Valuing the Business: Some Difficult Issues

Business valuations are almost always difficult and often complex. A valuation is also frequently subject to the judgment of the person conducting it. In addition, the person conducting the valuation must assume that the information furnished to him or her is accurate.

Here are some issues that must be considered when arriving at a value for the business:

Product Diversity – Firms with just a single product or service are subject to a much greater risk than multiproduct firms.

Customer Concentration – Many small companies have just one or two major customers or clients; losing one would be a major issue.

Intangible Assets – Patents, trademarks and copyrights can be important assets, but are very difficult to value.

Critical Supply Sources – If a firm uses just a single supplier to obtain a low-cost competitive edge, that competitive edge is more subject to change; or if the supplier is in a foreign country, the supply is more at risk for delivery interruption.

ESOP Ownership – A company owned by employees, either completely or partially, requires a vote by the employees. This can restrict marketability and, therefore, the value.

Company/Industry Life Cycle – A retail/repair typewriter business is an obvious example, but many consumer product firms fall into this category.

Other issues that can impact the value of a company would include inventory that is dated or not saleable, reliance on short contracts, work-in-progress, and any third-party or franchise approvals necessary to sell the company.

© Copyright 2015 Business Brokerage Press, Inc.

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Considering Selling? Some Important Questions

Some years ago, when Ted Kennedy was running for president of the United States, a commentator asked him why he wanted to be president. Senator Kennedy stumbled through his answer, almost ending his presidential run. Business owners, when asked questions by potential buyers, need to be prepared to provide forthright answers without stumbling.

Here are three questions that potential buyers will ask:

  1. Why do you want to sell the business?
  2. What should a new owner do to grow the business?
  3. What makes this company different from its competitors?

Then, there are two questions that sellers must ask themselves:

  1. What is your bottom-line price after taxes and closing costs?
  2. What are the best terms you are willing to offer and then accept?

You need to be able to answer the questions a prospective buyer will ask without any “puffing” or coming across as overly anxious. In answering the questions you must ask yourself, remember that complete honesty is the only policy.

The best way to prepare your business to sell, and to prepare yourself, is to talk to a professional intermediary.

© Copyright 2015 Business Brokerage Press, Inc.

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Is Your “Normalized” P&L Statement Normal?

Normalized Financial StatementsStatements that have been adjusted for items not representative of the current status of the business. Normalizing statements could include such adjustments as a non-recurring event, such as attorney fees expended in litigation. Another non-recurring event might be a plant closing or adjustments of abnormal depreciation. Sometimes, owner’s compensation and benefits need to be restated to reflect a competitive market value.

Privately held companies, when tax time comes around, want to show as little profit as possible. However, when it comes time to borrow money or sell the business, they want to show just the opposite. Lenders and prospective acquirers want to see a strong bottom line. The best way to do this is to normalize, or recast, the profit and loss statement. The figures added back to the profit and loss statement are usually termed “add backs.” They are adjustments added back to the statement to increase the profit of the company.

For example, legal fees used for litigation purposes would be considered a one-time expense. Or, consider a new roof, tooling or equipment for a new product, or any expensed item considered to be a one-time charge. Obviously, adding back the money spent on one or more of these items to the profit of the company increases the profits, thus increasing the value.

Using a reasonable EBITDA, for example an EBITDA of five, an add back of $200,000 could increase the value of a company by one million dollars. Most buyers will take a hard look at the add backs. They realize that there really is no such thing as a one-time expense, as every year will produce other “one-time” expenses. It’s also not wise to add back the owner’s bonuses and perks unless they are really excessive. The new owners may hire a CEO who will require essentially the same compensation package.

The moral of all this is that reconstructed earnings are certainly a legitimate way of showing the real earnings of a privately held company unless they are puffed up to impress a lender or potential buyer. Excess or unreasonable add backs will not be acceptable to buyers, lenders or business appraisers. Nothing can squelch a potential deal quicker than a break-even P&L statement padded with add backs.

© Copyright 2015 Business Brokerage Press, Inc.

Photo Credit: DodgertonSkillhause via morgueFile

VRG assists local law firm with appraisal

San Diego, CA, United States– Vanguard Resource Group, a full service business brokerage and appraisal firm, recently performed an appraisal for a prominent local law firm.

The law firm, which prefers not to be identified, needed a second opinion of value for a business that was part of a divorce mediation.

“We were asked if we could do a quick valuation and have it ready for their mediation the following week” stated Ken Oppeltz, Managing Principal of Vanguard Resource Group.  “While we typically need a bit more time, we value our relationships with our attorney and CPA partners, so did what we needed to do, and provided the valuation two days prior to their mediation.”

VRG assists buyers, sellers, CPA’s, Attorney’s, and other advisors identify the value of privately held companies. VRG can perform quick and inexpensive Market Data Comparable & Most Probable Selling Price Reports.

VRG completes sale of Cal’s Auto to industry buyer

Escondido, CA, United States– Vanguard Resource Group, a full service business brokerage and appraisal firm, recently facilitated the sale of a local auto repair facility to an industry buyer.

Cal’s Auto, based in Escondido California, had a great reputation in the north San Diego inland area. But Cal was looking to retire and had tried unsuccessfully to sell his company on his own. Cal just happened to ask a local real estate agent if she knew of any business broker, she did, and the introduction to VRG was made.

“Cal’s facility was top notch, but Cal was retiring, so we knew we needed to find a buyer experienced in auto repair” stated Dave Haug, Senior Associate of Vanguard Resource Group.

Vanguard Resource Group, through its marketing effort and relationships with other professional business brokers, identified an industry veteran looking to expand.  He loved the facility, the reputation, and VRG closed the transaction from start to finish in just three months.

VRG closes sale of trailer dealership

San Diego, CA, United States– Vanguard Resource Group is pleased to announce the successful sale of a prominent southern California trailer dealership. Vanguard Resource Group represented both the buyer and seller in the transaction.

The seller is a well-known retailer of utility, horse, construction, and specialty trailers serving all of southern California and much of the Southwest. With a strong reputation and over 20 years in business, the company generated interest from multiple investors. However, given the uniqueness of the business, the seller was searching for a buyer with some related experience that could take the business to the next level.

Ken Oppeltz, Managing Principal of Vanguard Resource Group, stated “Because of the strong financial results, the company generated a lot of interest. But we were able to identify a buyer with vehicle dealership experience, both in operations and in sales management. Since the seller owned the real estate and would be the buyer’s new landlord, it was important to find just the right buyer. We think this deal was a win-win for both parties”

United Fastener sold to private equity firm

San Diego, CA, United States– Vanguard Resource Group, a full service business brokerage and appraisal firm, recently facilitated the sale of a local industrial fastener company to a Canadian private equity firm.

When United Fastener, a San Diego based distributor of fasteners, decided to sell, they engaged Vanguard Resource Group to sell their business.

“It’s not often we get a chance to represent a 42 year old industrial products company, especially one that has been family owned and passed from father to son. We felt honored to have been entrusted with the sale of the family’s biggest asset.” stated Bill Lange, Managing Principal of Vanguard Resource Group.

When marketing the business, Vanguard Resource Group identified several potential buyers. But in the end, the seller felt the best combination of price and terms came from a Canadian based private equity firm. While being the first acquisition in California for a private equity firm was not easy, the parties and their attorney’s worked closely together to facility both a good transaction and a well thought out transition plan.

Nannell’s and Food Factory sold to owner/operators

Rancho Bernardo, CA & Lemon Grove, CA.  United States– Vanguard Resource Group, a full service business brokerage and appraisal firm, recently sold two small “main street” businesses to local owner/operators

Nannell’s Florist, based in the Mercado shopping center in Rancho Bernardo, was a long-time favorite for many north county inland residents. But when the seller got engaged, then married, then decided to have a baby, she knew it was time to move on. While many bigger players including very well-known shops showed interest, the facility and community was best served by an owner/operator. VRG through its marketing efforts identified a buyer who was in the floral industry, but working from her home. Nannell’s proved to be an excellent next step for the buyer to transition from a home based operation to a retail storefront. Now named Cozy Posies, the owner is working hard to combine the traditional florist shop with specialty events and weddings.

Food Factory was a 42 year old diner located in Lemon Grove, California. Seating just 30 guests and the customers enjoying seeing the owner behind the grill, VRG knew they had to find an owner/owner with both experience and personality. The business was sold to a husband/wife chef team, renamed the Bleu Whisk, and is enjoying great review on Yelp.com.

VRG has sold businesses valued between $100k and $30MM. VRG provides “Wall Street” services for “Main Street” businesses.

Mango Mango’s signs lease in La Jolla

La Jolla, California.  United States– Vanguard Resource Group, a full service business brokerage, commercial leasing and appraisal firm, recently represented the tenant, Mango Mango’s in a new lease.

Mango Mango’s is a new Mexican juice and sandwich concept. They will occupy approximately 1100 square feet at 627 Pearl Avenue, La Jolla California.

Jose Bravo, Vanguard Resource Group Principal and their Director of Leasing stated “This site was formerly El Pescado and has not been available for about 30 years.”

Terms of this lease were not made available

Do You Have an Exit Plan?

“Exit strategies may allow you to get out before the bottom falls out of your industry. Well-planned exits allow you to get a better price for your business.”

From: Selling Your Business by Russ Robb, published by Adams Media Corporation

Whether you plan to sell out in one year, five years, or never, you need an exit strategy. As the term suggests, an exit strategy is a plan for leaving your business, and every business should have one, if not two. The first is useful as a guide to a smooth exit from your business. The second is for emergencies that could come about due to poor health or partnership problems. You may never plan to sell, but you never know!

The first step in creating an exit plan is to develop what is basically an exit policy and procedure manual. It may end up being only on a few sheets of paper, but it should outline your thoughts on how to exit the business when the time comes. There are some important questions to wrestle with in creating a basic plan and procedures.

The plan should start with outlining the circumstances under which a sale or merger might occur, other than the obvious financial difficulties or other economic pressures. The reason for selling or merging might then be the obvious one – retirement – or another non-emergency situation. Competition issues might be a reason – or perhaps there is a merger under consideration to grow the company. No matter what the circumstance, an exit plan or procedure is something that should be developed even if a reason is not immediately on the horizon.

Next, any existing agreements with other partners or shareholders that could influence any exit plans should be reviewed. If there are partners or shareholders, there should be buy-sell agreements in place. If not, these should be prepared. Any subsequent acquisition of the company will most likely be for the entire business. Everyone involved in the decision to sell, legally or otherwise, should be involved in the exit procedures. This group can then determine under what circumstances the company might be offered for sale.

The next step to consider is which, if any, of the partners, shareholders or key managers will play an actual part in any exit strategy and who will handle what. A legal advisor can be called upon to answer any of the legal issues, and the company’s financial officer or outside accounting firm can develop and resolve any financial issues. Obviously, no one can predict the future, but basic legal and accounting “what-ifs” can be anticipated and answered in advance.

A similar issue to consider is who will be responsible for representing the company in negotiations. It is generally best if one key manager or owner represents the company in the sale process and is accountable for the execution of the procedures in place in the exit plan. This might also be a good time to talk to an M&A intermediary firm for advice about the process itself. Your M&A advisor can provide samples of the documents that will most likely be executed as part of the sale process; e.g., confidentiality agreements, term sheets, letters of intent, and typical closing documents. The M&A advisor can also answer questions relating to fees and charges.

One of the most important tasks is determining how to value the company. Certainly, an appraisal done today will not reflect the value of the company in the future. However, a plan of how the company will be valued for sale purposes should be outlined. For example, tax implications can be considered: Who should do the valuation? Are any synergistic benefits outlined that might impact the value? How would a potential buyer look at the value of the company?

An integral part of the plan is to address the due diligence issues that will be a critical part of any sale. The time to address the due diligence process and possible contentious issues is before a sale plan is formalized. The best way to address the potential “skeletons in the closet” is to shake them at this point and resolve the problems. What are the key problems or issues that could cause concern to a potential acquirer? Are agreements with large customers and suppliers in writing? Are there contracts with key employees? Are the leases, if any, on equipment and real estate current and long enough to meet an acquirer’s requirements?

The time to address selling the company is now. Creating the basic procedures that will be followed makes good business sense and, although they may not be put into action for a long time, they should be in place and updated periodically.

© Copyright 2015 Business Brokerage Press, Inc.

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