Management Buyouts, or MBOS, can sometimes have a negative connotation. Maybe that’s because it sounds like the management team is getting “taken out”. On the contrary, it is the exact opposite. A Management Buyout is a fancy acronym for when the current managers buy controlling interest of a company from its owners. That’s a good thing for management!
Some entrepreneurs claim to not be ready to plan a succession. Some know they need to, but are scared to even think about it because “they don’t know, what they don’t know”. Some are simply in denial, “why would I leave?” they ask, “I love my business”.
Selling a business is one of the most exhausting endeavors an entrepreneur will undertake. Unfortunately, many simply do not succeed. In fact, only one out of ten entrepreneurs will actually complete the business sale process and transfer their business to another. Selling a business involves many different parties, all of whom have a special role and a unique skillset. Most importantly, they must all work together. Those entrepreneurs who succeed recognize ‘it takes a village to sell a business’.
Often, business owners ask me one of those “quick questions” – what can I do to maximize the sale price of my business? The answer? Not as simple as you may think. But there are 4 factors that can increase the value of your sale price.
Selling a business for the entrepreneur often is a tumultuous, emotionally draining experience. Unless the entrepreneur has sold a business previously, the journey feels awkward and is marked with multiple high and low points. To guide the entrepreneur, we’ve created the 10 Steps to Selling a Business Infographic.
After enduring the economic downturn, this entrepreneur executes his exit plan with the assistance of an experienced exit planner.
If you have ever endured the process of selling a business with the assistance of professional advisors who specialize in mergers and acquisitions, you will agree with me that this is not something to try at home!
Success doesn’t come without its obstacles. Just ask Richard Hagerty, a 40 year business veteran and successful entrepreneur.
This three part series tells how one entrepreneur took a chance on an emerging market, weathered an economic storm, and exited with a bright future.
Right Place at the Right Time
It almost seems like cliché advice a commencement speaker would offer to a group of graduates.
Keep your ear to the ground, work hard and always be on the lookout for the next big thing. And when that next big thing does indeed come, don’t be afraid to take a chance on it.
During the initial negotiations of a business sale, one of the primary issues is whether to structure the sale as an asset sale or a stock sale. Typically the seller and the buyer have opposing preferences in this regard. The seller generally prefers a stock sale; while the buyer generally prefers an asset sale.
EBIT is an acronym for Earnings Before Interest and Taxes. This is a term Bankers often use as a measure of a business’s earnings from operations. The EBIT reveals operating profitability without non-recurring or unusual income or expenses.
This is a story with an unhappy ending. I heard this story from employees who worked for a company many years ago. I knew the company well and as far as I know, this is the truth.
As I meet with entrepreneurs, I’m often asked the same question: “When is the best time for me to sell my business?” The answer to this question is not the same for every business owner, for many reasons.
EBITDA is an acronym for Earnings Before Interest Taxes Depreciation and Amortization. EBITDA is often used as a measure of a business’s cash flow. Also it is used frequently in many business valuation formulas, depending on the business’s specific industry.
Last week was one of those weeks I will never forget. Over the course of a few days, we closed a business acquisition and celebrated with another client his retirement after forty plus years of entrepreneurship. These back-to-back events served to prove the truth that in life one will get what one gives.
The best solution to a problem lies in uncovering what the root cause of the problem really is. So often, this is the case when an entrepreneur is struggling with profitability in their business. Over the past few posts, we have discussed the concepts of how a minimum order policy and Pareto’s Principle applied to the customer/client base can be very powerful to help an entrepreneur improve the value of their business.
Proprietary information such as customer lists and recipes are intellectual property. However they are not formally protected in the same way as are trademarks, copyrights or patents. These and other types of confidential information can only be protected if they are treated as trade secrets.
The many years of hard work and long days at the office may be about to pay off—you have just received an offer from a potential buyer to acquire your business. Just as you developed and followed a detailed business plan to build your business, now you need to develop a well-thought out plan covering the sale of your business, paying proper attention to the due diligence process.
If I have said under my breath once, I have done so at least one hundred times… “The devil is in the details!” As we work with business owners and deal makers on the hunt for profitable businesses to acquire, this expression has become our theme song!
One of the most crucial, yet subjective, aspects of any business valuation is determining the specific company risk premium of the business being appraised. The specific company risk premium varies with each company and is intended to be an adjustment to reflect a variety of circumstances inherent in the company and its industry.
Anyone who owns a family business is intimately familiar with the blood, sweat, and tears associated with building and then keeping the business viable. Nevertheless, it is not unusual for the business entrepreneur to postpone consideration of various issues involved in transferring the business to the next generation, including determining the value of the business.
Your worst nightmare comes true! You get an email on Friday afternoon from your largest customer indicating that they are changing suppliers for “strategic reasons.” They represent 20% of your sales revenue and 35% of your profits.
It is a unique pleasure to find two equal partners or shareholders acting in harmony over selling a business. Unfortunately, when I say “unique”, I mean rarely ever. Please understand, it is not as if this never happens. It is just so unusual, that when faced with the situation, I find myself warning both parties before they proceed to sell their business.
When considering your business valuation and business risks in the hopes of selling that business, there are many factors to consider. One important factor to understand is the application of valuation discounts. The valuation of a controlling interest versus a minority interest within a privately held business can have different values, depending on the circumstance.
If you have the opportunity to buy or sell a business, negotiating the terms of a letter of intent (an “LOI”) is one of the first and most critical steps in the process of completing the transaction. A well-written letter of intent provides a valuable foundation for a potential transaction as it captures the parties’ intentions with regard to the structure, timing and material terms of the transaction. An LOI often imposes significant obligations on each of the parties, and consequently is typically the product of fairly intense negotiations between the parties.
For every entrepreneur, a smooth transition of business ownership will be of importance at some future point. The Buy Sell Agreement deals with a specific exit strategy case. An agreement by and between business owners, it establishes a mechanism for the purchase of ownership interests following the departure of an owner due to a triggering event (i.e., death, divorce, disability, retirement, etc.).
The various types of valuation reports produced by a business appraiser can be confusing to an entrepreneur, especially when the appraiser belongs to more than one valuation association. Under most appraisal standards, a business appraiser can produce two types of reports: a detailed appraisal report or a calculation report.
When you sell a business, typically you will find language in the Stock or Asset Purchase Agreement that defines exactly what the Seller and the Buyer agree to do or guarantee as part of the transaction. In other words, each may agree to make the other party not responsible. The term used to identify this particular form of guarantee is indemnification.
The “indemnification basket” is one of the most important deal terms found in the Letter of Intent and ultimately in the Purchase Agreement and is often misunderstood by both the buyer and seller of a business. Buyers want the basket to be as low as possible and Sellers want it to be as high as possible. Baskets may be one of two types: a deductible basket or a tipping basket.
Throughout the lifecycle of a business, it is important for a business owner to remain focused on increasing the profitability, competitive advantage and market reach of the business. An entrepreneur typically accomplishes these objectives by (i) reinvesting the profits of the business to increase its workforce, customer base and cash flow and (ii) using business profits (along with other financing) to acquire competing businesses. Such business acquisitions typically serve two purposes by eliminating competitors and increasing the growth rate, product and service offerings, and market share of a business.
A typical entrepreneur invests a tremendous amount of time, effort and money in building a business. That is why it is so important for entrepreneurs to make sure employees and third parties who work with the business are prohibited from improperly using or disclosing any confidential or proprietary information of the business(e.g. customer lists, trade secrets and financial statements). Similarly, and in connection with the opportunity to sell a business, it is critical for the owner of the business not to provide any confidential information to a prospective purchaser until that party has signed a well-written non disclosure agreement.
Understanding a company’s operating results is an important factor for a business owner to determine the value of a business. However, the operating results must be placed in the proper context by comparing them to results of the industry as a whole. By doing so, a business owner is able to understand how they are doing financially relative to their industry peers. This exercise is known as benchmarking.
Recently, small business owners and people who start a business were identified in both the Rasmussen Reports and the Harris Poll with the highest favorability ratings. These two reports confirm what I have observed for decades. Entrepreneurs are good people who work very hard, create opportunities and help others succeed.
There are ways to improve the likelihood you will achieve a successful sale of your company if you take the time to develop ground rules with your business partners. The sooner you do so in the process of selling a company, the better.
At some point in time, every business owner will leave their business (voluntarily or involuntarily). Through proper planning, an owner should expect to achieve their desired goals. Statistics show that the value of an owner’s business accounts for over 90% of their personal wealth. However, more than 75% of all business owners do not have a formal transition plan in place.
Just a few days before everyone rings in the New Year, I have a ritual that I undertake and enjoy immensely. It doesn’t involve highly caloric food, expensive Champagne or making a resolution. I have shared my New Year’s ritual with successful entrepreneurs and have always received a positive response. It’s really simple. It requires you to ask yourself three questions. What happens next, is up to you.
I believe that paying attention to those things around you which are becoming irrelevant may reveal something which will save your company from failure. In fact, if you want to increase the value of your business, pay close attention to what is becoming irrelevant in the world around you! It may be the best thing you could do for your company.