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After growing a regional technology services company to a multi-million dollar operation, it came time for me to consider an exit and sale from the business to allow the company to grow to its next level. I envisioned that through either a strategic acquisition or through bringing in a new CEO that has a deeper and wider relationships in the software services arena that a more robust growth will take place. This process eventually led me to comprehensively understand what goes on inside the exit and sale of a business. Having been on the other side as well of buying other businesses, my blog will reflect actual real life transactions and events that pertain to the complex and complicated process of buying and selling small businesses.

Tuesday, November 30, 2010

The Legacy Options for Two Family Owned Businesses - The Conundrum

Last month I met with a buyer interested in acquiring one of our "Big 10 University" licensed promotional companies. The buyer is considering our business as an "add on" to the existing business he currently run as a family. In my process there needs to be an understanding as to why such acquisitions make sense for our client seller. The way this deal might be structured may make sense because both the potential buyer and the seller client are both running legacy businesses that involve close family members. You may consider this a "blending of two families" with two separate businesses. As simplistic as it may sound, it might be the most complex proposition to consider as eventual to this type of merger you have egos getting in the way.

In addition to the already complex "blend" the buyer will add a variant to the ongoing business for sale through the relocation of the acquired company. This relocation plan, in discussing with the seller, will be the biggest hindrance to making this a conducive deal. A key family member working in the business opposes the relocation. For many years the business has been in a location favorable to the key employee and if this key member will cease to be involved in the business, the business may lose one of its attractive value proposition, which is to inherit trained and skilled employees in the acquisition.

It is unfortunate that the seller did not consider such aspects of his exit from the business in advance. Exit planning does not happen overnight. It is a series of steps in evaluating the critical factors that will be considered in the future. Not everyone has a crystal ball to predict the future, but with careful planning and a timely execution, alongside of working with professionals who are equipped and credentialed in the exit planning process, similar hindrances enumerated above will be mitigated, if not avoided.

Lending Problems Still Hamper Small Business Sales

April 1, 2009
Lending problems still hamper small business sales
AP Business Writer

Andrea Edmunds got a great deal when she decided to buy a small business. But that still didn't make it easy.

Edmunds recently bought back PoshTots and PoshLiving, two linked retail companies she had co-owned until three years ago. The firms' new parent company was in bankruptcy court and Edmunds wanted to buy the businesses back, even though the companies' sales were way down and financing is hard to get.

"I had enough confidence and faith that it's going to turn around," Edmunds said of her businesses and the economy.

Edmunds managed to accomplish what many would-be entrepreneurs are hoping for in a troubled economy: to buy a small business despite the many obstacles that are making deals hard to complete.

Business brokers, who bring buyers and sellers together, say there are a growing number of people who want to buy, including many who have lost their jobs over the past year and need to make a living. And there are plenty who want to sell, including baby boomers hankering for retirement.

Getting financing for deals is still tough, although the government has taken steps to make Small Business Administration loans easier to obtain. The brokers say banks are not only uneasy about borrowers, they're also questioning the health of the companies up for sale.

"Even with those changes, we feel that it seems as if the money may never reach the small business owner," said Jeff Hoops, senior vice president of The Haley Group in Paso Robles, Calif.

Small businesses have found it hard to borrow from banks for years, long before the recession; a neophyte owner or company has been too risky for many banks to take on. The recession and banks' unwillingness to lend in general over the past six months have made it that much harder.

Edmunds said her financing came from a private, locally-owned bank that was supportive of her plans. The fact that she knew her businesses so well was a plus, and the purchase price was down dramatically — $735,000, compared to the $12 million she and two partners got three years ago. The companies, based in Glen Allen, Va., sell upscale home furnishings.

Brokers are seeing lower prices in general along with fewer transactions.

Peter Berg, managing director of Transworld Business Brokers in Fort Lauderdale, Fla., said the volume of deals his firm did last year fell 10 percent but the value of all the deals put together went down 30 percent.

Meanwhile, deals are taking longer to complete while banks give prospective borrowers and companies much closer scrutiny. Emmet Apolinario, who owns a Sunbelt brokerage in Columbus, Ohio, said that before the credit crisis, a purchase could close in 45 to 60 days after an offer was accepted. Now, one of his pending deals will take five months to close.

Would-be buyers have been hit in several ways. Besides the bank financing issue, the nest eggs they would have used for down payments have shrunk as the stock market plunged. They can't draw on home equity because housing prices are down, and if they already had a home equity line of credit, their banks have very likely pulled the accounts or cut them drastically. Also, banks that are willing to lend are demanding bigger down payments.

Sellers have their own set of problems. More of them are having to act as lenders to close the deals. Apolinario has been telling them, "there is no way I can get you 100 percent cash. You will have to provide some seller financing."

That does have an upside for sellers, though: They get income from the interest on the loans they grant their buyers.

But, Apolinario said, many owners are also finding that they can't get the price they expect on their companies; these assets have fallen in value along with real property and stocks.

Brokers see small signs of a possible pickup in deals. Apolinario said the SBA loan changes have led to more prospective buyers calling.

Berg said he sees many people actively looking for a company: "They either have been laid off or are afraid of being laid off and want to be pre-emptive."

Still, he said, "it doesn't mean an uptick in the number of transactions. We're just seeing an uptick in the number of inquiries."

Hoops expects the climate for buying and selling to start picking up perhaps as early as June, "when people get comfortable with the fact that they're going to have to live with this (economy) for a while."

He expects prospective buyers to say, "things are bad, but I've got to plan for what I'm going to do next, no matter what happens in the economy."

Franco Ferrari, owner of a Sunbelt business brokerage in Casselberry, Fla., near Orlando, expects that the entrepreneurial spirit is what will bring more buyers in, rather than expectations that government steps will heal the economy. "There's confidence in their ability as a mom and pop operator that they can go in there and make that business produce," he said.

Found Dead

We talked to a potential client last December about the possibility of exiting his business. The client has a nice operation that they have built through the years and provides services to enterprise class customer base. To summarize the business, it is a B2B operation that, over the years, has provided an ongoing strong value proposition to their clients.

In our discussions we would normally talk about the competitive aspect of their business. They said that there was one particular national competitor on a regional basis that manages to "under cut" them from their pricing. It is not typical that the client would lose out on a potential engagement because the other party would be able to offer a more attractive price.
I mentioned that when a competitor is able to offer a less expensive route in most cases, there are areas where they take short cuts in either their product or service. In order to offer low prices, they would have to cut the quality by obtaining products from an overseas alternative, where quality assurance and product integrity may not be up to par. Do they use labor or utilize service that do not adhere to the same standards they do? What drives these costs or savings?

The competition is a smaller operation that does not have the same investment in infrastructure and operations. From the description of this competitor, it is the typical competitor that sells their services and products on a purely commoditized model. The short cuts occur in the safety aspect of their business and they have minimal safety procedures in place. It may even be described as an outright risk doing business with such a vendor.

Today they found one of the competitor's associates dead. He was found in a structure where there was no safety gear (and procedures) in place. The competition's delivery of their service and product was delivered in such a manner that extreme short cuts were taken in order to provide a highly competitive price. It took 35 rescue and first responder personnel to extract this employee's body.

In reviewing this particular incident, who incurs the liability in this tragedy? The enterprise customer could certainly be held liable for this incident. Yes, it was a contractor, not an employee, but should blame be put on their purchasing decisions? They wanted something on the cheap without taking into account, what short cuts are actually being taken to deliver this service at such a price. I would also venture to say that the company probably did not even have any insurance coverage for such an event.

This awful tragedy does turn a benefit for our client in the sense. They can clearly show the value proposition of why their pricing schedule is different. They do what is proper and right to deliver their services in a safe and quality manner. They've already won additional customers as a result of their standards.

In choosing the right service provider to help you exit the business, are you utilizing the right decision matrix to accomplish this? Have they gone through a similar process themselves, ran their own enterprise and understand all the nuances of business ownership and the eventual exit of an owner? Choose wisely for one of your biggest investment in your life: your business. Utilize the help of a professional.

Year 2010 M & A Market Hoping New Year Brings More Activity Than Did Dismal 2009

M & A market hoping new year brings more activity than did dismal 2009
Daily Reporter Staff Writer
December 24, 2009

A local leader in the mergers and acquisitions field said he's "cautiously optimistic" about increased activity in the coming year after a moribund 2009.

"The recession for Wall Street is over, but then I talk to companies and they're still not hiring," said Emmet Apolinario, president of the Ohio Business Brokers Association.
During tough economic times businesses that are struggling may not be attractive because buyers want to acquire more successful companies.

"We do have a lot of buyers right now but there's a shortage of good businesses being taken to market," Apolinario said.

On the other hand, it's also a good time to go bargain hunting, he added, if the companies are stabilized.

"There are valid reasons for a sale. They don't have to be distressed," he said.
Many businesses hurt by the economy, however, are attempting to slug it out during the slow times with hopes of improvement not far away, Apolinario noted.

"I'm seeing a lot of distressed businesses hanging in there, hoping for a glimmer of hope," he said.

Other, more financially strong businesses are waiting to see if they can improve more and fetch a higher selling price, Apolinario said.

There some signs of life, however, especially among buyers.

"There is still some money in private equity, executives looking to buy, (but) some have been looking for a year. There's a shortage of good businesses to sell," he explained.
Many of those buyers are executives or Baby Boomers looking for a new career and or the independence that comes with being an owner.

"They've been in the corporate jobs for 20 years and they are finding opportunities in buying businesses," Apolinario said, adding they're often doing it not as a part-time or side gig, but as a full-time job.

As far as the types of businesses sought, health-care companies are in the strongest position, Apolinario said.

Also, handyman and repair businesses are doing well as consumers hang on to products longer rather than purchase new ones and perhaps need the old items maintained.
At the other end, the retail sector is abysmal.

"Businesses that have a footprint in the retail market have not done well, being affected of course by consumer spending," said Apolinario.

Restaurants, too, are "challenging," he said as consumers have cut their spending on dining out.

Any increase in activity would be an improvement on what's occurred this year in the deal-making business.

"It's been a tough year for mergers and acquisitions and business brokerage," said Apolinario. "The SBA stimulus package was a big help to get some deals done."

The federal stimulus package in the spring included a 90 percent federal guarantee of U.S. Small Business Administration loans by banks and lowered fees, which encouraged banks to provide more small business loans.

Still, it was such a rough year that Apolinario said he's seen some people leave the business brokerage field and that Ohio Business Brokers Association membership is down more than 20 percent this year.

Meanwhile, national mergers and acquisitions experts, too, are holding their breath that activity will improve next year.

"While it is likely that deal activity may not return to pre-crisis levels within the next few years, there is some cause for optimism when looking at the three drivers of deal activity: confidence, credit and cash," said Steve Krouskos, Americas markets leader for Ernst & Young LLP's transaction advisory services, in a recent statement.

For the second half of 2009, deal activity remains sluggish but is showing signs of modest acceleration, according to Ernst & Young.

The firm said deals continue to get done, but the types of deals completed, and the way these deals are financed and executed, has changed significantly.

"The new 'normal' is defined by continuing uncertainty, weaker demand and margin erosion, scarcity of capital and more risk-aversion in strategic decision making. Managing all aspects of the capital agenda is the best way to manage the new normal," said company officials.

"In this deal environment, the margins for error have narrowed," added Rich Jeanneret, Americas vice chairman for Ernst & Young's transaction advisory services. "Many companies feel inclined to stash cash and be reactive, but winning companies will be those that have the confidence to use their capital to seize opportunities."