Apex Blog

Value Drivers: Revenue Trends

Thu, 17 May 2012 21:11:00 GMT

Buy Low – Sell High: This practice makes sense with investments and it makes sense when thinking of your business value. If you started the business from scratch, hopefully it has been built up to a profitable venture and you have plenty of equity. If you bought a business and have increased it revenue and profitability, most likely you have increased the overall value of the business (as you have read in past blogs, there are other variables to consider).

What most people are looking for when buying a business are the revenue trends over the last 3-5 years. If the revenues are stable or growing - great. If they are in decline, we need to understand the reasons for it. The reasons for the decline might keep a buyer interested, however, there are more perceived risks associated with a downward trend. This will prove to be a negative impact on business value. One of the other difficulties in selling a business with downward trends: banks willing to finance a business in this situation are an endangered (maybe extinct) species, forcing the seller to become the lender.

Many times we see business owners pass up the opportunity to sell at the high point, and who are instead pressed into selling at the worst time due to age and health concerns. An owner who decides to keep working into their 80’s inspires many of their family, friends, and peers. I’m sure any of us would feel blessed to be able to do that. But too often those companies lose momentum as the owner loses energy and passion and we end up with a distressed business.

Buyers want good businesses with strong trends and business owners can get more for their business when they exhibit strong revenue trends. Hmmm, seems like a winning combination!

Value Drivers: Customer Concentration

Thu, 24 May 2012 19:47:00 GMT

Big customers always seem to be a big carrot for business owners. It’s hard to blame them when the big orders come in. With all the excitement of the big order, the owner with extreme customer service focus makes the customer very happy. Over time, these large customers may drive down the gross margin of the business because of their power and influence, and because they know the business owner needs them. At first it seems ok. As time goes on, the big customer gets most of the owner’s attention and most of the company’s resources.

Often times we see businesses that have customers that exceed 50% of total revenues. The customers are challenging, but gee wiz, they are the best customer ever! Many times the business owner hasn’t done the analysis that may reveal the customer costs them much more than the value received.

Sometimes businesses are built solely to service one customer. The whole intent and strategy to enter the business was because of a connection with the customer or a creative fix to an existing problem that the customer had. The future challenge becomes building diversification in the business so that no customer exceeds 10-15% of revenues. The stress from having one major customer can be a real negative influence on business owner's strategic actions. The decision to have one major customer is fantastic if the business owner understands the risk.

When a decision to sell the business enters the picture, customer concentration risk has a huge impact on value. The more concentration there is with a few customers, the lower the value of the business. It’s that simple. There is too much risk for any buyer, even strategic buyers. Talk to your Kansas City Business Broker for details of how to prepare ahead of time to transition your business to family, employee, or to an outside party.

Value Drivers: Clean and Accurate Financials (Part II)

Mon, 14 May 2012 14:42:00 GMT

Current Financial position and historical records are the major factors in putting a value on a business. Last week the focus came down to trust issues around the financials. This week we’ll focus on the numbers.

Definition of Cash Flow: owner salary, net profit, depreciation, interest expense, and discretionary expenses not necessary for continuing operations

As mentioned in last week’s blog, the typical business advisor (accountant, financial planner, attorney, banker, business coach, etc.) needs to understand the existing situation and historical information to unlock some mysteries in the business. What are the trends, opportunities, threats? Solid financial information should lead to solid advice.

When selling a business, the marketplace puts a value on the cash flow of the business. Have the cash flows been steady, increasing, or decreasing? Are the cash flows readily apparent in the financial statements? Is the cash flow expected to continue or are there major changes expected? A buyer needs to understand the cash flow in order to make a good offer on a business. That offer takes the following into consideration:

1. Return on the buyer’s initial investment (paying the new owner’s salary),

2. Cash to pay off debt for the acquisition, and

3. Retaining cash in the business to support operations.

A business that shows a cash flow of $100,000 may be able to achieve a market value of 2 or 3 times that amount. Let’s say the value is $300,000 (3x $100,000). Last week I used an example of someone sending a family of 15 on a European vacation. Let’s say that the tax deduction used for that vacation was $25,000, and the tax savings was approximately $7,500. It feels good to save $7,500 on taxes; however, the value of the business went down considerably more than that. A $25,000 expense translates into lost business value of 3 x $25,000, or $75,000!

Sure, there is negotiation, and this is just a simple situation that should be easy to explain to the buyer and the bank. It does illustrate a point, however, that some simple tax dodges to save a few bucks will certainly make a much larger reduction in business value.

Talk to one of our Apex Business Advisors to help you plan and improve the value of your business before it is time to sell.

Value Drivers: Clean and Accurate Financial Information

Fri, 27 Apr 2012 20:00:00 GMT

One of the biggest struggles we have with our entrepreneur clients is that they have lousy financial statements. Many times it’s from lack of caring and know-how, but sometimes it’s done intentionally.

How does a professional advisor, such as a banker, lawyer, accountant, or business broker advise their client when the business financials consist of a check book and a box of receipts? Or the situation where the business owner has one cash register that isn’t connected to the accounting system (because that one is for unrecorded cash), or the owner runs all personal shopping through the business, or takes a family of 15 on a European vacation on the business, or doesn’t use an accountant or bookkeeper at all? The company’s tax return doesn’t resemble (in the slightest) the profit and loss statements and balance sheets. The examples of poor record keeping and tax dodges that we see go on and on.

Let’s focus on the value of the business based on quality of financial statements for this blog. As mentioned above, advisors are hard pressed to advise a client that has poor financials. We need to see revenue and margin trends, the relevant expenses, cash flow, sales by customer, liquidity, and much more. We need to know the true picture to know how the business compares to similar businesses in the industry, to recognize trouble spots, to find opportunities, to budget, and to plan an eventual exit.

The Exit: When a business is entertaining a potential buyer, will the buyer see a true picture of the business immediately or will they have to dig for the truth? The more they have to dig, the less trust they will have in the management (and the value of the business just went down). Will the buyer see a concerted effort to avoid paying taxes? What else might the seller be hiding? Can the buyer trust the seller (and the value of the business just went down)?

In most situations the buyer needs a bank to fund an acquisition. Banks don’t trust anything other than the tax return (and for good reason). You can see where this is going, can’t you? The bank doesn’t like the financials because they don’t match the tax returns, the tax returns don’t show enough cash flow so they tell the buyer that he is paying too much for the business (and the value of the business just got reduced again!).

Having accurate financial statements is not difficult, but it does take some focus and action. If you need help with getting your books in order, Apex Business Advisors can direct you to a local professional. It’s ok to ask for help!

Value Drivers: Business Owner Who Works in the Business

Wed, 02 May 2012 15:03:00 GMT

Over the next several weeks you will read about keys to business value. These are some basic drivers that will make your business or the business you are pursuing, more (or less) valuable. We are talking about the attractiveness to a potential buyer in an open market. Disclaimer: There are lots of different things that can impact the value of a business - and we won’t cover them all.

Sure there are times when some of these drivers don’t impact the value of the business – like if you find a gullible buyer, family member that will be taking it over, a strategic buyer that may focus on only one driver, etc. However, a business owner can’t rely on these buyers to be there when it’s time to sell the business, so it’s better to make the business more appealing to a broad market.

This week the focus is on a Business Owner Who Works in the Business. The alternative is the owner that is working on the business. If the owner is working in the business, i.e., driving the truck, running the machinery, or making the sales calls, then the potential buyer pool has been shrunk to those who can fill those shoes, and fill them well. A potential buyer would have to possess the same technical expertise of the current owner.

You’ve probably heard the adage “Work on the business, not in the business.” There are good reasons why consultants and professional advisors repeat this. First of all, if you are working in the business, you will get really tired and not be able to put energy into growing and enhancing the business. (The E-Myth, by Michael E. Gerber, has some good examples of how working in the business can bring it down.) The impact on business value is dramatic. Is a buyer of the business buying a job - or buying a system, a brand, a process, etc.? We do have buyers that are interested in “buying a job”, but they are a small population and are also very selective.

Call your Apex Business Advisor for more information.

Interest Rates are Low and Banks More Aggressive

Fri, 06 Apr 2012 15:46:00 GMT

We spent the better part of 2009 and 2010 trying to chase bankers who were not returning phone calls. There were many banks changing hands and were not able to pursue loans for business acquisitions. Over the last year, we have witnessed banks being more "aggressive" in seeking business clients. They have money that they need to loan and they are looking to Apex for deals to fund. Bankers are not throwing money around, and they are still conservative. However, they need to make loans to be profitable.

The interest rate for a 10 year, business acquisition loan is as low as 5.5%. This is about the lowest rate that we have ever seen. We have done quite a bit of business with Wells Fargo and there is a lot of good information about SBA loans here.

These two factors, aggressive banks and low interest rates, are creating an environment where deals are getting done. The people that will gain the most are business owners needing working capital and equipment loans, and for buyers of businesses that need to borrow money to fund an acquisition.

An important part of our job as advisor is to help you find funding for your deal and working with the banks to get them the information they need to make good decisions. Call one of our brokers today to learn more.

Fitting the Pieces Together - A Recent Success Story

Fri, 30 Mar 2012 13:23:00 GMT

We enjoy sharing success stories about the buyers and sellers that we work with. We had a business owner with a technology based company that wanted to sell. They were asking $950K for the business based on the current revenue stream. (This was all happening in the middle of 2011.) Potential investors were concerned that the core technology might be outdated, so they kept passing on the opportunity.

The seller continued growing the business through new implementations of the technology. Over the next six months, they also bought a competitor. (Interestingly, our buyers had a chance at that business as well, but passed again because they were still nervous about the technology.)

Fast forward to January 2012. The asking price went from $950K to $1.9M because of the acquisition and overall increase in revenue. The increased asking price was justified based on performance. The happy ending is that the seller just accepted an offer for close to the full asking price.

Everyone wins in this story:

The seller had bought the business with a plan to grow it and sell it for a profit. Accomplished.

The buyer had been looking for a business for 4 years. It is a husband and wife team that really liked the clean cash flow and growth potential of the business. They had experience with the core technology and are excited to own and grow their own business. Success.

Connecting buyers and sellers so that everyone wins is what we do best. If you are on either side of that equation, we would love the chance to talk about how we can help.

Capital Gains Taxes Set to Raise in 2013

Thu, 15 Mar 2012 20:45:00 GMT

Capital gains taxes will be going up from 15% to potentially 25% in 2013. If you are doing a deal that is valued at $1M, that can make a big difference in what you are able to put in the bank after selling your business to the tune of $100K. If you are close to retirement or thinking about selling your business, you should move aggressively to prepare your business. You will realize a substantial savings if you close by December 31st of 2012.

The shocking thing to us is how little this is being talked about in Kansas City. If you are reading this and you know someone who owns a business, please consider forwarding this on to make sure they are in the loop… you never know when they are considering a sale of their business.

There are many sources on the internet documenting the potential rise and we especially liked the article from Forbes discussing how the increase could go based on various legislation. (Source link: Forbes, January 24, 2012)

Congratulations to Mike for his 6 Year Anniversary with Apex

Thu, 08 Mar 2012 21:45:00 GMT

We are excited to celebrate the fact that Mike Funk has been a Senior Broker with Apex for 6 years! Mike was originally a client of ours when he was selling his wholesale distribution business. His entrepreneurial background fit well with the organization and his experience allows him to provide valuable insight to the business owners he represents and the buyers who look to him for guidance. Mike has won several awards with Apex, including the Million Dollar Club.

What we appreciate so much about Mike is that he is a straight shooter and can bring fun to the process of selling businesses. If you want a true professional that will give you the real story, Mike is your man… and we are proud to have him as part of the Apex team!

Too Much Revenue from ONE Customer?

Fri, 02 Mar 2012 17:44:00 GMT

This is another real world story of the interesting situations that we find when brokering deals.

We had a great business with great cash flow and great products. On the surface, everything looked like this was a business that could be sold at 3 or 4 times cash flow. When we dug deeper, we found that there was one huge customer. Yes, the customer was profitable, but they made up two-thirds of the business revenue. That is challenge enough, but it got worse. The account manager for this major customer was a family member of the owner, and was being paid twice the market rate for their position.

The price of a business gets discounted for each of these situations separately, but when combined, it makes it almost impossible to get a deal done. In this situation, the person that would benefit the most and have the best chance for success, as a buyer, is the family member. But they are also the individual with the most leverage to influence business price.

What could the business owner have done to have a better chance at selling? The business owner needed to be making strategic changes at least 12 months before trying to sell. The first move would be to get a new account manager involved with the major customer to minimize the risk of the relationship with the family member. In addition, it would be a good idea to have an employment agreement in place with the new account manager that includes a non-compete. The harder thing is to expand the business so that one customer doesn’t represent so much of the revenue stream. Not easy, but this can be done.

If everything can be fixed except for the customer concentration, you could probably sell, but be prepared to finance the buyer.

Actions Speak Louder than Words

Thu, 23 Feb 2012 19:22:00 GMT

We love to tell real world stories about what happens when buyers and sellers come together to try and do a deal. Recently, an owner agreed to finance 50% of the purchase price of their business. As the due diligence process began, the type of questions that the buyer was asking became a red flag for the seller. The process was also getting bogged down by the buyer not responding in a timely manner. The buyer wouldn’t answer what we would consider normal, everyday conversational questions some of which had to do with moving his family to town to run the business.

This caused the seller to start to doubt that the buyer was going to pay back the loan, run the business properly and take care of the employees. The seller was thinking: "If you are acting this way with me, my key people aren’t going to be able to work with you and will leave. If the key people leave, the business will fail and you won’t be able to pay back the loan".

The lesson here is that character and being responsive are incredible factors that come into play when a deal is being discussed. Remember to put yourself in the other person's shoes for a moment. Negotiations could go your way more often.

Apex Enhances Offerings – Business Valuation Services

Wed, 02 May 2012 14:56:00 GMT

We are proud to announce that we have expanded our core service offerings to include Business Valuation. It is not a requirement of our clients to have a valuation analysis performed. However, since it is not required, this tends to reduce the importance of this process in the mind of the seller. Business Valuation is a critical part of selling your business or preparing to sell. Don't leave money on the table!

Too many people have the impression that it is an expensive and painful process. It is not. The basic process requires a document to be completed and 3 years of tax returns supplied. Your broker will help you with this to make sure that the information is accurate, complete, and presents the business in the best possible light.

As a result, we have formalized the process. If you want to make sure you get full value for your business, click the link below to find out more!

Business Valuation

Congratulations to Anita for her 5 Year Anniversary with Apex

Fri, 10 Feb 2012 19:44:00 GMT

Please join us in celebrating Anita being with Apex Business Advisors for 5 years! Anita joined our company in January of 2007. She was introduced to Doug Hubler by another long term broker, Jeff Crooks. Jeff was certain that Anita would make a great addition to our team. He was absolutely right! Anita has proven to be a great asset to our company, and as proof has won several sales awards including our annual trip for the top producers. This past year the award winners spent 5 days in Playa del Carmen.

Anita’s clients appreciate her straight forward and honest approach. They trust her to have their best interests at heart and help them navigate the buy/sell process - putting into practice all the things we stress in the Apex Core Values. We appreciate Anita and all she brings to the team. Congratulations Anita!

For more information about Anita, check out her LinkedIn profile.

Don’t Wait! Selling Your Business Takes Time

Wed, 25 Jan 2012 15:14:00 GMT

When you sell a home, your realtor walks through your house, takes some pictures and lists your property on MLS. They determine the starting list price based on features of your home and comparables in your area. This process usually takes a few days. Selling your business is NOTHING LIKE THIS.

We have to analyze your business, develop the value, set up the marketing program and start soliciting our current pool of buyers. If we had a buyer on your business the very first day we got the listing, and we negotiated an acceptable price and terms with the buyer, it would still take 60-90 days to get to closing from that point. It is not uncommon for a new business listing to be on the market for months.

We have literally had people call us on a Friday and said “can I have my business sold by Monday?” This is no joke, and honestly, this is not a business we chose to represent.

If your goal in 2012 is to sell your business, we should be talking now and getting prepared!

Why Do A Business Search?

Mon, 16 Jan 2012 19:35:00 GMT

Business buyers want to replace an income, have more control over their destiny, and increase their wealth opportunities, but may not know where to start. Searching for the right business can take months or even years using the old standard method of reviewing whatever comes on the market at the time it comes on the market. Sometimes that means making do with what is available – “compromising”.

Although this method actually works in many cases, a more efficient means of finding a business would mean instituting a focused search process. In a formal search, the broker is working for the buyer rather than a seller. The broker seeks out businesses based on the buyer’s experience, financial ability, location, and specific business types. The broker contacts businesses that meet the buyer’s criteria, assesses potential seller’s interest, gathers data, and assists in negotiations. Using this process, the buyer is in control and has options.

Often, from the seller’s point of view, they don’t want to be “For Sale”. Keep in mind that many, many businesses sell every year that are not advertised for sale. Business owners may be willing to talk about selling if they know the buyer is serious. There’s no better way to prove how serious a buyer is than performing a focused search. To learn more, contact one of our brokers.