First 100 Days of Business Ownership

Part of a business broker’s job is to not only help a buyer find a business, but help them manage their time once they have the keys to the front door. And what those new businesses owners quickly realize is that those first few months of business ownership are both challenging and critical.

That’s why it’s essential new owners quickly put together a solid plan for those first 100 days. It would be unrealistic to determine your success or failure based on that period of time, but if you don't plan properly, you will have a very bumpy start to life as a business owner.
There are seven critical steps to help you learn the ropes of your new business. Some will be obvious as you look through this list, but with so much on your plate as you become a business owner, it's easy to overlook the obvious.

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. The key reason is to put these people at ease over the ownership transition. There is a lot of anxiety at this stage and, most likely, the new owner is worried that the key employees may leave while the key employees are uncertain about their futures. In most cases, everyone wants and needs to maintain a status quo and the sooner you communicate that to the employees and develop a relationship the sooner you can put your imprint on the business.
Also, make it a point to talk to the mid- and low-level employees. They need reassurance as well, but more critically to your success, these workers may be sitting on a ton of good ideas they are anxious to share if someone just asked. Welcome their input. I'll bet you'll get many ideas.

2. Meet with key customers. A business doesn't survive without customers. That's true for the storefront bakery and the parts manufacturer for a steel producer. Prioritize your most valuable customers. Who are the largest and most profitable clients? Who buys the most widgets? Ask what you can do better to retain their trust. Also, ask your employees if there have been key customer losses in recent months. Meet with those customers and ask what you can do to earn their trust again.
Don't forget the smaller customers. With proper care and nurturing, they can become your biggest spenders--and your biggest advocates. 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. New ownership can be a blessing or a curse for suppliers. A blessing, of course, if there were payment issues with past ownership. A curse, perhaps, if they were paid on time with the old owner. They want to make sure that will continue. In either case, you need to spell out your plans to your suppliers on how will manage the business. These 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 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 dollars 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 a key manager who's a little too friendly with a competing business you'll want to put that high on your list. Does a key supplier deliver certain perishable items--cheese, fish or meat--too late in the day?
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 I trust to certain employees?
I strongly recommend you don't 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.

Setting Goals and Budgeting to Meet Them

Setting Goals and Budgeting to Meet Them – By Jeffrey D. Bronswick, CPA, MBA

It’s already February. Do you have your 2011 goals and budgets set yet? Many companies do but others have found that the day to day activities of running and working in their businesses have gotten in their way. It’s not too late. So whether you haven’t done this already or you need to do some fine tuning, here are a few tips that will keep you on the right path.

What you should take away from this blog is:
1. Set goals
2. Have a budget
3. Hold your employees accountable
4. Be profit-driven!

What you need to do to get there:

Accounting information and controls
Without good information, you cannot make good decisions. Make sure your accounting is accurate, timely and enables you to drill down for details when necessary. You will have a better understanding of the financials side of your business so you have less surprises and more control. Also, you need good financial controls and processes in order to minimize mistakes, avoid being taken advantage of, and to maximize profits.

Sales
Sales goals should be consistent with the type of sales in your overall marketing/business strategy. The goals should be specific: be able to identify who, what, when, where and how. Hold your sales staff accountable. Don’t let them tell you how much they can sell. You need to tell them. You/management sets pricing and terms. Any price concessions must require your/management approval. Monitor sales people frequently. And, of course, reward those that meet or exceed the goals you set.

Gross margins
Negotiate costs and terms with vendors. Set goals for operational efficiencies. Reward those in charge of costs for lowering costs while maintaining/increasing quality of your product or service.

Selling, general and administrative expenses
What does the company really need to drive a successful business? Hold your employees accountable for the performance of the business, control of costs and productivity. Set goals for them and train/mentor them.

Net profits
A business is formed to earn profit and increase the wealth of its owners. If a company isn’t profitable, it will ultimately fail. So management should be rewarded based on bottom line results and not on sales or gross margins. If the company doesn’t make a reasonable profit then management hasn’t earned an extra reward.

ROI to investors (you /your partners/stockholders/investors)
Ask yourself, why should someone buy or invest in this business? Make your business into something that a buyer or investor would covet. If you can do that, you are on the path to either make a lot of money with your business or sell your business for a large return. You win either way. However, this is where longer range plans (beyond one year) are needed.

Jeffrey Bronswick, CPA, MBA
Jeffrey D. Bronswick is President of RP&Co. - Certified Public Accountants located in Buffalo Grove, IL. Jeff received his Bachelor of Science in Accountancy (Cum Laude and with University Honors) from Northern Illinois University in 1988 and later received his MBA. Since 1965, RP&Co has helped hundreds of businesses and organizations with their financial concerns. Whether it's analyzing a client's business performance to help improve profitability, minimizing income taxes, performing certified audits, or providing specific consulting services, they make recommendations that help their clients make better decisions and achieve their goals.

Is Selling Your Business the Best 'Exit Plan'

My neighbor asked me, “Why would anyone sell a successful company?”. He could not understand why anyone would leave a business that was doing well. Of course successful companies get sold all the time.

So why do these business owners sell? The short answer is that most closely held businesses sell for human reasons, such as burn out, retirement, illness, partnership disputes, family issues or other personal reasons. Usually the business is fine but the human being running the business needs a change. To understand this better it is key to understand the other options for exiting a business.

Close the Business/Liquidation
Closing a business that is profitable never makes sense. Even if the assets are liquidated the price is likely to be pennies on the dollar versus selling the business as a going concern with employees, customers and a reputation that is intact. Not only does the business owner get the lowest value but the employees, vendors and customers are hurt by this type of exit.

Accident, Illness or Death
No one wants to exit their business this way, but many do. The loss of an owner not only creates tremendous issues for the family but also creates a leadership void in the business. Even the most competent management can struggle when a key business leader is lost to a serious accident, illness or death. No one plans for this type of exit but many end up exiting the business this way because they failed to create an alternate plan.

Succession
Succession by a family member or key employee has its benefits. They know the business, its product or service, employees, customers and vendors. Succession can be operationally successful for the exiting owner if they make sure the successor is carefully selected, qualified and groomed for the position. The owner must be careful not to make an emotional choice of a relative or favorite employee but instead choose the successor with the right skills to lead the company into the future. You are not seeking an “Employee” mentality but an “Owner” mentality. If that rare person can be found in the business who can make the transition to Owner, they often do not have the cash needed to purchase the business. They are also likely to want to pay less for the business as familiarity will blind them to many of the value drivers of the company. So although succession can be operationally successful it is rarely a financial success for the outgoing owner.

Sell
Closing or liquidating the business minimizes the value to the owner. Accident, illness or death forces the issue on the owner. Succession provided a very limited pool of options with limited financial reward.

Selling on the other hand allows the business owner to decide their ideal timing, maximize the value of the business they worked so hard to build, coordinate the use of the sale proceeds for financial planning and align their personal goals with the sale of a business. Selling the business allows the business owner to create a wealth event and often significant on-going passive income without having to run their business.

Whatever they are, human reasons are always pushing and pulling on a business owner. Burn out, stress, divorce, illness, partner disputes and limited growth capital are some of the human reasons that push owners out of the business. Retirement, enjoying life, relocating, a new business opportunity and passive income are some of the reasons that pull a business owner out. Whatever the motivation, the fundamental reason a business owner chooses a sale as their ideal exit plan is control. The business owner chooses to understand the value of their business and to proactively pursue the right buyer and the right price. By selling a business you choose to exit your business by choice, not by force.

The professional team at Chicagoland Sunbelt can help you confidentially sell or buy a business in Chicago and surrounding areas. For more information check out our site at ChicagolandSunbelt.

How to use Powerful Accounting Practices to Improve a Business

The below blog provided by Jeffrey D. Bronswick of RP& Co.

Whether you are buying, selling, starting or growing a business, cash flow planning is critical to the success of any business. Businesses with proven techniques for cash flow planning are more successful and therefore more valuable than their competitors. If you are buying a business, make sure these practices exist. If you are selling, identify areas that need improvement and fix them in order to increase the value of your business in the eyes of a prospective buyer.

Planning should be done in advance and for at least one year out. The cash flow plan should be closely aligned with the strategic plan for the business. The purpose behind the plan is to:
1. Predict when, where, and how cash needs will occur
2. Predict what the best sources are for meeting additional cash needs
3. Be prepared to meet these needs when they occur (it helps to keep good relationships with bankers and other creditors)
4. Plan business profitability and growth

The starting point for avoiding a cash crisis is managing the balance sheet. Collection of accounts receivable and payments to vendors are two areas that require daily attention. A well run business will develop both short-term (weekly, monthly) cash flow projections to help manage daily cash, and long-term (annual and up to 5 years) cash flow projections to help develop the necessary capital strategy to meet business needs.

Remember, the plan should be by week or by month. NOT by year. Many businesses make this mistake. Most businesses have cycles and planned and unplanned major expenditures, so you need to see the highs and lows in the business on a weekly or monthly basis. If you plan properly, the cash needs will be very apparent on the cash flow projection in a given month. If you know in advance when the cash needs of your business are the highest, it will trigger actions on the part of the business for capital retention, cost reduction and bank borrowing availability.
How does a well-run business deal with these ups and downs? By negotiating in advance…
1. Vendor payment terms
2. Customer payment terms (and prepayments if warranted by the business)
3. Bank lines of credit
4. Long term debt
5. Equity capitalization

If the business has not prepared cash flow projections before, preparing historical cash flow statements and balance sheets will help you gain an understanding about the past cash flow performance and your potential needs in the future.

The process of planning future cash flows is very time consuming, but if it is done correctly, it will not only save you money, it could save your business.

Jeffrey D. Bronswick is President of RP&Co. - Certified Public Accountants located in Buffalo Grove, IL. Jeff works closely with his clients in helping guide their growth and financial success, assisting them with operational and financial issues, and in charting tax strategies to maximize their after tax income. Jeff received his Bachelor of Science in Accountancy (Cum Laude and with University Honors) from Northern Illinois University in 1988.

A Tale of Two Businesses by Guest Blogger Ed Cook

I recently listed two businesses of similar size with similar characteristics. Good management, good reputation and priced right. Yet one sold in less than 4 months and one is still for sale more than 9 months after listing. Can you figure out which one sold and which one did not?

Business A - Pet Care Business
$100,041(Cash Flow)
$297,000(Sales Price)
2.97(Multiple - Sales Price/Cash Flow)
$98,010(Down Payment Required)
$198,990(Seller Financing Offered)

Business B - Business Supply Company
$140,174 (Cash Flow )
$390,000( Sales Price )
2.78 (Multiple - Sales Price/Cash Flow)
$331,500 (Down Payment Required)
$58,500 (Seller Financing Offered )

There was no doubt in my mind that Business B would sell quickly. It had the numbers, the reputation and a great location. I knew that Business A would sell, but assumed that would take a bit more time. Well guess what? The answer is A. That pet care business received 4 solid offers and sold within 4 months of listing, while the business supply company remains for sale 9 months later and has yet to receive one offer. Why the difference? Seller financing.

The pet care business went to market offering terms of 33% down payment with the remainder as a seller note. This opened up a huge pool of buyers, most from outside the industry, and allowed the seller to be selective with both prospective buyers and offers.

The business supply company went to market offering terms of 85% down payment and a 15% seller note. They have yet to receive an offer. Quite simply, buyers are looking to put as little money down as possible. If they are being asked to put down $330,000 on a business listed at $390,000 they will simply move on to the next deal. They will go out and buy a bigger business where the seller is offering financing.

But seller financing offers one more thing to the buyer that is even more important than the financial consideration. When a seller is willing to finance a large portion of the transaction it shows the buyer that the business is sound and that the owner feels it will be successful for years to come. That implicit guarantee from the seller sends exactly the right signal to the would-be buyer.

The business supply company eventually offered up more seller financing but it was literally too little, too late. The buyers had moved on to other deals. Here we sit nine months later with no offers. All because the seller was not willing to offer proper financing.

When you sell your business, offer the proper terms at the proper price with the initial listing. That gives you the very best chance to sell your business.

By the way, the pet care business accepted a cash offer as the buyer sought to differentiate himself from the other offers. It’s funny that the seller that offered financing ended up with cash while the one that wanted cash will end up taking terms.

Ed Cook is a professional business intermediary with Chicagoland Sunbelt. Ed has over twenty years of broad-based experience in every aspect of running a small business giving him the skills and knowledge needed to help buyers and sellers achieve their needs. Ed has been very successful in helping his clients navigate this difficult market. If you would like to learn more about the process of buying or selling a business, Ed can be reached directly at ecook@sunbeltnetwork.com.

It’s not a secret that 2009 was a tough environment for business sale transactions. With most of the nation struggling just to stay afloat, the market was bare. There were few candidates with the ability to buy, few business owners willing to sell with values so depressed, and few lending institutions with the desire to finance transactions. So everyone hunkered down, waiting for a recovery.

Now in 2010, we’re starting to see many of these buyers and sellers come out of hiding. More deals are getting done, and they are getting done in less time. Here at Chicagoland Sunbelt, we have seen some steady trends in this year’s sales.

To the surprise of many of our current and prospective clients, deals are being consummated in record times and at solid valuations. We attribute this strong rebound to many things including pent-up buyer demand and good companies that have been able to weather the recession.

Perhaps the most surprising trend has been the speed at which some of our engagements have been able to close. Deals closed this year took approximately 191 days from the signing of the engagement to closing date, with several high-profile listings taking less than 120 days.
The speed of closing is a very telling measure of establishing the proper pricing and marketing strategy to match the pent-up demand. To put these numbers into perspective, even in the best markets most business sales take 270 to 360 days to close.

The other trend has been the large percentage of deals receiving multiple buyer offers. Eighty-two percent of the deals closed this year have received multiple offers, with many of these deals receiving four or more offers. This market dynamic has enabled our clients to secure solid valuations and maintain an 85% selling price to original asking price.

A key driver of robust activity has been the shared risk by buyers and sellers. Without the leverage of a bank to finance an acquisition, buyers are coming to the table with a larger percentage of the down payment, and owners have realized that seller financing is the only viable alternative to secure a deal. In fact, 67% of our closed deals in 2010 have included seller financing and, in many cases, the percentage of the deal financed by the seller has exceeded 40%.

The business-for-sale market has clearly changed, but those parties willing to adapt and be creative can still get good deals done.

2010 Fast Selling Businesses

It is no surprise that 2009 was a challenging year for business sales transactions. Most companies were experiencing sharp declines in revenues, customers and profits — not the sort of environment conducive to selling a business.

Before the economic meltdown, our firm had been forecasting that the large wave of baby boomers approaching retirement would fuel the business transaction marketplace, but those plans changed in late 2008 and 2009. The economy has altered those plans permanently for some of the unfortunate business owners who could not weather the downturn.

We had no reason to believe, given the weak economic forecasts, that the transaction markets would rebound in 2010. But rebound they did. We have experienced a very robust first half of 2010, with many of our transactions selling in record times with multiple offers. We have analyzed these business transactions and there were some key traits they share.

Seller financing: Banks are still not lending and buyers have few alternatives to fund a transaction. Motivated sellers have stepped forward with offers to finance the transfer of their businesses, and they are being rewarded for this approach. Seller financing has been the single biggest factor in securing a quick sale at a premium price. The earnings multiples these businesses are receiving are at least 20% higher than those received by businesses being offered with little to no seller financing.

Infrastructure: It is important that a new owner be able to work into a business that has a diverse client base, trained employees, documented systems and procedures and the capacity for growth. Buyers are flocking to businesses that are built with solid foundations and where the seller is not ‘the business.’

Recurring revenues: Businesses that have a certain amount of recurring revenue are garnering lots of attention. This structure is true in good and in bad economies, but it has been especially true in our current market. For example, we represented a business in which 70% of the revenues were recurring. The business was on the market for seven days and garnered nine offers.

Growth potential: Companies that have the capacity to grow with little or no capital investments are attractive. There’s an adage in our industry that “buyers pay for what the business is doing today, but they buy it for what it could be.” Every buyer wants to know that they can take the business to the next level and increase their ROI with little to no capital investment. These businesses can typically receive additional value in the form of a higher earnings multiple or future payments tied to the growth of the business. Businesses are selling in record times and at solid multiples of earnings.

If your business has some or all of the above traits then now can be a great time to go to market and maximize your value.

Alternative Exits

The below article about 'Alternative Exits' for a business owner was written by Monica Mehta a principal in the New York based investment firm Seventh Capital. There are many ways to exit a business and a combination of the right advisors, good planning and timing will increase your odds of maximizing the value. Below is a copy of Monica's article which recently appeared in Business Week online.

If you're looking to sell your company, it's time to get creative. While the small business mergers and acquisitions market is finally inching forward and deals are getting done, they better reflect seller motivation than attractive valuations. Bank involvement in acquisition financing deals also remains low. As long as buyers are forced to pony up bigger equity checks, sellers frustrated by anemic valuations are unlikely to see pricing snap back. Offers remain far from desirable.

Still, if you're looking longingly at an exit, fear not. Unconventional deal structuring can maximize a company's long-term value and do wonders to bridge the gap between a buyer's limitations and a seller's expectations. If there's just no way to get there via a traditional sale, there are alternative exit strategies that may yield better results.

1. Strike a deal with a third-party buyer.
Sellers who can look past a low valuation and embrace strategies that offer added, deferred payments can bump up a deal's overall payout over time. "Business owners that are flexible with terms and open to seller financing can still create a feeding frenzy among buyers," says Domenic Rinaldi, president and managing partner of Sunbelt Chicago, a leading business broker. He's seeing more creative deals than he did a few years ago and notes that sellers willing to assume greater risk regarding terms are netting premiums.

There are a variety of ways to sweeten a sale down the road. A low up-front price can be offset by a long-term consulting contract that pays the seller an outsized salary for minimal post-sale involvement. Sellers that own the real estate related to their business can also make up for a low purchase price by excluding the real estate from the deal and negotiating a long-term lease with the new buyer at favorable rates. Negotiated earnouts—bonus payments based on company performance—can also give a bounce down the road.

Deferred payments can also lower overall tax liability by spreading payments over an extended period, potentially during a period of years where your income will be in a lower bracket. If you are able to direct the downstream income to a separate business entity (for example, a consulting company or a real estate business), you may be able to write off certain expenses as well. A tax professional can help you think through related considerations.

Another way to bump up your company's value is to introduce healthy competition to the sale process. Start by making sure that your business is priced right. A realistic valuation is critical to generating interest. Today sellers can expect no more than two-times to three-times earnings for their business, excluding the value of hard assets such as real estate. If you can get enough potential buyers involved, the leverage swings back in your direction and you can negotiate the best terms.

Seller involvement in deal financing is also a prerequisite. A business owner unwilling to provide seller financing is generally not serious about making a sale. It is not unusual for purchasers to expect 30 percent to 50 percent participation from a seller. (For more about seller financing, see "Sellers Increasingly Play Banker.")

2. Sell to your employees.
If you can't make the numbers work with an external buyer, selling to your employees through an employee stock option plan, or ESOP, can be a good Plan B.

Here's how it works: A business directs up to 25 percent of its annual payroll before taxes into an ESOP trust. This pretax money can be used to buy a variety of investments, including shares of the founder's company stock.

The money held in the ESOP trust is managed exclusively by the company's board of directors, not employees, allowing the principals to maintain control of these funds until the owner is ready to retire.

An ESOP can buy any number of shares, from a minority position to a controlling interest. If the ESOP acquires more than 30 percent of the outstanding shares of a company, a seller can avoid capital gains on those shares indefinitely, giving this method of sale a huge leg up. Like an external buyer, an ESOP trust can also seek a bank loan, using the business's assets as collateral, to cover a portion of the purchase price.

An ESOP doesn't make sense in all cases. Only corporations—C or S corps—are eligible to form an ESOP. The business must be profitable, generating at least $100,000 in pretax income, and must have at least 15 employees. An owner selling shares to an ESOP must use a fair market value that can be supported by an appraisal.

A plan and trust will cost approximately $50,000 to set up and roughly $10,000 to $15,000 each year to maintain in legal, accounting, and appraisal fees. Ideally, ESOP experts advise that you set up a plan 10 years before you seek liquidity. In reality, business owners rarely plan that far in advance. A transaction can be structured in a matter of months.

With an ESOP sale, you will be ceding control to your workers. A transition plan is critical to make sure they are prepared to carry on once you leave the business. ESOP advisors such as the Menke Group specialize in these vehicles and can be a good source of information if you choose to explore this path.

3. Don't sell just yet.
When all else fails, your best option may be not to sell at all. Think about how you can rework your business to run without you and still let you collect a portion of its annual profits. If you can forgo a large up-front payout, you may make more money this way than by selling for a mere two-times to three-times earnings.

In order to step back from the day-to-day activity, you will need to promote existing employees or hire management to run the business without you. Finding such talent isn't easy, but a business that doesn't rely on its founders to survive is in a better position to sell. Bringing in management will also require you to be involved for a longer transition, but no more than would be entailed by a sale in which the seller's purchase price is tied up in back-end payments.

The profit your business generates after paying for additional employees may start to feel just like the staggered payments you would receive from a highly negotiated third-party sale. You might find that you net more over time this way. And if the economy improves in three to four years, you will be in great shape to sell for a premium, having already properly structured your exit.

Capital Gains Tax Rate to Increase in 2011 – Should you Sell your Business Now?

The current capital gain rates are scheduled to expire effective December 31, 2010 and will probably increase from 15% to 20% in 2011. The federal government will have little choice given the mounting deficits and soaring debt. In fact, most accountants and wealth mangers have been advising their clients to consider accelerating any tax liabilities as we may never see today’s tax rates again.

This tax increase will have a particularly devastating impact on business owners who are considering the sale of their business. Unfortunately, the recent recession has had a significant impact on the health and bottom lines of many small businesses and many of these business owners are waiting for the economy to turn around before considering a sale. The good news is that many small businesses appear to be getting healthy again. The bad news is that it will be just in time to realize these tax increases. If you have considered selling your business the below analysis of how much an owner would need to increase their bottom line (EBITDA) to stay even should cause you to think twice about the timing.

Assume the following:
• The federal capital gains tax rate is increased from 15% to 20% beginning in 2011
• The maximum personal federal tax rate is increased from 35% to 39.6%
• The company EBITDA is $500,000
• The sales price multiple is 4 times , resulting in the sale price and taxable gain of $2,000,000 (ignoring any basis issues for example purposes)

As a result, the federal capital gains tax on a $2,000,000 gain would increase from $300,000 (15% of $2,000,000) if the sale were completed in 2010 to $400,000 (20% of $2,000,000) if the sale were completed in 2011—an increase of $100,000. This is simply the capital gains tax calculation and does not include any federal or state income taxes which will be increasing and take an even larger chunk of your sale proceeds. When you consider all the proposed tax increases (Capital Gains, Federal and State) the net effect on your sale proceeds will probably be a decrease between 11% and 15%.

To mitigate the effect of these tax increases a business owner would need to grow their bottom line by a considerable amount. So, the question becomes should you consider a sale in 2010 or resolve to grow the business beyond its current levels and know a larger portion will go to cover the increases in the tax rates.

Are You Emotionally and Financially Ready to Sell Your Business

Walking away from your life's work is a big step that doesn't come without its obstacles. Determining your readiness to sell your business -- sans any pressing circumstances to do so -- largely comes down to two factors: 1) your financial readiness to sell a company, and 2) your emotional readiness to sell a company.

Assessing Your Financial Readiness to Sell a Company
Your financial situation, the easier of the two factors to consider, is oftentimes the one most overlooked by sellers. The key question is whether the proceeds you will receive from selling your business will give you the financial means to leave the business. For most business owners, the value of their business is a large chunk of their net worth. Unleashing that value is critical to reaching their post-sale goals. You're one of the lucky ones if the proceeds of your sale are not required for you to retire or move on.

On the flip side, selling a business involves cutting off your access to the money you've been drawing out of the business every year. Ideally, the proceeds from the sale of your business will be large enough to cover your obligations going forward. How much money do you need and what sale price will give you what you need? Can your business command that price or anything close to it? If not, now may not be the right time to list your business for sale.

To best assess your financial readiness to sell a company, it's often a good idea to engage the services of a reputable wealth manager, an individual who can analyze your entire portfolio and calculate your post-sale needs. One of the key steps in completing this financial analysis is engaging with a knowledgeable independent third party to value your business. As business valuation is a complex matter, it should only be undertaken by professionals with the appropriate certifications, years of experience and access to a database of comparable transactions. Most business intermediaries will have a handful of appraisal and valuation firms that they work with on a regular basis, and can offer a recommendation.

After receiving a completed business valuation, your wealth manager can now appropriately analyze your portfolio and understand whether or not a sale will yield enough money to fund your projected retirement and allow you to sustain the lifestyle you want post-sale.
If the proceeds from the business sale are not enough to allow you to leave the business, you may need to focus on spending a few years to build up the value before you sell, or you might consider lowering your targeted financial spend after the sale. Alternatively, you might need to come up with a way to supplement your income and bridge the gap.

Assessing Your Emotional Readiness to Sell a Company
The more elusive part of evaluating your readiness to sell is your emotional readiness. Can you really walk away from the business you built for so many years?

While most transitions will require the seller to stay in touch with the new owners for some period of time, there is still that moment when your services will no longer be needed. What are your plans for when that day arrives? It's best if, as a business owner, you can detail exactly how you are going to spend your days after the sale. This gives a clear indication of whether or not you are ready to sell. For instance, will you plan trips and activities with friends, kids and/or grandkids? Will you pursue a hobby? Or perhaps even run a smaller business in a completely different field? If you cannot describe post-sale life, you should question your sale decision.
While there might be some legitimate reasons an owner has not planned this next phase – burnout, a partnership break-up or an illness – a seller's motivations matter in so many ways.

Knowing the seller's 'next steps,' and motivations for selling, can be extremely important in the actual transaction process. It can be an indication of how they will handle a business negotiation, their willingness to provide the necessary training and transition to a new owner, their flexibility and patience with a deal, and most importantly, their receptivity to heeding the advice of any professionals helping to manage the transaction.

The story of a seller who owned a niche manufacturing business illustrates the importance of assessing emotional readiness to sell. The seller's business was very unique and had great fundamentals. It was in a great position to attract multiple buyers and, in fact, six very substantial offers were made to the owner shortly after it was listed for sale. Unfortunately, none of those deals were consummated. Why? It really came down to the fact that the owner was just not emotionally ready to walk away unless he received an exorbitant -- and unrealistically high -- offer. He had engaged the expertise of a business intermediary, took the time to meet with many different prospective buyers, and appeared to be committed to selling. Yet when the moment arrived, he could not disengage from the business and he created veiled objections that boiled down to the fact that he just wasn't ready to sell. The net result was that the time, energy and capital of many involved parties was wasted.

To this end, it's really important to ask yourself the tough questions before pursuing the difficult and long task of marketing your business for sale. Will you have the necessary funds for your desired post-sale lifestyle, and are you emotionally ready to pursue a life after business ownership? If you cannot develop a post-sale picture of your life, you may need to keep running the business -- assuming you have the will and drive to remain competitive and relevant.

Staying on After the Sale

Selling a business and walking away can be very difficult and very rare in this marketplace. Oftentimes, there is a transition (“training” and/or “consulting”) period dependent on the size of the company and the role of the owner. Transitions may be as short as a month or two or as long as several years. Given the instability of the markets right now, buyers are very interested in retaining the seller to shorten the learning curve and help with the smooth transfer of key relationships.

In the typical business sale, a transition period of two to three months is included, and sometimes a “telephone consulting period” is added (e.g., 6 months of telephone consulting not to exceed 5 hours per month). Also, the seller may additionally be retained as a consultant at a negotiated rate. In some instances, a long-term employment contract is negotiated and the seller maintains daily involvement for a much longer period of time.

For the owner who wants to sell the company and leave quickly, which is fairly uncommon these days, the focus should be on the development of a strong management team. Be sure to introduce key employees/managers to your major customers and vendors and look at ways to delegate responsibilities. The more the customers think they are interacting with “the company” versus the “owner” the easier the transition. If you have established a good management team, less time will be required for the transition to the new owner. In addition, a well developed team usually adds value to the sale.

Occasionally there are owners who want to sell but just are not ready to quit working. They may be looking to sell early and slowly transition away from unwanted or overwhelming administrative and management duties. This is a perfectly acceptable strategy and may be very welcomed by a new owner - assuming the parties can work well together on a go forward basis. Working well requires that both parties be respectful of their new roles and it is incumbent upon the seller to not second guess or undermine the new owner as he or she begins to put their footprint on the business.

Either way, long-term employment contracts can be included in the sale agreement. The seller can stay on board and work with the business a few more years while still drawing an income and benefits.

If you are selling your business, in most cases you will not be able to walk away the day after the sale and in most cases you probably do not want to. Talk to your business intermediary about the true timeline of the sale and transition. If you want to sell while the price is right, but you are not quite ready to leave immediately, consider the options available to sell now and maintain a role with the company.

Setting Exit Objectives

Article Contributed by Ted Thomas, President of Sun Exit Advisors


"When a man does not know which harbor he is heading for, no wind is the right wind." So said Seneca almost 2,000 years ago. Today, speaking to business owners he might likely say, "Exit Planning for business owners must start with knowing your exit goals and objectives; otherwise, failure may be inevitable."

Why is Seneca's wise counsel so true today? In this first and most indispensable of The Seven Exit Planning Steps™, owners form their goals and objectives. But what should an owner’s objectives be and why is it so vital to fix them before taking the next Step?

I recently met with Ben, the owner of a 45-employee plastic extrusion company. He had long thought of transferring his business to a son and a key employee but had done little to prepare for that transfer. After years of procrastination, at age 58, he was finally ready to retire.

"Ben, it's helpful that you've decided on two of the critical Exit Objectives all business owners must face and answer. You've determined how much longer you want to work in the business. It seems you want to leave sooner rather than later. And second, you have decided to whom you wish to transfer the business, in your case your son and a key employee. But you still need to determine a third, critical, Exit Objective, how much money do you want or need when you leave the business? And, does that money need to be in cash or would you accept a promissory note?"

Like many owners, Ben had two choices. First, he could retire now and sell the company for cash — but not to his son and key employee. They had no cash and no bank would lend an amount even close to the amount of money necessary to close the deal. If Ben wanted to sell now and achieve financial goals, he would have to sell to an outside third party with sufficient cash. His alternative was to sell the company to his son and key employee — knowing he would have to wait six to ten years to receive the entire purchase price.

Ben's situation illustrates why setting consistent and achievable objectives early in the Exit Planning process is so critical.

The three principal objectives common to nearly all business owners (and the questions that must be answered in setting these objectives) are:
1. Leaving the business on your timetable. How much longer do you want to remain active in the business?
2. Leaving the business financially stable. Think of financial stability as a stream of after-tax income, adjusted for inflation. How much income will you need for the rest of your life after you leave the business? Do you want to be cashed out when you leave the business or are you willing to receive the purchase price over many years?
3. Transferring the business to a particular person. To whom do you want to transfer the business? To a child? Key employee? Co-owner? Or perhaps to an outside party who can pay top dollar for the company?

If you don't answer these questions and thereby set your basic Exit Objectives, you may end up like Ben. He was left without a means to exit his business in style because he wanted to transfer the business to a key employee and he wanted cash. Your failure to set consistent and achievable objectives can leave you without the means to exit your business as well. If you prefer to "leave your business in style" you must formulate specific, consistent, attainable goals and objectives. Your Exit Objectives are the foundation for all subsequent planning, or in Seneca's words, "the harbor you must head for."

Know, however, that many owners may not reach their objectives. Why? Because they may not have a plan to achieve them. They may be too hurried, too focused on their businesses, and they may not know how to go about planning. Many owners understandably lack Exit Planning experience — they may not even know where to start. We suggest you begin your Exit Planning process by working with experienced advisors. Financial and insurance advisors often have the software and experience necessary to help you determine your financial needs based on your current net worth.

The Importance of Working 'ON' your Business

Do You Really Want to Grow Your Business? Make Time to Work ‘On’ It, Not Just ‘In’ It.


What Owners Tend to Do
As a business owner, what did you have at the top of your to do list today? If you are like most owners, you probably had numerous details to handle, most or all of which fit into the category of ‘urgent.’ But what made those items high priority? By and large, the majority of our daily tasks do not add lasting profit or real value to the business. Typically, we get caught up in small items that seem pressing but do not qualify as genuinely important. We take care of things because they are easy and we can quickly check them off our list, because they are more enjoyable to do, or because they seem time sensitive (but are not necessarily important). At those moments, we are not working on the business, we are working in it.
Working in the business is necessary much of the time, but as an owner you must carve out time to work on it if you are seeking to drive significant growth, profit and value. If you never spend time focusing on where the business is going and how you will get there, you will not maximize the results. You are just treading water.


How you can drive growth
How do you refocus your energies and carve out the time necessary to work on the business more strategically? One very powerful solution is to join a peer advisory group. A peer advisory is a collection of ten or so non-competing owners who get together on a regular basis, along with a professional facilitator, to discuss business issues or opportunities. Their sole mission is to help each other succeed. Owners who commit to this process rank it as one of the best business decisions they ever made.


By their very nature, peer groups create an opportunity to work ‘on’ the business. Your peers can be more objective about your business, and as such, they see your blind spots. They point out when you are focused on your goals and when you are wasting your time. They 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 needed to thrive. Since these groups include other owners like you, they have no vested interest in any one idea. You hear what you really need to hear, not what someone wants you to know because of their own self-interest. What makes peer groups work is the fact that the combined experience of a team of business owners tackling problems is far superior to that of any one individual.


Owning a business is a challenge. For those owners who are truly committed to working on their business and growing their companies, peer groups can be a powerful tool.

When Is It Time to Sell

As a business broker who's been involved in hundreds of deals, I can tell you with certainty that the best time to sell your business is when it's doing well. I can also tell you that this is exactly when most business owners have the hardest time pulling the trigger on a sale. If things are going so well, they ask, why should they sell and potentially leave money on the table?

An entrepreneur's dream is to build a successful and profitable business, so to many owners it might seem illogical to walk away. Using a recent example involving a client, let me illustrate how it can pay off to sell when things are good.

This client hired our firm to determine the value of his business and market it to potential buyers. This company had all the attributes buyers are seeking--a great track record, increasing revenues and profits, long-term clients, key employees, a niche product, and very healthy margins. In fact, this business was just wrapping up a record year, and the future prospects were outstanding. At first glance, this was a model seller who had made the tough decision to sell when things were going well.

As anticipated, our firm generated multiple offers--several of them well above the value placed on the business. This was great news, and we thought the toughest part would be deciding which of the many qualified buyers the owner would choose. Wrong.

Because of all these offers, the owner began to second-guess the value of his business and became convinced that the buyers were undervaluing it. As such, we could not get a deal done, and the buyers went on to pursue other deals. Just four months later, the business started to slow. Today, it's not as valuable as it was when offers were on the table, and it will be some time before it regains its previous value.

The timing of a business sale can be a nebulous thing, especially in the current environment. Many people are surprised to hear that there are plenty of businesses performing well and generating healthy returns. There are great opportunities to successfully sell a business right now and maximize your investment. Even if sales are currently flat, don't misread that as a bad sign. Many analysts and economists like to toss around the phrase "flat is the new up." So if your business is holding its own--or if sales are slightly up or slightly down--consider it good news in this economy.

Selling a business has always been an individual decision, and timing the sale right can be tricky. It's always best for sellers to plan their exits so they can leave when they want and under the circumstances they want.

As such, it would be wise to plan an exit strategy even as you launch your business, but most people can't fathom taking that step just as they are getting started. What follows is a 10-year timeline to help you plan for the eventual sale of your business.
Let's assume you're thinking of retiring and selling your business when you turn 65. (That number could be 55 or 75, of course.) This timeline, a rough guide, will help you put the pieces in place to prepare your business for sale. If you create a plan from day one, most of your time will be spent running the day-to-day operations of your business so you won't need to scramble when you're ready. It also helps you better calibrate the best time to sell so you can get top dollar and achieve your personal goals.

7 to 10 Years Before Selling

This is the education and reading stage. Learn about successful business transitions, attend seminars on how to sell a business, and talk to retirees who have sold a business. Essentially, get familiar with the notion of what you'll need to do as the process continues. Take your time; this phase can last for several years.

3 to 5 Years Before Selling

Start to assemble a team of advisors (accountant, attorney, wealth manager, insurance agent, business broker and exit planner) for the express purpose of designing a plan that will meet your needs post-sale. These advisors may be different than the people you use to help you manage your business, and they should be well-versed in business transactions, tax planning and wealth maximization. An experienced exit planning professional should be retained to quarterback this process and ensure that all the parties involved are working toward a common set of objectives and goals. The outcome of this process can range from minor tweaks to your financial record-keeping and legal structure to significant changes in your business operations to ensure that you maximize the value of your asset.

2 Years Before Selling

At this stage, you should be revisiting the exit plan every six months to a year to ensure you are on pace to achieve your goals. If so, you can begin the window dressing necessary to prepare for a sale. If not, you may have to consider a course correction, modification of your goals, a delay in your exit or any combination thereof. If things are on track, this is the time to firm up your vendor and client agreements and ensure key employees are in place and that you have a complete operations manual that documents all processes and procedures.

1 Year Before Selling

Make sure you can answer this question with clarity: Why are you selling? That will be the first question every potential buyer will ask. By now you know what your business is worth and you have prepared all other aspects for a sale. Work with your business brokerage firm to start developing the "go to market" strategy. Ensure that you have a mix of strategic and financial acquirers identified, as well as a broad-based marketing plan to attract the largest number of buyers. Finally, when everything is ready, take a step back. Just focus on managing the business so it's running smoothly and let your brokerage firm manage the life cycle of the business transaction. This will lead to a graceful and profitable exit.

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 www.e-conversation.com to learn more about the above services.

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.

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.

Summary

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.

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.

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.

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.