SCORE Luncheon Remarks
Selling & Buying a Small Business
Allen Brind, CBB, CMEA, CEng
General Partner, Business Brokers New York, LLC
11:45 A.M., Friday, February 9, 2007
Oak Hill Country Club
Unmanaged Consequences
or Instead
“THE GOLD STANDARD”
Selling a Small Business
THE BIG ISSUES FACING THE SELLER:
When is a good time to sell?
What’s next for me?
Haven’t done it, I don’t know how
Little advanced planning
Business not prepared for sale transaction
Advisors, who needs them?
and................
Just can’t make a decision
But the owner/sellers have a Vision, although
Implementing can be beyond their knowledge and comfort zones!
The reality is
At least 80% of small businesses are not sold, nor passed to family members to operate
Proceeds recovered tend to be mainly from real estate
When there are gains, they are often eroded by levels of taxes
Which results in
Loss of wealth to the family
Loss of economic base to the community
The situation usually winds up in wither or waste
So why this result, so often?
Owner wasn’t prepared, could not get started
It got too late, business became perishable
Absence of proper guidance Or if sold
Caught by All Those Tax Bills
If business successfully sold, often the result is:
A set of large tax bills awaiting
Most, that could have been minimized.
Extreme, but not unusual, example:
Sale Proceeds |
$ 1,000,000 |
|
Less: Transaction expenses |
- 100,000 |
|
Net proceeds (gain) |
900,000 |
|
Less: Income tax - Federal * |
- 320,000 |
35.0%* |
- NY State * |
- 70,000 |
7.7%* |
Net proceeds after Income Tax |
$ 510,000 |
* At maximum marginal rate and assuming no tax basis and sole proprietorship
Extreme, but not unusual example with Inheritance Tax:
Sale Proceeds |
$ 1,000,000 |
|
Less: Transaction expenses |
- 100,000 |
|
Net proceeds (gain) |
900,000 |
|
Less: Income tax - Federal* |
- 320,000 |
35.0% |
- NY State* |
- 70,000 |
7.7% |
Net proceeds after Income Tax |
$ 510,000 |
|
Less: Inheritance Tax* |
- 230,000 |
45.0% |
Net proceeds after Inheritance Tax |
$ 280,000** |
* At maximum marginal rate and assuming no tax basis and sole proprietorship
** And the pain could be worse
The RIGHT…WAY TO DO IT
THE GOLD STANDARD
Advance Planning and Preparation
PAST -- Performance, Appeal, Structure, Timing
Effective Deal Execution
PERC -- Professional, Efficient, Range, Confidential
Advance Planning and Preparation Process
Performance
Appeal
Structure
Timing
Important tasks to be done well....well before the sale
Effective Deal Execution -- PERC
Professional
Owner prepared for the process
Gathering competent transaction team
Efficient
No costly mistakes
Minimize cycle time
Easy for buyers to make decisions
Competitive process
Range
Reach out to all appropriate categories of buyers
Using effective detail structures suitable to buyer and seller
Confidentiality
Assure that the sale transaction
does not upset the normal course of business
keeps the seller in control of the process
Effective Deal Execution – (PERC) PROFESSIONAL
Competent Transaction Team
Coordination by Intermediary
Effective Deal Execution -- PERC, EFFICIENT
Management of Cycle Time by Broker
Independent Professional Valuation
Preparation of Offering Memorandum
Contacting and Qualifying Potential Buyers
Coordinating Due Diligence Processes
Planning and Supporting Site Visits
Providing Competitive Process (Horses near finish line)
Supporting Contracting, Financing and Closing Process
Effective Deal Execution (PERC), RANGE
Reach out to Appropriate Categories
Buyers |
Deal Types |
Networks-Personal |
Acquisition |
Networks-Internet Based |
Merger |
Affiliations with other Brokers |
Joint Venture |
Links to Strategic Buyers |
Partner |
Links to Financial Buyers |
Alliance |
Examples of BBNY Networks
Affiliation with BBN - Business Brokers Network…National Network of 500 National Brokers [similar to Real Estate MLS]
Affiliation with Major National M&A Firm Representing Affluent Buyers, Investors and Corporations
Member of International Business Brokers Association, National Equipment & Business Brokers Institute, Rochester Business Alliance and Relationship with Leading Industry Marketing Firms, such as BusinessesforSale and BizBuySell
Effective Deal Execution (PERC), CONFIDENTIAL
Maintain Appropriate Confidentiality
Employees
Customers
Competitors
Vendors
and among Potential Buyers
Advance Planning and Preparation
P erformance
A ppeal
S tructure
T iming
Effective Deal Execution
P rofessionalism
E fficiency
R ange
C onfidentiality
Buying a Small Business
Key Success Criteria
Business you can manage well
A business you can enjoy
Provides sufficient income
Afford to purchase (with resources to spare)
With favorable trends
Tolerable risk
Consistent with life-style and location
Bought well
Marketable when time to sell
Mostly a Mirror Image to Selling a Business
Can Be Significant Financial Risk to Buyer
Usually more Difficult than being a Seller
Can be a “Power Trip” CAVEAT EMPTOR
Most Business Acquisitions fail to meet expectations
Capability and Experience of Buyer is Key
Must Conduct Detailed Due Diligence, Legal and Business
Go to the Business Records; Verify
Trends-- Inventory, Receivables, Payables can Reveal Trouble
Conduct Self-Guided Interviews of current and former Employees, Vendors, and Customers
Assure that Know-How and Processes are Transferable
Potential Fatal Errors You Must Avoid
Lack of an adequate, viable business plan
Insufficient sales to sustain your business
Poor marketing plan: unappealing product, poor customer identification, incorrect
pricing and lackluster promotion
Inadequate capital, misuse of capital, poor cost control
Poor management skills: lack of delegation, leadership or control
Lack of experience and knowledge
Lack of managerial focus/commitment
Poor customer service
Poor human resource management
Failure to properly seek and use
professional advice; accounting, legal, financial, etc
Source: SCORE Rochester
Sources of Financing
Purchase Business |
On Going Financing |
|
Buyer equity |
20%* |
Leasing |
Seller financing |
20%* |
Factoring |
External financing |
60%* |
Business expansion loans |
100% |
Line of Credit |
|
*wide variations |
Other Sources
Friends & Family
Customers
Creditors of seller
Partners
Basis
Tangible collateral
Business plan & trends
Management team
Demonstrated cash flow
Owner’s personal assets
Due Diligence
Use Accountant/Auditor, Attorney, Advisor, Other Consultants
Confirm Valuation
Avoid Surprises
Prepare for Transition
Make Adjustments
Make “Go” or “No-Go” Decision!
Valuation $$$
Small businesses are primarily valued on the characteristics of their demonstrated earnings (EBITDA), and an assessment of the business risk
Larger businesses tend to have higher value multiples
Asset positions may increase the value
Retained debt and above normal liabilities would be a deduction from the values above
Searching for Businesses
Business Brokers and Associations
Commercial Real Estate Brokers
Attorneys, Accountants, Banks
Industry Associations
Vendors and Distributors
Internet Search, Classified Advertising
But remember, most businesses are sold in a confidential manner
THE GOLD STANDARD
“Competent Transaction Team”
Coordination by Intermediary/Advisor
Prepared by Business Brokers New York
Contact Details:
Alan Brind
General Partner
585-624-7998 Ext 111
Doug Mabon
Associate Broker
585-624-7998 Ext 214
www.bizbrokersny.com