Sabre Capital is a leading Merger & Acquisition firm in the Carolinas. Since 1984 we have assisted companies in a broad range of industries manage their strategic alternatives. Services include valuation, pre-marketing consulting to maximize value and an aggressive team driven implementation with hands-on professional follow through.

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James A. "Trip" Holmes, III - CBI
919-847-0099
holmes@sabrecapital.com

What Are Buyers Looking for in a Company?

It has often been said that valuing companies is an art, not a science. When a buyer considers the purchase of a company, three main things are almost always considered when arriving at an offering price.

Quality of the Earnings

Some accountants and intermediaries are very aggressive when adding back, for example, what might be considered one-time or non-recurring expenses. A non-recurring expense could be: meeting some new governmental guidelines, paying for a major lawsuit, or even adding a new roof on the factory. The argument is made that a non-recurring expense is a one-time drain on the “real” earnings of the company. Unfortunately, a non-recurring expense is almost an oxymoron. Almost every business has a non-recurring expense every year. By adding back these one-time expenses, the accountant or business appraiser is not allowing for the extraordinary expense (or expenses) that come up almost every year. These add-backs can inflate the earnings, resulting in a failure to reflect the real earning power of the business.

Sustainability of Earnings

The new owner is concerned that the business will sustain the earnings after the acquisition. In other words, the acquirer doesn’t want to buy the business if it is at the height of its earning power; or if the last few years of earnings have reflected a one-time contract, etc. Will the business continue to grow at the same rate it has in the past?

Verification of Information

Is the information provided by the selling company accurate and timely, and is all of it being made available? A buyer wants to make sure that there are no skeletons in the closet. How about potential litigation, environmental issues, product returns or uncollectible receivables?
The above areas, if handled professionally and communicated accurately, can greatly assist in creating a favorable impression. In addition, they may also lead to a higher price and a quicker closing.

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A Reasonable Price for Private Companies

Putting a price on privately-held companies is more complicated than placing a value or price on a publicly-held one. For one thing, many privately-held businesses do not have audited financial statements; these statements are very expensive and not required. Public companies also have to reveal a lot more about their financial issues and other information than the privately-held ones. This makes digging out information for a privately-held company difficult for a prospective purchaser. So, a seller should gather as much information as possible, and have their accountant put the numbers in a usable format if they are not already.

Another expert has said that when the seller of a privately-held company decides to sell, there are four estimates of price or value:

1. A value placed on the company by an outside appraiser or expert. This can be either formal or informal.

2. The seller’s “wish price.” This is the price the seller would really like to receive – best case scenario.

3. The “go-to-market price” or the actual asking price.

4. And, last but not least, the “won’t accept less than this price” set by the seller.

The selling price is usually somewhere between the asking price and the bottom-dollar price set by the seller. However, sometimes it is less than all four estimates mentioned above. The ultimate selling price is set by the marketplace, which is usually governed by how badly the seller wants to sell and how badly the buyer wants to buy.

What can a buyer review in assessing the price he or she is willing to pay? The seller should have answers available for all of the pertinent items on the following checklist. The more favorable each item is, the higher the price.

  • Stability of Market
  • Stability of Historical Earnings
  • Cost Savings Post-Purchase
  • Minimal Capital Expenditures Required
  • Minimal Competitive Threats
  • Minimal Alternative Technologies
  • Reasonable Market
  • Large Market Potential
  • Reasonable Existing Market Position
  • Solid Distribution Network
  • Buyer/Seller Synergy
  • Owner or Top Management Willing to Remain
  • Product Diversity
  • Broad Customer Base
  • Non-dependency on Few Suppliers

There may be some additional factors to consider, but this is the type of analysis a buyer should perform. The better the answers to the above benchmarks, the more likely it is that a seller will receive a price between the market value and the “wish” price.

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Top Ten Mistakes Made by Sellers

1. Neglecting the day-to-day running of their business since it will sell tomorrow.

2. Starting off with too high a price since the price can always be reduced.

3. Assuming that confidentiality is a given.

4. Failing to plan ahead to sell / deciding to sell impulsively.

5. Expecting that the buyers will only want to see last year’s P&L.

6. Negotiating with only one buyer at a time and letting any other potential buyers wait their turn.

7. Having to reduce the price because the sellers want to retire and are not willing to stay with the acquirer for any length of time.

8. Not accepting that the structure of the deal is as important as the price.

9. Trying to win every point of contention.

10. Dragging out the deal and not accepting that time is of the essence.

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Are Your Independent Contractors Really Employees?

The Internal Revenue Service is going after FedEx in a big way. The IRS claims that the people who apparently own and operate a FedEx Ground route are really employees of FedEx and not independent contractors as FedEx claims. If the IRS wins this battle, it will cost FedEx many millions of dollars, not only in back taxes, but also in state workers’ compensation, federal unemployment, disability taxes, Social Security and Medicare taxes. (Independent contractors pay the entire 15.3 percent of Social Security and Medicare taxes, although they do get credit for half on their federal tax return.)

Businesses like the independent contractor status because it frees the business from the taxes and worker costs mentioned above. The business is free to simply pay the contractors, leaving the independent contractor without the benefits described above. The IRS is well aware that it loses many billions of dollars due to the independent status and it considers many of these independent contractors to be actual employees. Why do employers use the independent contractor status? Simply because it saves them a lot of money. However, it also deprives these workers of the benefits of employee status.

What is the difference between independent contractor status and an employee in the eyes of the IRS? For the official form (Form SS–8, Determination of Worker Status in pdf format) that is submitted to the IRS for a decision on whether the independent contractor is considered an employee by the IRS go to www.irs.gov/pub/irs-pdf/fss8.pdf. There is no charge for requesting a decision by the IRS.

IRS Form SS-8 outlines 32 questions (and 13 questions for service providers or salespersons) that help determine the difference between employee and independent contractor. These 32 questions come under three main categories: Behavioral Control, Financial Control, and Relationship of the Worker and Firm. If an employer controls the independent contractor, tells him or her what to do (and perhaps even how to do it), and makes many of the decisions regarding the work, the “independent contractor” is most likely really an employee.

It might be time to reconsider the status of any independent contractor in your employ. The prudent thing to do, even if you only have one independent contractor, is to make an appointment with your legal advisor.

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Preparing the Business For Sale

For sellers to receive top dollar for their businesses, planning is critical! It is not something to put off just prior to the decision to sell. Following are some factors to consider, both long-term and short-term.

Long-Term Considerations

Ideally, the seller will start planning a full year in advance of a sale, because numerous elements will take considerable time and expense to execute. Most small private companies, for example, have their financial documents “reviewed” or “compiled” but rarely audited. Auditing statements involves conducting an actual physical inventory, with each accounts receivable and all other financial details verified in the process. While audited statements are mandatory for public companies, many private companies opt not to pay the extra cost of auditing, which can range from $10,000 to $40,000. However, an audited statement, which is a verification of the reported numbers in the financials, may result in a higher offer by the buyer.

Other items to address in preparation for selling a company include cleaning up the balance sheet of old debts and writing off uncollectable accounts receivable and old inventory. This ensures that the buyer is not deterred by a less than pristine financial statement.

Settle outstanding lawsuits and engage top management in non-competitive and stay agreements.
Further, make sure the plant is in excellent physical shape; spruce it up if need be. If the facility does not show well, it will very quickly turn off buyers.

Short-Term Considerations

In addition to the long-term issues discussed above, certain elements need to be considered in the short term. Prior to going to market with the sale of a company, sellers need to allocate about two to four months for organizational purposes. A critical element in organizing a business sale is to assemble a team of advisors, including a mergers and acquisition (M&A) intermediary. This representative will partner with the seller during the entire selling process and will probably be in contact with the seller almost daily for the next six to twelve months. The Intermediary will also orchestrate the process and act as “quarterback” for the team of advisors. A transaction attorney, an accountant, and most likely a tax attorney who will be knowledgeable about the company’s personal affairs should also be by the seller’s side.

Next, it is advisable to have a valuation of the business that not only determines the “anchor” price but also supports the seller’s reasoning in the negotiating process. Along with the business appraisal, sellers should consider obtaining a machinery/equipment appraisal and a real estate appraisal. The buyer will need these separate appraisals to know what will be required in order to finance some of the hard assets.

Finally, the preparation of the selling memorandum by the intermediary is the major selling tool in the entire process. This document describes in detail the industry, the company, the financials, and investment considerations.

Along with this document, a seller should have a “war room” of various documents pertaining to the business: lease agreements, bank agreements, a sales representative agreement, and corporate minutes. The war room would be the single place where all of the necessary secured files are kept. These files contain all the pertinent facts of the company, which buyers will want to review as part of their due diligence process.

There is an old saying that the right time to prepare to sell your company is the day you start the company or purchase it.

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