Knowing when to act and when not to act is a key component in all important decisions. Likewise, knowing when to keep your business and when to sell it can make a significant difference in the success of your exit and your future financial security. Take the following test and review your answers with your Access Business Advisor to ensure that your timing is perfect!
Do you want to be a part of a growth industry with tremendous upside potential?
Demographic trends in the United States, and around the world, suggest that business brokerage is just such an industry. An aging baby-boomer population, corporate downsizing/outsourcing and globalization are all augmenting the desirability of owning a small business. Most people, however, have little or no experience in buying or selling a company; they need the help of a professional business broker!
Access Business Advisors provide valuable services to both business sellers and buyers, most of whom are
undertaking the most significant financial and emotional transaction of their lives. As an Access Business
Advisors, you will:
What qualifications are needed to become an Access Business Advisors?
Generally speaking, Access Business Advisors have one or more of the following attributes:
About the Access Business Advisors affiliation with the Sunbelt Network
Sunbelt is the largest network of individually owned and operated business brokerage offices in the world. The Sunbelt network has approximately 250 franchised offices located throughout the U.S., Canada, Europe, Asia, Australia and South America. Our network retains more than 1,000 experienced business brokers, who annually handle the sale of thousands of privately-held businesses. Sunbelt’s primary focus is listing and selling “Main Street” businesses, which we define as businesses with less than $2,000,000 in annual sales. However, we also have the ability to handle the sale of substantially larger, privately-held businesses.
Due to the sustained growth of Access Business Advisors and the Sunbelt network, Access Business Advisors are seeking qualified candidates who are interested in becoming business brokers. If you are interested in becoming a business broker with a world-class, market-leading organization, this could be the career opportunity you’ve been seeking.
Please send inquiries and resumes to Cecil Martin at cmartin@8649342225.com
I received a call from Mr. Smith today. We had talked on the phone a month or so ago when he asked if I “do ESOPs.” I confessed that I don’t specialize in ESOPs — I represent business owners in maximizing value and minimizing risk in the sale of private companies. He was friendly and we chatted further. He shared a little about his situation, and inquired about the private merger and acquisitions market. I then wished him luck as he hung up to pursue the ESOP option. I had a hunch that I’d hear from him again … and I did. But let’s get back to that first conversation.
I learned that Mr. Smith is a long-time business owner and is well into retirement age without a succession plan. He has always enjoyed running his business and is in fine health for his age, which is probably why he has not felt pressure to “get something going.” But as he said, times are changing. Mr. Smith worries about not being as sharp as he used to be and the risk of falling behind the competition. He also would like to spend more time with his grandkids; he’s always wanted a “family ranch,” as he called it. Maybe the time to “cash out” is now, he said, then added: With an ESOP, I can sell to my employees, who’ve earned it, and avoid paying all my money to Uncle Sam.”
Why did I expect to hear from him again? Well, the ESOP seems to fit a very narrow group of business owners, and it was an unlikely option for Mr. Smith based on what I learned about him and his business. His motives were valid, but he had not yet looked into the details. Let’s take a minute to do just that…
Congress created the Employee Stock Ownership Plan (ESOP) in an effort to preserve the economic stability of communities and encourage a wider distribution of wealth. It is basically a tax incentive program designed to make a sale to employees more attractive. These incentives are provided to sellers, buyers, and even bankers who finance ESOP transactions. An ESOP, therefore, is a means by which a business owner may “sell” the company to its employees and receive tax benefits for doing so.
How does it work? Typically, the company’s ESOP takes out a loan to purchase the owner’s stock. The company, in turn, contributes a portion of its monthly pre-tax profit to the ESOP to pay off the debt and allocates paid-for shares to the employees’ accounts. As such, the owner’s stock in the company is “purchased,” over time, by the company and distributed to the employees — pretty good deal for the employees.
The advantages of the ESOP begin with the ability of the seller to defer capital gains taxes if the proceeds from the sale are invested in domestic corporate securities within 12 months. Next, company payments to the ESOP to repay debt borrowed, both principal and deductible. Finally, employee ownership company performance.
There are strings attached, however. First, the company must be a C-Corporation, an entity that is found in diminishing numbers today. Strong cash flow will be required to obtain ESOP financing and repay ESOP debt. Next, 25 percent of the stockholders and family members of the seller must be excluded from the ESOP, while all employees with 1,000 hours on the job must be allowed to participate.
Those who have installed an ESOP will tell you that the costs can be significant. Legal fees for initial set-up can run from $13,000 to $100,000. And costs associated with the required annual valuation and ongoing reporting and record keeping can easily run $10,000 per year. Finally, the first 49 percent of the owner’s shares are valued and purchased at a minority discount of around 30 percent, wiping out the tax savings on nearly half of the sale. Oh, and banks require the seller to personally guarantee the ESOP debt — so much for cashing out!
In summary, it’s hard to argue with the concept of selling to employees for significant tax savings, but when we look into the details, we find strict rules and requirements, which eliminate most business owners lured by the prospect. Our owner who was hot on the ESOP, Mr. Smith, found this to be the case. Remember — he wants to retire and needs cash for that “ranch.” In addition, it turns out that his son is active in the business and wishes to stay on. Mr. Smith was looking for a way to maximize the value of his business, but an ESOP wasn’t the answer for him. Is it for you? Read on.
A D V A N T A G E S O F E S O PT O T H E B U S I N E S S OWNER
D I S A D V A N T A G E S O F E S O P T O T H E B U S I N E S S OW N E R
At a time when publicly owned companies are finding it extremely difficult to access the capital they need to make acquisitions, private equity groups (PEGs) can still be an option for some business sellers. PEGs tend to be less constricted because they’re not as reliant on the credit markets, and many are looking to put their ample funds to work.
Attracting the attention of these investors, however, requires some understanding of how they work and what they look for in an acquisition target.
Back in the game? PEGs typically are funded by third-party investors, including individuals and institutions. They make money for their shareholders by acquiring companies, and then “flipping” them after a holding period of several years. PEGs either sell their holdings to new buyers or initiate a public offering, ideally realizing gains.
In a recessionary economy, positive cash flows and competitive market shares are more advantageous than ever.
For much of the past decade, PEGs have been major players in the M&A market, their aggressive acquisition tactics spurring global M&A volume. As has been the case with the entire financial sector, the global economic slowdown has sidelined many PEGs over the past year.
Although some of these investors seem to have retreated for the foreseeable future, others appear to be waiting for an opportune moment to get back into the M&A market. PEGs have continued to raise new capital, and some appear to be stockpiling their balance sheets in anticipation of a future buying boom.
Private equity firm Audax Group, for example, recently announced that it would buy debt-collecting business URS. And Kelly Capital LLC, a San Diego-based PEG, agreed to purchase automotive paint and collision repair company Earl Scheib Inc. for $8 million — roughly $2 per share.
Appealing qualities. These recent PEG acquisitions highlight the characteristics of companies that are successfully selling these days. In a recessionary economy, positive cash flows and competitive market shares are more advantageous than ever. And companies in relatively insulated and low-risk business sectors, such as accounting and debt collecting, also have an advantage.
Whatever your industry, several factors can boost your company’s appeal — in both rough and rosy M&A markets. They include:
Highly capable management. Many PEGs aren’t interested in immediately replacing their acquisition’s management team, unless, of course, the company is financially distressed or organizationally troubled. PEGs, therefore, look for companies with skilled and seasoned management made up of individuals looking to transition out of the business eventually.
Low debt. PEGs typically fund acquisitions with a combination of equity capital and large amounts of leveraged debt — intending for the acquisitions future cash flows to repay that debt. If your company has a relatively low debt burden that a PEG could add to its balance sheet, you have a big market advantage — particularly in a credit crunch.
Aggressive growth plans. Because PEGs plan to sell their acquisitions after a period of several years — or, once the company achieves hoped-for returns — these investors tend to prefer higher growth businesses. You’re in a good position if you have strong future earnings projections, a rapidly growing customer base and an increasing market share.
Meet the players. As is true in much of the business world, it’s not just who you are, but whom you know. The PEG world is no exception and is built heavily on personal relationships. In fact, many PEGs staff their advisory boards with former executives of their past acquisitions who, in turn, advise the PEGs on future purchases.
Access to private equity investors is one of many good reasons to work with an M&A advisor when selling your company. An experienced advisor will already know the private equity market and its major players, including board members.
Your advisor also will know which PEGs specialize in your industry or type of business and will have some idea of the company characteristics favored by particular PEGs. This will help you market your company to their criteria and increase the likelihood that you’ll receive a lucrative bid.
Explore your options. Corporate acquisitions have slowed significantly as credit has dried up, and these buyers are likely to stay out of the M&A market for a while. PEGs, however, may still be an appealing option if you’re ready to sell now. Many PEGs have retained their appetite for acquisitions and, more important, have actual money to invest. Private equity may not be the solution for every seller, but you should discuss this option with your advisors.
If you’re considering buying or selling a business, the precarious state of the economy shouldn’t be your only concern. You also need to think about the potential for major tax law changes that could affect business owners and a few that could affect M&A transactions. You should be prepared to work with your advisors to navigate the new tax landscape.
Change will come. Tax changes are far from definite, and new policies will likely take time to pass through Congress and go into effect. Still, many tax experts believe that the current administration will be able to enact into law an increase in long-term capital gains tax, from the current 15% rate to 20%.
Higher taxes for some individuals and many companies are also likely. The White House has proposed to increase the top two income tax rates to 36% and 39.6%, from 33% and 35%, respectively. This could affect many small businesses because, as a 2007 National Federation of Independent Business survey found, about 15% of small-business owners and half of those with at least 20 employees claimed household incomes of more than $200,000 and likely fall into the top brackets.
Also, estate tax law changes could affect many business owners. Currently, the estate tax is scheduled to disappear in 2010 but resume in 2011 with a top estate tax exemption of $1 million and top estate tax rate of 55%. Many believe that lawmakers won’t allow the estate tax to expire and instead will make permanent the 2009 estate tax law, which provides a $3.5 million estate tax exemption and a top estate tax rate of 45%.
Defer no more. A policy that enables U.S.-based companies to defer paying taxes on overseas subsidiary income is also expected to change, and could affect some business buyers. Currently, tax laws allow U.S. companies to defer taxes on this income until the subsidiary transfers the money to the parent company. Going forward, however, companies will likely have to pay these taxes immediately. If your company buys a business with overseas operations, you’ll need to report all overseas income, which could be a major tax burden and reduce corporate income significantly.
Many believe that lawmakers won’t allow the estate tax to expire and instead will make permanent the 2009 estate tax law.
A few positives. Although some tax policy changes may make certain transactions less advantageous and more complicated, others can benefit M&A participants. For example, the Stimulus act passed in February extends the maximum net operating loss (NOL) carryback period to five years for qualified small businesses with gross receipts of $15 million or less. Generally, an NOL may be carried back only two years. The extended carryback period applies to 2008 (not 2009) NOLs and could help fundamentally sound but temporarily troubled companies with what is essentially a tax refund — boosting their bottom line and enhancing their sale prospects.
The Stimulus act also includes a provision for businesses, in certain situations, to defer cancellation-of-debt income (CODI) generated from repurchasing business debt after Dec. 31, 2008, and before Jan. 1, 2011, until calendar year 2014. This could be an incentive for a business seller to buy back debt and reduce its debt load.
Knowledge is power. If you’re considering selling your business or making an acquisition in the near future, a potentially higher tax bill or more-complex deal process could give you the incentive to speed up your deal. Before you act, however, discuss your plans with an experienced tax advisor. Tax and M&A professionals can work with you to mitigate the tax consequences of the new laws on your sale or purchase.
Given the state of the financial markets and general economy, now may seem like an unlikely time to sell a company. But selling in the current market can actually be less challenging than you think — and may even provide benefits you haven’t considered.
Determining whether to sell is always a difficult and complex decision, involving many considerations specific to your plans and business. For example, how urgent is your exit plan and how much do you hope to realize from the sale? Although the current economic environment may factor into your decision, it shouldn’t be your primary consideration.
Bad news, good news. To sell your company at a fair price, you need only one buyer that really wants to acquire it. A global credit crunch means that some buyers have limited financing options right now and may not be looking for targets. That’s the bad news. The good news is that many of the buyers shut out of the current market are financial buyers — companies seeking opportunistic, short-term investments — such as private equity and hedge funds. The majority of those remaining are strategic buyers seeking synergies and other long-term advantages of an acquisition.
These buyers may be willing to pay more for a target that meets their specific needs. What’s more, companies that are profitable and not highly leveraged are regarded as attractive acquisition targets regardless of market conditions. Stable earnings and low risk are particularly prized in poor economies, and private companies immune to day-to-day stock fluctuations enjoy an additional advantage.
Owners of larger companies might want to explore whether selling their business in pieces — by division, subsidiary or asset — rather than as a whole is a favorable option. Partial acquisitions can be attractive to buyers who want a specific product line, hard asset such as a production facility or human resources such as a software development group.
Shaping up. As long as your company isn’t financially distressed and doesn’t have significant liabilities that may necessitate compromise, you should remain confident in its appraised value. Several strategies, however, can help improve your chances of selling well.
Reducing short-term debt, if at all possible, is near the top of that list. If you have outstanding loans or upcoming loan or bond financings, ensure that you’re current on payments. Few buyers will be interested in assuming additional debt from a prospective acquisition — particularly debt with onerous rates and terms.
A current business valuation that takes into account your company’s long-term performance is also essential. Buyers may try to get a reduced deal price by arguing that any recent performance declines due to a poor economy make your business a less viable acquisition. So you need to be prepared to show that historical earnings are solid and explain to buyers that they provide a better forecast for future performance.
Opportunities remain. If you put your company on the market only to encounter unappealing bids or even deafening silence, your effort isn’t in vain. Entertaining offers helps you understand what buyers are looking for. What’s more, displaying your strengths can put you on the radar of buyers that are financially constrained now but plan to make acquisitions once conditions improve.
With the assistance of experienced M&A advisors, you are very likely to find a fair price for your business. Good companies are always valuable — even in hard times.
If you’re thinking about selling your company but are frustrated with the current market, you may want to consider a leveraged recapitalization. These transactions can be risky, and in an uncertain economy you may not want to add debt to your balance sheet. However, for some companies looking to raise capital, a leveraged recap can be an excellent stopgap tool.
Debt for cash. In a leveraged recap transaction, a company accesses liquidity by assuming new debt — generally a significant amount for a specific purpose. The cash might be used, for example, to pay shareholders an extraordinary dividend, fund a major share repurchase program or finance a business acquisition.
Recaps usually take one of two forms:
Reasons for a recap. Companies undertake leveraged recaps for a variety of reasons — primary among them, of course, is to raise cash. Recaps can offer enough liquidity to make an outright sale unnecessary. They also can improve your company’s chances of selling for a fair price in the future by:
Beefing up defenses. By assuming additional debt and reducing cash reserves, a company becomes less attractive to hostile bidders and, therefore, buys time until more appealing buyers emerge.
Lending more control. A recap can provide members of management with a larger number of shares and, thus, reduce the ability of dissident shareholders to force a sale.
Improving financials. It may seem like a paradox, but high debt levels can incentivize a company to improve its financial profile by reducing expenses and divesting itself of underperforming or nonessential units. The result can be a stronger company and more appealing acquisition target.
Some may be vulnerable. Leveraged recaps can be risky. A University of North Carolina survey of leveraged recaps in the 1990s found that companies had an average 17% debt-to-total-capital ratio before the transaction and a 50% ratio afterward. Such high debt loads typically make companies more vulnerable to general economic distress and market volatility. But if your company’s fundamentals are strong and you’re looking for an alternative to selling, a recap may be the solution for you.
A confidentiality agreement typically is the first thing prospective buyers and sellers sign when they enter M&A deal talks. These legal documents may seem like a formality, but they provide the foundation for a transaction’s successful execution and shouldn’t be ignored.
A safe space. Confidentiality or nondisclosure agreements are designed to keep information that parties exchange during the due diligence and negotiations process private. Typically review processes involve documentation about research and development, product rollouts, hiring and expansion plans, and long term strategies.
NDA’s are legally binding agreements M&A participants use to enable candid and detailed discussions during deal negotiations. They’re particularly important for sellers who need to feel comfortable enough to disclose competitive information to a serious buyer, particularly when the buyer is a competitor.
Buyers and sellers frequently have different objectives and prerogatives when it comes to the NDA, so be prepared to compromise.
Even when the general economy and the M&A market are booming, merger transactions can be hard to close. And when the economic climate is as uncertain as it has been recently, deals can seem like nearly impossible-to-reach goals. Although the selling company’s financial health and the buyer’s ability to get financing remain paramount concerns, neither party can afford to overlook another major factor — their stakeholders.
Who are your stakeholders? It probably seems like common sense that you’ll need to inform your company’s stakeholders as soon as you sign a sale agreement. The goal is to provide a constant, accurate stream of communication designed to head off rumors and to bring potential opponents into your camp as much as possible. But who, exactly, are your stakeholders?
You have many stakeholders — probably more than you usually consider. But the following all have some stake in your company’s future and need to be included in your M&A communication plan:
What links these disparate stakeholder groups is their connection to your company and, to be blunt, their ability to hamstring or even destroy a deal if they make an organized effort to oppose it. Disgruntled customers, a resistant employee union, disapproving editorials in your local paper or a government agency concerned about the impact of your merger can pose serious risks that you’d be foolish to ignore or underestimate.
A balancing act. As soon as your company has signed a sale agreement, quickly provide details of the deal to all stakeholder groups, using whatever channels best fit each. For example, you might inform customers through account representatives assigned to them, the local community via your media relations department and your employees through HR or department managers.
Keep in mind that communicating an M&A is a balancing act. Each group of stakeholders has its own priorities, which often can conflict with those of other groups.
For example, a buyer may plan to move all of the acquisition’s operations to its own location and, instead of relocating the target’s current employees, hire new staff from its own community. That community is likely to embrace the decision, but the news will be unwelcome to the seller’s employees, as well as the local government that relies on the selling company’s property taxes.
When dealing with this type of situation, be sensitive to the nuances in your general communications to all stakeholders and determine when it’s best to tailor messages to individual audiences.
During the M&A process, you may discover the deal will negatively affect one particular stakeholder group — for example, production workers in a particular facility will be laid off or a corporate giving program that benefits local charities will be discontinued. Your company should communicate these decisions to those affected while also detailing the benefits to other stakeholders.
So if employee consolidation is expected to reduce prices, share that with your customers. Or if trimming costlier and less efficient suppliers will help save jobs, let employees know. The bottom line: Get as many stakeholders on your side as possible.
Focused strategies. Most merging companies must contend with some resistance — both internal and external. Typically, the side with the best, most focused sales pitch wins the war. In addition to general facts and timing, communicate financial details to demonstrate the value of any changes associated with the deal. And consider setting benchmarks and mapping their progress in a public place, such as on a specially created Web site, so employees and other stakeholders can follow them.
This strategy worked for HP during its 2001 merger with Compaq. Promerger forces (led by HP’s CEO) set up a Web site, which it updated daily, sometimes even hourly. The site featured letters from senior management, detailed financials supporting the deal and in-depth responses to questions such as “Why support this merger?” Antimerger forces (led by
HP’s largest shareholder) were less organized and ultimately lost the battle for hearts and minds.
Cooperation is key. In the end, an M&A deal’s success depends on the cooperation of your company’s many constituents. Keeping stakeholders in the loop and treating communication as a critical part of the deal process.
Selling or buying a company is time-consuming — even full-time — work. Owners and executives who expect to run their company as usual during the M&A process generally find that they can’t do both jobs well. By assembling a deal team made up of key employees and professional advisors, you relieve some of the pressure on yourself. Your company is also more likely to successfully complete a deal quickly.
Coaching the deal. Deal teams range in size from less than a handful of people to a dozen or more, depending on the size of the company and complexity of the proposed transaction. Teams are responsible for moving a deal through every stage of a merger — from initial inquiries and analysis to due diligence, negotiations and, in some cases, integration.
Although it’s usually led by a professional advisor or the company’s owner, CEO or CFO, an effective deal team should include representatives from all major areas of a company, including accounting, legal, IT, personnel, public relations, and, if the company has significant holdings, real estate. M&A, financial and legal professionals work with the team to draft a deal plan and timeline and help the members stay on course.
Following the game plan. Typically, a deal team starts by setting rules to protect confidentiality and establishing a line of command. The team’s leader should encourage open communication from all participants during every stage of the merger and give members clearly defined tasks that contribute both to the objectives of each stage and the ultimate goal. These might include:
Initial stage. A seller’s deal team needs to prepare the company for sale, prepare nondisclosure statements and a confidential business review, and put out feelers for potential buyers. A buyer’s deal team should size up potential sellers and select a
target.
Due diligence. At this stage, both buyer and seller teams are responsible for processing and organizing large amounts of information — including financial, legal and operational. Sellers should ensure that documents are available and easy to review and that procedures are in place to protect proprietary information. Buyers should strive to be as thorough as possible, given the usually limited timeframe.
Negotiations. Buyer and seller teams often work together to draft and edit the details of the purchase agreement. Financial advisors play a particularly important role if the parties encounter roadblocks on price and deal structure.
The team’s job isn’t necessarily over when the paperwork is signed. Companies often rely on their deal teams to handle employee and public communications and last-minute issues such as regulatory compliance. And buyer teams often conduct the integration process.
Best outcome. Mergers can be stressful for everyone, particularly company leaders. But if you distribute deal responsibilities among the members of a focused and well-organized team, your company can enjoy a much smoother process — and a better outcome.
