Archive for category: General

Business Valuations are Critical

You need to know the value of your business and understand what variables influence value. Considering that your business could be the largest asset you own, wouldn’t it make sense to educate yourself about business valuations?

Is there enough value in the business to retire? Have you cooked the books too much (hiding your profits) so your business isn’t marketable? How does your company compare to industry standards? If something happens to you, do you have enough insurance to take care of partners and heirs?

The most common and accepted valuation method for the typical small business is based on a multiple of Owner’s Discretionary Earnings. However, that’s just a starting point.

Here are a few of the many things a bank or prospective buyer may look at that could influence value:

• Are there layers of management or just the owner?
• Is the owner the only technical expert?
• Is the owner the lead salesperson with most of the relationships?
• Is there limited growth potential in the industry by region or niche?
• Is the business revenue trending downward?
• Is the business cyclical or seasonal?
• Are there significant capital expenditures for new equipment?
• Does one customer make up a large percentage of revenue?
• Do the financial statements accurately reflect business activity?

Whether you are a buyer, seller, or one of our professional contacts, call your business advisor at Apex Business Advisors to discuss business valuation details.

Know who your investors are – Will they stand behind you?

The majority of the buyers we see (whether individual or corporate) want to acquire a business as the sole owner. Successful partnerships are rare, let alone successful investor backed buyers. We often see a buyer who claims to have investors that will back them on any given deal. This raises a red flag immediately for us based on our past experience. The investors are never at the meetings. The investors don’t fill out the forms or financial statements. They can back out at any moment, without giving any notice.

For investor backed buyers, we require all parties to sign the contracts as a group of prospective buyers.

Here are three stories of investors that have backed out of deals in the last 2 years:
1) An investor backed out at the last minute because a girlfriend he met in Las Vegas wanted to open a bar in Vegas.

2) An investor backed out at the last minute because he decided he wanted to buy classic sports cars and race them instead of buying a business.

3) The buyer and investor couldn’t agree on their shares of ownership. Investors usually want a big piece if they are the major funding source.

In all of these situations, the buyer was not in control of the deal and was left with no funding and no clear way to move forward to get the deal done. You have to be sure to protect yourself if you are going to rely on other parties to get your deal done. Do your homework and make sure that there is some kind of contract in place that outlines the partnership agreement for all parties before trying to buy a business.

If your broker has a funny look on their face if you mention that you have an investor, now you know why. Roughly 1 in 100 deals are successful when outside investors are involved. Contact an Apex Broker if you would like more information.

Buying an existing business is a smart, lower risk proposition when compared to starting a new company from scratch. It is also a good solution for people that don’t have a unique idea or long term, sustainable cash flow to get a new business up and running. This is a message we have been sharing for years and we saw a great article in the Wall Street Journal that backs up our view.

The following is an excerpt from the Wall Street Journal, July 31, 2011:

“If you’re interested in entrepreneurship, but lack ideas or time to create a new business, buying an established company may be a wise alternative. You’ll inherit a working infrastructure complete with resources you’d otherwise have to secure on your own, such as equipment and employees. You’ll also ideally be taking over a known brand built on a positive reputation over many years’ time.”

For more information, click here to see the full article on WSJ.com.

If you have been on the fence, not sure how the process works, or now is the time to get serious, we can help. Contact your Apex Business Advisor.

We recently helped a buyer and seller close a transaction. This is an example of a deal that worked because the buyer and seller overcame obstacles to get it done. The following happened over the course of two months.

From the seller’s perspective
When the deal got to the lender, the seller had to provide a lot of paperwork, which is normal. The seller supplied the information and the bank lost the paperwork. (Believe it or not, this happens.) The seller submitted the packet again. The bank asked for additional information, piecemeal versus all at once. Finally, the seller had filed his tax return, but it was going to take six weeks before the bank could verify the information. The seller had to go directly to the IRS to get documentation for the bank. This can obviously be a frustrating process, but you have to hang in there. These deals happen all the time, but there are often challenges like this to get the deal done.

From the buyer’s perspective
From the moment a business goes on the market, to the time the business is sold, every day activities continue. Business needs to keep going. It is important for a potential buyer to keep this in mind.The negotiations were done. In the time between the signing of the offer to purchase and the closing of the deal, one of the current customers called and asked to be released from a portion of their contract. The buyer understood this to be part of the normal course of business and did not overreact. Also during this process, the biggest customer contract came up for renewal. The buyer and seller worked together to make sure the contract was renewed with that customer. These are the times that a buyer might throw in the towel because they forget that this is normal business activity.

Be Patient and work through it
We are dealing with attorneys, accountants, bankers, friends of friends and more. Everybody is asking for documents and the process takes time. The parties and their advisors have different agendas and points of view. When you work with Apex, we filter these requests. We collect as much information as possible. This allows us to aggregate and facilitate the sharing of information with everyone involved.

Make sure you involve your Apex Advisor through the entire process. We will help bring everything together and save you time.

It surprises people how many different professionals need to be at the table as we help you buy or sell a business. Besides your broker to facilitate the process, see the list below to start getting a sense of what we are talking about:

• Attorney with acquisition experience (Buyer and Seller)
• Tax Attorney (Seller)
• Accountant to help with due diligence (Buyer)
• Banker for acquisition loan and working capital (Buyer)
• Financial Planner to minimize tax consequences and access personal funds (Buyer and Seller)

At the end of the day, the buyer and seller want to have a successful deal. It is important to bring professionals that have the right experience to the table who understand the goals of the buyer and seller. This will allow the process to move forward efficiently instead of allowing roadblocks to kill a deal.

We have been doing business in Kansas City for a long time and know the typical players that are coming to the table for these deals. If you don’t have a relationship with one of the professions listed, we can refer you to two or three of our trusted resources that you can interview and choose who to work with.