Challenge: There was a significant change in the profit and loss (P&L) statement from the seller after TVG had already marketed an EBITDA number and found a Buyer based on the original inaccurate data.
Since, the seller was unaware of his own financial numbers and not familiar with how to read financial statements, he gave the documents to TVG stating that they were complete and final statements from their CPA. At that point, their tax returns were not yet filed for that year, so TVG used the P&L for the current year in the EBITDA calculations. The full EBITDA number was calculated using two years of prior tax returns and one year of the current P&L. The current P&L was weighted at 50% towards the marketed EBITDA number to most closely mimic trends in their business. However, the CPA was a year behind on entering expenses due to the seller/owner’s delay of delivering credit card statements. This produced a grossly overstated profit statement.
Approach: When the bookkeeping was complete, the final and correct P&L was delivered. TVG was able to explain to the buyer the reason for the changing numbers. It was agreed that the sale price would be adjusted accordingly. The same multiple that was applied on the incorrect EBITDA was applied to the new EBITDA, and the buyer was satisfied with the adjustments. With a proper explanation of the error, he proceeded in buying the business. TVG used a weighted average of three years of EBITDA so the change in the current year EBITDA was only weighted at 50%. Therefore, the impact on the new sale price was only 50% of the corrected EBITDA numbers. Whereas, had TVG used the current year P&L EBITDA 100%, the effect on the sale price would have been much more significant.
Result: Buyer was happy with the approach to the adjusted sale price and TVG was able to close the deal.
While each business acquisition transaction varies in its complexity and size, knowledge of the process will help keep you on the path to a successful close.
Owner’s decision to sell
Intermediaries understand that there are two elements necessary for a successful business sale:
- The business offering must make economic sense to both a buyer and a seller.
- Often, it’s the occurrence of a cataclysmic event like fatigue, declining health, divorce or the desire to retire, that pushes the owner’s decision to sell.
Determining Your Buying Parameters
Before a search for a viable business can begin, buyers should have a good idea of their needs and buying requirements.
- Geographic preference
- Financial ramifications
- Financing is an issue in most small business transfers
- Type of industry, annual sales volume, number of employees, and longevity of business
Identify Potential Businesses
There is always an overabundance of buyers for good business offerings, the key is to determine the right fit. Buyers should be ready to sign a confidentiality agreement and provide verification of their financial ability to complete a transaction.
Determine the Value of the Business
The ultimate value of a business will be the final price negotiated between buyer and the seller. A seller may a request a business valuation from a CPA or a qualified valuation company.
Arranged Buyer and Seller Meetings
The meetings with a seller are of paramount importance to the deal. The decision of both parties will depend upon financial information provided to each, the quick response to questions answered and how each party presents himself or his business.
Offer to Purchase / Letter of Intent
After meeting with the owner and completing the analysis on the financial statements, buyers will:
- pass on a business
- ask for more information
- prepare a formal contract
The two most common legal vehicles are a Letter of Intent or an Offer to Purchase and either document is accompanied by an escrow check, as a good faith gesture.
Negotiations – Structuring the Deal
The seller has three primary decisions once a legal offer has been submitted:
(b) a decline
The purchase price, payment terms, length of training, consulting agreements, and allocation of purchase price are just a few items that can be leveraged to make a deal more favorable.
Due diligence is a time to learn more about the business to determine compatibility. The buyer performs due diligence to ensure that the books, records and operation of the business have been portrayed accurately. Due diligence can last between 7 to 45 days with the average length being around 21 days.
This is the best part of the whole process, the time you are handed the keys to the business. Prior to closing, the offer to purchase or definitive agreement is submitted to an escrow company or closing attorney so that legal and governmental due diligence can be performed. The closing agent’s responsibilities vary from agent to agent, but at a minimum should include:
- lien and title search
- real estate and personal tax prorations
- preparation of closing documents
- disbursement of funds to the seller
To learn more about buying a business download this book by Alex Vantarakis, “Entrance– A Business Owner’s Guide To Buying A Company”
TVG was engaged to represent a well-qualified buyer who was ready to leave his job in corporate America.
This buyer was well positioned financially and poised to be an ideal business owner, judging from his background.
We found an ideal business with the right infrastructure, cash flow, location and in a growing industry. We moved quickly to submit an SBA financed offer, only to be informed that the seller accepted a full price cash offer from a competitor.
Yes, we were discouraged, but we worked diligently to find more options that satisfied the necessary buyer requirements. Over the next few months, we were outbid and in other cases, the businesses didn’t hold up to further scrutiny. At this point, some buyers would become frustrated, but this buyer understood the difficulty of a business acquisition and had confidence that TVG would find the right opportunity.
A buyer’s guide for a successful business acquisition:
- Have your finances in order
- Be Patient but be quick
- Don’t get frustrated with the process
- Understand you may lose your perfect deal for any number of reasons
- There are people with more money than you
- Be open regarding industries
Almost a year from the start of our campaign, we identified 2 very different businesses which the buyer felt comfortable closing on. We determined the business that had the most growth potential and made an offer that was accepted by the seller. We were able to close the deal in December of 2017.
Did you know less than 40% of small businesses listed for sale, actually sell?
I know, scary! While the reasons vary, the main reason is that business owners don’t have an action plan in place to sell their business.
When should a business owner start their exit plan?
The Vant Group recommends that the business owner start the exit planning process as soon as the business is established or acquired. Unfortunately, business owners don’t think about exit planning until they experience a health scare or fatigue and then there isn’t enough time to incorporate systems and processes to maximize the business’s value. Many business owners invest time and resources into their business for years and are unable to monetize their investment, which is most often 80-90% of their net worth.
What are the best tips for a successful exit plan?
1) Set goals
It’s very important for a business owner to develop an exit plan. The plan should be very detailed and address questions like:
(a) What age do I want to retire?
(b) How much do I need for retirement?
(c) Do I want to sell the business to my family or an unrelated third-party?
2) Obtain a business valuation
After the plan development, the next step is to assess the value of your company in today’s dollars. Assuming you have been in business for 3 years or longer, it is necessary to obtain a business valuation from a qualified valuation person (business brokers and investments bankers are both good options).
3) Develop an action plan
At this step, identifying the obstacles or issues that decrease the value of your business and create an action plan to correct them.
The biggest issue TVG sees in small businesses is when business owners don’t work “on” their business, instead, they work “in” their business. It’s important to add the value of developed human capital to your business, giving employees the latitude of making decisions.
Business owners tend to depend on a few customers. It’s easier to maintain and penetrate a few relationships than to manage a lot of different relationships. Unfortunately, your business value decreases when one customer represents more than 10% of the revenue.
Business owners must keep clean books and accurate records.
4) Assemble a deal team
It’s important to develop a high-caliber team with the actual members of the team, dependent on the business owner’s situation. The members of the team should be an attorney that understands business transfers, a CPA and a merger and acquisition (M&A) intermediary – also known as a business broker or investment banker. Having a team around you will greatly increase your success and allow you to focus on running the business.
In the Forbes article, Study Shows Why Many Business Owners Can’t Sell When They Want To, you’ll learn why selling a business is such a complex endeavor and some key ways to create a plan to increase the value of your business.
Need an action plan? Arm your business with The Vant Group, a team of senior investment banking professionals with a record success rate of completed transactions across a range of industries. Specializing in providing merger & acquisition services for both sell-side and buy-side clients, TVG supports the client’s objective with expertise and professionalism in every engagement.
Deciding the market value of a business is the most difficult part of the selling process.
Business owners often have misconceptions, believing the business is worth more than the market value. A broker or a business valuation service is the best bet in determining a value that is in line with what the market is willing to pay for the business.
The largest component in determining business value is deciphering how much money the business makes. The financial statements are analyzed to create a base value and then subjective factors adjust the sale price either up or down.
Many buyers want to know how much of the business price is allocated to what they can feel and touch, or hard assets. Normally, the higher the value of the asset, the higher the sale price.
Often, a small business is valued by cash flow, hard assets and inventory. When A/R and/or AP are included in a business sale, the price is adjusted either up or down based on the A/R; A/P net values.
The terms of payment affect the business value. A business purchased using a high leverage factor is generally worth more, and sells quicker than one that requires all cash. Business transfers are either the purchase of a company’s assets or the sale of its stock. In the small business arena, a stock sale is usually most beneficial for a seller, while an asset sale is most beneficial for a buyer.
The subjective valuation factors of a business are years in business, employees, the reason for the sale, customer and supplier base and business desirability. Other factors that increase or decrease a company’s market value; market strength, industry growth, appearance, location and owner involvement.