Tip #12 - Buyers Will Not Pay For Future Efforts When Purchasing a Business

"My Business could be a Gold Mine for a New Owner!"

The statement, "With a little sales and marketing, a new owner could make a fortune with my business," has been heard over and over by prospective buyers. The question of course is, "Mr. Business Owner, why haven't you made that effort?" Buyers are not willing to pay the business owner for their future efforts and investment necessary to grow the business. Business owners must take those steps themselves, which would not only increase their revenues and profits, but would greatly improve the value of their business.

Houston Small Business Acquisitions Outpace Nation

More small businesses in Houston were sold in 2009 than in any other city in the U.S. Why? Because buyers are positioning themselves for the future.

We have been bragging about Houston's economy and the engine behind it for a long time. Pick your industry, we've touted it.

Houston Business Journal last week reported, "Houston-area small business sales outpace nation," which is the message we've been delivering and the trend we've been experiencing for years.

Here's the HBJ article:

Small business owners in the Houston area who wanted to sell their companies in 2009 were more successful in finding buyers than entrepreneurs elsewhere in the United States.

Local owners also got more money for their businesses than sellers nationwide, according to statistics from BizBuySell.com, a large online marketplace for selling businesses.

A total of 107 companies in the Houston area were reported sold by business brokers in 2009, down by 7 percent from 115 sales reported to BizBuySell in 2008. In comparison, BizBuySell reports sales were down 28 percent year-over-year for the country as a whole.

The median sales price for a local business in 2009 was $155,000, up 19.2 percent from the previous year’s median price of $130,000. The median sales price nationwide was down 16 percent.

"Prices didn’t fall," says Mike Handelsman, general manager of BizBuySell. "That’s the most surprising thing to me."

Houston companies also outperformed those in other parts of the nation in revenue and cash flow, he says.

Local businesses sold in 2009 had median revenue of $366,954, as compared to $287,000 in 2008. And the companies' cash flow increased to $101,949 from $85,668.

"That’s a really unusual result," Handelsman says. "That’s different from what we’ve seen in the total United States."

Here's a partial list of our economic posts over the last few years:

Why Should You Consider Selling Your Business in 2011 (Dec. 2009)
Texas Restaurant Industry - Biggest in the Nation in 2009 (May 2009)
Why Does Houston Have the Second Most Fortune 500 Companies in the Nation? (May 2008)
Texas No. 1 Economy In The Nation, Houston Leads The Way (Feb 2009)
Houston, Keep Your Seatbelts Buckled As Our Economy Takes Off (Jun 2008)
Inc. Magazine - "It's a Seller's Market for Buying Businesses." (Apr 2008)
Got Business? Houston Does -- Here's Why!(Apr. 2008)
Selling A Business In Houston - It's Still Hot! (Feb. 2008)
Houston Logistics Industry Is Top Rated In The Nation (Oct 2007)
Houston Leads Future of Alternative Energy (Dec 2007)
Houston Economy - Manufacturing and Transportation Sectors (Dec 2007)
Houston - A World-Class City and Economic Powerhouse (Dec. 2007)
Texas Ranks In Top 10 Richest Economic States In The U.S. (Dec. 2007)
Rocketing Houston Economy -- Small Business 101 (Jul. 2007)
Houston Economy Surpasses Expectations -- Stirs Small Business Activity (Mar. 2007)
Houston is Booming -- It's Not Only the Weather That's Hot Down Here (Mar. 2007)

Why You Should Consider Selling Your Business in 2010

The 2010 new year brings with it the time when business owners review their strategic plan and business goals. Many of the owners we talk to are wondering if this is the year to consider selling the business. In Texas, there are five specific reasons why it would make sense to sell in 2010.

There are many factors that determine best timing for selling a small business -- the financial condition of the company, valuation, growth cycle, profit history, and the current market. Usually the best time to obtain the highest price occurs when sales and earnings are good and trending upward with a history of good performance. This gives buyers confidence in projected future earnings.

Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, industry trends, stock market volatility, competition, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value.

Internal conditions within a company also change. Often in combination with external factors, sometimes independent of those factors.

So how should you determine if 2010 would be the right time for you to sell your business? The following are five factors for Texas business owners to consider.

(1) First, get a business valuation to determine what your business is worth in the current market. This is an initial step in determining if a sale would meet your objectives.

(2) Understand that the current status of the small business market place in Texas is one of the best in the nation and policies are in place for continued prosperity and growth in the State. "Texas is going to pop up on a lot of radar screens as a place to relocate or expand for businesses," reported Bloomberg.com on Dec 23 2009. Texas gained more residents than any other State as the recession deepened in 2008 and early 2009 as job seekers migrated to one of the nation's strongest labor markets. The Houston greater metro area enjoyed the second largest population growth than any other city in 2009 and has the second highest number of Fortune 500 companies. New York has the most Fortune 500's according to Fortune's last list on May 5 2008. Houston has been gaining ground over NYC for the past several years and that trend will continue, especially in light of each States' performance in today's economic climate.

(3) Buyers in every category are looking for alternatives to traditional investment avenues. They are looking for stability, better predictability and control. Business acquisitions offer all of these and can also offer a better return than traditional investment opportunities. Houston, and Texas, as a whole, are prime targets because of future economic expectations and long-term outlook.

(4) The capital gains tax rate is presently at historic lows at 15%. However, effective Jan 1 2011, this rate will increase, possibly by as much as 69%. Therefore, business owners considering a sale should sell by Dec 31 2010 in order to keep more of their proceeds. As reported in the Wall Street Journal Nov 12 2009, Congress is planning "a 5.4% surtax on incomes above $500,000 for individuals and $1 million for joint filers" to fund health care reform, which will affect both capital gains and dividends. If passed, the surtax goes into effect Jan 1 2011, the same day the Bush tax rates of 2001 and 2003 are set to expire. The current capital gains tax rate of 15% would rise to at least 20% -- 25.4% with the surtax. This represents a 69% increase overnight. This does not include any changes that might come from increases in state and local tax rates.

(5) Most importantly, even in our current economy, buyers exceed sellers and we have a robust small business exit market for now. The time will come when the flood of baby- boomer business owners ready to sell will outweigh the ready buyers.

Fueling the market are the different categories of buyers looking to put their money to work by acquiring profitable businesses in areas with a good economic future:

• Early baby-boomer corporate retirees
• Management-level refugees who have suffered a downsize who typically have severance pay or 401Ks to invest, and are looking to go into business for themselves. The stock market, or putting money in the bank, do not look attractive to these corporate refugees at this time in their lives
• Foreign buyers seeing U.S. businesses as investment opportunities while the dollar is valued lower against their own currency
• 30-something up-and-comers aggressively buying and building
• Strategic Buyers, both public and privately-held companies, are actively acquiring smaller firms as part of their strategy for quick growth and innovation. (Merrill Datasite - Dec 2009)
• Investment Buyers, such as private equity groups, "are going down-market" (Merrill Datasite - Dec 2009) and are seeking add-on acquisitions in the lower middle-market for their investment portfolios
• Blue collar workers who have been layed off are also looking to "buy a job."

If internal conditions, both business and personal, are right, 2010 is the time to consider selling a privately-held enterprise. We realize that the decision to sell is neither purely tax-driven, nor even a purely financial consideration. Business sales are usually motivated by personal factors.

However, because it can take anywhere from 4-12 months on average to sell a private company, we suggest that business owners considering a sale prepare now so they can take advantage of this exceptional, impermanent window of opportunity.

With all categories of buyers in play, historic low interest rates with the government working to make credit more readily available, the capital gains tax rate the most favorable in 30 years, and the positive future outlook of the Texas economy, it appears to be an excellent time for business owners in Texas to explore their opportunities for exit.

Cash Flow is the Kingpin When Selling Your Business

Think of the bottom line cash flow of your business as the first introduction to a buyer. If that bottom line is not attractive, buyers will not look. Pin your bets on improving cash flow to be a king in the marketplace.

Most small business owners spend their time trying to beat their competition by building the latest and greatest gadgets or providing the best customer service. They can become so focused in the daily details of working in the business that they lose sight of the end game. The most important thing an owner can build is value so they can one day sell the business. The more value created the more money a buyer will pay. So, how do you create that value?

Value is determined by available cash flow and the risks associated with obtaining it. Yes, the other aspects of the business such as product, service, market, and reputation matter too. But how will buyers judge those aspects? How will they ultimately gain perspective of all the virtues of the business? The main component will be how much cash flow it generates.

Not only is cash flow the best indication as to the quality of a business and its market, it is the single greatest reason that people go into business for themselves. It’s great to love what you do but if you can’t make money doing it, you can't make a living. Prospective buyers will evaluate a business for potential purchase based on the cash flow it generates, whether it be an individual looking for enough cash flow to support their lifestyle or a company looking for a strategic purchase that offers a return on their investment and growth potential.

You will be glad you pinned your bets on cash flow when it comes time to sell your business. Why? Because you will no longer be trying to beat your old competition for customers looking for the latest and greatest gadgets. You will be competing for buyers with every seller in the business-for-sale marketplace. But if you played your cards right, you will reign like a king among buyers by holding a crown jewel, a prized cash flow available for purchase.

SBA Update - What's Happening in Congress

On Thursday December 10th, Sens. Landrieu and Snowe introduced S. 2869, the Small Business Job Creation and Access to Capital Act. This new bill contains a series of measures that were separately introduced by Sens. Landrieu and Snowe earlier this year. The Senate Small Business Committee will mark up S. 2869 Thursday, December 17th. Highlights of the legislation include:

• Increase the loan limit on 7(a) loans from $2 million to $5 million.
• Increase the loan limit on 504 loans from $1.5 million to $5.5 million.
• Increase the loan limit on microloans from $35,000 to $50,000.
• Allow the 504 loan program to refinance short-term commercial real estate debt into, long-term, fixed rate loans.
• Extend the authorization to provide 90 percent guarantees on 7(a) loans and fee elimination for borrowers on 7(a) and 504 loans through December 31, 2010.
• Direct the SBA to create a website where small businesses can identify lenders in their communities.
• Increases the maximum guarantee on 7-A loans to $4.5 million.
• Changes the eligibility criteria to (a) a tangible net worth not to exceed $15 million and (b) the average net income after Federal Taxes over the past two full fiscal years is not more than $5,000,000.

The International Business Brokers Association® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

11 Knows Before Selling Your Business

1. Know why you want to sell your business. Having a solid reason and a committed resolve to a sale is essential in achieving a successful transaction. In addition, one of the first questions buyers ask is, "Why is the owner selling?" They want to know that it is for a good reason and not because there's something wrong with the business that might be hiding in the shadows.

2. Know what you will do with your time after your business sells. If you don't have a plan in mind, you might find yourself getting cold feet or feeling a little off balance when that first offer to buy the business comes along.

3. Know the value of your business. Get a business valuation by a reputable firm to understand what you could expect in the current marketplace. This is an initial step in determining if the sale would meet your objectives.

4. Know that you are current on all taxes. This includes sales taxes, unemployment taxes, payroll taxes, state income taxes and federal income taxes. Delinquencies in taxes of any kind can stop a deal in its tracks.

5. Know that all your policies, employee records, procedures and controls are documented. This helps a buyer feel confident that operations will continue to run smoothly under new ownership. These documented items will also help during the transition period when you train the buyer.

6. Know that your business can operate without you if necessary. A key employee or a staff who can run daily operations is more appealing than a business that is highly reliant on the owner's presence or is dependent on the owner's personal relationships with customers. This will bring more prospective buyers to the table because of the flexibility it provides. There are buyers who want to play a major role in the daily management of the business and some buyers who do not. Many businesses never get sold if the owner "IS" the business.

7. Know that your financial statements and tax returns are accurate. Deals can fall apart when discrepancies are found or distrust has a chance to percolate.

8. Know that your trusted advisors will be able to assist you in the transaction. A meeting with your attorney and/or accountant, for instance, will play a role in gathering all necessary documents for your business broker before going to market. Your team of trusted advisors needs time for preparation in order to effectively support you in the transaction.

9. Know that you have a business and marketing plan that will help a new owner understand where the opportunities for growth exist. This plan should explain why the business was started, how it progressed to its current status and what a new owner should do to take it to the next level.

10. Know that your asking price is based on reality...a reality that buyers and their lenders can believe in. The buyer will look at return on investment and their lenders will require that the deal makes sense in terms of debt repayment. A multiple of Discretionary Earnings is one method that can be used to establish a reasonable price range.

11. Know that you are willing to negotiate on price, terms or both, if necessary. Deal structure can make or break a transaction. When each party to the transaction is willing to be flexible, the odds are good that the effort will have the desired result -- a win for both parties.

The Initial Buyer Seller Meeting in the Business Sale Process

Most people will purchase or sell only one business in a lifetime. Therefore, as business brokers, a large part of what we do is educate buyers and sellers about the intricacies of the process. People rely on us to help them understand the steps involved in buying or selling a business. They understand that the better informed and prepared they are the more likely they are to achieve their goal. Therefore, in the beginning stages, we're the ones doing most of the talking.

When it comes time for the buyer seller meeting, however, our role is to make the introductions, be an observer, and be quiet for the most part. We may interject questions or comments when appropriate to guide the flow of information. This meeting is an important event for the buyer and seller. It is their time to understand each other's objectives, establish a rapport, and size each other up.

An appointment for a buyer and seller to meet is usually made when a buyer is considering making an offer to purchase the business. The buyer would have already reviewed the business profile and financials, and asked preliminary questions that had been answered by the broker. It is common for business owners to require that all such meetings be during non operating hours to avoid premature disclosure to employees and customers.

This is the chance for the buyer to tour the facilities, to learn about the operations of the business, the employees, the growth opportunities, the financial aspects of running the business, and to get a feel for what it would be like to walk in the owner's shoes. However, this meeting is not the time to discuss the price and terms of the sale. The business broker is the intermediary and will be the liaison for the two parties on that subject.

From a buyer's perspective, purchasing a business is a huge financial risk – most likely the largest in their life. While they know they will have the right to perform all the due diligence they deem necessary, a healthy amount of trust is involved. The buyer must gain a sufficient comfort level about the seller, the business, and its sustainability under their ownership in order to take the proverbial leap of faith.

The seller, on the other hand, usually has their net worth tied up in the business. Typically, the seller has invested many years building and nurturing the business. Retirement may depend on successfully selling the business at a just price. In today's market, a seller note is usually required. Even if a buyer is well funded, a lender will often want a seller to carry a note in order to reduce their own liability and exposure. It is a huge financial risk for the seller – most likely the largest in their life – just as it is for the buyer. In order to realize full payment, the seller has to trust in the buyer's ability to manage and successfully run the business.

In our experience, the first meeting usually takes about two to three hours. First impressions will be made during this short period. Each will be making their respective judgement of the other and pondering the possibility of a deal being formulated. This is usually the time when the buyer decides if this is the business they wish to pursue. If all went well, an offer to purchase is tendered. If the seller accepts, the due diligence process begins.

Understanding Seller Financing in a Business Sale

It has traditionally been a common practice for the sale of a privately-held small business to include some seller financing as part of the deal structure. Because of the tight credit market and lender efforts to reduce their own risks, that practice has become even more common and may be the key to getting the deal done.

Seller financing can accomplish several goals beneficial to both parties. From a buyer's perspective, most buyers feel there is a risk that the success of a small business is tied to the involvement of the owners. By having the seller finance a part of the purchase price, it can give the buyer confidence in the fact that the sellers believe that the business can thrive without them. From the seller's perspective, seller financing can help a buyer pay more for the business than if the deal were financed only through traditional financing sources.

With that in mind, it is important to remember that the purchase/sale of a business is a two-way street. Just as a buyer will conduct due diligence to determine the viability of the business, become comfortable with its financial and legal matters, and assess the opportunities for growth, a seller should be comfortable with the buyer as well, particularly if the offer includes a loan by the seller. The seller should understand the buyer's business background and qualifications, motivation for buying the business, and financial capacity to purchase and sustain the business.

Business owners who extend financing to a buyer for the purchase of their business often ask, "What happens if the purchaser defaults on the loan?" Should that happen, the seller would be able to exercise whatever rights are defined in the security agreement that is associated with the promissory note. The seller would usually have the right to get the business back, which may not always the best scenario if the business has declined and is not performing well. In addition, if the buyer is using the business' assets to get a bank loan, the seller will have to take a second position behind the bank. A seller should try to negotiate a personal guarantee by the buyer as part of the terms of the promissory note. The seller can also require the new owner to provide periodic reports on the performance of the business as part of the terms of the promissory note.

While it is important for a seller to protect themselves should a default occur, keep in mind that seller financing is often required for a reason, such as lack of bank financing, risks in the business, or to bridge a value gap. In other words, seller financing may be required in order to get the deal done.

Regarding the interest rate to be paid for the seller note, if the seller note is in conjuction with a bank note, it is hard to substantiate a rate much higher than the bank since a buyer is generally utilizing seller financing as a "bridge" mechanism to help the seller attain a higher price.

In the course of due diligence on the buyer, it is acceptable to ask for their credit record, particularly if the buyer is an individual. Personal credit records are available through several outside services, as long as written authorization is given by the individual. There are standardized forms that can be used whereby the buyer grants permission for the seller to obtain credit reports from specific consumer reporting agencies. Many of these credit companies can be queried via the Internet, such as Equifax, Experian, and TransUnion. If a fee is charged to obtain the reports, the buyer can be asked to cover it. The seller may also ask the buyer for a list of financial and business references.

Seller financing can accomplish the goals of, and be beneficial to, both parties as long as each feels confidence in the other.

The Three-Phase Process of Selling a Business

If you are like most business owners, you have thought about selling your business a time or two. It's perfectly normal to dream and wonder what it would be like to be free of all the trappings, headaches, and burdens of running your company. You probably also wonder how cumbersome the sale process might be and what it entails.

While we can't tell you what your imagination comes up with at the thought of freedom, we can tell you that selling your business requires a substantial commitment and should be a calculated decision. As with most endeavors, whatever you put into the process is what you will get out of it.

A fundamental element to a successful sale is preparation. Knowing what to expect, understanding the motives of your most probable buyer, anticipating their questions, and vetting potential problem areas of your business that might inhibit or delay an eventual sale are key to a sound selling experience. Once you feel comfortable with these basics you just might stop wondering and take the leap necessary to begin living that dream.

The selling process has three distinct phases and should always be performed within the confines of Confidentiality. The anonymity of your business is critical during the sale process and is important to protecting your interests. National statistics indicate that the majority of businesses sell within four to nine months.

PHASE 1 - Message

Before this phase begins, a valuation of the business would already have been performed. A valuation provides an objective price range that you can anticipate in the marketplace. Gathering the information for a valuation is not complicated or overbearing. Typically, the documents required to determine the probable price range of a company are tax returns for the most recent three to five years, a current year profit loss statement, current balance sheet, and an equipment list. Several years of financials helps paint a financial picture and current trend of the company. Knowing the value of the business also helps determine the most probable buyer, whether it be an individual, a strategic buyer, or a financial buyer,

During this initial phase the business profile is compiled. It encompasses the detailed analysis and assessment of the business for the purpose of packaging and communicating its value, its market, its assets, its strengths, its areas that can be improved (growth potential), and its financial history. The resulting profile is the Message that will introduce your business to the marketplace of appropriate buyers using a systematic methodology that protects the confidentiality of your business.

PHASE 2 - Action

This is the go phase where the business is launched into the marketplace. During this stage a rush of behind-the-scenes Action is taking place. Prospective buyers will be interviewed, confidentiality agreements will be signed, questions will be answered, and meetings will be arranged. The seller must continue to run the daily operations of the business and carry on as usual. Deviating attention away from day-to-day demands of business operations would affect employees, clients, sales, and ultimately profits -- which can mean a lower price in the marketplace.

PHASE 3 - Profit Point (Pay Day)

This is the final stretch, the closing phase of the process. It commences once a Letter of Intent or Earnest Money Contract is in place, after an offer has been made and accepted.

The first step in this stage is due diligence, which is an investigation or audit of the business by the buyer. Due diligence serves to confirm all material facts in regards to the potential sale. This includes reviewing all financial records plus anything else deemed material to the sale. Sellers could also perform a due diligence analysis on the buyer. Items that may be considered are the buyer's ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed. This is especially important if the seller is financing part of the deal.

After due diligence is performed and both parties are satisfied with the results, closing activities begin. A sample of some activities that are likely to take place during this closing phase are:

• Financing / Loan arrangements
• Property lease assignments
• Environmental testing, inspections, surveys, appraisals
• Transfer of equipment leases, contracts, licenses and permits or applying for new ones
• Transfer of utilities and other services, domain name, and title to vehicles
• Establishing new corporate legal entities, merchant accounts, insurance policies
• Clearing liens and tax liabilities
• Inventory count, verification of trade receivables and payables

The closing phase is the last mile that often has bumps, curves, and detours that can obstruct the way to the goal. However, these obstacles can be overcome by an expert driver who is keenly familiar with the terrain. After thousands of excursions, we know the route well and can safely guide the way to the destination Point...the closing table...the place where you can finally realize Payment...the Profits due from years of hard work...and where you are then free to turn your dream into reality....the whole reason for the trip!

Selling a Business in a Down Economy

With negative economic news grabbing the headlines, business owners are inclined to believe that it is not a good time to sell their company and that they will have to put their retirement plans on hold. While this rationale makes sense for some, waiting for better economic times does not necessarily equate to a higher value when the business is sold.

The reality is, in many instances, the business value declines during this delay because the owner is not as energetic and gung ho as in previous years and the business starts retiring before the owner does. This usually results in less revenues and a lower bottom line. Consequently, the business owner can lose several years of retirement yet not add any additional value to their net worth.

The sale of a profitable company in this environment is a viable strategy for business owners who are ready to sell. Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. Quality sells in any economic environment and profitable businesses that are properly positioned are still in demand.

Current economic conditions will most likely continue for the immediate future. We find that despite the credit crunch and economic turbulence, however, there is not a significant slow-down in buyer inquiries. Our observations are as follows:

• Strategic buyers and Private Equity Groups are plentiful and are looking for quality acquisitions.
• Management-level individuals who have experienced corporate layoffs who are typically baby-boomer age, have severance pay or 401Ks to invest, and are looking to go into business for themselves. The stock market, or putting money in the bank, do not look attractive to these corporate refugees at this time in their lives.
• Blue collar workers who have been layed off are also looking to "buy a job."
• All buyer groups are looking to Houston because of its economic position as #1 in the U.S.

Since the business value for most owners accounts for about 75% of their net worth (Business Brokerage Press 2007), this is an important financial issue where time is of the essence. For many business owners, the best strategy to enhance their wealth upon exiting their business is to improve value and not put their life on standby while waiting for the economy to turn around.

The following are 10 elements common to every business that improve value in the marketplace. Some are quite easy to implement with little effort or expense. In preparing your business as a quality acquisition opportunity and maximizing its value, the following recommendations are fundamental to achieving that goal:

1. Spruce up the facilities and check equipment to insure good working condition. Curb appeal makes an impression. A clean, organized facility gives a good feel for how the business is run.
2. Compile a list of furniture, fixtures and equipment along with applicable service records. This shows a prospective buyer that the company is well maintained.
3. Read your lease. Is it transferable? The landlord may need to approve new ownership before signing off on the lease transfer. Unfavorable lease terms can detract from value or hinder the sale altogether.
4. Streamline overhead and operational expenses to get the highest value. This can include divesting underutilized or obsolete inventory, assets and employees.
5. Minimize the business dependency on you the owner. Delegate more to key employees or managers who would stay on board under new ownership. A business with well-trained employees who can run daily operations is more appealing than a business that is highly reliant on the owner's presence or is dependent on the owner's personal relationships with customers. Buyers do not pay a premium if the business relies on the owner for its success.
6. Document how the business is run. Records and procedures make buyers more secure and confident that your success can be continued. Organize, document and update the following: training procedures, employee contracts and handbooks, job descriptions, policy manuals and operating procedures, mission statements, strategic plans, Internet presence, brochures, press releases, marketing campaigns, and customer lists.
7. Review your accounting processes. Are income statements and balance sheets well prepared and clean? Are you driving all income to the bottom line? Accurate financials add to a buyer's comfort level and will likely result in a higher sales price. Trends in accounts receivable and payable show whether or not you have good customers who pay on time. Be on the ball in contacting slow-paying clients. This shows better credit management, follow-up and attention to detail. Seasonality of cash flow and concentration of the customer base are also underlying factors that affect value.
8. Make sure patents, trademarks and other intellectual property rights are properly registered.
9. Clean up any outstanding legal, financial, or tax issues.
10. Be advised of and prepare for the questions that prospective buyers will most likely ask.

Sooner Than Expected - A Buyer's Market for Buying Businesses

While the economy is expected to remain weak throughout 2009, there will continue to be plenty of opportunities for individuals and businesses in a position to buy, according to a recently released survey.

The report, published by the International Business Brokers Association, found that 61 percent of the survey participants, professionals involved in selling businesses, believe that more businesses will go up for sale in 2009, while 66 percent say they will sell more businesses this year compared to 2008.

This is no surprise. In April 2008, just nine months ago, Inc Magazine published "The Most Valuable Businesses in America" issue, which spelled out the Seller's market that has historically existed but would change as baby boomers started retiring. So, we have, indeed, been anticipating the change of the business-for-sale marketplace. But it was predicted to occur steadily over the next decade. Economic turbulence has accelerated the natural process.

“While the economy has put a damper on business, the continuing trend of baby boomers looking to sell and retire will provide opportunities for potential buyers,” said IBBA Chair Andrew Cagnetta. “The survey of our members indicates that money will continue to be tight and the number of sellers will outpace the number of qualified buyers.”

The survey also found that in a buyer’s market, purchasers are more selective, so it’s important for sellers to make their business more attractive to buyers. Improving cash flow, updating documents and records and determining the company’s actual worth to make the business more attractive to a potential buyer is key to getting the business sold, it said.

Not only is this important for those owners of small businesses who are considering their exit, now more than ever, it is essential to the economic vitality of our country that these firms successfully transfer to new ownership. The estimated 25.8 million small businesses in the United States have a huge impact on our economy. Outlined below are powerful statistics that speak to the importance of the continuity of these enterprises. Small businesses --

• Have generated 60 to 80 percent of net new jobs annually over the last decade
• Employ 50.6 percent of the country’s private sector workforce
• Represent 97 percent of all the exporters of goods
• Represent 99.7 percent of all employer firms
• Generate a majority of the innovations that come from United States companies

Source: U.S. Small Business Administration

The survey of more than 1,750 International Business Brokers Association members showed that more than 37 percent believe the economy will be down significantly this year and another 29 percent believe the economy will be down slightly.


The International Business Brokers Association® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of business brokerage and mergers and acquisitions.

Private Equity Groups are Hunting for Business Acquisitions

Private Equity Groups have not been hard-hit by the credit crunch or the stock market decline. They have capital to invest and are looking for business acquisitions.

One of the major market shifts for the acquisition of privately-held companies has been the growth in the number of Private Equity Groups (PEGs) over the last decade, they number in the thousands.

PEGs have become key players in business acquisitions. They offer flexibility as a liquidity source, giving entrepreneurs the ability to take some cash off the table, recapitalize their company or simply sell and move on.

Private equity refers to buyout groups that seek to acquire ongoing, profitable businesses that demonstrate growth potential.

The private equity market had traditionally been restricted to acquiring larger companies. But increased competition for those larger operations, the greater growth potential of smaller firms, and an easier path to exiting the investment of smaller firms in the future have played a role in attracting PEGs to smaller companies.

PEGs are typically organized as limited partnerships controlled and managed by the private equity firm that acts as the general partner. The fund invests in privately-held companies to generate above-market financial returns for investors.

The strategy and focus of these groups vary widely in investment philosophies and transaction structure preferences. Some prefer complete ownership, while others are happy with a majority or minority interest in acquired companies. Some limit themselves geographically while others have a global strategy.

PEGs also tend to have certain things in common. They typically target companies with relatively stable product life cycles and a strategy to overcome foreign competition. They avoid leading-edge technology (this is what venture capitalist want) and have a preference for superior profit margins, a unique business model with a sustainable and defensible market niche and position.

Other traits that appeal to PEGs are strong growth opportunities, a compelling track record, low customer concentrations, and a deep management team. Most prefer a qualified management team that will continue to run the day-to-day operations while the group’s principals closely support them on the Board of Director level.

Private equity buyouts take many forms, including:

Outright Sale - This is common when the owner wants to sell his ownership interest and retire. Either existing management will be elevated to run the company or management will be brought in. A transition period may be required to train replacement management and provide for a smooth transition of key relationships.

Employee Buyout - PEGs can partner with key employees in the acquisition of a company in which they play a key role. Key employees receive a generous equity stake in the conservatively capitalized company while retaining daily operating control.

Family Succession - This type of transaction often involves backing certain members of family management in acquiring ownership from the senior generation. By working with a PEG in a family succession transaction, active family members secure operating control and significant equity ownership, while gaining a financial partner for growth.

Recapitalization - This is an option for an owner who wants to sell a portion of the company for liquidity while retaining equity ownership to participate in the company’s future upside potential. This structure allows the owner to achieve personal liquidity, retain significant operational input and responsibility and gain a financial partner to help capitalize on strategic expansion opportunities.

Growth Capital - Growing a business often strains cash flow and requires significant access to additional working capital. A growth capital investment permits management to focus on running the business without constantly having to be concerned with cash flow matters.

PEGs have become a major force in the acquisition arena. They can also be thought of as strategic acquirers in certain instances, when they own portfolio companies in your industry or a related area that addresses the same customer base. These buyers may be in a position to pay more than an industry or strategic buyer that does not have this financial backing.


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The International Business Brokers Association® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

©2008 International Business Brokers Association® (IBBA®) all rights reserved. Permission to reuse any or all of this material should be directed to the IBBA at 888-686-4442 and is restricted to IBBA members.

Buying or Selling a Business During Tough Times

With negative economic news grabbing the headlines in the United States, business owners may think it is not a good time to sell their company. But fortunately for owners looking to sell, that is not necessarily true.
Business sales are still taking place with sellers capturing attractive prices and favorable terms, when the deal is structured properly.

One of the the most important foundations of constructing a successful deal has always been a solid buyer, one that is creditworthy. Whether it is an individual, another company, or a Private Equity Group, qualifying criteria are demonstrated business acumen, significant assets to pledge as collateral, or a committed fund behind them.

With a proven, credible buyer at the negotiating table, lenders are more likely to support the transaction.

In today's environment, some seller financing should be expected to get the deal done. It is not uncommon during a tight economy that sellers must share the risks with the buyer and the lender in order to achieve the highest value.

Therefore, now, more than ever, it is in the seller's best interest to find the right buyer. This has resulted in the advantage going to buyers with a strong balance sheet

In today’s tight lending environment, a seller can still get a strong value for the business, but the seller may need to finance more of the purchase price than before. Regardless of the capital structure or finance considerations, a professionally-crafted and creative deal structure is the key.

Typically, seller financing has been somewhere between five percent and 15 percent. With the current lending climate, seller financing may approach 15 percent to 40 percent amortized over 10 years.

After the buyer has proven themselves in the business and shown that the debt payments will be made, the lender may allow restructuring of the seller’s note. As a result, the seller could receive full payment within three years to five years.

While the economy has put a crunch on available financing, it has not had a dramatic impact on the number of potential buyers. We continue to have strong buyer interest in acquisition opportunities and equity capital is still available. With the right buyer, the right portion of owner financing, and the right structure, deals are still getting done across the U.S.

What are the silver linings in today's market? First, the government has a strong focus on freeing up the credit market and the new administration will continue that effort. And, second, although there have been many high-powered, high-paying jobs eliminated over the past several weeks, we are starting to see an influx of contacts by highly-educated individuals who have money and want to acquire their own business as a result.

The American entrepreneurial spirit is still alive.

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The International Business Brokers Association® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

©2008 International Business Brokers Association® (IBBA®) all rights reserved. Permission to reuse any or all of this material should be directed to the IBBA at 888-686-4442 and is restricted to IBBA members.

Seller Can Stay After Sale of Business

Selling a business and walking away can be very difficult. But in many cases, as part of the sale, there's a transition period that can be as short as a month or as long as a year or two, depending on the size of the company and the role of the owner.

In most situations, once the seller passes the baton to the buyer, the new owner wants the seller to remain on board as part of the team. It helps shorten the learning curve and provides a seamless transfer of key relationships.

In the typical business sale, a transition period of several weeks is included. Sometimes a telephone consulting period is added that can span six months or so with specific time limitations alloted so the seller is not overly burdened. Also, the seller may additionally be retained as a consultant at a negotiated rate. In some instances, a long-term employment contract is transacted and the seller maintains daily involvement for a much longer period of time.

For the owner who wants to sell the company and leave quickly, the focus should be on the development of a strong management team. Be sure to introduce key employees/managers to your major customers and vendors and look at ways to delegate responsibilities. The more the customers think they are interacting with "the company" versus the "owner" the easier the transition.

If you've established a good management team, less time will be required for the transition to the new owner. In addition, a well developed team usually adds value to the sale.

Occasionally there are owners who want to sell but just aren't ready to quit working. They may be looking to sell early to get a premium price while the market is in their favor or to get away from unwanted or overwhelming administrative and management duties.

Either way, long-term employment contracts can be included in the sale agreement. The seller can stay on board and work with the business a few more years while still drawing an income and benefits.

If you're selling your business, in most cases you won't be able to walk away the day after the sale and in most cases you probably don't want to. Talk to your business intermediary about the true timeline of the sale and transition. If you want to sell while the price is right, but you're not quite ready to leave immediately, consider the options available to sell now and maintain a role with the company.

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The International Business Brokers Association® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

©2007 International Business Brokers Association® (IBBA®) all rights reserved. Permission to reuse any or all of this material should be directed to the IBBA at 888-686-4442 and is restricted to IBBA members.

Houston Update - When Is The Right Time To Sell A Privately-Held Company?

There are many factors that determine best timing for selling a small business -- the financial condition of the company, valuation, growth cycle, profit history, and the current market.

Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, the mergers-and-acquisitions marketplace, industry trends, competition, stock market volatility, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value.

Internal conditions within a company also change. Often in combination with external factors, sometimes independent of those factors. Changes do, and will, occur and they always tend to impact business value -- sometimes eroding value and sometimes increasing value.

So how should you start thinking objectively about the best time to sell?

A good visual of right-timing would be to imagine the life of your business plotted as a bell curve with the peak being the top of the growth cycle. The top is when you have reached the flat plane of growth...a sustaining mode. Buyers pay the best prices when they can't see the top, when the curve is still climbing upward. Once the top is visibly breached, buyers may pass on the opportunity or may pay prices based on a downward trend and higher risk factor. If you wait until your revenues are already sliding over to the downside of the bell curve, you have waited too long. Your business has already started to retire before you have. Buyers are not too interested in declining businesses. To get the best deal you have to sell on the way up -- not at the top or the downside -- and when the market and prices are good.

Markets change and fortunes change from year to year. The current status of the small business market place in Houston is hot. Buyers in every category are plentiful, our economic position is one of the top in the U.S., business policies are in place for continued prosperity and growth, interest rates are at historic lows, and capital is available for business acquisitions.

Fueling the market are the different categories of buyers looking to put their money to work. For example, a variety of people in the Individual Buyer Category are:

• early baby-boomer corporate retirees
• corporate refugees who have suffered a downsize
• foreign buyers seeing U.S. businesses as investment opportunities while the dollar is still valued lower against their own currency
• 30-something-up-and-comers aggressively buying and building

Strategic Buyers, both public and privately-held companies, are actively acquiring smaller firms as part of their strategy for growth and innovation and Investment Buyers, such as private equity groups, are seeking add-on acquisitions for their investment portfolios.

Every buyer category, individuals, strategic, and the investment buyers, are actively looking for opportunities to take part in Houston's prosperous future outlook. Each may vary in their acquisition criteria regarding the industry sectors and revenue ranges they are targeting, but we have seen one major common trend occurring. More and more private equity firms and corporations are looking for smaller businesses. These strategic and investment buyers, in increasing numbers, are considering businesses with lower minimum cash flow and total revenue generation as acquisition candidates than they were just one year ago.

We expect this trend to accelerate, especially in Houston, for ten specific reasons:

1. While the national credit crunch may have impacted the larger transactions, the smaller transactions are still very active because all buyer categories for privately-held, small enterprises are looking to put their money to work.


2. Houston banks have been minimally affected by the credit crises. First because of the area's relatively strong economy and second, because many banks have been spared major damage from the sub prime mortgage market because most of the banks focus on servicing small businesses (Houston Chronicle Dec 2007).


3. According to Fortune 500 2008 list of annual rankings of America's largest corporations, Houston is called home by the second largest number of Fortune 500 companies, second only to New York City. Houston has been steadily adding to its collection of Fortune 500's for the past several years, while New York's number has declined. Houston stands well ahead at the #2 spot with Dallas, Chicago, and Atlanta lagging considerably behind.


4. Houston is the best U.S. City for earning a living (Forbes, 08-18-08) and is recognized for its dynamic business environment, low unemployment and high wages relative to income. "And it's not likely to change anytime soon," says Forbes. Houston's pro-growth, no nonsense politics are major factors driving developers and other capitalistic-minded investors to Houston. Business experts and economists say it's a matter of simple economics — low taxes, affordable land and an expanding labor force.


5. Houston is one of America's top ten recession proof cities, according to Forbes' article, America's Recession-Proof Cities, released April 29, 2008.


6. Texas’ business climate is ranked best in the nation for the fourth consecutive time according to a survey conducted by Development Counsellors International (DCI). The survey measures CEO’s perception of a state’s business climate based on several economic variables. Business leaders throughout the world recognize the Lone Star State as a place where their business can grow and thrive thanks to its reasonable regulations, low taxes, fair legal environment, educated workforce and an unparalleled quality of life.


7. Overall, the Texas economy continues to grow at nearly three times the national average. CNBC recently named Texas America’s Top State for Business and overall best economy. Texas was also recently recognized by CEO magazine as the Best State to do Business for the third year in a row.


8. Last year, more than half of all new jobs created in the United States were created in Texas, with Houston leading the way.


9. Houston's future outlook is predicted to flourish. The city is uniquely situated and ready to capitalize on the longstanding megatrends that are transforming the global economy (Newsweek June 2008, "Houston, We Have No Problems").


10. Houston is headed toward becoming not only the leading city of Texas and the South, but also a player on the global scene: it is emerging as one of the world’s great cities. (Joel Kotkin, an internationally-recognized authority on global, economic, political and social trends, in his April 2008 article, Lone Star Rising).

Most importantly, buyers exceed sellers and we have a robust exit market for now. The time will come when the flood of baby-boomer business owners ready to sell will outweigh the ready buyers, and acquisition appetites and prices will fall. It will shift to a buyer's market rather than the seller's market that exits today.

The time is right when the external and internal conditions are right...when the market, the buyers, and values are good and financing terms are favorable. It's that simple. If you turn down a great market, when buyers are willing to pay a great price, or if you wait too long, the market cycle or your business' internal conditions will likely have changed. The Market is ready and it is never wrong. And, like time, it waits for no one.

Time is the Killer of Most Deals

Keeping the Process Moving and Keeping the Deal on Track helps Seal the Pact.

Many factors can bog down the sale of a business. In fact, more than purchase price or structure, time is the most likely reason that a business sale may fail.

Time can breed frustration and fatigue. As a potential sale drags on, the owner is left in an uncomfortable state of flux. The buyer may also become frustrated as fees mount. The deal can reach the point when one party declares…“It just wasn’t meant to be.”

National figures indicate that the average business sells in nine to 12 months from start to close. Once a letter of intent (LOI) has been signed, the final due diligence and closing process usually takes 30 to 90 days.

So how do you keep the sales process moving forward?

Attentive Intermediaries.

Your business broker / intermediary should be able to give you the time, attention, energy and resources necessary to focus on your deal. Be sure to ask your business broker or intermediary about his or her organization’s work on closing details. You want to be sure that you are working with someone who can cover minute details, looking weeks and months ahead in the sale process.
Obtaining appraisals, ordering environmental investigations, transferring licenses, title work and many other details need to be handled properly and in a timely fashion to be able to close a transaction. For the best possible results, you want to work with someone who knows the proper sequence of events so there aren’t any unnecessary delays. There’s a lot to coordinate and missing just one detail can cause a delay in closing the deal.

Transition Specialists.

From your business broker / intermediary to your attorney and accountant, you want to consider hiring specialists in business transitions. Inexperienced advisors tend to be overly conservative to protect their liability. Which can drag out the negotiation process and may cause frustration for the parties involved. If you are serious about selling your business, you really don't have the time or money to pay to educate your advisors on the mergers & acquisitions process.

Comprehensive Overviews.

Your advisor should spend the time packaging the business up front. A comprehensive business review can be developed that answers 80 to 90 percent of the standard questions a potential buyer will have. This helps both the buyer and the lender make decisions more quickly. It will also save you time because your intermediary won’t be requesting pieces of information as new buyer questions arise.

Seller Preparation.

Be prepared to move forward emotionally and financially. A seller will sometimes thwart the sale because they haven’t seriously considered their future plans or their financial expectations are out of line. A professional advisor should be honest in what he or she believes the market can bear and should not let you go to market with an unreasonable asking price.

Buyer Screening.

Finally, your intermediary should screen all buyers to ensure they are serious about the potential acquisition and have the financial means to move forward with a transaction. You don’t want to waste time with buyers who simply can’t afford a purchase. Selling a business can certainly be an emotional ride. It’s a time to work with deal makers and specialists who will help to minimize the stress and help everyone move forward toward the timely completion of the business sale.

The International Business Brokers Association® is the largest international, non-profit association operating exclusively for the benefit of people and firms engaged in the various aspects of a business brokerage and mergers and acquisitions. IBBA® has 1,950 members worldwide, with corporate headquarters in Chicago, Illinois.

Valuation - The First Step Towards Selling Your Business

"I have a medium sized company which I have owned for about 20 years. We specialize in the manufacture and distribution of chemical products and have built a good business. However, my children aren't involved or interested in the business so I am considering selling it. The problem is that I have no idea how to begin the process."

Since most business owners only sell a company once in their lifetime, it is quite understandable when an owner makes such an inquiry. While the thought of selling their company may seem overwhelming to many business owners, if thought in terms of small steps instead of giant leaps, it is really quite simple.

What is the initial question that comes to mind when you think about selling your business? One might guess that you wonder how much someone would pay for it.

Well, your first thought is the very first step you should take towards the ultimate goal of selling your business. Get a valuation to get an objective price range that you could expect to receive in the marketplace. It's that simple.

Typically, the documents needed to determine the probable price range of a company in the current market are tax returns or profit loss statements for the most recent three to five years, a current year profit loss statement, a current balance sheet, and an equipment list. Again, as you can readily see, the required items for a valuation is not complicated. Several years of financials helps paint a historical picture and current trend of the company. Upward trends are the desired scenario.

Since profits on financial statements and tax returns of privately-held businesses are usually minimized in order to reduce income taxes, the financial statements are restated in a valuation to show the true cash flow of the business.

As part of that process, a professional business broker / intermediary will ask easily-answered questions that will help determine which expenses are discretionary in nature or are not strictly necessary. There will be other expenses that may be non-business related benefits going to the owner and family members, or one-time, non-recurring or unusual expenses that would not be borne by a new owner of the business. These expenses will be part of the true discretionary cash flow that would be enjoyed by a new owner.

This valuation, or Broker's Opinion of Value, is normally provided at no cost. It should clearly outline the details that buyer prospects and their advisors would need and can understand. It should be assessed on the same premises lending institutions use for the purpose of determining if the price makes sense. If a formalized business valuation or appraisal is required, a Restricted Appraisal is one alternative, which is less complicated than a Full Appraisal, and much less costly.

Just as an athlete might get a physical to determine their preparedness for a marathon, you should also measure your Company's fitness for the marketplace. A valuation is an unbiased examination of your company's marketability and helps you pinpoint where your company is in its business cycle. It is the foundation, the meat and bones, on which a business owner can base their readiness to sell.

Other considerations in determining the business value will include competition, regional demand factors, proprietary products or processes, what type of buyer the company would attract, favorable lease terms, advantageous supplier relationships, management's desire to exit or stay with the business, concentration of customers, and many other relevant factors.

Your company's history of earnings represents its financial health and can establish the baseline for the monetary worth of the enterprise. The single most important factor for valuation is how much money the business makes. This figure should be maximized and be shown to be maintainable under new ownership in order to get the best price possible when the time is right. Buyers pay for the past, but buy for the future.

Most owners never take the necessary steps to plan their exit and end up selling because of unexpected events or crisis-driven reasons rather than on their own terms. According to members of the International Business Broker Association, 75% of business owners do not know the market value of their company. This is too large a number considering how painless a task it is to achieve.

The sooner you take the first step in determining the value of your business, the more informed and comfortable you will be in planning your next step.....whether it be deciding the time is right to sell now, or making improvements for a future sale.

Understanding the value and what drives the value of your business is the next stride in the small-step approach.

Indo-American Chamber of Commerce Presents Small Business Success Series

The Indo-American Chamber of Commerce of Greater Houston (IACCGH), as part of their Small Business Success Series, will be hosting a moderated dinner event at Bombay Brasserie Restaurant in Houston, Texas, on June 24, 2008. Tara Energy, headquartered in Houston and one of the largest independent retail electricity providers in Texas, is sponsoring the event.

Frank Stabler, CEO of Certified Business Brokers (CBB), has been invited to serve as a distinguished panelist for the event to answer questions on the following topics:

• How To Sell Your Business
• How To Buy An Existing Business
• How To Finance Your Business
• and other related questions from guests and attendees

Since 1999 the IACCGH has been a powerful advocate and important resource for businesses looking to capitalize on the tremendous opportunities presented through international trade. This organization has made a significant impact on the rich, diverse and prosperous Houston economy.

For more information about this event, call IACCGH at 713-624-7131. RSVP Required.

Who Are The Buyers For Privately-Held Companies

When selling a business, it is important to know who the buyers are for privately-held businesses and why they buy.

Most owners of small and medium-sized businesses don't think about exiting their business nor do they plan for that inevitable day. They enjoy their work and their lifestyle. Many of them don't even realize that their business may be an attractive acquisition target.

With about 8,000 Americans turning 60 every day, about 20% of businesses owned by boomers will be looking for buyers within the next three years. We are now in the initial stages of what is expected to be the greatest wave of business transfer activity in U.S. history. This future large-scale baby boomer exit will make for a buyer's market for businesses rather than the seller's market that exists today.

If you have been thinking about selling, this article will help you see your company as a potential acquirer might see it. Understanding who the buyers are and their respective acquisition criteria equals better preparedness when the time comes to sell. Having realistic expectations and understanding the factors that drive value in the marketplace will further bolster an owner's readiness for a successful sale. Proper valuation and presentation to the most likely buyers is crucial to achieving a sale for the best price in the shortest time frame possible.

There are three main categories of buyers of privately-held small to midsize businesses: The Individual Buyer, The Investment Buyer, and The Strategic Buyer. Each category has distinctive characteristics and motives for making an acquisition. The price each is willing to pay is directly proportional to their motive.

THE INDIVIDUAL BUYER CATEGORY

The Individual Buyer represents the largest number of prospective buyers for small to midsize privately-held businesses. Target companies typically have gross revenues between $200,000 to $3 million. Why? Enterprises with gross revenues under $200,000 do not provide sufficient net earnings and those with revenues over $3 million become difficult for individuals to obtain the level of financing required and to compete with the other categories of buyers.

Most Individual Buyers seek enterprises that have full-time employees or management in place, documented operating procedures, a diversified customer base, verifiable financial records, and net earnings at least similar to their most recent salary with an upside potential for growth. These qualifiers give Individuals confidence in the business' continuity and stability. Employees who can run daily operations is more appealing than a business that is highly reliant on the owner's presence or is dependent on the owner's personal relationships with customers.

While Individual Buyers may not always know the latest techniques for valuing businesses, they are capable of determining if the business makes enough money to earn a livable salary, pay the debt service on the new loan to purchase the business, and provide a reasonable return on their investment. These factors are the ultimate test to see if the price and terms of the deal make sense.

THE INVESTMENT BUYER CATEGORY

One of the major market shifts for privately-held companies has been the growth in the number of Private Equity Groups over the last decade, they number in the thousands. The Investment Buyer's primary goal is to acquire a company, grow it, and then cash out, usually within five years through either selling the business to a public company or taking the business public themselves. They are primarily influenced by return on investment and prefer to invest in companies with gross revenues in excess of $5 million with superior profit margins. Their targets usually have a unique business model with a sustainable and defensible market niche and position. Other traits that appeal to the Investment Buyer are strong growth opportunities, a compelling track record, a deep management team, low customer concentrations, and insulation from or a strategy to deal with import competition.

The relative sizes of acquisitions by category of buyer (compressed into their broader categories) is shown in the accompanying Table.

THE STRATEGIC BUYER CATEGORY

The Strategic Buyer is usually a public company or a larger privately-held company. Their targets are businesses that would compliment their own and that by combining the two would create a synergy of operations resulting in lower costs, new customers, and other advantages. Strategic Buyers are the most likely to pay more than other types of buyers because they gain a variety of financial benefits and quick business growth.

Synergy means that joining the two companies will produce more, or be worth more, than just the sum of their parts. Here's a simplified example: a large real estate company purchases a mortgage company. It can now use its existing customers (those who buy homes) and offer them the mortgage funds to finance their purchases. The benefits of this type of acquisition help both companies be more competitive and profitable.

Generally, Strategic Buyers target companies that have gross revenues in excess of $2-3 million, offer unique market share not readily available to their own company, such as opening in a new market not previously served or obtaining product lines and/or services not previously provided, but synergistic to their own customer base. Target companies will be especially attractive in industries where economies of scale are possible whereby the acquiring company can obtain significant post-deal expense savings, such as elimination of dual facilities, support staff, or other overhead expenses.

Certified Business Brokers' M&A Group Completes the Sale of Multi-State U.S. Firm to International Strategic Acquiror

HOUSTON, TX -- May 2, 2008 -- Certified Business Brokers' M&A Group (CBB) announced the sale of a privately-held, multi-state non-destructive testing company with headquarters in Houston and regional offices in three other states in the U.S. to a multi-national strategic acquiror.

The Houston-based non-destructive testing (NDT) company, which has been providing inspection services to the energy and fabrication industries for over 30 years, engaged CBB to sell the company. Terms of the transaction were not disclosed.

The sale was made to a privately-held corporation headquartered in New Jersey that is well-known for providing complete NDT solutions to satisfy industry, academia and advanced NDT needs worldwide. The acquisition was part of the New Jersey company's continuing growth strategy to strengthen their overall position in the marketplace by expanding through niche acquisitions in the markets it serves.

Certified Business Brokers (CBB), which has sold more companies in Houston than anyone for more than three decades, represented the seller and provided professional marketing, valuation, structuring and negotiation services.

About CBB
Founded in 1974, Certified Business Brokers is the largest business brokerage firm in Texas and one of the largest in the country. The firm was a founding member of the International Business Broker Association (IBBA), the largest business broker association in the world, and a founding member of the Texas Association of Business Brokers (TABB), the precursor and model used to form the IBBA and other business broker associations across the country. Their clients are small to mid-market privately-held companies. Their services include Mergers & Acquisitions, Business Brokerage, and Business Valuations.

More information about Certified Business Brokers is available at (713) 680-1200 or www.certifiedbb.com.

Contact:
Rose Stabler, Managing Partner
CBB - Certified Business Brokers
(713) 680-1200
Email: rose@certifiedbb.com

Inc. Magazine - "It's a Seller's Market for Buying Businesses."

It's all about supply and demand.

Potential buyers and sources of capital for the acquisition of profitable privately-held companies is plentiful while the supply of businesses on the market is not. This makes a profitable, established business a hot commodity and in demand. Inc. Magazine spells it out in this month's issue, "The Most Valuable Businesses in America."

During my first conversation with Darren Dahl in February, in preparation for his writing the article for Inc. Magazine, he wanted to understand what drives the value of a business and why some businesses are more desirable than others.

I first described the Houston marketplace, which enjoys one of the top economies in the nation. Location, location, location is always a value driver, and a business location is no exception. I've been writing about Houston's hot economic climate for over a year now and told Mr. Dahl that Houston is a "bulls eye" target for business acquisitions because of it. We cannot satiate the marketplace of buyers because there are not enough businesses currently for sale.

Good businesses are in short supply. The number of buyers looking to buy a business far exceeds the number of businesses available. So when a new business hits the market it will usually sell very quickly if the owner's expectations are realistic, if their financial history and data are upward trending and in good order, and is marketed properly.

We have buyers waiting for businesses such as these and are ready to act quickly when one comes along. They know that if they don't pull the trigger, they will miss out to someone else who will.

One of our "Serial Entrepreneurs," as described in Inc.'s article, agreed to a conference call with myself and Mr. Dahl, and pretty much described what makes him tick and what he looks for and why. Entrepreneur Gary has been working with Don Piercy, one of our staff of professional brokers, for several years and has four businesses in his collection and is currently in the process of acquiring his fifth. We thank Gary for taking time out from his very busy schedule to share his viewpoints.

In continuing the issues surrounding value, while a price tag can certainly be put on any item for sale, including a business, price doesn't mean value. Value is in the eye of the consumer. It is the perceived benefits that the business represents to the market of buyers that makes it valuable. Perceived benefit, or value, looks different depending on who's looking. And, ultimately, the price that will actually be paid will be determined depending on how MANY are looking. Which means if lookers are plentiful, demand is high. The price will reflect that demand.

I further explained that while the reasons that business owners of small privately-held enterprises sell do not vary significantly, the reasons for buying do. I described the various categories of buyers and their respective acquisition criteria and told Mr. Dahl that the price each type of buyer is willing to pay directly correlates to their motive for the acquisition. This is why it is important for business owners to know who the most likely buyer would be for their company prior to going to market.

It was then that Mr. Dahl decided to focus part of his article on the buyers rather than just the attributes of the business. Inc. Magazine's article covers the U.S. market as a whole and does not describe all buyer types. But it definitely describes the current Seller's Market that exists for profitable businesses for sale today.

In closing and of particular relevance, is that 8,000 Americans are turning 60 every day, which means about 20% of businesses owned by boomers will be on the market within the next couple of years. About 65% to 75% will be exiting within a decade, which means we will experience what is expected to be the greatest wave of business transfer activity in U.S. history. The future large-scale baby boomer exit will make for a buyer's market for businesses rather than the seller's market that exists today.

Not only is this important for those owners of small businesses who are considering their exit, it is essential to the economic vitality of our country that these firms successfully transfer to new ownership. The estimated 25.8 million small businesses in the United States have a huge impact on our economy. Outlined below are powerful statistics that speak to the importance of the continuity of these enterprises. Small businesses --

• Have generated 60 to 80 percent of net new jobs annually over the last decade
• Employ 50.6 percent of the country’s private sector workforce
• Represent 97 percent of all the exporters of goods
• Represent 99.7 percent of all employer firms
• Generate a majority of the innovations that come from United States companies

Source: U.S. Small Business Administration

Read Inc. Magazine's Full Article

Selling Your Business - Exit Strategy Seminar

Certified Business Brokers (CBB) will host a breakfast Exit Strategy Seminar on April 10, 2008 in Houston's Galleria Area. The seminar team will consist of CBB's M&A Group, Merrill Lynch Wealth Management Advisors, as well as Tax, Legal, and Accounting professionals. The seminar will cover key issues surrounding the successful sale of a privately-held company:

• Maximize your company's value.
• Who would be the most likely buyer?
• Understand the sale process.
• Plan for retirement.
• When is the right time to sell?
• Minimize post-sale taxes.

The seminar is free. Breakfast will begin at 7:00 AM and the presentation will begin at 7:30 AM and be completed by 9:00 AM. For details about location and to reserve your seat, please email rose@certifiedbb.com or call our office at 713-680-1200.

People put tremendous thought into launching a business. They should put equal planning into selling one.

Typically, business owners are so busy handling daily operations that they give little thought to what they’ll do when it’s time to retire, sell, or turn over control. Suddenly, that day arrives.

Which means these business owners are not completely prepared for the sale of their business. Making the shift too quickly or without proper planning can make a difference in the proceeds received from a sale. This affects retirement, estate taxes, sales taxes and even the business’s worth at sale time.

It is all about planning, preparation, timing and execution.

We will discuss the current Houston economy and the current business transfer marketplace. We will walk through the sequence of events involved in the entire sale process from valuation, right-timing, to what to expect after the sale.

Merrill Lynch Wealth Management Advisors will discuss retirement strategies and how to best invest your after-sale proceeds to sustain your lifestyle through your retirement years. Tax, legal, and accounting professionals will be addressing those aspects of the business sale transaction.

Huddle with the Experts when Buying or Selling a Business

Acquiring a business is a team effort and finding the right business broker (intermediary) is just the start of building your squad.

Oftentimes, buyers do not know how to go about tackling the whole process of investigating the business they like or how to evaluate the financial data. This questions represents a common real- buyer inquiry:

"I'm ready to purchase the freight company I've been looking at that's currently listed for $1.2 million. I've never bought a business before and I need someone who can help me through the various phases so I don't overpay and don't miss key legal issues that might be involved. Where can I find such a person?"

The answer is: You need more than one person.

Making a business acquisition is a team effort, and your business broker, also known as a business intermediary, is the quarterback. The broker drives the deal by acting as the buffer and go-to guy with the buyer, the seller, the attorney and the accountant. We do everything to move the deal along, including coaching and some tactical rationale therapy.

It's an extremely emotional process. Sometimes, the reason deals don't get done is that emotions get in the way. A good intermediary will take the emotion out of the transaction. Feeling an emotional connection to the business you intend to purchase is important since it will be a large part of your life. However, during the due diligence process common sense must be injected into the game plan.

As the coach, the broker sees the big picture. S/he keeps the ball spiraling towards the goal and creates the synergy needed to prevent false starts, fumbles and needless setbacks.

Your broker can help you find your other team members, including an attorney to act as your blocker to protect you in the legal aspects of the transaction and an accountant to tackle the numbers and tax issues.

As a general rule, small business owners sell a business only one time -- and buyers purchase a business only once in their lives. A business owner's professional advisors who have counseled them on the operations of their business consists of their attorney who does general business law and their accountant who does their books and tax filings. New buyers, too, have probably called on attorneys for various reasons such as preparing a will, for example, and have used accountants to file their income taxes. It is important to note that these types of professional advisors may have little or no experience in a business sale transaction.

Another general rule is that a deal structure that favors a buyer from the tax perspective normally is detrimental to the seller's tax situation and vice versa. Negotiations are opposing in nature and require creative solutions by experienced business brokers....the negotiators.

Good brokers will have a list of professionals with whom they have worked with in the past - deal makers versus deal breakers. You need an accountant and attorney that specialize in business transfer transactions.

You wouldn't call an eye doctor to perform foot surgery, so why call a patent attorney or a general accountant to help you perform due diligence on an acquisition candidate. You need specialists.

Professional advisors can make or break a deal. You must articulate your wishes to your team in order to have them working together towards the common goal. Each advisor, such as a business broker (intermediary), an attorney or an accountant, has a specific role in the transaction and should be working on behalf of their client to achieve the objective for which they were engaged.

Your advisors should provide the information you need in the time period required -- so you can make the decision on the purchase. You are the ultimate decision maker in the deal.

Communication between all of the parties involved is a priority to prevent the deal from dying. Each advisor should clearly understand the wishes of their client.

The accountant needs to know from the client that this is an earnestly desired transaction and that, unless something completely unanticipated is discovered, his or her job is to provide, review, and verify the financial records of the business in order to get the deal done.

If there is no one monitoring and leading the progress of the transaction, the ball can be dropped somewhere along the way before the final yard...before breaking the plane of the goal line.

The use of a professional business broker to captain the effort can alleviate communication problems, avoid needless delay, and keep the momentum rolling.

The experienced business broker has been through the due diligence and closing process many times, much more often than any of the attorneys or other advisors involved. They keep the deal on track and act as the captain that keeps the team working together towards the common goal.......the successful consummation of the sale.

As long as all advisors in the huddle understand the game plan and are all getting the same signals from their respective clients -- the buyer and the seller -- the odds are good that the effort will have the desired result -- a win.