The boom ahead

Signs of life emerging

I’ve been saying it for a couple of months now, and lately a few other voices have joined the chorus: The time to sell/buy a small business is now or is coming very soon. Take advantage of the improving conditions by making sure your small business is in top form.

The following item appears this week in Bloomberg’s Business Week, involving an interview by Karen Klein with mergers and acquisitions specialist Bill Roman:

There are eager buyers for small and midsized companies whose owners have powered through the recession and expect to see demand rebound this year. That’s according to Bill Roman, the managing director of the Boston office of Harris Williams, which advises middle-market companies on mergers and acquisitions and focuses on sales in the $25 million-to-$1 billion range. While business sales fell dramatically in 2009, Roman says Harris Williams is seeing deals pick up in 2010. With few business assets in supply and high buyer demand, valuations for high-quality companies have held surprisingly steady, he tells Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.

From a Q&A:

Is there anything specific that a business owner can do to improve a company’s valuation?

A lot of what’s required is outside the entrepreneur’s control. The biggest driver of whether you’re going to be able to sell your business is your sales growth. You can try to improve that through marketing. And you can assess what your order book looks like and whether your quotations are up. An early indicator of a good valuation is your quote rate trending up, compared to prior sales periods.

Is there pent-up demand for new mergers and acquisitions?

Absolutely—both from strategic or corporate acquirers and from financial buyers. So many business owners are sitting on the sidelines because their business has softened. The corporate development people at the large corporations augment their organic growth with acquisitions, but they haven’t been able to find quality companies recently.

The above information gives you some of the why on selling your privately owned company as the economy starts to recover from the Great Recession. I offer the how in my book, How to Sell Your Privately Owned Company: A Basic Guide for Independent Business Owners – Baby Boomer’s Edition.

I’ve seen economies cycle through boom and bust periods, and chances are you have too. The time to act is in the beginning of the boom, not at the tail end as it runs out of gas. That’s why it’s important to start now.

Eric R. Voth is a serial entrepreneur, a private investor, consultant, and writer. He is author of How to Sell Your Privately Owned Company, a Basic Guide for Independent Business Owners, Baby Boomer’s Edition. Eric and his colleagues help a business Seller prepare and groom his or her company prior to offering it for sale or merger – then guide the owner through the actual process. He became involved in this field as a result of merging his own company in 1993.

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Why you need to develop a successor

Leadertalk blogger Becky Robinson of Mountain State University’s* School of Leadership and Professional Development writes about the importance of developing others as part of your succession plan.

Her experience in developing a core group (or even an individual) to carry on the work you began is a good example of how to prepare your company for sale even if you’re years away from selling.

She writes: “If you are passionate about the work you do, you need to build into others and help them develop their abilities. It’s the only way to ensure that what you’ve started continues.”

The example she gives for her posting is a home-schooling cooperative, but that mind set – making sure someone is there to carry on – applies to anything you might be passionate about, especially if it’s a business you have built and nurtured over many years.

My book, How to Sell Your Privately Owned Company, makes a few salient points about having a succession plan:

Ultimately you should have a well-defined succession plan in place that you share with family members, partners and possibly key employees.

For many business owners the best plan is one in which they sell their business and agree to stay on and run it for a set number of years. This allows them to take a significant amount of cash off the table, meet the needs of their estate and protect their family and their personal retirement. By selling the business early and agreeing to stay on and work for at least another five years, they put their exit strategy in place and while they are alive, well and healthy they can make sound business decisions.

People who plan are generally more successful than those who don’t. Waiting till the last minute to sell your business is not a plan; it is an act of desperation.

Whether you have a favorite potential successor, or someone you want to mind the shop after you sell, you need to have a succession plan in place and you need to groom your successor.

Eric R. Voth is a serial entrepreneur, a private investor, consultant, and writer. He is author of How to Sell Your Privately Owned Company, a Basic Guide for Independent Business Owners, Baby Boomer’s Edition. Eric and his colleagues help a business Seller prepare and groom his or her company prior to offering it for sale or merger – then guide the owner through the actual process. He became involved in this field as a result of merging his own company in 1993.

* Mountain State University, a not-for-profit private university in West Virginia, was formerly known as Beckley College. MSU has rapidly grown in the last two decades from a two-year college to a university that offers bachelor’s, master’s and doctoral degrees.

You’re not alone

Barbara Taylor’s New York Times blog, Transaction, caught my eye the other day. Her career path has some similarities to mine: After selling a successful business, she is now involved in the business of buying and selling businesses.

Transaction is another forum for business owners to discuss issues concerning their businesses, including the prospects of buying or selling a privately owned business. And if initial reactions are any indicator, there are quite a few interested business owners.

It’s always interesting to see the perspective of fellow private business owners. One message in Taylor’s post especially rang true (and it should sound familiar to readers of my blog and my book):

“Even if you’re not planning to sell your business any time soon, I hope to get you thinking about how you can run your business with an eye toward what you can do to achieve maximum value if and when you do decide to sell,” Taylor says.

That, of course, is the purpose of my book, How to Sell Your Privately Owned Company, but it doesn’t hurt to have that message reaffirmed by a third party, especially one with the readership of the New York Times.

In the comments that followed, econobiker asked the following:

“Yeah, and how do small business owners work the system for profit beyond the operation/running of the business?

“Such as that ‘company owned car’ or somehow having vacations at the same time/place as an industry event or employing relatives on the payroll as consultants or personally owning real estate which the company then rents from the owner, etc, etc, etc…

“We want to know the unpublished side deals available!!!”

I offered this answer, which also was posted:

Most ownership perks are legitimate expenses used as tax minimization strategies.

Such matters are rather irrelevant when a business is offered for sale. A business owner’s benefits (salary, commissions, perks, incentives, personal loans and discretionary expenses) are identified – and published in footnotes – when “recasting” a Seller’s financial statements.

Proper recasting places a monetary value on such items. This amount is then added back into the bottom line earnings, thereby enhancing the company’s profitability and its value.

Here’s why it’s important: On a Seller’s financial statements – which are carefully scrutinized by Buyers – it is in the Seller’s best interest to show that the business is generating the highest possible level of profitability. Why? Because – as Barbara mentions – many businesses are priced using a multiple of EBITDA – Earnings (Profits) Before Interest, Taxes, Depreciation and Amortization.

Thus, higher Earnings will dictate a higher asking price for a company.

Most business Buyers understand the recasting process and how it’s used. It allows them to assess the business, its cash flow, its future earning capacity, and whether they’re able to make a reasonable rate of return if they buy the company.

Therefore, in business transaction, “unpublished side deals,” and “working the system for profit beyond the operation/running of the business” become moot issues.

 

Eric R. Voth is a serial entrepreneur, a private investor, consultant, and writer. He is author of How to Sell Your Privately Owned Company, a Basic Guide for Independent Business Owners, Baby Boomer’s Edition. Eric and his colleagues help a business Seller prepare and groom his or her company prior to offering it for sale or merger – then guide the owner through the actual process. He became involved in this field as a result of merging his own company in 1993.

Hot off the press

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When selling your company, you can go it alone. Or, you can arm yourself with the knowledge you need to get the best deal. You decide.