The Entrepreneurs Advocate

Archive for the ‘Valuation’ Category

In these tough economic times, it is more important than ever to plan ahead.

That is why it gives me great pleasure to invite you and your clients to a seminar on Planning Your Exit from Business Ownership. This seminar is presented by the Stetson University Family Enterprise Center in partnership with Holland & Knight, LarsonAllen and my company, Bankers Advocate.

It will be held at the Stetson University Center at Celebration, Florida on Thursday, November 5, 2009.

Whether the exit from ownership is in six months or six years, this factual and hard-hitting seven hours will provide you with the information that you or your clients need for a successful Ownership Exit and/or Transfer.

Learn from Seasoned Professionals how to:

• STRUCTURE YOUR BUSINESS for a Successful Exit
• IMPROVE THE BOTTOM LINE Profits until you Sell
• DEAL with CONFIDENTIALITY ISSUES
• RECEIVE MAXIMUM VALUE for your Business
• KNOW the Types of Buyers and their Value Drivers
• HOW to Sell or Transfer to FAMILY/KEY EMPLOYEES
• AVOID TAX & LEGAL PITFALLS in the Process

This is an opportunity to participate in a valuable interactive seminar and a great networking event.

Can you afford not to attend?

You can view the brochure and register online by clicking on the links below.

To view a detailed seminar brochure : CLICK HERE

To register for the conference on line: CLICK HERE

We hope that you will join us. Please pass this on to anyone who you think would benefit.

Sincerely,

Chris Curtin
COO, Bankers Advocate
(561) 882-1331

PS: Reply to this blog and receive a special friends of Bankers Advocate deep discount.

I received this in an email from Rich Goeldner of FairValue Advisors. My take on the reduced multiples paid for the smaller mid-market companies is that sales/ebitda trended down for many of them in 2008/2009 and financing dried up. I expect a reversal of this chart in 4th quarter 2009. enjoy. Chris

1.The Buyer’s lender will demand one and there is a good chance yours will match the one subsequently ordered by the Entering buyer’s bank. Do you only want an appraisal from the buyer’s and lender’s perspective?

2. Pre-financing can be arranged for the potential Entering buyers of your business. This also gives you insight into the buyer’s capacity and character. If the Entering buyer (key employees or outsider) is not credit worthy, precious time is not wasted and the ensuing confidentiality risk is minimized.

3. You are in control of the selling price. What more needs said?

4. You are in control of potential buyer’s offering price and their perception of your business. Remember, your business only gets one chance at a good first impression.

5. If the Appraisal comes back lower than your Exiting Strategy needs, steps can be taken to improve your businesses cash flow before it is too late. You do not want the rude awakening that could come from an educated buyer’s low-ball offer.

6. You are in control of the buyer’s team of advisors. In addition, data gathering during the appraisal process can reveal any potential due diligence problems that could arise later.

7. Your business will stand out versus the poorly presented businesses for sale. Remember, your business is competing against other investment opportunities that potential buyers are investigating. The certified, third party appraisal makes your business look more appealing and professional.

8. We live in a litigious society. The certified, third party appraisal is your best weapon against buyer’s remorse and any charge from the buyer that they overpaid.

9. A rule of thumb appraisal or one done by a member of the Exiting team could be seen as tainted. A potential buyer will discount the asking price if a qualified certified, third party business appraisal is not done at arms-length.

SBA backed loans are down 31% in South Florida. The new SBA SOP (standard operating procedures) have made the rules more onerous for Entering clients and prospects. A constant refrain we hear from banks is we would have done this deal a year ago. In the past we would have placed loans with 1-2 target banks and typically that was good enough. Now we place packages at 3-5 lenders and are constantly researching new lender’s risk parameters and appetite for loans by market segments.

This is toughest borrowing market we at Bankers Advocate have seen in in 10-15 years. What steps can you take to make sure a lender will fund your transaction?

• Books and Records Current and Error Free- Many posts in this blog harp on this subject, but it is even more important in this tough lending environment.
• All Loans Now Require a Business Plan- A good idea before becomes a requisite now. Much of the data gathered during the third party appraisal process can be used in a business plan. Having the data will make this go smoother and faster. Also, it is a good learning and team building exercise for the Entering and Exiting entities to work on this together.
• Third Party Evaluations Required-We have never taken an assignment without one being done. It is good to see the SBA back us up.
• Source of Equity-Rules have tightened on borrowing monies against your house and other assets. Coverage on this new debt cannot be only covered by the cash flow from the new business. Verification of funds by the lender has been made stricter too. Documentation and analysis needs done prior to the loan being submitted.
• Change in Ownership must Benefit the Business-This is a tricky one, but we can help write the narrative for the loan documentation.
• Exiting Seller Financing-Lenders like to see the Exiting  party “invested” in the process. Some amount of seller financing is encouraged  and even required on some deals by the SBA.
• Experience of Entering Buyer-A good resume, track record and tying this together with a good business plan is paramount. This needs addressed early in the process as this variable has become a deal breaker.

Deals (and loans) are still getting done, but planning, structure and choosing the correct lender(s) is even more critical in these challenging times. 

Later this week on June 19th in Ft Myers and June 20th in Ft Lauderdale, I am participating in two Planning Your Exit from Business Ownership Seminars. BB&T, Ruden McClosky and Richard Hall CPA are my gracious sponsors. Whether you want to Exit your business in six months or six years, this factual and hard hitting four hours of material will give you the information you need to make one of the more important decisions in your life.

Don’t worry, you won’t be sold or asked to buy anything. I half kiddingly tell all attendees that my only goal is that you will see that the Exiting Process is so complicated you dare not do it without professional help (of course I hope you consider Bankers Advocate). Some of the topics discussed will be:

STRUCTURE YOUR BUSINESS for a Successful Exit
IMPROVE THE BOTTOM LINE Profits until you Sell
SUCCESSFULLY SELL your Business
DEAL with CONFIDENTIALITY ISSUES
RECEIVE MAXIMUM VALUE for your Business
HOW to Sell to FAMILY or KEY EMPLOYEES
AVOID TAX & LEGAL PITFALLS in the Process

We have a few spots still available for both Seminars. Readers of this blog can still get the early discount rate if they RSVP by this Tuesday night. Call the office at (561) 882-1331. I hope to see you there.

In AccuVal’s (a global leader in valuation, advisory and asset management services) most recent newsletter, the above question was asked. Here is their answer:

A: In addition to the appraisal approach, business risk, financial risk, and liquidity risk should also be considered.

Business risk is defined as the degree of uncertainty of realizing expected future returns of the business resulting from factor other than financial leverage. Business risk is applied to all factors that can have an effect on forecasted earnings, including any issue that may impact administrative and operating expenses, cost of sales, and sales. An appraiser takes into consideration the competition, industry, management focus, and working capital of that specific company.

Similar to the definition of business risk, financial risk is defined as the degree of uncertainty of realizing expected future returns of the business resulting from financial leverage. Financial risk pertains to interest expense. Interest expense can impact the pre-income tax earnings that were forecasted. Financial risk is company specific and is assessed on the asset base of the business. The level of financial risk varies. It can be considered minimal if business is primarily financed by equity. If financed by debt, however, the financial risk would most likely be considered medium to high.

Liquidity risk is industry specific, whereas business risk and financial risk are company specific. It is also not relative to the realization of some level of income. Liquidity risk relates to the uncertainty associated with the disposal of a closely-held business at fair market value. The uncertainty stems from the length of the disposition period as it relates to the time value of money.

Whenever we take on a new Exiting client, we get a 3rd party business appraisal done by a reputable company (one that the banks will take, hold up in court, etc.). We also utilize a business appraisal in our targeted search program for Entering Clients. Our website is chock full of good reasons to get one. Occasionally in addition to a regular or enterprise appraisal, we use a Hypothetical Appraisal. From the American Society of Appraisers (ASA) website, here is the definition:

Hypothetical Appraisals- A hypothetical appraisal is an appraisal based on assumed conditions which are contrary to fact or which are improbable of realization or consummation. The Society takes the position that there are legitimate uses for some hypothetical appraisals, but that it is improper and unethical to issue a hypothetical appraisal report unless (1) the value is clearly labeled as hypothetical (2) the legitimate purpose for which the appraisal was made is stated, and (3) the conditions which were assumed contrary to fact are set forth. A hypothetical appraisal showing the value of a company which it is proposed to form by merging two existing companies would he deemed to serve a legitimate purpose. On the other hand, a hypothetical appraisal of a projected apartment house, based on an assumed rent schedule which is so much above the market that it is practically impossible for it to be realized, would not serve any legitimate purpose and its issuance might well lead to the defrauding of some unwary investor.

So from this you can see why we sometimes utilize a hypothetical appraisal. If your business will be purchased by an individual or financial buyer who hopes to run it, grow it and earn a nice living after debt coverage; a hypothetical appraisal is probably not right for you. If your business is large enough or unique enough that it will add immediate synergies to a strategic buyer like a PEG or larger company, then it make sense.

Warning! There are unscrupulous companies who try to get $40,000 or more from business owners selling them on the merits of purchasing a hypothetical appraisal. They will dangle their roster of strategic and international buyers as a lure. Please use some common sense. If the size of your business or its lack of uniqueness would not entice these larger buyers, don’t be fooled. These companies are in the business to sell appraisals for $40k, not to sell your business. A reasonable appraisal will be a fraction of that price. See this INC article for details.