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.