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.

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