Uncertainty And Expectation: The Joys Of Life

No one likes uncertainty. Most of the time, we feel relatively confident about the future. Over time, economies grow, asset values appreciate and our stan­dard of living improves. We might worry about the failure of one of our customers or the success of a new product, but the world keeps turning.

However, today the world is awash in uncertainty. Several major financial institutions have failed while others fight for their lives. Almost every economy and industry is in recession. Real estate and stock prices were down by a third at the end of October. And in the U.S., a new administration is set to take office in January.

The breadth and depth of uncertainty raises myriad questions and provides few clear answers. How will the new administration address the unprecedented economic and financial crisis we face? Will it raise taxes, and if so, by how much? When will the credit markets thaw? Amid the chaos, you might be question­ing all these things, as well as your strategic business alternatives and capital needs.

Are buyers making acquisitions given the current environment?

According to the Bureau of Eco­nomic Analysis, non-financial business cash balances as a percentage of total liabilities were about 10 percent at the end of the second quarter of 2008—an 18-year high. This historic amount of cash provides buyers much of the capital they need to make acqui­sitions. That being said, middle market deal activity slowed slightly in the third quarter of 2008, accord­ing to GF Data Resources. Although the full impact of the economic and credit market turmoil has yet to be seen, high performers in attractive industries will likely stand out more now than they did during the 2006-2007 boom. The result? Buyers are spending more time looking for acquisitions and performing due diligence. Leverage multiples are lower. Financ­ing terms are tighter, but deals are getting done.

Is it too late to sell my company before capital gains tax rates increase?

U.S. President-elect Obama has promised to tax capital gains at 20 percent, an increase compared with the current rate of 15 percent. However, most of his tax ideas were floated before the credit mar­kets froze and the economy faltered. Pundits say this could force the president-elect to shelve his tax plans while he focuses on the economy. According to Roberton Williams, principal research associate with the nonpartisan Tax Policy Center, “Most of his tax proposals will be deferred because they don’t have a stimulus effect, and some of them will make the economy worse.” Regardless, the 15-percent rate on capital gains will revert to 20 percent after December 31, 2010, if no action is taken. Tax rates are only one of many factors to consider. If you are ready to explore a sale, 2009 and 2010 will likely be good years to sell from a tax perspective.

My balance sheet is strong, but sales are flat. Is this a good time to consider growth through acquisition?

Data compiled by the Administrative Office of the U.S. Courts reveal bankruptcy filings rose 28.9 percent to 967,831 during the 12 months ended June 30, 2008. It seems likely this trend will continue into 2009 and perhaps beyond. As sales and profits plummet and the ratio of assets to liabilities constricts, it becomes increasingly difficult to fund a business as a going concern. Alternatives become limited. At some point, a dis­tressed sale, reorganization or liquidation are the only options. Although they may not necessarily be in or headed for bankruptcy, some of your competitors are weak and present acquisition opportunities. Even if your markets are shrinking, the right acquisition can help you grow by grabbing more market share. If you have access to capital, one or more carefully structured acquisitions may be one of the best ways to restart growth.

If most of my sales are to the auto industry, how do I grow or survive?

CSM Worldwide predicts North American auto production will contract more than 11 percent to 11.3 million units in 2009 from 12.8 million units in 2008. By 2010, production is expected to bounce back more than 8 percent to 12.3 million units, reaching 16.0 million units in 2014. With auto production stuck in reverse for the next few years, acquiring one or more of your competitors can help. However, you need to diversify. So, an acquisition outside the automotive industry would be best. The experience gained and skills developed while serving auto customers should be transferable to other, attractive industries. It is hard to imagine a more demanding customer base than the auto OEMs or their suppliers. If you lack access to the capital required to make an acquisition, but your business model is sound, you might need to find a financial or strategic partner to help.

My bank has asked some of my business friends to find another bank even though they have never missed a payment. What can I do to avoid this situation?

To banks, loan agreement covenants are more important than payments. That means you need to understand all financial and non-financial covenants, how to satisfy them and when to communicate with your bank. Consider a covenant checklist and fore­casting model to monitor compliance. Make them part of your annual budget process and review them at least quarterly. And communicate potential prob­lems with your lender(s) as they arise. Don’t wait. Banks are expecting record levels of covenant viola­tions during the next few quarters, so it is a good time to reread your covenants and start being proactive. If your bank is one of the many looking to raise capital, one of its best sources is its customers who do not comply with their loan agreements.

Given the level of uncertainty, many business owners and managers are reconsidering their strategic alterna­tives and capital needs. The mergers and acquisitions window remains (cracked) open, especially for buyers with cash and sellers with exceptional businesses who want to sell at the 15-percent capital gains rate. Banks are lending, but only to outstanding companies that know and satisfy their covenants.

Taxing Considerations for Business Sellers

When selling your business, tax considerations play an important role in maximizing the cash return to you and the rest of the shareholders. Because Uncle Sam will penalize you if he doesn’t receive a share of the proceeds, it’s in your best interests to ensure he gets his due – but not one penny more.

To minimize the tax bite, sellers must understand the legal implications of the terms and conditions at the start of the sale process. When you consider divesting your business, consult with your advisors to get appropriate advice. In the interim, let’s discuss some basics so you better understand how tax laws can affect you when you sell your business.

What’s Your Type?

When you established or bought your firm, you either chose a business type or acquired an already formed business. Common business structures include C corporations, S corporations, limited liability companies (LLCs), general and limited partnerships, and sole proprietorships. Note that S corporations, LLCs and partnerships generally are more tax friendly to sellers than C corporations.

Sellers of C corporations prefer to sell stock rather than assets for two primary reasons: All liabilities go with it, and, more important, only the stockholders recognize – and thus pay tax – on gains from the sale. In other words, there’s no gain at the corporate level.

Buyers, on the other hand, prefer to pay for depreciable assets and assume only the liabilities that they want. When C corporation assets are sold at a profit (that is, marked up from book value), Uncle Sam takes two bites from the apple – one at the corporate level and one at the shareholder level after the company pays out what’s left of the gain to its shareholders. Fortunately, in many cases the second bite will probably be smaller because of the new 15% tax rate on dividends under the Jobs and Growth Tax Relief Reconciliation Act of 2003.

Conversely, when an S corporation, LLC or partnership is sold, the gain or loss from selling the assets is passed directly through – with no tax at the corporate or company level – to selling stockholders, LLC members or partners. The buyer and seller must agree to the assets’ value because the IRS requires the value of each asset class to appear in the sales agreement (or in one of the exhibits).

So, when establishing or buying a business, remember that there are significant tax benefits from using the S corporation, LLC or partnership form of business. Also, negotiate the transaction’s structure; it may significantly affect what you as the seller can keep after taxes are paid.

If you’re buying a C corporation, you can establish an S corporation or LLC to buy it. Then you can merge the C Corporation into the buying organization. When it comes time to sell, you’ll be able to reap the tax benefits we’ve discussed. Note that if you’ve converted a C corporation to an S corporation, 10 years must pass before a seller can receive the conversion’s full tax benefits. So make sure (whether you’re buying or selling) to consult with your tax advisor along the way or a nasty surprise may await you.

Often C corporation sellers will try to get a higher price from the buyer to offset a part of the larger tax bite. When that occurs, the buyer will want to make part of the consideration a consulting agreement, employment agreement or earn out. Why? These payment types are tax deductible to the buyer when paid to the seller, whereas funds spent on stock, inventory, fixed assets, goodwill and the like are not.

But, while these agreements are tax friendly to the buyer, they are tax unfriendly to the seller because any money received from these types of agreements is taxed at the “ordinary” income tax rate rather than the lower long-term capital gain tax rate.

Another consideration regarding taxes has to do with the timing of payments received. If you are selling your privately held company (either stock or assets) through an installment sale, you may report the gain on the installment method to time tax payments to coincide with cash received because of the sale.

Why Go It Alone?

Tax laws and IRS rules and regulations are extremely complex. A savvy seller will seek sound tax advice throughout the divestiture process to minimize taxes and maximize take-home cash. Please call us to help ensure that Uncle Sam gets only what’s coming to him.

Take Note of New Financial Reporting Standards

Combining two businesses is never simple. Myriad factors – many beyond anyone’s control – can affect each step along the way. The best-case scenario is an honest accounting of assets and fair third-party mediation throughout the merger process. Toward that end, the Financial Accounting Standards Board (FASB) rigorously deliberated accounting treatment of business unions. The results? Statements of Financial Accounting Standards 141 and 142.

Goodwill Hunting

Statement 141 addresses business combinations, while Statement 142 focuses on goodwill and other intangible assets.

Statement 141.Intangible assets are now recorded separately from goodwill at their fair values and amortized over their remaining lives. Previously, many companies recorded as goodwill any purchase price not allocated to an acquired company’s current assets’ fair market values and real and personal property.

Statement 142.This prescribes a new method of testing goodwill for impairment by establishing a separate test using fair value, which is based on market evidence or standard valuation techniques. If the goodwill’s fair value is less than its book value, goodwill is impaired. Impairment loss is measured by the amount that goodwill’s carrying value exceeds its implied fair value.

It’s now important to have an expert perform a business enterprise valuation of the reporting unit to estimate its value as an operating business and then value identifiable assets, such as working capital and real property.

The valuation’s underlying assumptions must be based on market participants’ transaction price expectations. For asset valuations, this would include assessing the asset’s current use. For reporting unit valuations, your expert should consider whether the acquiring entity would be willing to pay a premium for a controlling interest. If so, a publicly traded reporting unit’s market capitalization may not represent the unit’s fair value as a whole, because such a control premium would cause the unit’s fair value to exceed its market capitalization.

Now, only the purchase method accounts for business combinations. So why should you care? Well, that involves valuing acquired intangible assets as well as valuing current assets and real and personal property. Intangible assets that are separable from goodwill must be recorded at their fair values and amortized over their remaining useful lives. But, goodwill (both existing and future) and intangible assets with indefinite lives won’t be amortized under any circumstances.

Within six months of the closing, existing goodwill must have a benchmark value assessment, which must establish whether the existing goodwill’s book value is impaired.

Assessing Goodwill Impairment

Under the new statements, the goodwill impairment test requires a market-based valuation of the reporting unit (that is, the unit reporting the goodwill). There are several impairment hot spots, including:

The reporting unit’s current-period operating or cash flow losses, combined with a history of losses or a forecast of continuing losses, or

Significant adverse change in one or more of the assumptions or expectations (including competitive factors and loss of key personnel) used to determine fair value.

Other existing goodwill doesn’t require an immediate impairment test; however, such goodwill will need a benchmark assessment.

Finally, FASB itemized 29 intangible assets separable from goodwill. They’re based on the following categories:

  • Marketing
  • Customers
  • Contracts, and
  • Technology.

Fortunately, assessment isn’t as onerous as it might appear, because not all of the enumerated intangible assets exist within every business.

What’s It Worth?

Statement 142 requires measuring goodwill impairment based on market value. This means valuation by independent professionals specially trained in fundamental, discounted cash flow and market pricing analyses. So please call us to facilitate a FASB 142 valuation.

Sidebar: More Than Words

In addition to changing the rules, Statements of Financial Accounting Standards 141 and 142 have altered a few definitions. Here are two frequently encountered expressions:

  1. Reporting unit. Goodwill can often be associated with a specific operating or business unit. Statements 141 and 142 define a reporting unit as the “lowest level of an entity that is a business and that can be distinguished physically and operationally and for internal reporting purposes from the other activities, operations, and assets of the entity.”
  2. Fair value. The new accounting statements define fair value as “the amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.” Thus, fair value is not a book value concept. A reporting unit’s fair value is “the amount at which the unit as a whole could be bought or sold in a current transaction between willing parties.” According to Statement 142, quoted prices on active markets measure fair value best. But, if such quotes don’t exist, estimate fair value using standard valuation techniques.

Selling Your Business? Learn To Think Like a Buyer

You’ve built a great business with love and care. The business has grown larger than you’d ever imagined, and it generates a nice profit that has allowed you and your family to live a comfortable life. Now you’ve decided it’s time to sell. You assume there’s a buyer out there who will pay you a fair price and then nurture the company with the same attention you have. What’s more, selling the business is a major part of your retirement plan.

Needless to say, buyers look at businesses differently than sellers. So to achieve the outcome you want, it’s important to think like buyers and understand how they evaluate a business. By entering the mind of prospective buyers, you can see what you can do to increase your company’s appeal.

What Buyers Look For

There are many types of buyers: strategic and financial, individuals, companies, and private equity funds. Despite differences, all buyers consider how much they’ll invest to acquire a business, the amount of risk they’ll bear and the potential return on their investment. To evaluate an opportunity, buyers focus on three major areas:

1. Cost and terms. What will it take to acquire the business? (How much cash and how much debt?) What are the deal’s terms and conditions?

Because we’re constrained by space, we’ll focus on one standout issue: the amount of cash required to make the deal. By decreasing the cash requirement and increasing the acceptable debt portion, a seller can make its company more attractive – and perhaps even increase its selling price.

The biggest factor directly affecting a deal’s attractiveness is the asset base. Simply put, the more the buyer can borrow against to do the deal (or for post-transaction capital), the less cash you need upfront. As collateral, banks usually accept land, buildings, equipment, inventory and accounts receivable.

Many entrepreneurs have purchased the land their business resides on and leased it to the company. An often unanticipated side effect is that this structure reduces the company’s asset base, thereby decreasing the amount of debt leverage the seller can obtain.

Another way sellers can reduce the buyer’s initial cash requirement is by accepting part of the purchase price over time. Commonly known as “seller paper,” this can do a great deal to lubricate a sale.

2. Continuity. Will the business continue to operate similarly after the sale? In fact, much of the risk of buying a company relates to continuity. Let’s look at a few examples of potential continuity problems:

  • The current owner has personal relationships with customers, distributors or vendors that the new owners may have to struggle to maintain.
  • The current owner has special expertise that is undocumented and difficult to learn.
  • Key personnel aren’t committed to staying.
  • A major threat of offshore competition looms.

Sellers armed with solid responses to these types of continuity concerns will more frequently get their desired price. Even if you don’t want to sell your business for a few years, take steps now to ensure it can run smoothly without your personal involvement. That independence can be worth millions to you when you sell.

3. Growth. Don’t hesitate to point out unexploited opportunities. For instance, you may have focused your sales efforts in one geographic region, but there may be many opportunities to take the product national or international. A buyer who believes he or she can substantially increase revenues will pay more for the business than one who believes the current owners have maximized opportunities.

What Sellers Should Do

It may seem counterintuitive, but the things you may be most proud of can work against getting the best price for your company. Not many entrepreneurs like to boast, “My company would run just fine without me,’ or ‘There’s lots of sales opportunities I failed to exploit.” Yet these may be the very factors buyers seek, along with lower cash requirements. Please call us for help in understanding how to best present your company for sale.

Rethinking A Sales Strategy

Whether you’re thinking about a divestiture or a sale of your company, or if you’re in the middle of an operational turnaround or managing your business as usual, maintaining and growing sales are critical to your success. That’s why every business needs a disciplined approach to selling.

One such approach is outlined by Robert B. Miller and Stephen E. Heiman in their acclaimed work, “Strategic Selling.” In this book, they share insight gained through years of consulting with top sales people.

Here’s a summary of the book’s key elements to put you in the strategic sales frame of mind:

The Ideal Customer

No single product or service is made for everyone. That’s why companies make money by matching their offerings with the self-interests of their custom­ers. The ideal customer is the standard against which to measure the actual customers.

Start by analyzing the best custom­ers. In your opinion, what qualities make them the best? Do they generate the most revenue for your business? Do they pay their bills quickly? Are they smart, rea­sonable people who stretch your capabilities?

Next, use your answers to define the “perfect” cus­tomer. Consider two categories of customer charac­teristics: demographics and psychographics.

Demographics are the physical characteristics that define a customer. What are their annual revenues? What industries do they serve? Where are they located? What are their distribution channels?

Psychographics are the values and attitudes shared by the individual buyers within a company and held collectively by the company itself. What are their core values? Is their business mission or vision similar to yours?

Buying Influences

Are you involved in a complex sale? That means several people must give their approval before it is finalized. Here’s a scorecard on the roles that people play in influencing a complex sale:

Economic buyer: The economic buyer will give final approval, and can say yes when everyone else has said no, or vice versa.

User buyer: The user buyers make judgments about the potential impact of a product or service on their job performance. The user buyers’ success is tied to the success of the company’s product or service.

Technical buyer: This person screens out potential suppliers and focus on the product or service and how well it meets certain objective specifications. Technical buyers can’t give a final yes, but can give a final no.

Coach: The coach guides sellers to the other buyers and provides the seller with information to help position themselves and their product or service with each one.

Response Modes

When selling a product or service, it is important to know how receptive the buyers are to the change—or sale—that is being proposed.

Growth mode: This buyer knows the difference between the way things are and the way they should be and will be receptive to a proposal if it helps them do more or better.

Trouble mode: A buyer in trouble mode also sees the difference between the current and future states, but is concerned about a problem. This buyer will wel­come change that addresses the cause of the problem.

Even keel/overconfident mode: These buyers think the current situation is as good as or far better than desired. In other words, if it ain’t broke, don’t fix it. They are completely unreceptive to change.

Win-Results

The buyers’ personal needs should be met as well as their business needs. This can be achieved by giving them win-results. A win is a personal gain that satisfies a buyer’s perceived self-interest. A result is the impact a product or service has on the buyer’s business processes. A win-result is a result that gives a buyer a personal win, which is the real reason people buy.

The Sales Funnel

It’s important to actively work the sales funnel so that orders are predictable. To do so, customers and prospects should be sorted into one of three sections of the funnel: above the funnel, in the funnel, and best few.

Above the funnel. You have data, which suggests a fit between your product or service and the prospect’s needs. In this section, it is time to qualify or verify the suggestive data by contacting the buying influences. At least one buying influence should be contacted and a growth or trouble discrepancy that a product or service can address also should be identified.

In the funnel. You’ve verified the possibility of an order: You’ve contacted at least one buying influence and spoken about growth or trouble. In this part of the funnel, the buying influences and the results each buyer needs to win should be identified. Also, the response mode of every buyer should be understood. Time and uncertainty decrease as you move down the funnel.

Best few. You’ve all but eliminated luck and uncer­tainty in the final buying decision. There are a few discrete tasks to be performed. The bases have been covered so well that you’ve moved beyond trial and error or guessing. Finally, there’s at least a 90 percent probability that the order will close in half the time or less of the normal sell­ing cycle.

Robert B. Miller and Stephen E. Heiman published a more recent book called “The New Strategic Selling.” Also, find information about sales performance on their Web site at www.millerheiman.com.

Valuing Closely Held Companies

Changes in the U.S. equity capital markets during the past several years have caused significant shifts in shareholder value for both publicly and closely held companies. While shareholders of public companies can easily measure the magnitude of these changes, their impact on the value of closely held firms is less clear.

The management teams of many closely held concerns have looked to the professional judgment of independent investment and financial advisors to establish their companies’ fair market values. Here are key factors these experts consider in their determinations, followed by profiles of three primary valuation methods: discounted cash flow, comparative company and comparative transaction analyses.

Fair and Square

An independent financial advisor assessing value typically has one primary objective: to determine the price a willing buyer would pay a willing seller in an arm’s-length transaction in which both parties know the relevant facts. In the absence of a liquid public market – in which value is determined by current supply and demand factors – analytical techniques can effectively determine fair market value.

Investors, financial analysts, corporations and regulators examine many variables in evaluating fair market value. Some relevant factors include:

  • Size of the markets and potential growth for the company’s products or services,
  • Breadth of products or services offered, as well as the diversity and stability of the company’s earnings base,
  • Cost and availability of equipment, labor and other critical operational factors,
  • Effect of government policy and regulation on firm revenues, net income and capital expenditure plans,
  • Quality and depth of management,
  • Quality and efficiency of operating facilities,
  • The company’s financial condition, as well as its revenue growth rate and cash flow margins and its ability to manage ongoing capital requirements, and
  • Overall condition of the economy, the industry and the capital markets, including how investors generally regard the industry as an investment medium.

Getting Started

The valuation process typically starts with extensive discussions with senior management. These meetings – critical to assessing the relative importance of various valuation considerations – provide a means of reviewing the company’s history, current operations, competitive position and likely future financial performance. A tour of key operating facilities also helps a third-party advisor fully understand the business and clarify the degree to which operations are capital intensive.

When valuing a private company’s equity securities, the advisor often determines the company’s total value (also known as enterprise value). He or she then deducts third-party security obligations, such as outstanding debt, from the enterprise value. The resulting amount is a company’s equity value.

From a quantitative standpoint, the financial advisor thoroughly analyzes historical and current financial information as well as internal financial forecasts. In addition, the advisor usually reviews industry data and comparative public company financial data obtained from independent sources.

Methods To Prevent Financial Madness

The valuation process incorporates several analytical methodologies commonly used to value private businesses. They include:

Discounted cash flow (DCF) method. The DCF approach projects the company’s cash flow as an ongoing entity and then discounts it back at an appropriate risk level to arrive at an aggregate present value.

The DCF method requires making reasonable financial projections about revenues, manufacturing and operating costs, working capital requirements, and capital expenditures to determine the amount available annually to distribute to shareholders or reinvest in the business. The third-party advisor then discounts these net cash flows back to a present value at a return rate that reflects the perceived degree of risk associated with achieving the results, based on macroeconomic, industry and company-specific factors.

The DCF analysis calculates an enterprise or total company value – unless the financial projections specifically include financing-related costs (for example, interest expense) and third-party security obligations such as debt repayment. If those financing-related cash flow requirements are factored into the projections, an appropriately applied DCF analysis provides the estimated equity valuation for the company.

The company’s DCF-derived value then reveals its going-concern value. This contrasts sharply with liquidation value, which represents only the amount of proceeds expected from an orderly sale of the company’s assets (land, building, inventories and the like). The DCF analysis implicitly assumes the company will continue operations.

Comparative company method. With this method, the advisor establishes the fair market value of a closely held company by examining the market prices and valuation multiples of similar public companies. Although identifying public companies that match exactly is sometimes difficult, investors must view each of the comparable companies similarly in their ongoing appraisals of relative investment values.

Thus, comparable companies generally should be subject to the same economic forces that affect the firm being valued in terms of operations, markets and government regulation. The resulting ranges of price/earnings multiples, cash flow multiples and market-to-book values for the comparable group represent minority interest valuations.

Some companies have several unrelated businesses, making comparability more complex. Then selecting a different set of comparables for each operation may be appropriate. Using this approach, a financial advisor establishes separate values for each business segment based on its individual earnings, cash-generating ability and investment risk.

Comparable transactions method. This method examines multiples similar to those used in the comparable company approach. However, the transactions method examines the prices paid and the related valuation multiples of control transactions (for example, sales and mergers) for companies similar to the subject company. The relevance of these comparison transactions depends on the extent of the similarities between the companies and their respective businesses.

Control vs. Minority Interest

The ownership level being valued has an important effect on the valuation of closely held company stock. Historically, investors have paid significant premiums to gain control of a company’s operations and cash flow. Thus, a valuation may reflect a “control” premium a third-party investor would likely pay if the ownership percentage being valued were greater than 50% and results in control over the company’s operations and financials.

In recent years, the average premium paid for control of publicly held companies has ranged from 30% to 50%. Of course, this premium varies by industry, reflecting the different risks and opportunities of the targeted business’s products and services. In some instances, strategic buyers have been willing to pay premiums significantly above marketplace norms. It’s important to note that the comparable transactions method already factors in these control premiums.

If the ownership level being valued represents less than half of the company’s voting power, the financial advisor may apply a discount that reflects the lack of cash flow control. Although comparative company market prices already reflect minority interest values, applying a discount to the going-concern value derived by projecting future cash flows may be appropriate – if the discount included financial benefits of a control buyer.

Stock Marketability

Another common valuation adjustment is to reflect the unique risks inherent in the securities of closely held concerns. Such securities usually aren’t considered marketable.

An efficient market for buying or selling closely held company stock doesn’t typically exist; thus, the stock is regarded as having poor liquidity (defined as one’s ability to buy or sell an asset quickly at a known price). Because most closely held companies don’t guarantee a market for their stock, an advisor will apply a discount to reflect the “lack of marketability risk” facing investors. This is especially true when valuing a minority interest position.

The Final Analysis

Determining the fair market value of a closely held company is a matter of judgment that considers all relevant quantitative and qualitative factors. The process requires a critical understanding of a company’s historical operating record and the unique risks and opportunities that a closely held company is likely to face in the years ahead. Please call us if you need assistance valuing a closely held business.

What’s an Investment Banker’s Role in a Business Sale?

When you think “investment banker,” does your mind immediately jump to Wall Street? Many minds do. Truth is, investment bankers also have a substantial presence on Main Street. As a matter of fact, they’re absolutely critical in middle-market company sales.

Investment bankers can immeasurably enhance the sale of privately held businesses, providing valuation counsel, identifying the best potential buyers, creating a competitive auction and negotiating deal terms. The benefits of working with them are measured in both money and time. So how do investment bankers help obtain the highest dollar value for companies? As we’ll see, through a streamlined, efficient sales process.

Performing on the Sale Stage

Let’s say the owners of Vendme Co. want to sell the business. They retain an investment banker — let’s call the firm Greenbacks & Lucre — that takes four big steps toward the company’s sale:

  1. Perform a preliminary valuation. This assessment focuses not only on Vendme’s financials and strategic positioning, but also on its competitio and conditions within its industry segment. This essential step benchmarks the company’s market worth and helps its owner establish realistic expectations.
  2. Identify and weed prospects. Greenbacks is now ready to identify a pool of potential buyers most likely to pay top dollar for Vendme. Of course, it will also check other similar industries because the right buyer is sometimes found outside the seller’s usual operating environment.
  3. Now the weeding can begin. Greenbacks narrows the buyer pool to the most qualified candidates, based on their strategic alignment and access to capital. Only when the final pool of prospective buyers has been identified will Greenbacks disclose Vendme’s financials and other information. By being judicious in its contacts and working at the highest levels of a buyer organization — presidents and CEOs, primarily — Greenbacks helps safeguard Vendme’s confidentiality while conveying the strategic fit to key decision-makers.
  4. Hold an auction. The prospective buying pool has been drained of unqualified parties — now what? Greenbacks immediately shifts to the crux of the sales process: creating a competitive auction. By maintaining a tight timeframe throughout the bidding process, sustaining active contact with prospective buyers and conveying bid information, Greenbacks heightens potential buyers’ sense of urgency and Vendme’s perceived value.
  5. Negotiate the deal. Greenbacks’ work isn’t done when the bidding is through and a successful buyer emerges. It still has to negotiate the best deal possible for Vendme. To that end, Greenback’s negotiator will address issues such as type and amount of consideration to be received, contractual terms, extent of the owner’s ongoing involvement and retention of key employees.

Paving a Smooth Road to Sale Closing

The story ends happily: Greenbacks secures the most advantageous deal for Vendme — and the highest sales price, too. Although Greenbacks and Vendme aren’t real, the good results reaped from this process assuredly are. Please call us; we can help you identify prospective buyers, create a competitive auction and negotiate lucrative deal terms.

When The Going Gets Tough, The Tough Cut Costs

According to Mark Zandi at Moody’s Economy.com (www.economy.com), the economy has probably been in recession since late 2007. Moreover, the firm’s weekly survey of business confidence has plunged over the past month, and expectations regarding the outlook for the next 6 months are as bleak as they have been in the almost 6 years of the survey. The question is no longer whether or not we are in recession, but how severe will it be. Mr. Zandi believes it will likely be the most painful recession since the downturn of 1980-1982.

Assuming the economy has entered a deep and long recession, managers need to focus less on growth and more on cash and cost cutting. That is not to say you should ditch your sales and marketing plan altogether, but instead, redouble your efforts to eliminate waste and maximize profit in your business. To be sure, the playbook that works during a healthy expansion is not likely to work through a period of prolonged economic contraction.

As a business owner or manager, look to your operations for opportunities to dramatically reduce expenses. But first, make sure your company’s accounting and financial systems provide the infor­mation needed to make good decisions. In this article, we discuss a few of the tools and best practices used by high performers. The silver lining: Most of these ideas work in good times as well as bad.

Let The Information Flow

First, let’s briefly review the basic sources and uses of capital, since your accounting and financial sys­tems must accurately capture these transactions for you to manage your capital and expenses effectively.

  • Shareholders and lenders supply capital to the company.
  • Capital is used to buy assets like inventory and equipment, which are deployed to create cash flow.
  • Inventory helps the company generate revenue, most of which is used to pay operating costs.

After paying its operating costs, the company can do three things with its cash profits. It can pay prin­cipal and interest on its debt; it can pay dividends to shareholders at its discretion; and it can retain or reinvest the remaining profits.

To determine whether or not your systems are functional, you need to answer the following questions:

  • Are your financial statements up to date?
  • Do you trust the accuracy of your statements?
  • Do you maintain a cash-flow model covering at least 13 weeks? Most companies only do this after they are in trouble.
  • If your balance sheet includes significant interest-bearing debt, does your model incorporate your bor­rowing base?
  • Does your cash-flow model help you manage the collection of accounts receivable and payment of accounts payable? These are key components of your working capital.

A functional system will help you mange your cash and other working capital and decide which expenses to trim. It will also help you determine which custom­ers and products are profitable and which are not. On the other hand, an under-performing accounting and finance system leads to a lack of control. During an economy when every dollar counts, it’s critical that your accounting and finance system can provide you with quick, accurate answers.

From Cost Cutting To Performance Improvement

Operations management focuses on the effective planning, scheduling, use and control of a manufac­turing or service organization. Traditional functions include design engineering, industrial engineering, management information systems, quality manage­ment, production management and inventory man­agement. If each is effective, together they turn capital into profits. If not, capital is likely wasted.

The following questions will help you determine whether or not you are getting the most out of your business operations:

  • Are your direct labor and material costs greater than 65 percent of sales? If so, either your prices are too low, your costs are too high, or both.
  • Are your purchasing and engineering departments obsessed with reducing material costs?
  • If sales are falling, are you reducing expenses, line item by line item, in proportion to the sales decline?
  • Do you use at least five or six key process metrics that indicate at all times whether or not you are meet­ing your production, quality, inventory and delivery goals?
  • Do you make use of a robust “clear to build” pro­cess that includes an MRP process, precise raw mate­rial counts and a sound production planning process?
  • Do you employ a daily cycle counting system for inventory?
  • Do you keep on hand more than ten working days of inventory? How much inventory is slow moving or obsolete?
  • What is your current product mix and how does it compare to your equipment capacity?
  • Do you perform multiple change-overs on certain machines or work cells while other equipment sits idle?

Now more than ever, ineffective operations can hurt sales, too. Customers are watching suppliers more closely, and many are installing risk managers to monitor vendors and help buyers make purchasing decisions on current and new pro­grams. They continue to measure the basics like delivery and quality, but more are requesting financial state­ments for the first time. If your bal­ance sheet is short on working capital and long on debt, and your operations are not delivering quality earnings, customers will likely start looking to other sources. In some ways, custom­ers are starting to think like lenders.

So, for now, cash and cost cut­ting trump growth. Leverage your accounting and financial systems to their fullest, and challenge your man­agement team, shift leaders and all employees to scrutinize every aspect of your operations. It will help you weather the current storm and ingrain best practices that will pay dividends well into the future.