselors undergo serious and continuous education and training program to keep up with the ever changing and fluid business environment. There are technological changes to keep up; there are demographical shifts to observe; there are consumer behaviors to understand; there is a tightening credit market to contend with; and the new SCORE counselor is ready for all the changes and ready to counsel his client.

Counselors are experienced enough to know that fundamental business concepts have not changed; however they are keenly aware of the changes in demographics, geographics, psychographics and the buying behavior of the business clients. The businesses still have to determine the needs of their clients; they still have to provide value to them; still they have to be competitive; they still have to provide superb service to their clients; still they have to make the product or service available to the clients, at right time, at right place and at right price.

How does someone get started with SCORE Chicago?
One can get involved with SCORE Chicago in several ways. They can volunteer as a Counselor, and join the other 11,500 counselors nationwide providing services through 370 local chapters. Interested and qualified professionals, in business or just retired who sincerely believe in improving their communities by creating new jobs, can contact the local chapters on how to become a SCORE counselor.

One can support the SCORE mission by contributing to their cause as a donor by contacting the local or national chapter. SCORE generally is dependent upon the local donors for 25 to 30% of their operating budget. The rest of the resources are self generated by their chapters and a small grant from the Small Business Administration. Often, some of their clients also donate to SCORE as an appreciation for receiving substantial free counseling, consulting and mentoring services.

You can become a sponsor of SCORE activities. The sponsor generally supports workshops, or other services to be conducted at the sponsors’ premises. Or the sponsor just donates a fixed amount of money once a year supporting SCORE CAUSES.

You don’t have time? You can be a resource counselor for SCORE. You can provide your expertise that might be tapped by a SCORE counselor on as needed basis, including conducting advanced business topic workshops, or offering other services that SCORE clients might be seeking. SCORE depends on their workshops for over 50% of their funding requirements. SCORE Chicago conducts over 125 for fee workshops per year and another 130 free workshops all over Chicagoland.

Can you give us an example of some success story of someone who worked with SCORE Chicago?
Chicago School Supply—A Story of Growth
Michael Ockrim began selling school and office supplies, as well as furniture and equipment, to schools in the City of Chicago. His company, Chicago School Supply, LLC, sought to take advantage of a gap in the school supply market to fulfill the needs of Chicago schools. Michael came to SCORE in need of help in expanding his business
Three SCORE counselors, Gene Migely, Norm Letofsky, and Phil Hartung, worked with Michael to develop hiring, training and compensation plans and to deal with a multitude of business issues. They continued to meet with Michael every three months to review his progress and to advise on actions and plans.

Since it started, Chicago School Supply has added three sales representatives, an office manager and three e-commerce websites. In 2008 the company achieved over one million dollars in annual revenue, which represents a 180% growth, and the company continues to grow.

Michael had the following to say about the help he received from SCORE:
“As an entrepreneur, it is important to surround yourself with smart people that challenge your thoughts and business model. The SCORE coaches inspire critical thinking and provide excellent outside perspective. Oftentimes, as business owners, we become so consumed by our day-to-day corporate minutia that we fail to see the bigger picture or analyze the core competencies that have made us successful. Thank you SCORE for taking the time and effort to work with me and Chicago School Supply!”

As the new chapter chair for SCORE Chicago, what would you say to someone who is thinking about contacting SCORE Chicago for advice?
We, at SCORE offer our services to two distinct groups; 1) those who are already in business, and 2) those who are considering entering their own venture. As you can imagine, the advice is different for each of these groups.

The best way to determine if SCORE Chicago can help you is to visit our website and to set up an initial consultation with a counselor.

In our experience, SCORE is a great resource that is available to anyone facing the challenges of owning, starting or buying a business. We appreciate Eshwar taking some time to share his thoughts and insights.

Friday, October 2, 2009

Deal Strategies from an Attorney's Perspective

It has been a challenging year on many levels. In the business transaction marketplace the deal advisors have had to dig deep into their reservoir of experiences to put and keep deals together. In a normal market, creativity is a primary factor in helping buyers and selling and that is especially true in this economy.
I recently had the opportunity to speak with Markus May, an attorney with Eckhart Kolak, who specializes in Mergers and acquisitions. Markus shared some interesting insights about the current market and potential strategies to get deals done.

Interview with Markus May from Eckhart Kolak:

Q: What kinds of deals are typical for you and your firm?
A: As a small boutique business law firm in the Chicago Loop, we see a wide range of deals. We have helped numerous “main street” businesses with a sales price of less than $1,000,000 and up to $40,000,000. Our sweet spot tends to be businesses selling in the $750,000 to $5,000,000 range.

Q: What has the M&A market been like in 2009?
A: It has been an interesting year from a mergers and acquisitions perspective. We have seen a large tightening of the credit markets and financing has really dried up in the first three quarters of 2009. Our firm remained quite busy, but we have heard that numerous other firms are suffering at this time.
It appears that due to the slow economy, business valuations are down this year. Because of this downturn in business values, some sellers are not placing their businesses on the market and are waiting for business values to increase. With the layoffs in management, there are a large number of buyers in the market. However, because of the lack of available financing, they have not been able to close on deals.
I believe the SBA’s relaxing of the goodwill rules (effective October 1, 2009) will help provide lending on the under $2MM loan size deals. In summary, the sellers tend to be on the market a little longer than they were in the last few years while waiting for a buyer with the proper resources to become available.

Q: Are there any other market conditions worth mentioning?
A: The other market condition we are seeing is a decrease in business valuations due to the overall economy and fear in the marketplace. While a company has, in the past, been able to base its selling price on historical revenues and EBITDA (earnings before interest, taxes, depreciation and amortization), current buyers are not agreeing with those valuation methods due to concerns related to the economy and its effect upon the business.

Q: How are sellers and buyers bridging this potential valuation gap?
A: We are seeing a large increase in performance based pricing using tools such as earnouts, equity ownership or profit sharing in order to try to bridge the valuation gap. Really, this becomes some form of deferred purchase price.

Q: Can you describe an earnout in further detail and provide an example?
A: An earnout is a purchase price component based upon meeting certain milestones. In the past, earnouts were typically used to address the “hockey stick” situation where a seller tells the buyer, “If you do A, B, and C, then your revenues/income will go up and therefore you should pay me more for the company.” The buyers of course asked why the seller had not done A, B, and C in order to increase the value of the business and were unwilling to pay for what the seller perceived as being a higher value for the company. This difference in value was often bridged by creating an “earnout” which provided that if certain parameters (revenue or income goals) were met, the buyer would pay an additional amount of money to the seller. For example, if a company was earning $500,000 per year in EBITDA and there was an agreement the value of the company was $2MM based upon that EBITDA, but the seller wanted an increased sales price due to things the purchaser could do to increase the value of the business, a buyer may agree to pay $2MM plus X% of EBITDA for the next two years, with a cap of $400,000 in earnout payments.

Q: How has the earnout situation changed in today’s environment?
A: In today’s economy, what we are seeing is more of a “reverse hockey stick” where fear is driving valuations. Buyers are unsure that even if a company has a solid five year track record, whether the earnings and profitability will continue in the future. Due to this fear, buyers are less willing to pay full value and are asking sellers to share in the economic risk. Further, this is another way to bridge the financing hurdle if a bank is not willing to lend on a deal. For example, if the buyer in the above example thinks the business is only worth $1.5MM, an earnout could be structured to provide that the buyer will pay an additional $500,000 for the business if EBITDA continues at the same level it was prior to the sale.

Q: Are there any issues with respect to how earnouts are determined?
A: One of the issues that often arises in these types of situations is a discussion as to whether an earnout should be based upon top or bottom line numbers. A seller prefers the earnout to be based on top line numbers, such as revenues. The buyer prefers bottom line numbers such as net income. In practice, this issue can be fairly heavily negotiated and there should be safeguards in the agreement that allow the seller to at least audit the numbers presented by the buyer to verify that the proper amount of earnout is paid to the seller.

Q: What other form(s) of deferred pricing are being negotiated?
A: Seller equity ownership in the new company is another option when a seller is hesitant to give full control to a buyer. Rather than just receiving earnout payments, a seller may require some ownership in the company and a board position in order to exercise some control over the company going forward. A deal may be structured so the seller retains some equity in the old company if the transaction is processed as a stock deal. If it is an asset deal, the seller may take an equity interest in the buyer’s company. Often the buyer may want an option to purchase the seller’s stock at some time. For example, there may be an option which forces the seller to sell its equity interest to the buyer once certain parameters are met; e.g., once seller has received $XXX in dividends, the seller is required to sell the stock back to the buyer. These are just a few ways to bridge the valuation gap.

There are, of course, tax implications to all of these different strategies and it is important to properly structure any type of deferred purchase price or performance pricing parameter.

Q: Do you have any other advice for buyers and sellers in this market?
A: We are still seeing deals getting done. It just takes a little more creativity than in the past and the people who succeed are still the ones who take the time to do things right. I closed a deal a couple weeks ago where I was able to save the client approximately $23,000 in the course of two hours at the closing table. If the client had not hired a deal attorney, this is money that would have been lost. Its important to surround yourself with a good deal team of a broker, attorney, accountant, and others who can help you succeed. This is not like a house closing or a general business contract where most attorneys are able to serve you fairly well.

Markus May backgrounder
Markus May is an attorney with Eckhart Kolak LLC - a boutique business law firm located in the Chicago Loop which provides its clients with high quality legal representation in business areas. Mr. May is a client focused business attorney with knowledge in a broad range of industries. He helps clients with transactions, including mergers and acquisitions and drafting and negotiating contracts, shareholder agreements, leases, and other documents. Markus is a frequent speaker on the legal aspects of buying and selling businesses and other business law related topics. He represents business clients as well as clients who desire to start, buy or sell businesses. Mr. May is a member of the Illinois State Bar Association Corporations, Securities & Business Law Section Council (Vice Chair 2009), the Chicago Bar Association Corporation and Business Law Committee (Chair 2009), the DuPage County Bar Association Business Law Committee, and the Midwest Business Brokers and Intermediaries (Board of Directors 2008 – present). He has published numerous articles on topics related to business sales and the operation of businesses. He can be reached via phone at 312-236-0646 or 630-864-1004 or via e-mail at or

Wednesday, September 16, 2009

The SBA has come to Their Senses for Business Acquisition Lending

The SBA has finally realized the error of their ways and reversed their Standard Operating Procedure change enacted on March 1, 2009. The SBA, at a time when small business sellers and buyers needed them most, made the decision to limit the amount of goodwill a bank could finance in a business acquisition loan. The rules change restricted a lenders’ ability to finance goodwill under a 7(a) program for the lesser of 50% of the purchase price or $250,000, whichever is less. The effect of this change was catastrophic - causing the banking industry to essentially halt most, if not all, lending related to business acquisitions. In a business sale transaction the Goodwill is the amount of the purchase that is over and above the value of the fixed assets in a business. This SBA change was particularly acute given the fact that most US businesses are service based with the majority of value derived from Goodwill.

After months of lobbying by various industry groups the SBA has taken steps to correct their mistake. Effective October 1, 2009, the new rules will now allow for Goodwill and Intangible Assets as follows;

A) Financing of a loan with Less Than $500,000 of Goodwill is ALLOWED without Restrictions

B) Financing of a loan with More Than $500,000 of Goodwill is Permitted IF the combined equity from the Buyer and Seller is 25% or more of the Purchase Price

C) Financing of a loan with More Than $500,000 of Goodwill AND the equity from the Buyer and Seller is less than 25% MAY still be eligible, however it will require a full SBA approval under CLP and GP processing.

These changes combined with the SBA’s 90% loan guarantee to the banks is VERY positive news. It will take awhile for this change to filter through and impact small businesses but these actions are a big step in the right direction and to be applauded.

The challenge that will remain is the declining financial performance of many small businesses. Thus, business acquisition lending will probably not come back in a big way until the top and bottom lines of these businesses recover from the effects of the worldwide recession. The good news is that many small businesses have attacked their expenses through layoffs and the introduction other cost cutting measures and it may not take very long to see positive earnings when the economy turns around.

Tuesday, September 8, 2009

Factoring to Finance a Business Acquisition

Financing has been a common theme for most of our blog posts this year. The lack of bank funds for business acquisitions has left the marketplace to scramble for alternatives. One such option is to 'factor' a company's receivables to secure a transaction. Factoring is simply the ability to obtain upfront cash against a company's accounts receivables.

As with most financing options, factoring has its pros and cons, and I recently had the opportunity to interview Sean Lelchuk of Bibby Financial Services to learn more about this service. Below is a recap of my interview with Sean and some insights into how this may apply to your business acquisition plans.

First, a little background on Sean and Bibby Financial. Bibby Financial Services is an independent, family owned business that operates in 27 countries. Bibby provides receivables funding services for domestic and export receivables, and purchase order financing. Sean is a Business Development Officer in their Florida office and is responsible for assisting clients with their factoring needs. Sean is a former small business owner and understands the importance of having access to capital for business growth and maintenance.

Interview with Sean Lelchuk from Bibby Financial Services:

Q: Please explain factoring.

A: Factoring is where an advance of cash is made to a Client against the purchase of an accounts receivable by a financing company (aka Factor). The Factor then proceeds to collect the receivable. The balance of the receivable less any fees due to the Factor is then payable to the Client on collection of the receivable by the Factor. Factoring is an effective way for a business to finance growth or to assist in the restructuring of a business. It is also a means by which an acquiring company may leverage existing assets of a target company as collateral for secured financing to help close a deal. It also does not lead to any loss in equity of your business nor does it involve taking specific security over personal assets.

Q: How can factoring be used to help buyers and sellers in a business sale transaction?

A: For the buyer, there are two main ways to use receivables finance to creatively finance an acquisition transaction.

1. Funding your receivables: In this scenario, you establish a factoring facility on your own receivables to extract cash out of your business to bring to the closing table. Usually, this can be done on a relatively short term basis allowing for the purchase of the target company with the conversion of a current asset.

2. Funding the target company's receivables: This approach is a little bit more complicated, but can work to even greater advantage. Assuming it is an asset sale, you can work with a factoring company to finance the existing receivables of the target allowing for the seller to essentially help finance the sale of their business. At the closing table, the factoring company will provide an advance on the outstanding receivables of the seller's company to contribute to the cost of acquisition.

For the seller, the advantages of this approach are that the seller usually does not need to offer direct financing to the buyer, can "take home" some of the money they have earned through delivering their product or service, and can, in some instances, offer this method as a way to finalize a deal.

Q: What are the Pros of Factoring?

A: The biggest pro in working with a factoring company is that the main determinant in whether or not the funding will come through is the credit of the business's customers - not the credit of the buyer or seller or their companies. To obtain traditional debt financing everyone knows that it can be a challenge to close on a facility, especially for an acquisition, and more challenging in these times. The other pros are that you will also acquire a built in credit team to monitor the business's customer quality and aid in decisions to sell to new customers, a collections team to help make sure payments are received in good order, and access to other types of secured financing as most factoring companies have a long list of colleagues that finance other assets (i.e. equipment, inventory, property, etc.) that may prove to be helpful in the event additional funding is needed. Also, factoring companies do not require the submission of a regular borrowing base certificate and all the time necessary to compile one, and in the event additional availability on the facility is needed it is much easier to obtain an increase from a factor than it would be with a bank - if the invoices are there and the debtor credit is good, these companies make money by putting money out the door.

Q: What are the Cons of Factoring?

A: Most often the biggest concern is cost. It is true that factoring rates are higher than a traditional line of credit, but the flexibility with a factor, the ease with which a factoring facility may be obtained, and the opportunities that can be realized usually outweigh the additional cost. There is documentation that is required on a regular basis, but this is usually related to the transactions conducted by the business (i.e. PO's, invoices, and proofs of delivery) and is typically readily available. Customer notification and invoice verification can be worrisome for those who are guarded with their customers, but I have found that this is usually managed very well by the better factoring companies.

Q: Can you give a recent example of how you used factoring in a sale transaction?

A: Recently, a venture fund wanted to acquire a company that manufactures flooring and sells to distributors. The fund had allocated a set aside amount for the acquisition, and expected, based upon purchase and sale negotiations that it would be sufficient to close the deal. At the last minute, the seller decided to raise the selling price due to an uptick in backlog orders and argued that the price increase was justified by the addition of the pending business. The fund went back to management, but was denied an increase in allocation for the purchase. The lead agent contacted one of our brokers who directed him to us. We discussed the opportunity, reviewed the supporting documentation (i.e.transactional paperwork for the target company's typical sale, financials, receivables and payables, legal entity documentation, etc.) and the revised draft of the purchase agreement. We proposed on the transaction where we would finance the receivables of the target company for 12 months at the specified discount, advance on the eligible receivables outstanding at the time of purchase to contribute the shortfall created by the revised selling price for the business, and the fund was pleased that they did not have to come up with additional cash to finalize the deal. The target company did not have any secured financing, so we were able to secure the assets and close on the transaction.

Q: Where are the pitfalls in this type of acquisition financing?

A: The biggest thing you want to watch out for using receivables financing as collateral for secured funding in an acquisition transaction is that you do not want to strip the target company of operating capital. This may happen by taking too large an advance on the receivables to support the purchase - make sure the company will have sufficient working capital to operate when the transaction closes and those funds are removed from the business. Another thing you want to watch out for using receivables (or any other asset) as collateral for secured financing in an acquisition transaction is that you do not pay too dearly for the asset as a line item in the purchase agreement. If the seller wants to sell at a price over book value of the asset try to structure the purchase such that you pay for the book value at closing and any amounts over that (i.e. goodwill) on a schedule out of future profits from the accounts sold or as some kind of royalty. Make sure that any receivables collected by the seller during the negotiation stage are either removed from the asset listings or credited against the purchase price. You may want to include a provision in the purchase agreement that allows for a credit or repayment for any accounts uncollected (bad debt) after 90 days from closing. As an alternative to the above, you may consider setting an allowance for bad debt/uncollectable accounts and discount that from the purchase price.

One other item to look into is whether the assets are currently secured.
In this case, you must make sure that the receivables you intend to use as collateral are unencumbered since almost all factoring companies require a UCC-1 filing in the first position on at least the receivables themselves. The best way to avoid these issues is to do your due diligence and speak directly to a factoring company that is capable of handling these types of transactions during the purchase and sale negotiations.

Q: What are the costs of Factoring and typical terms?

A: Some factoring companies will provide you a rate sheet showing you what discount they will take for x number of days an invoice is unpaid. I find this to be misleading and counterproductive since each business is unique and you cannot put a generic formula to task for businesses in various industries, operating a differing volumes, and, most importantly, with very different customers. Most factoring contracts are structured on a 12 month commitment with minimum monthly factoring volumes. They are typically full-turn which means that all invoicing must be submitted to the factor regardless of whether or not you want an advance on the sale. Advances, once product or service is delivered and verified (directly by the factoring company), range from 70 - 95% of eligible receivables. Accounts that will be excluded from eligibility are those that are over 90 days old, are cross-aged (meaning that even though there may be outstanding invoices under 90 days, there are some, usually a percentage of total outstandings, that are over 90 days for the same account), and those for which a credit limit decision was unfavorable. Pricing can range widely and is dependent upon two main
criteria: 1. Debtor (customer) credit, and 2. Monthly volume. These items are inversely related to pricing - the better the quality of the customer and the higher the committed volumes, the better the rate. Rates typically range from 12 - 24% on an annualized basis.


In these uncertain times, finding creative ways to finance an acquisition is a given. You need to be aware that the cost of money derived from factoring receivables is usually higher than if you were to take out a traditional loan or line of credit, but the flexibility and ease of obtaining increased limits often allow for more business to be transacted or supplier discounts to be realized, thus offsetting (an in some cases eliminating) the effective costs.

Saturday, August 29, 2009

When Selling, the More Buyers the Better

I cannot tell you how many times I hear from business owners who are contemplating the sale of their businesses that they have someone interested in buying their business and that they are going to negotiate with that single party. I’m certain it will come as no surprise that most of those deals never get done and, even worse, the owner spent countless months on a fruitless exercise. There’s also a strong likelihood that the owner spent the majority of their time chasing this deal only to find that the business is now suffering. This is not a hypothetical or isolated situation, we hear these stories on a daily basis from countless owners.

One of the critical aspects for a successful business sale is to generate many interested buyers. Multiple buyers vying for a single business will significantly increase the odds that your business is sold at the highest price with the best terms and in the quickest timeframe. Selling in the quickest timeframe should be of primary importance. The longer the business stays on the market the higher the risk that confidentiality will be breached and the value of the business will be diminished.

To illustrate, in the last 45 days our firm has had 2 deals terminated by buyers. In both cases the buyers were dragging the due diligence process out and positioning the deals for a renegotiation (which is very common when an owner is trying to sell their own business and working with just one buyer). Because we continued to market these deals to other buyers, when the above deals were terminated, within days, we had new deals negotiated and buyers in due diligence. We not only maintained the selling prices but in one instance we obtained better terms for our client.

A good business brokerage firm should be able to give you the leverage needed to ensure the best price and terms in the quickest timeframe. To validate that you are working with an above average firm make certain they have:

· Been in business for more than 5 years
· A large database of buyers
· A large group of brokers who are trained
· A large list of seller clients which indicates the health of their business
· One or more broker who hold the professional designation of CBI – this is a designation earned through the IBBA and takes years of training and experience

Remember, more buyers equal more leverage. This will dramatically increase the odds of a successful transaction.

Wednesday, August 19, 2009

Financing A Business

In today’s economy, securing financing to purchase a business has become a full time job, and there’s no guarantee all the hard work will pay off in the end. Banks have all but disappeared from the process, leaving business buyers and sellers wondering how they can possibly get a deal done. This is in stark contrast to 2008, when loan origination fees were healthy and banks were vying for SBA-backed business loans. In fact, most of the banks our brokerage firm was dealing with in 2008 have completely abandoned these types of transactions. This leaves most business brokers, buyers and sellers competing for a shrinking number of financing options.

The government’s attempt to boost bank lending to businesses is falling on deaf ears. We have seen cash levels on bank balance sheets triple over the last year, while lending has steadily declined. In addition, the SBA, which serves as a guarantor for many of these loans, has taken steps that have made this market even more erratic. The good news is that the stimulus bill included new SBA plans for temporary fee reductions; guarantees increased to 90 percent for certain types of loans, deferred payment loans micro loans and several other improvements. The bad news is that the SBA, acting outside of the stimulus bill, has enacted a significant change to business acquisition loans by placing caps on goodwill financing.

On March 1, 2009, the SBA enacted a change which limits the amount of goodwill in a business acquisition loan to 50 percent of the loan with a hard cap at $250,000. Goodwill is the portion of a business that is in excess of the physical assets and inventory. Given the shift in the economy from asset-based businesses to service-based businesses, the majority of small business transactions now originate from such goodwill financing. This is devastating news for small business owners and potential buyers, as it has effectively negated any of the positive intentions of the stimulus bill.

Lenders, as well as the business brokerage industry, have united behind this issue and lobbied SBA officials with little success. Hopefully, the SBA will realize this change is causing banks to shy away from business acquisition deals, choosing instead to deploy their resources toward asset-based lending.

Despite these hindrances, buying a business in this economy is still a real option for people who have lost their jobs. Many retiring baby boomers--a large percentage of small-business owners in the nation--are looking to sell and now could be a great time to buy if you are prepared to explore financing alternatives.

Before determining a financing solution you must understand the historical earnings and current trends of the business you wish to acquire. Calculating the true earning power of a business can be a difficult task. Most business owners maximize tax strategies to minimize reported earnings so they pay fewer taxes. Therefore, when a prospective buyer looks at the net income, they may not be seeing the whole story. Business sellers and their advisors will often “recast” the earnings to show the earning power of the business. This recast number is commonly referred to as seller’s discretionary earnings.

Because bank financing is complex, has high closing costs and is almost impossible to secure right now, seller financing is quite common in business acquisitions, and a must in today’s economy. Seller financing can be as flexible as the buyer and seller need it to be and is only limited to what the buyer and seller can agree on. The seller, like a bank, will still be concerned with the buyer’s net worth, credit history and experience in the industry. The seller is also likely to want a higher percentage in down payment from the buyer because they are at more risk than a bank. Most buyers like the idea of the seller financing since it simplifies the financing and keeps the seller vested in the business’ future success.

There is no doubt that tough times are still ahead, and until the banks and SBA get back to the business of lending for business acquisitions, rather than deterring it, business sellers and buyers should know that there are alternatives. With the help of good advisors and creative thinking, buyers will find there are still plenty of excellent acquisition opportunities.

Wednesday, August 12, 2009

Should you Expand your Business through Acquisition?

Despite today’s market, countless business owners are finding ways to weather the economic storm and keep their businesses profitable. The gut instinct for many is to look for ways to cut costs internally by trimming headcount, salary, employee hours, or seeking ways to reduce production costs or improve efficiency. Some business owners, though, could benefit from considering business expansion.

There are plenty of ways to expand a business. The most basic form of expansion is to focus on your current customer base and adapt your business’s offerings to fit their changing needs. This may involve purchasing new equipment or enhancing the inventory selection to provide more products or services applicable to a variety of demographics. Excellent customer service is also essential when today’s consumers have many options available to them. Providing additional support hours at the request of customers, for example, is a surefire way to maintain a more loyal following and possibly generate word-of-mouth recommendations.

You can also look to expand your business to new customers by introducing a new location, acquiring a competitor or moving into a related industry. Not only will these expansion opportunities help position your company for continued growth, they will also enhance your business’s selling power once it comes time to exit the business. Here are some questions every business owner should ask themselves, however, before considering any type of expansion.

What Type of Expansion is Right for Me?
Not all types of expansion will work for every business or for every industry. Business owners need to be particularly diligent in researching what will work for them and what resources they have at their disposal. Before considering expansion, rule out the options you know are not plausible, or that you simply don’t have the time, money or desire to pursue.

You can make this decision by doing some initial research. If considering expansion that goes beyond internal activity or purchase, talk to local business brokers and ask for their input into what trends they are seeing in your industry. You can also look at competitors that may be expanding to see what they did and where they had success or failure.

Will I Really Benefit From Expansion?
There are several benefits that could come with business expansion, but also a lot of assumed risk. Some things to consider include:

Economies of scale - Expansion may expose you to economies of scale, with cost advantages that result from having expanded. Consider if this might be the case for you.
Customer base -- Not only should you ask yourself if expansion will expose you to new customers, but also if your existing customers will remain loyal while you work out all the growing pains.
Yourself - Will expansion bring unavoidable stress into your life that could potentially deter your ability to successfully operate the business under the new expansion?

Can I Afford Expanding the Business?
In today’s market, business loans are not easy to come by. With big lenders struggling to survive the market, receiving a loan for your business may be a bit more difficult than anticipated. People who are getting loans are being forced to leverage large pieces of collateral, such as their homes. This adds a lot of risk to any type of business expansion because failure could mean the loss of not only your livelihood, but your home as well.

For buyers considering the purchase of another business – whether it’s a competitor or a business in a related industry – seller financing is proving to be one of the only ways to get a deal done. Seller financing is a loan provided by the seller of a business to cover an agreed percentage of the sale price. Consider how you will fund your expansion before taking any drastic steps.

Getting Started with Expansion
Once you have decided to take the initial steps toward expansion, consider how exactly you will make it happen. If it is only internal growth, put together a plan for how you will allocate resources and what you will do to make your current business bigger and better.

If your plan includes acquiring a new business, judge how well you feel you can take on that process yourself. There are several tools already in place, such as buyer acquisition programs that utilize the expertise of business brokers and intermediaries to set your goals, identify target businesses, screen the businesses, advise on offers and assist with negotiations and closing.

While there are countless considerations to make before deciding to expand your business, these three standard questions can help facilitate your decision-making process. Taking advantage of the downturn -- with its lower business-for-sale asking prices -- by buying up your competition can put you in a great position for when the economy bounces back.

Wednesday, August 5, 2009

Peer-to-Peer Advisory Services can get your Business back into Selling Shape

Business is getting more complex. The current economic turbulence has added an extra layer of challenge to already overstretched business owners. Owners have always had to be nimble, but now they must be able to pick up new ideas and run with them faster than ever before. Missteps are virtually inevitable. We all need to learn from our experiences and be more efficient, but, are you having trouble picking up on your mistakes and correcting them rapidly? Have you been able to fully capitalize on all the opportunities that have presented themselves? In this economy, failure to do so can be fatal.
This complex environment, one that requires more expertise than ever before, needs to be handled differently. There is a solution. It has been said, “we all learn from experience, but it does not have to be our own.” Peer-to-peer advisory helps you capitalize on the experience of others and has helped thousands of business owners overcome these problems listed above as well as many others.
What is peer-to-peer advisory? It is a collection of non-competing owners, CEO’s or partners who get together on a regular basis to discuss business. The best groups gather to focus on solving specific, real business issues or identifying opportunities in order to help each other succeed. These groups are typically professionally facilitated to ensure that the meetings are as productive as possible.
The value of peer to peer groups is that they can serve as your board of advisors in the form of an informal kitchen cabinet. And, they create an opportunity to spend some focused time working ‘on’ the business not just ‘in’ it. The group can help to overcome the isolation of being at the top, serve as a sounding board for new ideas, offer practical solutions to business problems from people who have lived them, and create the accountability you need to thrive.
Since these groups include other owners like you, they have no vested interest in any one idea. They commit time to your questions knowing so that you will do the same for them. The combined horsepower of a group of experienced business owners tackling problems is far superior to that of any one individual so solutions come more quickly and are more effective when implemented. Peer to peer advisory may be the best way for small- or medium-sized business owners, those with far fewer resources than their larger company competitors, to achieve balance in the marketplace as well as in their own lives and find success in our complex world.

Sunday, July 26, 2009

Plan your Exit and Sell your Business at the Right Time

As a business broker one of the most concerning calls I receive is from a Seller who has not planned for his exit from the business. In fact, the Exit Planning Institute estimates that 90% of most business owners never planned the sale of their business. The impact of this lack of planning can range from very disappointing to disastrous.

A proper exit plan should include the input from all of your advisors and take a comprehensive review of your personal and business goals. A plan could take a year to design and several more years to implement prior to a sale. A well orchestrated plan includes setting financial goals, understanding the business value and drivers, business growth plans, business sale, tax optimization, wealth and death planning.

Financial Needs. Understanding the owners exact financial needs are critical to a meaningful plan. What will the owner(s) need to realize from the sale of a business, post taxes, to maintain the desired lifestyle.

Business Value. Obtain a snapshot of the business value and the key drivers. This step should be completed by an independent third party who is certified in valuing businesses. This value should then be used to calculate an owner’s net proceeds from any sale. This will answer the key question regarding timing of a potential sale.

Maximizing value. Continue to build value by optimizing the key drivers of the business. It is critical to continue to grow the business even after the decision has been made to sell the business. It can take 9 to 18 months to sell a business and during that period of time the business needs the owner to be fully engaged to ensure maximum value.

Going to Market. Assuming that a sale to an insider or family member is not viable, then this is the time to ‘confidentially’ take the business to market. You already know the value of the business and the structure that will yield you the net required to retire. Identify a business intermediary that can generate the largest number of potential buyers and manage your business through to a successful closing.

Have a Contingency Plan. As an entrepreneur you know from experience that even the best plans can unravel before your eyes. You need to be prepared for any number of things that can get in the way of you and your exit, i.e.; key employee departure, economic turmoil, owner disability, or any other unforeseen wrinkle. While you cannot plan for every conceivable problem, it is absolutely possible to build contingencies that contemplate the continuing operation of your business.

Managing the Proceeds. Understand what will happen with the proceeds from any sale. How will your money be managed to afford you the lifestyle you desire and minimize your tax liabilities.

Estate Planning. This step should consider the needs of the owners spouse and heirs. Not only how much money will be transferred but in what vehicles will the wealth be held to minimize the tax liability of the beneficiaries.

This type of plan requires a competent team of advisors who are committed to the exit planning process. Your team should include an attorney, accountant, wealth planner, insurance advisor, banker, business valuation expert and a business consultant. An exit planning team leader who has a process and the experience to lead these advisors to your desired outcome is a critical piece of building and executed a plan.

Planning the exit from your business will give you the best chance at maximizing your proceeds and achieving your post-ownership goals.

Tuesday, July 14, 2009

CIT Bankruptcy will impact Business Acquisitions Financing

The potential bankruptcy and failure of CIT could prove disastrous to small business. CIT has been a significant force in lending to small businesses for start-up capital, working lines of credit, leasing and business acquisition loans. While CIT lending activity has been quiet for many months they have continued to provide a lifeline for many small businesses during the recent financial crisis.

CIT has petitioned the federal government for additional funds to maintain their liquidity. Thus far, the government has been slow to respond to this potential bankruptcy which I believe is critical mistake. There seems to be growing sentiment that other financial institutions will step in to fill the void left by a CIT bankruptcy. I have not seen any evidence that there are other banks willing to lend to small businesses. In fact, we continue to see loan requests put into a holding pattern and loan brokers have told us that the banks are showing no signs of life.

Small business owners with lines of credit from CIT are, and should be, very nervous right now. If a CIT credit line is cancelled I do not see any banks lining up to replace these loans. There may be a secondary market willing to fill this gap but it will come at a dear price to business owners in the form of exorbitant interest rates and onerous terms.

CIT may be too big to fail and the government should act quickly and decisively to avert derailing the timeframe of any economic recovery.

Tuesday, June 30, 2009

Increasing Numbers of Foreign Buyers are Looking for US Acquisitions

We sold a small screen printing business earlier this year to an individual buyer from Mexico. That buyer inquired about the business and consummated the transaction within 5 months. This is an incredibly fast transaction considering the visa approvals necessary to transfer a business to a foreign based buyer.

I was surprised by the recent buyer inquiries we have received in our offices. From the period of May 24, 2009 to June 23, 2009, seven percent of our activity was from a foreign location. You might think that the majority were from our neighbors to the north and south – that was not the case. A small percentage of this activity originated in Canada and Mexico. The majority of the buyer interest came from Europe and the Middle East.

Most surprising is how this has changed over the last 3 years. We were accustomed to receiving a handful of inquiries from distant locations but they were inconsequential. This is no longer the case. For several reasons I believe this is good news for sellers. Buying a business has become one of the more effective methods of immigrating into the United States. In fact, there are a healthy number of attorney’s who specialize in helping people immigrate with this type of transaction. There are different types of visas and we strongly recommend hiring experienced advisors. The higher impact for sellers is the opportunity to receive a higher value for the business. Typically buyers need a seller to ensure an orderly transition. In the case of a foreign buyer, this portion of the transaction because critical and thus should yield the seller additional value in the form of a higher multiple, employment contract and/or incentives tied to the future performance of the business.

Lastly, most of the visas associated with this type of transaction require that the buyer invest in the business and potentially add a minimum number of jobs over a defined period of time. This bodes well for the existing employees of the business and the community at large. Sellers should treat foreign buyer inquiries with equal amounts of interest and caution, while making certain that your business intermediary understands the nuisances of these types of transactions.

Tuesday, June 16, 2009

Where are the Banks on Business Acquisition Deals

We have been working on a business acquisition financing deal with a local community bank in Illinois since March 2009. As of yesterday, the bank provided the following update –“it’s still on the table as a viable transaction”. This is a community bank where the loan committee is made up of the board of directors – seemingly a group of people who should be able to make a decision. Frustration does not even begin to explain how the buyer, seller, loan brokers and advisors feel about this situation.

When did ‘LIMBO’ become an acceptable response? It’s as if the bank is sitting on the fence waiting for some divine message – is this how our financial institutions are making decisions? We have received no questions or requests for additional information - just a cryptic message that this is a viable transaction.

The total loan request for this deal is under $200,000 – we are not talking about a multi-million dollar deal. The bank has stated they like the business, they really like the buyer and they believe this is a good fit. The buyer has a solid credit background and can easily fund the down payment. In addition, the seller has agreed to carry back a portion of the deal. All the elements that make for a good deal are present and accounted for – except for a motivated lender.

This deal should have been approved or denied within 30 days of receiving all documentation which was on April 10, 2009. We are now at June 16th and the deal is in purgatory. While I am singling out this community bank, in reality all of our deals are suffering a similar fate.

Without the ability to transfer wealth and business ownership there is a high likelihood that businesses will fold, jobs will be lost, tax revenues will shrink and the economy will continue to languish. The Obama administration and the Fed must devise a strategy to get banks back to the business of lending. Until this occurs any discussion of a recovery is just wishful thinking.

Wednesday, June 3, 2009

The Importance of a Valuation when Selling a Business

A recent survey by George S. May International revealed that 58% of respondents had never had a formal business valuation, yet 29% were considering a sale in the next one to four years. I am continually perplexed by the number of business owners who do not regard this step as a critical factor in selling their businesses, especially since the business is probably their largest single asset.

I commonly hear from owners that they do not want to spend the money, their accountant will tell them the value, the business broker should be able to provide a market price, or that they know the price - which was based solely on a gut feeling. After years of running a successful operation, this seems like such a reckless way to handle the final stage of business ownership.

While I believe a valuation is imperative to a successful transaction, not all valuations are created equal. There can be wide disparities in the content of a valuation report, the costs, the credentials of the appraiser and the usefulness in securing a business sale. For example, GCF Valuation is one of the leading independent appraisers in the country. We have found their reports to be comprehensive and thorough, while at the same time being very cost efficient. They have accreditation from all the major governing bodies for professional appraisers.

Below are some of the key points when considering a valuation:

1- Real value. The key to a successful listing is having the business priced appropriately. If the value does not meet your expectations, the report should give you a roadmap of how to increase the value. Understanding the key value drivers can help you run your business more effectively.
2- Unbiased opinion. Prospective buyers are more likely to engage in negotiating knowing that the asking process has been set from someone other than the seller, the seller’s CPA or the business broker.
3- Time. A properly valued business should spend less time on the market, attract more buyers and result in a better return for the seller.
4- Brokers are not appraisers. Contrary to what sellers believe, brokers are typically not certified appraisers. While a broker’s valuable market experience can provide guidance in what the market will bare and generate multiple buyers, they are not equipped to establish a value.
5- Fees vs. returns. It is so easy to get caught up in the cost of a valuation and lose sight of the bigger goal, which is maximizing the return on the business. A professionally prepared valuation is one of the most important tools a broker and seller will have in securing a successful outcome.

A valuation for purposes of selling a business should not be exorbitantly priced. A typical small business valuation should range from $2,500 to $8,000 depending on the size and complexity of the business. Most professional advisors would agree that this is a small price to pay to know the true value of your largest asset.

Friday, May 29, 2009

Is now a good time to sell a business

I was invited to be a guest on the Business Insanity Radio show hosted by Barry Moltz. Below is a brief recap of the topics we covered during the show and click here to listen to a replay.

Given the shaky economy is now really a good time to Sell a Business? Now may be a great time given the sheer number of buyers in the marketplace right now. The number of buyers we are working with compared to the same period last year is up by a factor of three. If your business has solid fundamentals and you have plan, this is the time to talk with a professional intermediary. For example, our firm currently represents a B2B services business that has had flat sales the past two years and slightly fluctuating cash flows. This business has received five offers and this should result in an attractive exit for the owner.

How are you finding the buyers? We are dealing with strategic buyers and individual investors. The strategic buyers see a great opportunity to grow market share and top-line revenues. Individuals, largely the unemployed masses, are looking to replace an income and use this opportunity to gain some control of their careers and futures.

How are deals getting financed? Financing has become our biggest challenge but it may also be an opportunity for sellers. On the challenging side, the banks have almost completely withdrawn from the business acquisition lending market. Many of the banks have made their underwriting requirements so onerous that the bankers are not even bothering with these types of loans. In addition, the SBA implemented an SOP change that went into effect March 1st. It limits the amount of goodwill in a business acquisition loan to a maximum of 50% of the total loan, or a hard cap of $250k, whichever is greater. With our large service-based economy most of our deals easily eclipse the SBA benchmark and, as a result, the banks do not want to deal with these opportunities.

On the positive side, this is an opportunity for the sellers to gain control of their deals by offering seller financing. While there are risks associated with this financing strategy, there can be significant upside, for example: interest rates of up to 10 percent, a first secured position, deferred and potentially lower taxes, and faster transaction times. It is worth saying that the right advisors, with actual experience with seller notes, are imperative to ensuring a good deal for all the parties.

With the right plan and the right advisors, now might be a great time to exit the business.

Wednesday, May 13, 2009


Confidentiality is not just a seller issue. A buyer needs to be very concerned that the sale of a business is handled with care when it comes to employees, clients and vendors. I am continually surprised at the cavalier approach some buyers and sellers take to this critical issue.

A buyer on one of our listings made an innocent, but very disruptive, mistake during the due diligence stage of a deal. The buyer and seller had negotiated a contract for sale and the buyer was reviewing the operational and financial records of the business. During the buyer's discovery process he decided to contact an industry third-party to ensure that the company was in ‘good standing’ and all licensing was up-to-date. Seems like a reasonable step in the process, UNTIL the person the buyer called started to ask questions about who was calling and why the buyer wanted this information.

What the buyer did not know was that the person on the phone knew the company very well and, in fact, several of the employees were his friends. The buyer immediately realized this call was a mistake and he requested that the contact keep the call confidential.

The very next day the sellers arrived at the office to a group of anxious employees. The dam was breached, as the contact at the industry third-party wasted no time in calling his friends at the company.

The business is now at risk. When employees find out a business is for sale prior to the transaction closing they become nervous and their survival instincts kick in. They start to ask lots of questions and this atmosphere of uncertainty can cause them to start looking for other opportunities, become destructive or hold the deal hostage by placing demands on the buyer or seller.

The risks are obvious for the seller. The buyer may also be impacted should they take over a business with disgruntled employees. No good can come from compromising the confidentiality of a business. Any demands during a negotiation to meet with employees, clients or vendors should be resisted or the consequences can be devastating.

Monday, May 4, 2009

No TARP money......No Problem

By now it has been well-documented that the TARP money is not making its way into the hands of small business owners. We continue to see small business acquisition loan requests routinely denied, and even worse, completely ignored by the banks. We sent a small business acquisition loan request to a regional bank and, while they acknowledged receipt, there was no desire to even respond. When we requested feedback we were told that the deal looked real nice and they would get back to us somewhere down the road. Our clients find that kind of non-response irresponsible and appalling. I receive daily inquiries from sellers wondering where all the TARP money has gone. It's a great question, and one we cannot answer.

The apathy shown by the banks could not come at a worse time. There are an enormous number of sellers NEEDING to re-capitalize their business, obtain working capital or sell for some human reason (retirement, illness, burnout etc.) Then, there are the swelling numbers of potential business buyers who NEED to buy a business. These potential buyers are largely middle-to-senior-level executives who have been downsized and the prospect of finding a job looks dim.

The good news is that business acquisitions are possible without the government and banks. In fact, there was a time when banks played a minor role, if any, in small business acquisition lending. So, we now see the market retraining itself on the practice of SELLER FINANCING. In essence, the seller fulfills the role the banks have played, and in the process, gains back control of their goals. For obvious reasons, this form of financing is met with trepidation by sellers. However, with the proper guidance from seasoned advisors, these types of transactions can be more lucrative and provide better security for both sellers and buyers.

One recent transaction will serve to illustrate the need for sellers to embrace the idea of seller financing. We confidentially represented a business services firm in the Chicago area that had a 17-year track record, a stable client base and growing revenues. Our firm attracted multiple buyers and secured an offer from a private investor with solid financials. The deal structure was as follows:

50% - Buyer Down Payment
25% - Seller Note
25% - Bank Note

This business had physical (hard) assets on the balance sheet that exceeded the amount being requested in bank financing. The sellers had a long-standing banking relationship and offered to introduce the buyer to their banker, who was very bullish on this deal. After several weeks of working with bank on what we were told was a ‘slam dunk’ loan request, it was DENIED. The explanation offered by the bank was that they discounted the assets by 60%, an arbitrary amount used by this particular bank, and that this was insufficient to secure a loan. Never mind that the business was well-established, generated significant cash flow after debt service and that the buyers were experienced in the business. Seems implausible, but true! The buyers and sellers were undeterred and we renegotiated the deal with the buyers. We increased their down payment and thus had the sellers fill the void left by the bank.

This type of financing requires tons of creative thinking, experienced advisors and motivated buyers and sellers. In our next blog we will cover both the benefits and pitfalls of this type of financing and how to ensure a successful outcome.

Sunday, April 26, 2009

Time may heal all wounds.......but it Kills Deals

We recently represented a seller of a service-based business in the Chicago area. This was a good business with a proven track record, and our office secured multiple offers. Negotiations resulted in a strong offer with a financially sound buyer. We commenced due diligence within forty-eight hours from deal acceptance by providing operational and financial data on the business. There were a half dozen due diligence items to clear, and the process took six weeks for the buyer to get satisfied enough to proceed with a closing. The parties were both eager to consummate the deal and it was time to turn it over to the attorneys for final closing documents. We strongly recommended that the parties utilize the services of a closing attorney, which is the business equivalent of a real estate title attorney. The presence of a closing attorney has multiple benefits, such as efficiency and lower costs, BUT by far the most significant is that these deals have a higher closing ratio.

In this case, the seller decided to forgo a closing attorney and engage an attorney who was not very familiar with business sales and closings. It took four weeks, an eternity in deal time, for the seller’s attorney to produce a woefully inadequate set of closing documents. Conversely, the buyer had a very savvy attorney who saw the opportunity to exploit this weakness by slowing down the process, requesting more operational and financial data, and raising additional deal issues. The timing was unkind, as the business was going through a short yet unexpected soft period. This caused the buyer to re-think the entire acquisition, which resulted in a renegotiation that reduced the price by more than twenty percent. A terrible outcome, but completely avoidable had a closing attorney been engaged for this transaction.

In the sale of a business, a mortgage lender is usually not involved. That should not prevent the same approach from working. A closing attorney – someone experienced in buying and selling businesses - is engaged to provide transaction documents and other services. This person does not represent either the buyer or the seller, instead this attorney’s role is to provide efficient documents intended to be “fair” to both sides and bring the transaction to a quick close.

A closing attorney does not replace the need for legal counsel for either side of the transaction. Both sides must continue to be represented by a qualified lawyer who can review the documents and represent their client’s interests. This may be counter-intuitive, but by having an independent resource to document the transaction, the time and cost required to bring the transaction to a quick close can be greatly reduced and, most importantly, secure a successful transaction.