Posts Categorized: Selling a Business

3 Things to Consider When You Hit “The Freedom Point”

Posted by & filed under Seller Articles, Sellers, Selling a Business.

When was the last time you calculated the percentage of your net worth tied to your company’s value?

When you started your business, its value was probably negligible. Unless you purchased or inherited your company, it wasn’t worth much when you opened your doors, but over time, the proportion of your assets tied to your business may have crept up.

Let’s imagine a hypothetical business owner named Tim, who starts his company at age 30. He has a little bit of equity in his first home and a small retirement fund. When he starts his business, it’s worthless, so it doesn’t yet factor into Tim’s net worth calculation.

By the age of 50, Tim has built up $600,000 worth of equity in his home, his retirement nest egg has grown to $400,000, and his business has blossomed and is now worth $4,000,000. Tim’s company has crept up to represent 80% of his net worth.

Tim knows the first rule of investing is to diversify, which he is careful to do with his retirement account. Still, he has failed to achieve overall diversity given the success of his business.

What’s more, he may have unknowingly passed something called “The Freedom Point,” which is when the net proceeds (i.e., after taxes and expenses) of selling his business would garner enough money for him to live comfortably for the rest of his life. Your lifestyle determines your Freedom Point, but when you pass it, it’s worth considering the risk you’re taking.

If this pandemic has taught us anything, it is that nothing is for sure, and a thriving business one day can turn into a struggling company overnight. When your business makes up most of your net worth and selling it would garner enough money to retire, there’s no financial reason to continue owning your business. You may enjoy the challenge, the social interactions, and the creative process of building a business, but keeping it may be unnecessarily risky.

When you’ve crested the Freedom Point and want to diversity—but still don’t want to retire—you have some options:

  • Sell a Minority Stake: In a minority recapitalization, you sell less than half of your shares. Often sold to a financial investor such as a private equity group, a minority recapitalization allows you to diversify your net worth while continuing to control your business.
  • Sell a Majority Stake: In a majority recapitalization, you sell more than half of your shares to an investor who will most likely ask you to continue to run your business for many years to come. You get to diversity your wealth, keep some equity in your business for when the investor sells, and continue to run your company.
  • Earn-Out: When you sell your company, you’ll likely have to agree to a transition period of sorts. One of the most popular is called an earn-out, where you agree to continue to run your company as a division of your acquirer’s business for a specified period of time. Your earn-out may be as little as a year or as long as seven, but the average is three years. Therefore, if you’re past the Freedom Point and can see yourself wanting to step down in the next three to five years, an earn-out may be worth considering.

Building a successful business is rewarding, but when your personal balance sheet gets out of whack, it may be worth considering the risk you’re shouldering and the options you have for sharing some of it.

 

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Exit Strategy Options

Posted by & filed under Marketing, Seller Articles, Sellers, Selling a Business.

There are a variety of options when it comes to an exit strategy, depending on the size of your business and your desires regarding future participation in the business. Please see below a quick summary of the benefits of the more common options that one may wish to consider.

1. Merging with another company

a) The merged company should be able to benefit from economies of scale between the two organizations that would result in greater profitability.
b) This is an ideal way to quickly capture much greater market share.
c) Merging with another company may also provide a way to diversify offerings.
d) A merger may be a way to bring complimentary skills together making for a stronger overall employee base.

2. Strategic Acquisition by another company

a) This may the best way for a seller to fully exit business in the event the company is too large for the average individual buyer.
b) May offer employees additional opportunity for growth.
c) This approach may offer the seller a future opportunity to stay on with the company after having cashed out from the sale. Perhaps the Seller wants to reduce the burden of ownership but isn’t ready to fully exit the business.
d) There may be tax advantages when it comes to stock exchanges.

3. Private Equity

a) This option often offers sellers the best of both worlds – take “chips off the table” and also have future upside earnings if only selling a percentage of the business.
b) Capital can be provided for growth plans.
c) The Seller’s Management team may be an integral part of the future of the company.
d) Most private equity firms have specific criteria for the size of companies they desire to acquire.

4. Outright Sale to 3rd Party individual

a) This may be the best viable option depending on the size of your company.
b) This option typically provides the Seller with the cleanest and quickest “exit” from the business.

VR Business Brokers will be happy to meet with you and discuss these various options to help you assess the most viable for your circumstances.

Reality Check – What is Your Business Really Worth?

Posted by & filed under Sellers, Selling a Business.

This is the age-old question that just about every business owner asks themselves at some point – and of course, the short answer is “whatever someone will pay you for it”!

I’ve been dealing with business owners for over 30 years and many owners feel their business is worth considerably more than the market suggests it is. Occasionally, I find an owner who has under-estimated their business value, and it is very pleasing to inform them that I think we can get more for their business than they anticipated.

How should you determine a realistic value for a business – the answer is “statistics”! While there are multiple formulas that can be used to complete a business valuation, in the end, statistics from past transactions will be a major part of the process and will usually provide considerable influence on a buyer’s ultimate decision.

DealStats (formerly Pratt’s Stats) is a platform that boasts the most complete financial information on acquired companies in both the private and public sectors. Every transaction in DealStats is rigorously reviewed by a dedicated team of financial analysts in real time. Whether you are valuing a business, deriving a sale price, benchmarking performance or conducting fairness opinion research, you won’t find more complete and trustworthy comparable data in any other source.

DealStats reports on a quarterly basis cumulative results of this extensive analysis, providing users with the most current information available on business transactions. Additionally, as a user of the software platform, VR Business Brokers of Dallas can access specific transactional data to find comparable transactions to one we may be valuing at the time. We are also able to eliminate “outliers” on both extremes of the value scale to ensure a realistic assessment.

We have provided below summary information by DealStats on transactions reported as of the 3rd quarter of 2019. The statistics reported are based on the “Median” value within each sample grouping.

Annual revenue

Final Selling Price

$0 to $1M
$1M to $5M
$5M to $10M
>$10M

3.50x EBITDA, or 2.0x SDE as reported
4.10x EBITDA, or 2.8x SDE as reported
4.20x EBITDA, or 3.7x SDE as reported
6.70x EBITDA, or 4.0x SDE as reported

EBITDA – Earnings before interest, taxes, depreciation, amortization

SDE – Sellers Discretionary Earnings using industry standard add-back principles. This process is also referred to Normalized EBITDA.

The above results are inclusive of transactions within all industries and are based on privately held company transactions only.

As mentioned, the selling price multiples represent the “Median” value, and as one may expect, within each sample grouping there are significant ranges of multiples achieved, both from the EBITDA as well as SDE assessment. So, what are the most common factors that affect the ranges of multiples achieved?

Level of EBITDA or SDE attained – as a general guide, the higher the EBTIDA and or SDE attained above the median level within each grouping, the higher the multiple to be realized as the final sales price.

Trends in revenue and profits – businesses that have positive trends in revenue AND profits will generally attain a higher multiple than a business with equal or even slightly higher EBITDA or SDE but is experiencing negative trending.

Maturity of the business – as a general guide, a business with longevity of several years will attain a higher value for similar performance than a business that is only two to three years old. Additionally, buyers will look at the “average” performance over a two to three-year period rather than only focusing on the most recent annual performance. The point is that as a seller of a relatively new business, don’t expect a huge “spike” in your most recent year to result in maximum value for your business based solely on that year. There are exceptions to this – such as technology related companies with a recurring revenue business model.

Quality of Financial Accounting – the “cleaner” the books, the easier it is for a buyer to evaluate the business, therefore usually resulting in a higher valuation. And remember, there are likely two audiences assessing the Accounting quality – the buyer and the banker! The quality of financial accounting can be a major factor when it comes to attaining bank financing for the transaction.

There are many other factors that can affect the valuation of a business – condition of asset base, quality of management team, employee tenure, diversified customer base, industry training availability, just to name a few.

VR Business Brokers can assist you with the valuation of your business. Whether you are considering selling your business now, or several years in the future, it is important to understand the factors involved that can affect the overall value. We will help you assess EBITDA and SDE and guide you on the other elements that will affect the overall value of your business in the future.

About VR Business Brokers, Dallas, TX

VR Business Brokers of Dallas is part of the worldwide franchisor organization that has been servicing small to medium size privately held companies since 1979. VR Business Brokers of Dallas has handled transactions for privately held businesses with revenue ranging from $200,000 to $60,000,000 and assists business owners with exit strategy planning, business valuations, packaging and marketing of the opportunity, and full negotiation services through to closing. For more information about VR Business Brokers, please call 214-733-8282, or visit www.vrdallas.com.

 

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Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

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Leaving a Legacy: Why Some Sellers Choose ESOPs

Posted by & filed under Selling a Business.

Article written by Arielle Shnaidman and provided courtesy of Axial.net 

While Employee Stock Ownership Plans (ESOPs) have long been good exit options for smaller companies, in the last few years larger middle market businesses have started considering ESOPs as an exit strategy as well. Companies worth hundreds of millions of dollars that could have easily sold to private equity firms have opted to go the ESOP route. An ESOP allows employees to buy an interest in a company while at the same time giving the owner liquidity. 

Alberto Toribio del Pilar, a managing director with the St. Louis, Missouri-based boutique investment bank ButcherJoseph believes owners of larger companies are more frequently considering ESOPs because they are becoming a more proven way to realize meaningful value at closing while implementing a significant employee retirement benefit. 

As a firm, ButcherJoseph has a niche focus on ESOPs. The key tax advantage of this exit option is the ability for a seller (under the right circumstances) to defer capital gains tax on the sale of their business to an ESOP. ButcherJoseph works with sellers to figure out how to best structure their deal to get those tax advantages based on the market value of the business. These types of deals require the business to borrow money — usually against the assets or cash flow of the business — which is why companies with many assets to borrow against or healthy margins are typically a good fit for an ESOP exit strategy. 

For example, Nation Safe Drivers (NSD), a roadside assistance company, recently completed an ESOP in Boca Raton, Florida with ButcherJoseph’s help. “We explored several exit strategies, and we were by far the most intrigued with Employee Stock Ownership Plans. Our company has tremendous potential, and we wanted to share this future success with the dedicated employees who will continue growing NSD,” said Andrew Smith, NSD CEO in the press release.   

Leaving a Legacy 

At first glance, the clear tax advantages of an ESOP exit option for business owners seems like reason enough to pursue this option. However, tax benefits are rarely the only reason sellers pursue this option. 

“Maximizing cash at close is typically not the most important element of the deal for sellers in most of these cases, because these folks already have money,” says del Pilar. “They think about the ESOP structure because it’s an amazing opportunity for their employees.” ESOPs are not often the most lucrative option for the seller. First, while offering fair market value, ESOPs typically cannot match the high multiples offered by private equity firms. Sellers of an asset-heavy business could also see a bigger return by dissolving the company and selling off the assets. 

But for business owners who have put their blood, sweat and tears into building a company for many years, money isn’t necessarily the only factor when it comes time to exit. 

An ESOP allows employees to secure a portion of their retirement investment through their work and ownership. For example, ButcherJoseph worked with a 35-year-old Midwest-based aviation business on an ESOP. 

The business could have sold off its assets, which were worth more than the business as a whole, but the owner wanted to make sure his employees were taken care of. He was a highly-regarded figure in his community with family in the business along with tenured employees and a large technical group of mechanics who took care of the aircrafts. He didn’t want his company bought and relocated. For these reasons, selling his business to a private equity firm or competitor was not an option. 

The owner of the business worked with ButcherJoseph for several months to structure the deal. This involved working out management incentive plans to create an environment for performance and ensuring the owner would receive a certain amount of income after close. After the seller realized value at closing, he positioned himself as a creditor by providing seller financing. As a lender he receives principal and interest for the remaining value of his business at closing. 

Potential Risks 

Typically, ESOPs work best for companies that have strong, tenured management teams that can run the business efficiently after the owner exits. Additionally, companies should have a good collateral base with healthy margins to borrow against for the ESOP structure. The underlying business should be relatively solid and not subject to peaks and troughs. 

While ESOPs are good exit options for many, deals can go wrong if they’re not structured correctly. If the deal is done at too high of a valuation, or companies violate covenants with lenders, the deal can go south. Finally, selling the business, but not transferring control is also a way to run a foul with the rules and regulations governing ESOPs. A true board or voting mechanism needs to be put in place to ensure proper corporate governance. 

 

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Number of Small Businesses Changing Hands Dips Slightly, But Market Remains Ripe for Buyers & Sellers

Posted by & filed under Seller Articles, Selling a Business.

Small business transactions in the first quarter of 2019 experienced a modest year-over-year decline but remain at historically high levels, according to the latest BizBuySell Insight Report, a nationally recognized economic indicator that aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide. A total of 2,504 sold businesses were reported in the first three months of 2019, a 6.5% decline from the same period last year. Similarly, Q4 2018 saw a 6% decrease from the same quarter in 2017. 

It is important to note that both 2017 and 2018 set new records for the most annual small business transactions since BizBuySell started reporting the data in 2007. So while reported deals are down slightly from a year ago, the market continues to be very active compared to the previous decade. In fact, Q1 2019 represents the second highest first quarter on record, trailing only 2018. It is too early to tell if the recent plateau marks any kind of market shift or not. To gain additional perspective, BizBuySell also surveyed business owners and some leading brokers, the results of which are incorporated within this report. 

A number of factors could be tempering the strong transaction growth rates seen in recent years. Most notably, these include the recent government shutdown, low unemployment, record profits, deal financing, and general uncertainty around the impact of administration policies relating to tariffs, immigration, and health care. 

“Main Street business sales may have been impacted in part due to a stronger economy where individuals are more satisfied as employees (not looking to purchase businesses) and business owners are seeing higher profits (not looking to sell their businesses)”, said Jeff Snell, Chairman of the International Business Broker Association, the industry’s leading trade group. “Also, time to complete business transactions has increased marginally, potentially as a result of the Federal Government budget shut down which closed SBA loan guarantee processing offices. However, broker optimism through 2019 remains strong”, Snell added. 

“The business sale market still continues to perform strong in 2019 in terms of number of deals getting done and the multiples sellers are receiving. However, we are seeing signs that the market could become more challenging in the future with interest rates rising and financing becoming both more expensive and harder to acquire. This can make the buyer process lengthy and more difficult, which would suppress multiples and extend time to close”, said Jessica Fialkovich, President, Transworld Business Advisors of Denver. 

Of course, it is also possible the past two quarters have been outliers and 2019 will continue on its multi-year growth trend in upcoming quarters. It is something to watch closely as data comes in over the rest of the year. Inventory remains strong, with a 6.1% increase in listings in Q1 over the same quarter last year. 

“After several years of record activity, it’s good to see that there are still plenty of listings coming on to the market, so the small decrease in activity may be more about buyers taking a cautious approach than a slowdown in the supply,” Bob House, President of BizBuySell.com & BizQuest.com, said. 

 

Is now the time to consider selling your business? 

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:  

Sellability Score