Many experts say no! These experts believe that only half of the valuation should be based on the financials (the number-crunching), with the other half based on non-financial information (the subjective factors).

What subjective factors are they referring to? SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats – the primary factors that make up the subjective, or non-financial, analysis. Below you will find a more detailed look at the areas that help us evaluate a company’s SWOT.

Industry Status – A company’s value increases when its associated industry is expanding, and its value decreases in any of the following situations: its industry is constantly fighting technical obsolescence; its industry involves a commodity subject to ongoing price wars; its industry is severely impacted by foreign competition; or its industry is negatively impacted by governmental policies, controls, or pricing.

Geographic Location – A company is worth more if it is located in states or countries that have a favorable infrastructure, advantageous tax rates, or higher reimbursement rates. A company with access to an ample educated and competitive work force will also enjoy increased value.

Management – A company with low turnover in management and a solid second-tier management team comprised of different age levels is also worth more.

Facilities – A company operating profitably at 70 percent capacity is worth more than a company currently near capacity. Equipment should be up to date and any leases – either equipment or real estate – renewable at reasonable rates.

Products or Services – A company is worth more if its products or services are proprietary, are diversified with some pricing power, and have, preferably, a recognizable brand name. In addition, new products or services should be introduced on a regular basis.

Customers – A company is worth more if there is not heavy customer concentration, but rather recurring revenue from long-time, loyal customers, as well as from new customers created through a regular and systematic sales process.

Competition – A company not contending head to head with powerful competitors such as Microsoft or Wal-Mart will rate a higher value.

Suppliers – Finally, a company is worth more if it is not dependent on single-sourced key items or items available from only a limited number of suppliers.
As a business owner, have you asked yourself the following questions? And, more importantly, have you answered them?

• How do you spend your time managing the company?
• How are important decisions resolved?
• What milestones or metrics are used to measure the company’s progress?
• What is your greatest business challenge?
• What one item do you need to do a better job?
• What would you do if there was a business downturn?
• What concerns keep you up at night?
• How do you incentivize the management team?
• What would your customers/clients say about the company?
• What would your employees say about you?
• Describe your competition?
• What are the company’s long-term risks?
• Is this a mature market?
• Is growth sustainable?
 
 

This latest issue of the Privately Held Company is compliments of Gary Papay, CBI, M&AMI. Gary is president of CK Business Consultants, Inc. and is an active member of the M&A Source. Gary has been involved in the sale and acquisition of businesses for over 30 years, and is available to handle all of your merger, acquisition or divestiture needs.

P: 570-584-6488
F: 570-584-0199
gpapay@ckbc.net
www.ckbc.net

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

Ownership Transition – Survey Results

Mass Mutual Life Insurance Company provided the following survey results based on family-owned businesses. Although the survey was conducted several years ago, the results are still quite revealing, and still applicable.

• Four out of five companies are still controlled by the founders.
• 30% of family-owned companies will change leadership within the next five years.
• 55% of companies fail to conduct regular valuations of the company.
• 55% of CEOs who are 61 or older have not chosen
a successor.
• 13% of CEOs will never retire.
• 90% of businesses will continue as family owned.

• 85% of successor CEOs will be a family member.
• 20% of family owners have not completed any
estate planning.
• 55% of family owners do not have a formal company valuation for estate tax estimates.
• 60% of businesses do not have a written strategic plan.
• 48% of companies rely on life insurance to cover estate taxes.

The above survey indicates that many family businesses are not optimizing their opportunities. Their insular approach to succession, leadership, planning, etc., indicates their vulnerability for the long term. These vulnerabilities suggest that many business owners should work with professional advisors to resolve these issues. A professional intermediary is an essential member of this advisor group.

  
Personal Goodwill – Who Owns It?
 

Personal Goodwill has always been a fascinating subject, impacting the sale of many small to medium-sized businesses – and possibly even larger companies. How is personal goodwill developed? An individual starts a business and, during the process, builds one or more of the following:

• A positive personal reputation

• A personal relationship with many of the largest customers and/or suppliers

• Company products, publications, etc., as the sole author, designer, or inventor

The creation of personal goodwill occurs far beyond just customers and suppliers. Over the years, personal goodwill has been established through relationships with tax advisors, doctors, dentists, attorneys, and other personal
service providers.

While these relationships are wonderful benefits, they are, unfortunately, non-transferable. There is an old saying: In businesses built around personal goodwill, the goodwill goes home at night.

It can be difficult to sell a business, regardless of size, where personal goodwill plays an integral role in the business’ success. The larger the business, the less likely that one person holds the key to its profitability. In small to medium-sized businesses, personal goodwill can be a crucial ingredient. A buyer certainly has to consider it when considering whether to buy such a business.
 

In the case of the sale of a medical, accounting, or legal practice, existing clients/patients may visit a new owner of the same practice; they are used to coming to that location, they have an immediate problem, or they have some other practical reason for staying with the same practice. However, if existing clients or patients don’t like the new owner, or they don’t feel that their needs were handled the way the old owner cared for them, they may look for a new provider.

The new owner might be as competent as, or more competent than, his predecessor, but chemistry, or the lack of it, can supersede competency in the eyes of a customer.

Businesses centered on the goodwill of the owner can certainly be sold, but usually the buyer will want some protection in case business is lost with the departure of the seller. One simple method requires the seller to stay for a sufficient period after the sale to allow him or her to work with the new owner and slowly transfer the goodwill. No doubt, some goodwill will be lost, but that expectation should be built into the price. Another approach uses some form of “earnout.” At the end of the year, the lost business that can be attributed to the goodwill of the seller is tallied. A percentage is then subtracted from monies owed to the seller, or funds from the down payment are placed in escrow, and adjustments are made from that source.

In some cases, the sale of goodwill may offer some favorable tax benefits for the seller. If the seller of the business is also the owner of the personal goodwill, the sale can essentially be two taxable events. The tax courts have ruled that the business doesn’t own the goodwill, the owner of the business does. The seller thus sells the business and then also sells his or her personal goodwill. The seller’s tax professional will be able to give further advice on this matter.

  
 

The Role of a Professional Business Intermediary

Many sellers think the sole role of the business intermediary is to find a buyer for their company. Business intermediaries do a lot more than just finding buyers, as the following will demonstrate. Here are just a few of the valuable services they provide to a seller:

1. Work with the seller to arrive at a value for the company
An intermediary will work with the financial officer of the company to look at the historical numbers and assist in the recasting of the statements. Realistic projections may also be prepared. A firm valuation number may not be settled upon, but rather a range which the owner (or management) and the intermediary are comfortable with. Terms and structure will also be agreed upon or discussed based upon the current market. Compared to other advisors, intermediaries usually have more current statistics regarding the value ranges of small to mid-sized businesses in any given market or industry. This is especially true when an intermediary specializes in a particular field or industry.

2. Assist in selecting other members of the sales transaction team
A seller may have legal and accounting advisors. However, it is important that these advisors have the requisite experience in deal making. A business intermediary can often supply the names of advisors with the necessary experience to avoid the mistakes less experienced advisors frequently make.

3. Prepare the necessary documentation to market the company
It is critical that the marketing documentation do two things: create interest in the company, and then provide all of the background information necessary for a prospective buyer to determine whether this company is worthy of his or her continued interest.

4. Identify prospective buyers
It is important to determine what an appropriate buyer would look like financially, strategically, individually, etc. This determination requires honest dialogue between the intermediary and the seller regarding the seller’s specific goals and objectives as well as the seller’s opinions on the best type of buyer for his or her company.

5. Develop a marketing plan
An intermediary will create marketing strategies to reach the most probable buyers. Methods based on the intermediary’s databases will include direct mail, print and web-based advertising, emails, and phone calls.

6. Interview, qualify, and inform prospective buyers
This includes obtaining Confidentiality Agreements, setting up site visits with qualified and interested prospects, handling buyer questions and requests for more information, and discussing financing details with prospects. This happens to be the most time-consuming step in the sale process – a step the seller never sees, as it is performed in-house by the intermediary.

7. Begin the purchase proposal process
An intermediary will work with prospects on Letters of Intent (LOI), review proposals, and coordinate and attend buyer/seller meetings and Purchase and Sale discussions.

8. Negotiate details
Once a LOI has been drafted, sale details are negotiated. These details include price, terms, structure of the deal, and how the due diligence process will be handled.

9. Manage the due diligence process
Much of what is included in this process should have already been identified. This includes review of leases, contracts, agreements, etc. An experienced intermediary will help in offering suggestions about the timing and processes to help maintain confidentiality during this critical stage in the sale process. An intermediary should review drafts of the final purchase agreement, make sure they are in line with what was discussed and agreed on between the buyer and the seller, and offer suggestions if anything appears out of line.

10. Coordinate closing activities
This includes completion of documents, assignment of documents, and working out how the actual change of ownership will transpire.

This is just a brief overview of all that a business intermediary manages in the sale of a company. He or she attends to all the essential tasks from beginning to end, minding the big and small details. Through the entire process, the business intermediary also monitors those situations threatening to spring up that could cause the sale to “crater,” such as misunderstandings or the unexpected surprises almost guaranteed to occur in the sale of any business. Keeping the deal together from beginning to end is a valuable service provided by an intermediary to both buyers and sellers.