tag:blogger.com,1999:blog-12327319555544680252024-03-12T19:43:23.248-04:00Mt. Vista BlogAlan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.comBlogger22125tag:blogger.com,1999:blog-1232731955554468025.post-45198546146443856852020-12-11T08:19:00.003-05:002020-12-11T08:19:54.080-05:00Insurance Agency Mass Consolidation Continues<p> </p><p><span style="color: #434343; font-family: Arial; font-size: 11pt; text-align: center; white-space: pre-wrap;"><br /></span></p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqwItSgRJ6xSF40c5ytIBceXcwTCOpi79SFcic4F7lyMaLyFmgMIc_swegJvCOOjjKSCQURbvUbxBK_JnA33HahGS2AO0ZPNWLkmubynQ0aNlzuhumtOyNLDKyVUoMRnyg3BDE0CQc6bk/s1920/adeolu-eletu-unRkg2jH1j0-unsplash.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1272" data-original-width="1920" height="378" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqwItSgRJ6xSF40c5ytIBceXcwTCOpi79SFcic4F7lyMaLyFmgMIc_swegJvCOOjjKSCQURbvUbxBK_JnA33HahGS2AO0ZPNWLkmubynQ0aNlzuhumtOyNLDKyVUoMRnyg3BDE0CQc6bk/w571-h378/adeolu-eletu-unRkg2jH1j0-unsplash.jpg" width="571" /></a></div><br /><span style="color: #434343; font-family: Arial; font-size: 11pt; text-align: center; white-space: pre-wrap;"><br /></span><p></p><p style="text-align: left;"><span style="color: #434343; font-family: Arial; font-size: 11pt; text-align: center; white-space: pre-wrap;">Is the time right to sell your insurance agency, or expand it through acquisition?</span></p><span id="docs-internal-guid-b9a7ba7f-7fff-744c-4259-6538e1d7735a"><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">COVID-19 caused people to re-evaluate their risk, and that’s had huge ramifications for independent insurance brokers. Market conditions have kept demand high and commission fed premiums growing.</span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">This perfect economic storm has triggered unprecedented levels of industry consolidation and has left some scrambling for safe harbor by joining larger groups. </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">Even before the pandemic hysteria, both property and casualty, and employee benefits, insurance brokerage agencies were prime acquisition targets for a multitude of different buyers. Why? We attribute this to 4 major factors contributing to the interest:</span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">A steadily growing industry</span></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">Regular premium increases mean more revenue, thus increasing profit through commissions. </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Predictable recurring revenue</span></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">The holy grail for institutional investors. Revenue from renewed policies happens routinely without the customer acquisition costs associated with a new client. </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Fear</span></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">With so much uncertainly nationally and globally, investors are looking for the perceived “safer” investment in businesses that people need, not want. Plus, consumer confidence is historically low, so households are cutting out luxury items and tightening the budget. They want to protect what they have, which only feeds the industry. </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Boomers aging out</span></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">Born between 1946 and 1964, they are in the retirement window of 56-74 years old. Starting an insurance agency was a popular career path back for this generation, so some buyers are focusing on this niche alone. </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Added pressure for small brokerages</span><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"> </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">We are seeing higher than normal M&A activity partly because of the lucrative offers brokers are getting and also fueled by the realization that it is going to increasingly become more difficult to compete being a small brokerage in terms of competing for talent and other costs of doing business. </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">Selling the firm isn’t the only option either. Some are pursuing a “scale through acquisition” strategy themselves as a way to gain economies of scale. </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">2019-2020 has shown some interesting industry trends we are keeping our eye on. It should provide some insight into what strategic moves to make in the coming new year. </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Transaction volume at an all-time high</span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">According to a leading firm in the space, the total number of deals in the insurance brokerage hit an all-time high in 2019 with 649 total transactions, up from 643 in 2018. We think this trend will continue as the customer mix of brokers experiences the most significant change since the 2008 great recession. With so many businesses faltering, and up to 40 million Americans losing their jobs, it will inevitably create winners and losers in the commercial, personal, and home insurance space. </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">Private Equity Interest</span></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">Private equity groups have a renewed love affair with agencies. In 2019, PE groups represented nearly 66% of all buyers last year. They are still expected to remain active through 2020 and are paying better than average multiples for quality businesses. </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">What’s Next</span></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">We recommend clients have both a plan A and a plan B. There is still uncertainty in the market, and if anxiety gets too high, it can paralyze consumers which brings business to a stop. While the insurance industry is insulated from such downturns, it’s not immune either. We expect tine industry consolidation to continue. Prudent agency owners should have an idea of what their business is worth BEFORE they engage in conversation with an interested buyer. </span></p><br /><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">Talk to an advisory firm that has experience putting together merger and acquisition deals. Ask for an opinion of value that will help you understand if you still want to work in the business, or take the proceeds and enjoy retirement. </span></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"> </span></p><div><span style="color: #0e101a; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"><br /></span></div></span>Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-50934877084045637802020-12-11T07:28:00.001-05:002020-12-11T07:31:34.295-05:00Your Business Sale May Feel Like a Roller Coaster Ride<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNNakZWwsz1NSjtaghyphenhypheny3Y5YUkesZXYRWUNSWtHC7l073tU3gV_DYIhm5OoEPXQreD8LKreFfFd7oz9baygQaz03OjF5olRneYd5MHE5JW8itOWgjJNGJsUrCbtq5z3bGVQWBcfkZhPgs/s2048/justin-6LO03psPJnE-unsplash.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1365" data-original-width="2048" height="343" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNNakZWwsz1NSjtaghyphenhypheny3Y5YUkesZXYRWUNSWtHC7l073tU3gV_DYIhm5OoEPXQreD8LKreFfFd7oz9baygQaz03OjF5olRneYd5MHE5JW8itOWgjJNGJsUrCbtq5z3bGVQWBcfkZhPgs/w623-h343/justin-6LO03psPJnE-unsplash.jpg" width="623" /></a></div><br /><span style="color: #222222; font-family: Arial; font-size: 11pt; white-space: pre-wrap;">It’s time. You’ve worked for years to build your business, to make it into something you’re proud of. And now, you have an offer to buy your business. You’re prepared for the required financial disclosure, but the emotional swings during the process may surprise you.</span><p></p><span id="docs-internal-guid-ae28c0d1-7fff-e632-63bb-cfaf3454b698"><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> <span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">Your first surge of emotion is – justifiably - </span><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">exhilaration</span><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">. All the hard work has paid off. You’re able to take some time off (finally) to enjoy your family and unwind. An interested and qualified buyer is validation that your business is valuable, that your vision has been achieved. Caution: This joyful phase won’t last forever.</span></p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">It won’t be long before the “what if” phase sets in. What if your employees are angry about the sale? What if your longtime customers are unhappy? What if the new owner doesn’t run the business the way you did? What if retirement isn’t all it’s cracked up to be? What have I done? These questions are normal as you begin to assimilate what will be your new reality.</span></p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">You may also experience </span><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">anger and frustration</span><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"> during the negotiation process. No matter how much you both want the deal, the sale process reveals that you and the buyer will have some competing objectives. Every time the other party discounts the valuation or tries to grind out another concession, the frustration and maybe even some anger may grow. How dare they doubt your word? Who do they think they are? Who do they think I am?</span></p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><a href="https://www.linkedin.com/in/alan-austin-47783/" style="text-decoration-line: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;">Alan Austin</span></a><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">, President of </span><a href="https://www.mtvistacapital.com/" style="text-decoration-line: none;"><span style="background-color: transparent; color: #1155cc; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;">Mt. Vista Capital</span></a><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">, says this is where an experienced broker can help you manage your expectations and your emotions. “There’s a reason that 90 percent of business listings never close. It’s not uncommon for an owner to merge the value of the business with his emotional investment. It’s our job as advisors to help both parties stay focused on the issues and the negotiation - not what they’re feeling about the process.”</span></p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">No matter how rational you think you are, emotions can frequently take over in the heat of the moment. Losing sleep, spending all night ruminating over your decision, overthinking the details, and grinding your teeth will eventually affect your health. It’s natural, but not helpful. You might consider opening up to a friend you trust, someone with common sense who can provide support without judgment. But at the end of the day, a competent broker can talk you through all of the issues, explain both sides of an issue and help you find common ground. t’s not surprising that many business owners feel </span><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">grief</span><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"> after selling their business. Even if you were ready to move on, you’re bound to feel a sense of loss It is not unlike the emotions experienced by many executives when they retire. You’ve given up your daily routine, your sense of identity, your passion project. It’s like ending a marriage or losing a spouse, and you shouldn’t be surprised if you find yourself feeling a little bit of a loss. </span></p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">Austin describes the feelings this way: “Most owners have a strong personal connection to their company. …If they built the business from scratch, they might liken that process to parenting – nurturing the company through sleepless nights, protecting it from threats, helping it recover from illness, constantly leading and nudging it in the right direction, and preparing it to survive without them. Regardless of their motivation in selling, they will likely revisit that motivation and second-guess their decision over and over, up until, and probably for a time following, the closing.”</span></p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">Don’t forget that you might not be the only one riding this emotional rollercoaster. Your employees are facing an uncertain future with a new owner they just met. Your family is going through it all with you, including the sleepless nights and mood swings. Even if they’re happy that you’ll have more time for them, they’re still not sure how that will play out. They may also have their identity and self-worth tied up in your business, making this a loss for them as well. You’re changing their lives at the same time you’re changing your own. You’ve got to give them time to process their feelings as well.</span></p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">Finally, you accept the Letter of Intent. And then, you’ll have time to think through what you really feel. You can be </span><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; font-weight: 700; vertical-align: baseline; white-space: pre-wrap;">proud</span><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"> of what you’ve accomplished. You can start to think about what might come next: another passion project, investing your time for a good cause, or that trip to Europe you’ve been talking about for years. </span></p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: #222222; font-family: Arial; font-size: 11pt; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;">Take a deep breath. Exhale. You’ve earned it.</span></p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: #222222; font-family: Arial; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: x-small;">Resources:</span></span></p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"><span style="background-color: transparent; color: #222222; font-family: Arial; font-variant-east-asian: normal; font-variant-numeric: normal; vertical-align: baseline; white-space: pre-wrap;"><span style="font-size: x-small;">https://www.forbes.com/sites/richardparker/2016/10/24/the-business-for-sale-marketplace-why-90-of-listings-never-sell/?sh=720860016d85 </span></span></p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><p dir="ltr" style="background-color: white; line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;"> </p><div><br /></div></span>Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-7482618967856748182020-08-17T08:12:00.001-04:002020-08-17T08:13:20.322-04:00Is it Still a Good Time to Sell? Depends on Industry<p style="text-align: center;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVXd9F-ac1Gr7emrq4z98dnmDNgg4k2d0aEGChgjCsHJuBb3913NntoEPRGl3sP2uAuR9wvdydRj22j-w2xSmsbaJ3xrFikXnmk067Lk4S6YdpsltjTX4rneJcuVWZoc4Ik9TS-plbehU/s2048/kayle-kaupanger-WQnb13okQMM-unsplash.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1152" data-original-width="2048" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVXd9F-ac1Gr7emrq4z98dnmDNgg4k2d0aEGChgjCsHJuBb3913NntoEPRGl3sP2uAuR9wvdydRj22j-w2xSmsbaJ3xrFikXnmk067Lk4S6YdpsltjTX4rneJcuVWZoc4Ik9TS-plbehU/s640/kayle-kaupanger-WQnb13okQMM-unsplash.jpg" width="640" /></a></div> <span style="color: #999999; font-family: Arial; font-size: 14pt; white-space: pre-wrap;">The first half of 2020 has started with unforeseen events that may have changed the course of your company and your ability to sell it. </span><p></p><p style="text-align: left;"><span style="color: #999999; font-family: Arial; font-size: 14pt; white-space: pre-wrap;"><br /></span></p><p style="text-align: left;"><span style="font-family: Arial;"><span style="font-size: 18.6667px; white-space: pre-wrap;">Prudent business owners try to plan for nearly every scenario so they can better manage cash flow, staffing levels, production levels, banking relationships, etc. Consumer preferences change and so do market conditions, but I can assure you, no one foresaw a mandated government shutdown. It was a doomsday scenario for some businesses and yet a non-event for others.
The good news is that recent events likely haven’t stripped your company from its value, even if you were one of those who were deeply impacted. That’s because (at least for now) business brokers can explain away the second quarter as an “Act of God.” Merger and acquisition expert Alan Austin explains: “When buyers evaluate which businesses to purchase, they always look at historical performance as an indicator of the health of the business and expected future earnings. Sometimes, businesses have catastrophic events that can be damaging in the short term but can quickly bounce back from them. After all, this is why business interruption insurance exists. The disaster could be because of a fire, hurricane, or other Acts of God; such as an unforeseen pandemic. As M&A advisors, we’re making the argument that this “public health crisis” is one of those temporary setbacks that have little effect on long term earnings ability of most businesses.”
But what if a temporary interruption becomes not too temporary? Like the 3rd, 4th quarter, and into 2021? “That’s when things get more complicated,” says Austin. “The longer things go, the more difficult it is to make the argument that it’s temporary. Doubt creeps in buyer’s minds and they start to think that this is perhaps the new normal. Therefore, past business performance is no longer as relevant as it once was. Across all industries, I believe you’ll clearly see some winners and some losers in the coming months.”
So, is it a good time to sell your business, while so much uncertainty exists? “It depends,” Austin says. At the time of this writing, restaurants are not yet allowed to be at full capacity, cruise lines are not operating, airlines are on a reduced schedule due to demand and are operating at reduced capacity, and hotels are scrambling due to canceled business travel, summer vacations, and events. “Anything travel related is tough. That’s not to say that you can’t sell your business now if you are in the travel industry, it just means that you may not get the sale price you may have in the 4th quarter of 2019. There just aren’t as many buyers out there with the appetite for the risk this industry now has. Even if you do find a buyer, they will be asking for a deep discount.”
“However, there is nothing fundamentally wrong with our economy and once the government feels comfortable easing restrictions, I expect we will not only return to previous levels of economic activity but possibly to even stronger levels due to the pent-up demand.”
Some industries have been well-positioned and have prospered. People are spending more time at home and are investing in their living spaces. The home services category, which includes landscaping, remodeling, roofing, construction, retail garden centers, and other residential service-related businesses are doing quite well. Furthering the boom is the unexpected free government money. “If you own one of these businesses, it’s really a great time to sell because we can show an upward trend of revenue and profit that gets buyers excited,” Austin adds.
What other categories are hot right now? Austin likes healthcare services, technology, and anything construction related, among others.
<b>Cost of Money</b>
While the Payment Protection Program (PPP) and Economic Injury Disaster Loan (EIDL)are acronyms most business owners have learned about in recent months, there are other lesser-known Small Business Administration (SBA) loan programs that are designed to keep merger and sales activity high. Until September 27th, the SBA will pay the first 6 months of principal and interest on all new 7(a), 504, and Microloans.
“That’s a good deal,” Austin assures. Combined with historically low-interest rates, it makes perhaps the lowest cost of money we will see in our lifetimes. It means that buyers can acquire a new business, go through the inevitable learning curve, and not have the looming monthly debt service over their heads for half a year. It removes much of the friction of a business sale, so transactions can continue to happen.
The recommendation Austin gives any company owner is: “Know what your business is worth.” It’s sound advice anytime, but especially in this environment. Keeping your eye on your value can help you weigh decisions about your exit. Talking to a qualified business broker like Austin is a good first step. We can show you what comparable businesses have sold for in your area and what we can be learned from those transactions.
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</span></p>Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-29430147269381769642020-06-10T15:04:00.001-04:002020-06-10T15:04:23.610-04:00 7 Ways to Tell if it’s Time to Sell Your Business<div class="separator" style="clear: both; text-align: center;">
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;">Every business has both a beginning and an end. While it may be hard to fathom now, there will be a time when you will lock the door and turn off the lights for the last time. It can be a scary thought considering entrepreneurs put so much emotional and physical energy into starting and growing their businesses. Their identity is wrapped up in what they do for a living. Yet, it doesn’t change the fact that there is a “last day” coming, whether it’s on your terms or not. </span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;">“As with a building or any other physical asset, it needs to be managed as such.” That’s the message from longtime business broker, <a href="https://www.linkedin.com/in/alan-austin-47783/" target="_blank">Alan Austin</a>. He expands on the analogy, “Generally speaking, a building is an appreciating asset that if kept in good condition, will be worth more than when it was built two decades before. However, if the owner neglects maintenance and structural problems appear like a leaky roof or cracked foundation, that building will be worth much less.</span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;">The same is true for a business. If the business continues to adapt and expand, the value will continue to grow, if not, the business may develop fundamental flaws that hurt value or even make the business unsellable.”</span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;">When is the right time to sell a business? The answer isn’t always clear, but while the business is continuing to grow and prosper, begin to look for these 7 signs.</span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;"><b>Sales volume or quality is slipping because the owner is working less</b></span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;">There is nothing wrong with working less, but make sure you have the people and processes in place to handle business in your absence. If the business is overly dependent on its owner, performance will decline and value will erode. Buyers base their offers on actual historical performance, not what the business “could” be doing. </span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;"><b>Loss of motivation to train and mentor new employees</b></span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;">A leader’s job is never done. Inspiring and training new and existing employees is among the highest and best use of owner time. Failing to do this is a disservice to everyone that draws a paycheck from the business. </span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;"><b>Large capital investment is needed to remain competitive</b></span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;">“You’re either growing or dying” says Austin. Investing in new technology or reinvesting in your employees’ product knowledge and skillsets does cost money. But, if you aren’t continuing to invest in the business, it may be time to look for a buyer with deeper pockets. </span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;"><b>Approaching retirement</b></span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;">Father time waits for no one. Liquidating your largest asset can mean a comfortable retirement filled with fun activities and family time. Start planning for the business sale at least 5 years out to extract maximum value. </span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;"><b>You want to get involved in other businesses</b></span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;">Entrepreneurs love the thrill of building and the validation customers provide. If the entrepreneurial drive is strong in the owner, the allure of a new start-up may be more appealing than continuing to manage a mature business. </span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;"><b>There is a looming health issue</b></span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;">As the owner ages, the chances of developing health concerns increases. Cancer, Dementia, Parkinson’s disease, or a host of other ailments should create a sense of urgency to sell the business. Waiting too long runs the risk that the business will become a burden on the family and if the owner is unable to actively participate in the sale process, the business could lose value. </span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;"><b>Nobody to pass the business to</b></span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;">A son, daughter, niece, nephew, or even a key employee are all possible successors of the business owner. Passing a business to the next generation is a wonderful way to ensure a legacy, but if none of those options exist, it may be time to sell the business</span></span></div>
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<span style="color: #0e101a; font-family: Arial;"><span style="font-size: 14.6667px; white-space: pre-wrap;"> </span></span><span style="color: #0e101a; font-family: Arial; font-size: 14.6667px; white-space: pre-wrap;">“Timing is everything,” says Austin. “Clearly, it’s good practice to sell the business before it enters a period of decline.” Sometimes getting an outside party like Mt. Vista Capital to take a look at the state of affairs and give an honest assessment of value and salability is exactly what the business owner needs. Someone that is not emotionally invested can make a sound judgment based on the facts. Please let us know if we can assist this type of assessment.</span></div>
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Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-6161707331251372822020-04-21T14:34:00.002-04:002020-04-22T09:40:11.521-04:00There are Still Buying Opportunities Amid the Pandemic<div style="text-align: center;">
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<span style="font-family: "arial"; vertical-align: baseline;"><span style="font-size: large;"><span style="white-space: pre-wrap;">It might seem counterintuitive to think about buying a company while America is largely shut down, but that’s exactly what you should consider.
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;">With most businesses around the globe are in some form of a holding pattern, it’s wreaking havoc on the bottom lines of companies everywhere. Unlike normal economic down-turns, even recession-resistant businesses are being forced by the government to lock their doors and turn customers away. As a result, thousands of fundamentally-sound businesses that don’t have the cash reserves to weather the short term storm are finding themselves in big trouble. Even if the businesses have managed debt well and have cash on hand, the uncertainty is unsettling and putting the value of their businesses in question. </span></span></div>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;">The two main reasons businesses are listed for sale are the age (retirement) or the health of the owner and neither of these motivations wait for government-mandated shut-downs to expire. Consequently, thousands of businesses in America are continuing to be listed for sale, pandemic or not.</span></span></div>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;"><b>That’s good news for buyers. </b></span></span></div>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;">“Deals are out there to be had,” explains Alan Austin, President of Mount Vista Capital. </span></span><span style="font-family: arial; white-space: pre-wrap;">“During this pandemic crisis, we are seeing some buyers drop out of the market to focus on their own businesses. Fixing gaps in the supply chain, handling employee layoffs, and managing cash flow. For these companies, acquisitions are on hold,” he says. But for the buyers that are left, it means less competition to bid against. </span></div>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;">For those buyers bullish on the future and willing to look past temporary market conditions, there are still great opportunities out there. </span></span></div>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;"><b>Uncertainty: Advantage buyer</b></span></span></div>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;">Austin describes the relationship between uncertainty and sales price. In business terms, risk (or uncertainty) has an inverse relationship to how much a company is worth. The more the uncertainty, the higher the risk, the lower the sales price offered. In volatile times, there is less confidence in future earnings, so the likelihood of negotiating a great deal for the buyer is significantly improved. He who has less fear wins. </span></span></div>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;">We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.- Warren Buffett</span></span></blockquote>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;"><b>Low Cost of Capital</b></span></span></div>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;">Interest rates have been at record lows and have gone even lower recently. Banks continue to have capital to lend and are still looking for good loan opportunities. There is evidence that lenders have tightened their underwriting standards, in light of the economic uncertainty, but they are still making loans. For strong buyers, there is plenty of capital available and the cost of capital to fund acquisitions is at record low levels.</span></span></div>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;"><b>Government help</b></span></span></div>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;">In addition to the cheap capital, the government has implemented new programs to help small businesses and stimulate the economy. The Small Business Administration (and supporting banks) have had long-standing loan products that help entrepreneurs buy businesses. However, in March, they announced their best terms in history by paying the principal, interest, and fees on new loans for 6 months if issued before September 27, 2020.</span></span></div>
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<span style="font-family: "arial";"><span style="white-space: pre-wrap;">For companies eager to further their geographical footprint, or expand their product line, Austin says it all comes down to how comfortable you are in the unknown. We’re going to see some significant “wins” in the next few months. Those willing to make bold moves may make some of the best acquisitions of their career.</span></span></div>
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Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-20862060255832569942020-02-19T11:28:00.000-05:002020-02-19T11:34:30.757-05:007 Pitfalls Business Owners Should Avoid<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
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<span style="color: #0e101a; font-family: "arial";"><span style="font-size: 14.6667px; white-space: pre-wrap;">In the iconic and timeless business book 7 Habits of Highly Effective People, Stephen Covey explains Habit #2: Begin with the end in mind.
What that means is that there is a beginning and end to any business. The details in the middle will determine if you have a fulfilling and hugely profitable exit when it’s time to sell, or simply turn around and lock the door for the last time. Resigning to walk away and having nothing to show for it.
We’ve identified 7 pitfalls that all business owners should avoid. Doing so will help you sell your business one day for enough money to enjoy the next phase in life, whatever that may be.
</span><b style="font-size: 14.6667px; white-space: pre-wrap;">Customer concentration</b><span style="font-size: 14.6667px; white-space: pre-wrap;">
Total sales volume doesn’t always tell the whole picture. It can provide a false sense of security if you have one or two customers that disproportionately represent too much of your revenue, and therefore, your profit. While it’s good while it lasts, it can cause other problems especially when the customer suddenly decides to cease doing business with you. Buyers will learn about your customer concentration in the due diligence process. If they spot a problem, expect a huge discount to their offer; that is IF they are still interested in moving forward at all. Work hard to diversify your customer mix and revenue streams.
</span><b style="font-size: 14.6667px; white-space: pre-wrap;">Messy financial records</b><span style="font-size: 14.6667px; white-space: pre-wrap;">
Buyers want to see clean books. This means accurately accounting for income and expenses. It can be tempting to blur the lines between a personal and business expense so make clear distinctions between the two. The more profit your company shows, the more a buyer will be willing to pay. Hire the right talent to keep good, accurate records and consider getting your financial statements audited periodically.
</span><b style="font-size: 14.6667px; white-space: pre-wrap;">Management team in place</b><span style="font-size: 14.6667px; white-space: pre-wrap;">
Buyers want the peace of mind to know your business will continue to operate long after the original owner is out of the picture. The only way to do that is to have a capable and loyal management team in place. Usually, it’s also in the best interest of the business owner, to guard against burnout. Work to decentralize decision making and empower others that have your best interests in mind. Buyers pay a premium for a management team that adds value to the business.
</span><b style="font-size: 14.6667px; white-space: pre-wrap;">Volatility of earnings</b><span style="font-size: 14.6667px; white-space: pre-wrap;">
Inconsistencies in quarterly or annual earnings are a value killer. Wild swings in earnings translate to risk and uncertainty in the mind of a buyer. Is the business being mismanaged? Did a key employee leave? Did a large customer go to the competitor? These are all the questions and doubts that come from erratic earnings reports. Pay attention to large orders and fulfillment and do what you can to spread those among multiple months. If peaks and valleys do happen in your business, be ready with a data-driven explanation about the periods in question. Seeing steady, consistent linear growth always brings more confidence to buyers.
</span><b style="font-size: 14.6667px; white-space: pre-wrap;">Having non-business-related expenses</b><span style="font-size: 14.6667px; white-space: pre-wrap;">
Avoid putting non-business-related expenses in your business. A buyer will review your expenses during the business buying process and once they spot an irregularity, they will need an explanation. Then, scrutiny increases and you run the risk of the buyer not trusting the numbers, in general. They will be confused and suspect. Examples could be health insurance for extended family members, vehicles and personal trips.
</span><b style="font-size: 14.6667px; white-space: pre-wrap;">Hiding the bad news</b><span style="font-size: 14.6667px; white-space: pre-wrap;">
Every business owner has had times they are not proud of, whether it was a result of their decision making or not. We advise being transparent about these times and doing it early in the discussion. Control the narrative by explaining the circumstances and your actions. Doing so will earn the buyer’s confidence and establish that your negotiating style is sincere and truthful. Purposely hiding information, only to be discovered by the buyer later, can kill the deal. For the transaction to move forward, both buyer and seller must have confidence in each other.
Supplier concentration
Similar to customer concentration, supplier concentration is equally important. This means that the sources of the raw materials needed to produce your goods must be diversified to insulate you from market price changes and interruption in the supply chain. Even if it may drive your costs up slightly, consider doing business with multiple competing vendors. However, there is a good chance It will have the opposite effect and help drive costs lower when vendors know you have multiple relationships. Ask yourself how NOT being able to do business tomorrow with XYZ supplier would affect your organization. If the answer scares you, look for solutions BEFORE it happens.
These 7 pitfalls are learned through experience working with hundreds of clients over a lifetime of mergers and acquisitions. While there is no official one size fits all playbook for building and running a successful business, avoiding these common mistakes will move you from merely owning a job to owning a business that generates opportunities for yourself and those around you. The conclusion of your business life is always closer than it may seem, so start now to re-begin with the end in mind.
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<span style="color: #0e101a; font-family: "arial";">Alan Austin is president of Mt. Vista Capital, Inc., a full-service investment banking firm established in 2006 that provides professional M&A advisory, business valuation, and financial advisory services. He is dedicated to serving the needs of owners, shareholders, and management of privately owned, small-cap and public companies. His middle-market focus on sell-side advisory is designed to provide efficient execution of the clients’ transactions while maximizing value.
The financial advisory services arm of the firm assists clients in structuring and sourcing the capital resources needed to fund organic growth or acquisition strategies.
Whether in support of M&A activity, buy-sell agreements or estate planning, Mt Vista Capital can provide a fully compliant business valuation report. Mr. Austin has over forty years of broad-based corporate finance experience and has focused exclusively on middle-market investment banking transactions for almost twenty years.
He is a Chartered Financial Analyst (CFA) and holds the Series 7 and 63 securities registrations.
Securities transactions conducted through StillPoint Capital, Tampa, FL.
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Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-14701157119882701882020-01-10T11:52:00.000-05:002020-02-12T13:59:51.273-05:00How a Management Team Adds Value to Your Business<div class="separator" style="clear: both; text-align: center;">
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This article originally appeared on <a href="https://www.mtvistacapital.com/">https://www.mtvistacapital.com/</a><br />
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Most businesses in America start the same way. The expert technician turns business owner and their dreams start to take focus.<br />
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However, to create real wealth in your business you’ll have to move beyond being the technician and transition to a true CEO. That means focusing your energy on building a sustainable company that doesn’t rely on you for most decisions and interacting with every customer. You’ll need capable managers that work for you to accomplish this. They need to be enabled with the power to fix problems and allocate company resources as needed.<br />
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<span style="font-size: large;">Why does infrastructure build company value?</span><br />
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Potential buyers for your company are looking for a proven system of delivering a service or making a product. It doesn’t mean your business has to be perfect, but it does mean you have to demonstrate how you find, fulfill, and replicate customers. If that process is solely or even largely dependent on your personal efforts, you should get a management team in place that can take some of the load off yourself and build value in your company at the same time.<br />
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Alan Austin, owner of Mt. Vista Capital, explains “Buyers are looking for a machine that consistently generates cash flow. If the business is overly reliant on the owner’s input to make this happen, the value of the business is severely diminished. It can even make the business unsellable.” He calls it the “Keyman discount”<br />
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“The less important you are to the day-to-day operation of your business, the more it’s worth” - Alan Austin</blockquote>
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Building a company in this way is certainly a challenge that not all owners will be able to overcome, but Austin suggests starting with a clean sheet of paper and diagram how the ideal management structure should look. The organizational chart should have the business owner at the top followed by management-level positions that would be responsible for making operational decisions. You may or may not have these people in your organization already, but it becomes a good roadmap for the future.<br />
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Being able to show buyers how you are structured, or at least the structure you are working on, goes a long way in reducing buyer anxiety and their fear of the risks that comes along with a big business acquisition.<br />
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“Building a management team is also good for your mental health” adds Austin. “Most business owners are comfortable working 50+ hours per week in the beginning and making sacrifices, but pushing off family vacations and missing important milestones with your kids takes a toll. Unfortunately, I have seen many business owners ignore the warning signs and continue on the same path until they reach burnout - and that’s not good for anybody.”<br />
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Yes, it takes resources of time and money to pay fair management salaries, but doing this also brings you stability, continuity, peace of mind, and family security. To build life-changing wealth, you need to move beyond owning your own job and hire a team, so you will own a business.<br />
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<span style="font-size: large;">A succession plan means options</span><br />
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It’s never too late to establish a succession plan. Part of the services a consulting firm like Mt. Vista Capital provides is helping the owner plan for the day they walk out the door for the last time. “It’s something every business owner at every level should think about - regardless of how long they have been in business.” Austin makes the logical point, “How can we work toward the goal if we don’t know what it is?“ The fact is, every owner will exit their business someday. The only question that remains is, will it be on their terms?”<br />
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Having a strong management team in place or grooming key subordinates to fill these roles in the future gives the owner options. And what it really does is mitigate risk for a potential buyer. Whether your buyer is another company or even your employees, a strong management team ensures that the business will continue to operate. Buyers want assurances that the business will thrive like it has in the past and for the foreseeable future. Key business metrics like cash flow and customer retention should be ideally unaffected when the owner sells the business and walks away.<br />
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<span style="font-size: large;">Risk and money</span><br />
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In capital markets, there is an inverse relationship between risk and value. Austin explains that the more perceived risk there is to buying a company, the more conservative the buyer will be with their offer because they are trying to guard against the unknown. Conversely, you can expect a company to sell for <b>top dollar with multiple offers</b> when these factors are present.<br />
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<ul>
<li>Company is in a booming industry with a great outlook</li>
<li>The management team is servicing a diverse, long term loyal customer base </li>
<li>Multiple vendors mean little chance for business interruption</li>
<li>Financial records are clear and accurate</li>
<li>Has an absentee owner</li>
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Buyers always balance risk and value. And of course, lower risk means higher value.<br />
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<a href="https://www.linkedin.com/in/alan-austin-47783/" target="_blank">Alan Austin</a> is president of <a href="https://www.mtvistacapital.com/" target="_blank">Mt. Vista Capital</a>, Inc., a full-service investment banking firm established in 2006 that provides professional M&A advisory, business valuation, and financial advisory services. He is dedicated to serving the needs of owners, shareholders, and management of privately owned, small-cap and public companies. His middle-market focus on sell-side advisory is designed to provide efficient execution of the clients’ transactions while maximizing value.<br />
<br />
The financial advisory services arm of the firm assists clients in structuring and sourcing the capital resources needed to fund organic growth or acquisition strategies.<br />
<br />
Whether in support of M&A activity, buy-sell agreements or estate planning, Mt Vista Capital can provide a fully compliant business valuation report. Mr. Austin has over forty years of broad-based corporate finance experience and has focused exclusively on middle-market investment banking transactions for almost twenty years.<br />
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He is a Chartered Financial Analyst (CFA) and holds the Series 7 and 63 securities registrations.<br />
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Securities transactions conducted through StillPoint Capital, Tampa, FL.<br />
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<br />Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-50834802472037905732019-11-04T09:49:00.000-05:002019-11-04T09:49:43.570-05:00Selling Your Company; Investment Banker or Business Broker?<div dir="ltr" style="line-height: 1.38; margin-bottom: 0pt; margin-top: 0pt;">
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<br /><br />When the time comes for a business owner to consider selling their most valuable asset, it's important to select the right professional to assist in the process. Just like a business has trusted advisors, including an attorney, CPA and business banker, a business broker or investment banker should be added to the team, as much as a year before the sale. Here’s why: An experienced business intermediary will not only help you find a buyer but also help you position the business beforehand to extract maximum value. <br /><br />While business broker and investment banker are familiar business terms, It’s less clear what each of these specialties actually does. While both find buyers for clients and support the sales transaction, their approach is much different. <br /></div>
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So which one do you need? <br /><br /><b>Business Broker</b><br />
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A business broker typically works with businesses that have up to about 5 million in revenues, however, there is no hard and fast rule here. A business broker can sell a business of any size, but this range is where they are most effective. Larger businesses will need an investment banker who can provide in-depth analysis and marketing preparation and has relationships with institutional buyers. <br />
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Typically, the broker provides little support preceding the sale and routinely posts the confidential listing on popular internet sites. Similar to a real estate agent, they wait for the right buyer to present themselves. From there, they work through a process to validate the buyer, confirm financing is in place, and help the seller with final negotiation. <br />
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While a business broker provides limited support, it can be a great deal for the seller because the broker is only paid on performance; so they are motivated to get the business sold. <br />
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<b>Investment Banker</b><br />
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An investment banker may be a better choice for some businesses that are exceeding 5 million in revenues, have a complicated legal structure, or are just more sophisticated than a typical small business. Just as in the case of a business broker, an investment banker can represent a business of any size but this range compliments the banker’s skills and network. <br />
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The approach of an investment banker is different because they will work with the business owner and find where changes in the business model or operations can unlock more value. Expect them to help in such areas:<br />
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<li>Accounting</li>
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<li>While it is prudent to operate with a tax shielding strategy, an investment banker (and CPA) will help you move to a profit maximization strategy. This will reflect the business’s true value to the market.</li>
</ul>
</ul>
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<li>Employee management</li>
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<li>A buyer will want to know what key employees are essential for the business to run efficiently and that this management structure is in place. An investment banker will help you analyze who these people are and more importantly, highlight their roles to the new buyer.</li>
</ul>
</ul>
<ul>
<li>Supply Chain</li>
<ul>
<li>An experienced banker will be able to examine how the business buys and sells goods and services. They will be able to identify inefficiencies or being over-leveraged with one supplier or large customer. Diversifying and limiting risk will bring additional value to the business.</li>
</ul>
</ul>
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In addition to M&A advisory, an investment banker can provide other services such as business financing, formal business valuations and Employee Stock Ownership Plans (ESOP). Because of the considerable up-front preparation, investment bankers typically charge a retainer either paid monthly or in a lump sum when the engagement begins. <br />
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Once the business is tuned to command top dollar, the banker will get to work soliciting the business with a more strategic approach than the business broker. The banker will devote considerable effort to identifying strategic buyers who should be interested in the client’s business and will, confidentially present the client’s business to them. Depending on the size of the business, it may be attractive to private equity groups or other institutional buyers. Confidentiality is always protected with a non-disclosure agreement (NDA) between parties. Because transactions of this size may be governed by the Securities and Exchange Commission (SEC), investment bankers must be licensed.<br />
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When a buyer is identified, an investment banker will stay with the seller providing all the support necessary with the letter of intent, buyer meetings, final negotiations, and the closing. At that time, the banker will earn a commission as in the case of the business broker. <br />
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Whichever professional you choose, it’s universally accepted the business owner should not try and do this complex transaction on their own. In addition to not maximizing the sale price, potential mistakes structuring the transaction can haunt a business seller years down the line and even potentially undo a deal. <br />
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<span style="background-color: white; font-family: arial, sans-serif; font-size: medium;"><a href="https://www.linkedin.com/in/alan-austin-47783/" target="_blank">Alan D. Austin, CFA</a></span><br />
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Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-1690024712613976112018-09-14T17:47:00.000-04:002018-09-14T17:47:22.373-04:00When is the Best Time to Sell my Business?<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif; mso-bidi-font-size: 11.0pt;"><span style="font-size: large;">This
will be one of the most difficult questions for business owners to answer. Since your business is most likely your
largest asset it will most likely be the largest transaction you will ever execute. There are many questions you will need to answer
to be comfortable that now is the time.<o:p></o:p></span></span></div>
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<span style="font-family: "Arial",sans-serif; mso-bidi-font-size: 11.0pt;"><span style="font-size: large;">Has
the company outgrown your skill set? Can
you take the company to the next level without incurring massive amounts of
debt? Maybe you don’t want to incur more
debt. Have you gotten to the point where
you just don’t want to work 120 hours a week and have all the pressure
associated with owning your own business?
Remember the two great American dreams are to own your house and your
own business; but in both instances there is a time to downsize. Just a few
more questions and then some answers. Is
my business ready to sell? Can I cope with the economic and industry changes on
the horizons? Do I sell the company myself or hire an advisor to represent my
company? Should I sell the company or leave it to my children?<o:p></o:p></span></span></div>
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<span style="font-family: "Arial",sans-serif; mso-bidi-font-size: 11.0pt;"><span style="font-size: large;">Determining
the best time to sell is the result of a combination of factors. When you are ready to sell will the market be
ready? The two most important factors in
going to market: 1) are you ready to sell and 2) is the market timing
good. You should know your business
better than anyone, you know your customers, you know your employees and you
know the competition. You are the best
person to know if you and your business are ready. Market timing is a tricky question. We are not advocates of trying to time the
market. We believe that determining when
you are ready is more important than trying to time the market. Then it is our job to maximize value through
our proprietary sale process given the market conditions at that time.<o:p></o:p></span></span></div>
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<span style="font-family: "Arial",sans-serif; mso-bidi-font-size: 11.0pt;"><span style="font-size: large;">Having
said that, as we write this article we believe the M&A market is very
positive. Although interest rates are on
the rise, capital is still relatively cheap.
Corporate coffers are flush with cash reserves and financial buyers
(Private Equity Funds) are under pressure to put pledged capital to work. As a result, buyers are able (and willing) to
pay higher multiples in today’s market. <o:p></o:p></span></span></div>
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<span style="font-family: "Arial",sans-serif; mso-bidi-font-size: 11.0pt;"><span style="font-size: large;">We
said earlier that you know best whether your business is ready to go to
market. The most important factor in how
attractive your business will be in the market is your historical trend. Buyers prefer consistent, steady growth over
volatility and more than one tremendously good year. I will go so far to say that buyers are
suspicious of the sustainability of one tremendously good year. If your trends are positive and your last 3
to 4 years show stable consistent growth, then we would agree, your timing is
good.<o:p></o:p></span></span></div>
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<span style="font-family: "Arial",sans-serif; mso-bidi-font-size: 11.0pt;"><span style="font-size: large;">Should
I sell it myself or hire a professional investment banker? Since we are in the business of selling
business we would obviously say hire us to sell it. Having said that, it is important to
recognize how hard it is to run a Sale Process in a confidential manner and
continue to run the business. We add
substantial value to the sale process by: <o:p></o:p></span></span></div>
<div class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-indent: -.25in;">
</div>
<ul>
<li><span style="font-size: large;"><span style="font-family: Arial, sans-serif; text-indent: -0.25in;">performing pre-marketing due-diligence to
uncover positive business attributes to be highlighted and negative attributes
that we might be able to fix before going to market;</span></span></li>
<li><span style="font-size: large;">preparing a comprehensive marketing document
known as a Confidential Business Memorandum;</span></li>
<li><span style="font-size: large;">researching and assembling a target list of the
most likely buyers for your business.
Identifying the most likely buyers is critical in order to maximize
value;</span></li>
<li><span style="font-size: large;">controlling the flow of information so we can bring
multiple buyers to the table at the same time and create a private auction to
drive offers higher.</span></li>
<li><span style="font-size: large;">provide guidance on evaluating and selecting
the best offer based on both price and structure, relying on our combined
decades of experience completing business sale transactions.</span></li>
<li><span style="font-size: large;">free you up to continue to run your business
and not be distracted by the sale process.
During the sale process is the time to make sure your business is
operating at its peak.</span></li>
</ul>
<!--[if !supportLists]--><br />
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<span style="font-family: Arial, sans-serif; font-size: large;">These
skills and several other factors will allow a professional advisor to get you the
best price for your business regardless of market conditions. We bring our entire team to bear on each and
every transaction, including other professional such as the attorney,
accountant and frequently an estate planning professional. It is this team approach that assures that we
will close the deal. This is a process that could take 9 to 15 months, or
more. During this time, you need to be
running and growing your business. The
most valuable use of your time and skills during this process is to grow the
business. </span></div>
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<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif; mso-bidi-font-size: 11.0pt;"><span style="font-size: large;">Should
I leave it to family? That certainly is an
option. As I am sure you know, it
depends on the capability and the passion the next generation has for running
the business. Many times, the next
generation will be much better off with a liquidity event so they can pursue
their own passions. You should also
consider a sale to a financial buyer to provide a liquidity event for the
current generation and still allow the next generation to continue to run the
company and retain some ownership. We
have completed several transactions like this and consider it a win/win for both
generations. <o:p></o:p></span></span></div>
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<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif; mso-bidi-font-size: 11.0pt;"><span style="font-size: large;">Bill
Neely, Senior Partner<o:p></o:p></span></span></div>
<span style="font-family: Arial, sans-serif;"><span style="font-size: large;">Alan D. Austin, CFA</span></span>Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-31403021542204982852018-08-08T08:48:00.000-04:002018-08-08T08:48:08.552-04:00Driving the Valuation Multiple Higher<div class="MsoNormal">
<span style="font-family: Arial, sans-serif;"><br /></span></div>
<div class="MsoNormal">
<span style="font-size: large;"><span style="font-family: Arial, sans-serif;">At its core a
business’ value is simply the historical cash flow times a MULTPLE.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">So, given an historical level of cash flow,
how does a business owner increase the multiple that is applicable to his or
her business?</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">First of all, it is
important to understand that imbedded in this MULTIPLE are a multitude of
factors about the business, the industry the business operates in, and the
overall nature of the economic environment that affect the risk profile of a
particular business.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">Lower risk of
ownership equates to higher valuation multiples and vice versa.</span><span style="font-family: Arial, sans-serif;"> </span><span style="font-family: Arial, sans-serif;">So, <u>the key to increasing the multiple
applicable to your business is to reduce the risk of ownership.</u></span><span style="font-family: Arial, sans-serif;"> </span></span></div>
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<span style="font-family: "Arial",sans-serif;"><span style="font-size: large;">Let’s explore
what makes some companies worth only 4X cash flow while others are worth 7 – 8X
or even more. The key is to reduce buyer
risk. A more confident buyer is a more
generous buyer and a less risky deal is a more highly valued deal. Here are some of the factors that can reduce
risk and increase the valuation multiple.<o:p></o:p></span></span></div>
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<span style="font-size: large;"><b><span style="font-family: "Arial",sans-serif;">Quality of earnings</span></b><span style="font-family: "Arial",sans-serif;"> is probably the most important factor
for any buyer. A history of consistent,
reliable earnings can go a long way in making the potential purchaser
comfortable that they can count on the historical level of earning continuing
in to the future. One of the factors
that impacts this consistency of earnings analysis is the type of revenue
generated by the business. Revenue
generally comes in one of three types; project based revenue, repeat revenue
and recurring revenue. When revenue is
project based, each time a project is completed a new customer or project needs
to be identified and won in order to continue the revenue stream. This is the least valuable type of
revenue. Repeat revenues is
characterized by a stable set of customers who do place repeat orders but there
is no real certainty as to when the next order will be replaced. The best way to describe this is a business
with a loyal customer base. Obvious
examples of recurring revenue models are cable TV companies or home security
monitor companies where the customers’ payments repeat periodically (typically
monthly) and are frequently on auto-pay.
Ideally customers do not have to make a purchase decision every
month. The purchase is automatic. To the extent a business can move from
project base revenue to repeat or to recurring, they will see an increase in
their valuation multiple.<o:p></o:p></span></span></div>
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<span style="font-size: large;"><b><span style="font-family: "Arial",sans-serif;">Consistent positive trends</span></b><span style="font-family: "Arial",sans-serif;"> will also have a positive impact on the
valuation multiple. Whether this
consistency is in revenue growth rate, profitability margins, asset utilization
or required annual capital investment, consistent trends reduce risk and
increase the multiple. Any volatility in
any of these area increases risk to the potential buyer and reduces the
valuation multiple. I have frequently
said that growth rates do not have to be large; but that slow steady growth
rates are much more valuable than a large increase in one year followed by
drops in the next. Consistency is
critical to value. <o:p></o:p></span></span></div>
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<span style="font-size: large;"><b><span style="font-family: "Arial",sans-serif;">An established management team</span></b><span style="font-family: "Arial",sans-serif;"> that does not rely heavily on the existing
owner is one of the most important things a business owner can do to assure a
potential purchaser that the business has a high probability of continuing on
without a hiccup after a purchase. By
having a professional management team in place, the buyer has every reason to
believe that the critical functions of the business will continue even after
his or her purchase. <o:p></o:p></span></span></div>
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<span style="font-size: large;"><b><span style="font-family: "Arial",sans-serif;">Diversification</span></b><span style="font-family: "Arial",sans-serif;"> is also critical to reducing risk and increasing
the valuation multiple. When you stop
and think about it, we have all been taught to invest in a diversified
portfolio to reduce risk. The same
principle applies here when preparing a business for sale. For business owners, diversification can be a
factor in many aspects of their business.
Two of the most common areas where diversification is a focus include
the customer base and the supplier base.
Nothing hurts valuation multiples more that large customer
concentrations. The risk of losing one
big customer or having one of your critical raw materials controlled by a
single vendor can have a huge negative affect on valuation multiples. <o:p></o:p></span></span></div>
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<span style="font-size: large;"><b><span style="font-family: "Arial",sans-serif;">Well documented systems and business
processes</span></b><span style="font-family: "Arial",sans-serif;"> will also
reduce the transition risk for a new owner and will increase valuation
multiples. To the extent that a selling
owner can demonstrate they have a well-documented selling system, an
established supply chain, well-documented procedures for hiring and on-boarding
new hires, that they have key performance indicators (KPIs) that are monitored
and drive action, and have up-to-date IT systems, they should be rewarded with
a higher valuation multiple. <o:p></o:p></span></span></div>
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<span style="font-size: large;"><b><span style="font-family: "Arial",sans-serif;">Asset quality</span></b><span style="font-family: "Arial",sans-serif;"> is also an important factor in
increasing valuation multiples.
Companies with high quality accounts receivable (no collection
problems), inventory that does not include any stale or obsolete inventory and
that consistently invests fixed assets should see higher valuation
multiples. Businesses that have a high
degree of deferred capital expenditures will see their valuation multiple
depressed. <o:p></o:p></span></span></div>
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<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;"><span style="font-size: large;">Companies that
can protect their market position with <b>intellectual
property</b> should also benefit from higher valuation multiples. Buyers are always interested in the barriers
to entry that a company can create to keep competitors at bay. To the extent that a business has patents,
trademarks, copyrights or even trade secrets, they will be seen by potential
buyers as reducing risk and should result in higher valuation multiples. <o:p></o:p></span></span></div>
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<div class="MsoNormal">
<span style="font-family: "Arial",sans-serif;"><span style="font-size: large;">Lastly, <b>size can be a critical factor</b> in
reducing risk for potential buyers.
Universally, buyers perceive larger business enterprises as having a
better chance of surviving threats from competitors, dependence on single
vendors or even the negative affect of economic downturns. To the extent that a business owner can
continue to grow their business, they should be rewarded with higher valuation
multiples.<o:p></o:p></span></span></div>
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<span style="font-family: "Arial",sans-serif;"><span style="font-size: large;">Reducing the
risk of acquisition as perceived by the buyer is critical to increasing
valuation multiples. <o:p></o:p></span></span></div>
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<span style="font-family: Arial, sans-serif;"><span style="font-size: large;">Alan D. Austin, CFA</span></span>Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-62774419612795746562017-08-21T15:44:00.003-04:002017-08-21T15:44:38.862-04:00Attractive Acquisition Attributes – Part Three, Diversification<br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">As we explained
in our series titled “Low Risk is the Key to Valuation,” any business attribute
that lowers acquisition risk also increases value.<span style="mso-spacerun: yes;"> </span>By definition, this type of attribute is an
attractive acquisition attribute for buyers.<span style="mso-spacerun: yes;">
</span>In previous posts we have described how <em>consistency</em> and <em>recurring
revenue</em> are attractive to buyers and increase the value of your business.<span style="mso-spacerun: yes;"> </span>In this post, we will explore why
<em>diversification</em> is attractive to buyers.</span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">Diversification
can apply to many aspects of a business but the one overriding goal of
increasing diversification is to reduce the risk of some sort of disruption to
your business.<span style="mso-spacerun: yes;"> </span>Whatever the source of
“concentration,” the opposite of diversification, it should be evaluated to see
if there is a way to create more diversification.</span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">When we discuss
diversification with business owners the discussion usually begins with a focus
on customers.<span style="mso-spacerun: yes;"> </span>Frequently, one of the
first questions we get from prospective buyers is whether there is any customer
concentration.<span style="mso-spacerun: yes;"> </span>This is so common that we
always address customer concentration in our offering memorandums when
marketing a business.<span style="mso-spacerun: yes;"> </span>The level of
concentration where buyers begin to get concerned varies from business to
business and sometimes industry to industry.<span style="mso-spacerun: yes;">
</span>Usually a customer that represents 10% of total revenue is not too big
of a concern.<span style="mso-spacerun: yes;"> </span>When one customer is more
that 20%, buyers begin to get concerned and may discount the price more because
of this increased risk.<span style="mso-spacerun: yes;"> </span>Customer
concentrations above 30% can kill a deal or negatively impact value to the point
that a sale is not attractive to the seller.<span style="mso-spacerun: yes;">
</span>High customer concentration can also cause the buyer to defer part of
the purchase price and tie its future payment to that customer’s retention, over
time.<span style="mso-spacerun: yes;"> </span>Do whatever you can to decrease
your reliance on any one customer.</span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">Supplier
concentration is another key area.<span style="mso-spacerun: yes;"> </span>Any
business that is dependent on one source for any of its raw materials runs the risk of business interruption if that supplier is unable to continue
to provide its raw material.<span style="mso-spacerun: yes;"> </span>This could be caused by one of several
different factors that are outside of your control such as natural disaster, an
interruption in their own supply chain, labor strikes, financial problems and
many others.<span style="mso-spacerun: yes;"> </span>The message here is to establish secondary
sources of supply and use them on an on-going basis to keep them interested in
your business.<span style="mso-spacerun: yes;"> </span>It is always easier to
establish a new supplier relationship when things are going well than when you
have your back against the wall.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">What are some
other ways you could diversify your business?<span style="mso-spacerun: yes;">
</span></span></span></div>
<span style="font-size: large;">
</span><br />
<ul>
<li><div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">Different Markets – Are there other industries that you are currently not selling to that would find your product attractive.<span style="mso-spacerun: yes;"> </span>For example, a manufacturer of industrial adhesives who sells primarily to the automotive industry may be able to expand in to the aerospace industry.</span></span></div>
</li>
</ul>
<ul>
<li><div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">Geographical Diversification – If your current revenue stream is concentrated in one geographical location, explore opportunities to expand your geographical reach.<span style="mso-spacerun: yes;"> </span>If your business is reliant on a physical presence in the markets it serves this would involve opening a branch location.<span style="mso-spacerun: yes;"> </span>If not, it may be as easy as hiring additional sales representatives to target a specific geographical market.<span style="mso-spacerun: yes;"> </span>Expanding overseas is frequently a diversification/expansion strategy that domestic businesses use to diversify their customer base to other parts of the world.<span style="mso-spacerun: yes;"> </span>An additional benefit of international diversification is the economic cycle diversification it provides.<span style="mso-spacerun: yes;"> </span>World economies seldom expand and contract at the same time so having customers in other parts of the world could soften the effects of a domestic recession.</span></span></div>
</li>
</ul>
<ul>
<li><div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">Product Diversification –<span style="mso-spacerun: yes;"> </span>Are there ways you can add products or modify your product to broaden your appeal to more customers?<span style="mso-spacerun: yes;"> </span>Adding a related product that your current customers would find attractive is a good way to strengthen customer loyalty and get them to buy more from you.<span style="mso-spacerun: yes;"> </span>Another strategy is to slightly modify your product to appeal to a different customer group.<span style="mso-spacerun: yes;"> </span>For example, if you have a high-end product; develop a less expensive version.<span style="mso-spacerun: yes;"> B</span>e careful not to encourage your current customers to move down market but it is a common strategy to have a “professional version” and a “hobbyist version” of the same product, with different benefits, features and price points.</span></span></div>
</li>
</ul>
<ul>
<li><div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">Sales Channels – Have you thought about diversifying your sales channels to reach a different audience?<span style="mso-spacerun: yes;"> </span>Opening an on-line store, for example, might be a viable strategy.<span style="mso-spacerun: yes;"> </span>If you don’t offer your products over the Internet, add an e-commerce element to your website. <span style="mso-spacerun: yes;"> </span>If you already sell online, look for strategies to sell online through different channels. <span style="mso-spacerun: yes;"> </span>Look at the various “marketplace” programs at major e-tailers like Amazon. Consider opening an eBay store, especially if you have miscellaneous overstock items in your warehouse. Rather than marking them down to next to nothing and undercutting new products, sell them on eBay.</span></span></div>
</li>
</ul>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"></span><span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">There are many other
areas that you should also assess for risk reduction strategies.<span style="mso-spacerun: yes;"> </span>Think outside the box.<span style="mso-spacerun: yes;"> </span>For example, how important is an
uninterrupted electrical power supply to your business?<span style="mso-spacerun: yes;"> </span>How expensive would it be if your facility
was shut down for a day or even a few hours due to an electrical outage?<span style="mso-spacerun: yes;">
</span>Installing a back-up generator would address this risk and is a way to
diversify your power source.</span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">These are just a
few thoughts on reducing risk and increasing value through
diversification.<span style="mso-spacerun: yes;"> </span>Every business is
different and we would encourage you and your advisor to assess your business for risks created
by lack of diversification.<span style="mso-spacerun: yes;"> </span></span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;"> </span></span></div>
<span style="font-size: large;">
<span style="font-family: "arial" , sans-serif; mso-ansi-language: EN-US; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">Alan D. Austin, CFA</span></span>Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-85584361802925821532017-08-21T15:29:00.001-04:002017-08-21T16:09:52.072-04:00How to Position a Company for Sale<br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">As with many
questions, the answer to this question is not earth-shattering but implementing
the answer in an effective manner can be a challenge.<span style="mso-spacerun: yes;"> </span>The answer is to position your company in the
best light; present it to the most likely buyers who will see the most value
and create a sense of urgency.</span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">Position your
company in the best light.<span style="mso-spacerun: yes;"> </span>The first
thing you should acknowledge when selling a business is that there are no
secrets.<span style="mso-spacerun: yes;"> </span>Once a letter of intent is
accepted by the seller, the buyer will have the opportunity to conduct
extensive due-diligence on your business.<span style="mso-spacerun: yes;">
</span>Most business owners do not appreciate how detailed, expansive and
intrusive this due-diligence process can be.<span style="mso-spacerun: yes;">
</span>The seller should also expect that any deficiency in their business,
whether they know about it or not, will most likely be uncovered during
due-diligence.<span style="mso-spacerun: yes;"> </span>So, it is best to
acknowledge these deficiencies upfront; fix them if you can and deal with them
openly if you can’t fix them.</span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">Selling a business
is nothing like selling a house but sometimes a familiar analogy is
instructive.<span style="mso-spacerun: yes;"> </span>When selling your home, it
is normal to clean it from top to bottom, keep it tidy throughout the sale
process, take care of any deferred maintenance, spruce up the landscaping,
etc.<span style="mso-spacerun: yes;"> </span>It is the same with a
business.<span style="mso-spacerun: yes;"> </span>Clean up the facilities, take
care of any deferred maintenance, update your procedure manuals, have job
descriptions for key positions, make sure all your business and financial
records are accurate and up today.<span style="mso-spacerun: yes;"> </span>The
list of things to do is extensive and will be the topic of a separate post.</span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">Once you have
done what you can internally to address any concerns a prospective buyer may
have, your investment banker (M&A Advisor) will prepare a comprehensive
offering memorandum.<span style="mso-spacerun: yes;"> </span>This is primarily a
marketing document but it is also an opportunity for you and your advisor to
disclose and address items before they become an issue.<span style="mso-spacerun: yes;"> </span>For example, if you have one customer that is
20% of revenue, normally a big negative for most buyers, this must be
disclosed.<span style="mso-spacerun: yes;"> </span>At the same time, this can be
addressed by disclosing that the risk of the loss of this customer is minimal
due to a long term “take or pay” agreement with them, if that is the case.<span style="mso-spacerun: yes;"> </span></span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">Positioning
your company in the best light is the job of the offering memorandum.<span style="mso-spacerun: yes;"> </span>This document must be comprehensive and accurate.<span style="mso-spacerun: yes;"> </span>At the same time, it
should accentuate the positive attributes of your business while simultaneously mitigating the areas of concern, if possible.<span style="mso-spacerun: yes;"> </span>This document is critical to implementing an
effective marketing campaign.<span style="mso-spacerun: yes;"> </span>Your
advisor must be skilled at creating a compelling memorandum in order to
effectively position your company for sale.</span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">After preparing
your business and the offering memorandum the next step is making sure the
opportunity is presented to the most likely buyers.<span style="mso-spacerun: yes;"> </span>If the seller's goal is to maximize value
then presenting the opportunity to both strategic and financial buyers is
critical.<span style="mso-spacerun: yes;"> </span>If selling a majority stake so
the owner can “take some chips off the table” but continue to own a minority
position and continue to run the business, then the target audience would be
limited to financial buyers, i.e., private equity funds.<span style="mso-spacerun: yes;"> </span>Having an advisor that has the research
capabilities to identify active strategic buyers in your industry and that has
relationships with an extensive group of private equity funds is critical.<span style="mso-spacerun: yes;"> </span>You also need an advisor who is committed to
reaching out to these potential buyers to raise the profile of your
offering.<span style="mso-spacerun: yes;"> </span>There are many competing
opportunities out there for these potential buyers and it is your advisor's job
to raise the profile of your offering above the rest. </span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">The last step
in the process is to create a sense of urgency.<span style="mso-spacerun: yes;">
</span>This starts with a coordinated process of presenting your company to all
the likely buyers at the same time and then quickly following up with these
potential buyers to determine who is interested and who is not.<span style="mso-spacerun: yes;"> </span>This coordinated distribution of the
memorandum allows you and your advisor the ability to set a limited time for
evaluation by these potential buyers and the ability to set a deadline for the
submission of offers.<span style="mso-spacerun: yes;"> </span>By controlling the
deadline for offers, your advisor has created a sense of urgency and an auction
process where one offer can be compared against another.<span style="mso-spacerun: yes;"> </span>This process will frequently lead to a second
round of bidding among the top offers.<span style="mso-spacerun: yes;"> </span>Once the best offer is accepted, buyer
due-diligence begins and you are moving toward a closing.</span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">In order to
have an effective transaction, it is critical to position your company in its best light with
a professional offering memorandum; present your company to the most likely set
of buyers and create a sense of urgency and an auction process. Engage an experienced M&A advisor to assist you in positioning your company for the best possible sale.</span></span></div>
<span style="font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif; mso-ansi-language: EN-US; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;"><span style="font-size: large;">Alan D. Austin, CFA</span></span></div>
Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-43767701705262376842017-08-17T07:23:00.002-04:002017-08-21T11:39:00.443-04:003 Reasons an M&A Advisor is Worth Their Fee<br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;">I have to
believe that every business owner that is considering the sale of their
business goes through the exercise of deciding whether to use an M&A Advisor
or trying to sell their business themselves.<span style="mso-spacerun: yes;"> </span>I
understand the apprehension that comes with hiring an M&A Advisor.<span style="mso-spacerun: yes;"> </span>On the front-end, the Advisor's fee looks daunting; so
the real question is whether their services added value.<span style="mso-spacerun: yes;"> </span>I am in the business so naturally I am
convinced we add value in the form of higher valuations and more efficient
transactions.<span style="mso-spacerun: yes;"> </span>But you don’t have to take
my word for it.<span style="mso-spacerun: yes;"> </span>Go to this </span><a href="http://www.axial.net/forum/3-reasons-ma-advisor-worth-cost/" target="_blank"><span style="font-size: large;">Axial Network article</span></a></span><span style="font-family: "arial" , sans-serif;"><span style="font-size: large;"> that presents a recent survey of CEOs
who had recently sold their business and reported that 100% of the respondents
said their M&A Advisor added value.<span style="mso-spacerun: yes;"> </span></span></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="mso-spacerun: yes;"><br /><span style="font-size: large;"></span></span></span></div>
<div style="margin: 0in 0in 0pt; text-align: center;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large; mso-spacerun: yes;"><a href="http://www.axial.net/forum/3-reasons-ma-advisor-worth-cost/" target="_blank">3 Reasons an M&A Advisor is Worth the Cost</a></span></span></div>
<span style="font-size: large;"></span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif; font-size: large;">The article goes
on to discuss three specific ways an M&A Advisor adds value and also
highlights the benefits of early preparation when considering a sale. This
article is a good start on the value provided by an experienced M&A Advisor
but it is certainly not exhaustive.<span style="mso-spacerun: yes;"> </span>We
will explore more of the areas where we add value in the sale process in future
articles. </span></div>
<span style="font-size: large;"></span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif; font-size: large; mso-ansi-language: EN-US; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">Alan D. Austin, CFA</span></div>
Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-43788385844104073692017-07-14T17:30:00.001-04:002017-08-21T11:57:30.373-04:002017 is a Seller's Market; If You Want to Sell, Now is the Time<span style="font-size: small;"><span style="font-family: inherit;"><span style="font-size: medium;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;"><span style="font-family: "calibri" , sans-serif; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;"><span style="font-family: "arial" , "helvetica" , sans-serif;">We are frequently asked, "when is the best time to sell my business?"<span style="mso-spacerun: yes;"> </span></span></span><span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif;">There are many factors that go in to answering that question
but they generally fall in to two broad categories:<span style="mso-spacerun: yes;"> </span>Internal Factors and External Factors.</span><span style="mso-spacerun: yes;"> </span></span></span></span></span></span></span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"><span style="font-family: "arial" , "helvetica" , sans-serif;">The internal factors are factors that relate to the specific
circumstances of the business and the business owner(s).<span style="mso-spacerun: yes;"> </span>Some of these factors include where the
business is in its lifecycle, the level of profitability, growth trends, the
age and health status of the owner(s) and their need or desire for liquidity
and the owner’s desire to reduced business risk.</span><span style="mso-spacerun: yes;"> </span>These are topics we will discuss in a late
article.</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Today we want to discuss the external factors that are in
play today that make 2017 possibly one of the best times to sell a business in
last decade.<span style="mso-spacerun: yes;"> </span>If you have been thinking
about selling, we believe now is the time to pull the trigger. </span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Why are we so optimistic about the market opportunities
today?<span style="mso-spacerun: yes;"> </span>It does not happen very often but
it seems that the stars are aligned to maximize value for the selling
owner.<span style="mso-spacerun: yes;"> </span>This is truly a “Seller’s
Market.”<span style="mso-spacerun: yes;"> </span>Here are some of the factors
that lead us to this conclusion:</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "calibri";"><span style="font-size: small;"><span style="font-family: inherit;"><span style="font-size: medium;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;"><strong>Business Expansion</strong> – We are in the 9<sup>th</sup> year of
the current business expansion.<span style="mso-spacerun: yes;"> </span>I would
be the first to acknowledge that it has not been the most robust expansion but
that slow, steady growth is one of the reasons it has lasted so long.<span style="mso-spacerun: yes;"> </span>Most businesses are performing as well now as
they have at any point in the last decade.<span style="mso-spacerun: yes;">
</span>In addition, most businesses have had a steady continued growth in
revenues and profitability; two extremely important factors that increase value
in the eyes of the buyers.</span></span></span></span></span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "calibri";"><span style="font-size: small;"><span style="font-family: inherit;"><span style="font-size: medium;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;"><strong>Economic Cycle</strong> – Synonymous with the business expansion
described above are the economic cycles that are inevitable in any
economy.<span style="mso-spacerun: yes;"> </span>We are clearly still in a growth
cycle but it will eventually turn the other direction, it is just a matter of
when.<span style="mso-spacerun: yes;"> </span>It is always better to sell a
business during a growth cycle because at that point in the cycle the outlook
for the buyer is better and they perceive less risk in the acquisition.<span style="mso-spacerun: yes;"> </span>The perception of less risk for the buyer
translates in to a higher price for the seller.<span style="mso-spacerun: yes;">
</span>We don’t know how much longer this expansion will last so sooner is
better if you are thinking about selling in the next several years.<span style="mso-spacerun: yes;"> </span>If your industry is particularly susceptible
to economic cycles, like home building or the related lumber and building
material distribution business, then this is even more of a concern for your
business.</span></span></span></span></span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "calibri";"><span style="font-size: small;"><span style="font-family: inherit;"><span style="font-size: medium;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;"><strong>Cost of Capital</strong> – Although we are beginning to see interest
rates increase slightly they are still at historic lows.<span style="mso-spacerun: yes;"> </span>Prime rate is currently 4.25% and 3-month
LIBOR is only 1.30% both of which represent relatively cheap funds for business
purchasers.<span style="mso-spacerun: yes;"> </span>When buyers can access
inexpensive capital like this to complete business acquisitions their overall
cost of capital is lower.<span style="mso-spacerun: yes;"> </span>As you know, a
lower cost of capital equals higher value for the seller.<span style="mso-spacerun: yes;"> </span>As interest rates continue to rise and the
buyer’s cost of capital goes up the same business generating the same level of
cash flow will become less valuable to these same buyers.<span style="mso-spacerun: yes;"> </span>If the economic down turn is just around the
corner, your business may be worth more now than it will be for many years to
come.<span style="mso-spacerun: yes;"> </span></span></span></span></span></span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "calibri";"><span style="font-size: small;"><span style="font-family: inherit;"><span style="font-size: medium;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;"><strong>Access to Capital</strong> – Closely related to the lower cost of
capital is the abundance of capital available for acquisitions.<span style="mso-spacerun: yes;"> </span>Generally speaking, strategic buyers have
benefitted from this long and profitable economic expansion resulting in
reduced debt, stronger balance sheets and more cash reserves available for
acquisitions.<span style="mso-spacerun: yes;"> </span>Similarly, private equity
and sub-debt funds continue to have successful fundraising experience and
consequently have an abundance of capital available, specifically for business
acquisitions.<span style="mso-spacerun: yes;"> </span>Thirdly, the bank lending
market is still hungry for loans and are anxious to lend for business
acquisitions.<span style="mso-spacerun: yes;"> </span>Consequently, buyers have
access to the equity and low-cost debt-capital to fund desirable business
acquisitions.</span></span></span></span></span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">In summary, the access to abundant and low-cost capital and
a continued business expansion makes 2017 a ‘Seller’s Market.”<span style="mso-spacerun: yes;"> </span>In addition, avoiding the inevitable cyclical
downturn that is certainly in our future makes 2017 the time to go to market.</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">When selling a business, engaging the right advisors is
critical.<span style="mso-spacerun: yes;"> </span>Here are just a few reasons
why Mt. Vista Capital is the right M&A advisor for your business.</span></div>
<ul><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;"><span style="font-family: inherit; font-size: medium;">
</span>
</span></span>
<li style="color: black; font-style: normal; font-weight: normal;"><div style="color: black; font-style: normal; font-weight: normal; margin-bottom: 0pt; margin-top: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">A team of senior transaction advisors that handle the transaction from inception to close; no hand-of to junior associates.</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;">
<span style="font-family: inherit; font-size: medium;">
</span></span></span></li>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
<span style="font-family: inherit; font-size: medium;">
</span>
</span>
<li style="color: black; font-style: normal; font-weight: normal;"><div style="color: black; font-style: normal; font-weight: normal; margin-bottom: 0pt; margin-top: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">A broad cross section of industry experience
including manufacturing, distribution, business services, technology, etc.</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;">
<span style="font-family: inherit; font-size: medium;">
</span></span></span></li>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
<span style="font-family: inherit; font-size: medium;">
</span>
</span>
<li style="color: black; font-style: normal; font-weight: normal;"><div style="color: black; font-style: normal; font-weight: normal; margin-bottom: 0pt; margin-top: 0in;">
<span style="font-size: small;"><span style="font-family: inherit;"><span style="font-size: medium;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;">A dedicated focus on serving the needs of owners
and shareholders of privately owned middle-market companies, small-cap public
companies and orphaned divisions of public companies.<span style="mso-spacerun: yes;"> </span></span></span></span></span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;">
<span style="font-family: inherit; font-size: medium;">
</span></span></span></li>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
<span style="font-family: inherit; font-size: medium;">
</span>
</span>
<li style="color: black; font-style: normal; font-weight: normal;"><div style="color: black; font-style: normal; font-weight: normal; margin-bottom: 0pt; margin-top: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">A proprietary transaction process designed to
bring multiple buyers and maximize value.</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;">
<span style="font-family: inherit; font-size: medium;">
</span></span></span></li>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
<span style="font-family: inherit; font-size: medium;">
</span>
</span>
<li style="color: black; font-style: normal; font-weight: normal;"><div style="color: black; font-style: normal; font-weight: normal; margin-bottom: 0pt; margin-top: 0in;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">The ability to provide in-house business valuations.</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;">
<span style="font-family: inherit; font-size: medium;">
</span></span></span></li>
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;">
<span style="font-family: inherit; font-size: medium;">
</span></span></span></ul>
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">
</span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">We are pleased to offer a complimentary business valuation
analysis to any business owner that is considering a sale transaction in the
next year or two.<span style="mso-spacerun: yes;"> </span>Please feel free to
contact us to discuss any of your specific valuation or transaction
questions.</span></span><br />
<span style="font-family: "arial"; font-size: large;"><br /></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "calibri";"><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Alan D. Austin, CFA</span></span></div>
Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-45137850670061510542017-06-12T17:44:00.000-04:002017-07-14T17:33:25.577-04:00Industry Focus – Registered Investment Advisor Firms (RIAs)<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;"><span style="font-family: inherit;">The transfer of
ownership of Registered Investment Advisory firms is being driven by the same
mega-trend that is impacting a large majority of privately held businesses; the
aging of the baby-boom generation.<span style="mso-spacerun: yes;"> </span>Many
of the owners of RIAs are simply aging out or will be over the next several
years and as a result will be looking for a way to monetize the value of their
business.<span style="mso-spacerun: yes;"> </span>Unfortunately, many of them
will come to find they “own a job” with very little enterprise value to
sell.<span style="mso-spacerun: yes;"> </span>Depending on the number of years
remaining until retirement, it may not be too late to focus on certain key
value drivers that will increase enterprise value.<span style="mso-spacerun: yes;"> </span></span></span></span><br />
<span style="font-family: inherit; font-size: large;"></span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: inherit; font-size: large;">Let’s start
with the end game in mind.<span style="mso-spacerun: yes;"> </span>What are
purchasers looking for?<span style="mso-spacerun: yes;"> </span>Generally,
purchasers are looking for RIAs that have the following attributes:</span></div>
<ul><span style="font-family: inherit;"><span style="font-size: large;">
</span>
</span>
<li><div style="margin: 0in 0in 0pt;">
<span style="font-family: inherit; font-size: large;">$500 million of Assets Under Management (AUM), or more</span></div>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span></span></li>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span>
</span>
<li><div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"></span><span style="font-family: inherit; font-size: large;">A consistent investment process that is applied consistently across all accounts</span></div>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span></span></li>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span>
</span>
<li><div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"></span><span style="font-family: inherit; font-size: large;">Consistent internally-driven growth</span></div>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span></span></li>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span>
</span>
<li><div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"></span><span style="font-family: inherit; font-size: large;">An efficient, technology-driven business model</span></div>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span></span></li>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span>
</span>
<li><div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"></span><span style="font-family: inherit; font-size: large;">Profit margins (after a reasonable owner’s salary) of at least 20%</span></div>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span></span></li>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span>
</span>
<li><div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"></span><span style="font-family: inherit; font-size: large;">No compliance issues</span></div>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span></span></li>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span>
</span>
<li><div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"></span><span style="font-family: inherit; font-size: large;">100% fee-based business model</span></div>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span></span></li>
<span style="font-family: inherit;">
<span style="font-size: large;">
</span></span></ul>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"></span><span style="font-family: inherit; font-size: large;">If this does
not describe your firm now, what can you do now to head in this direction with
the time remaining?<span style="mso-spacerun: yes;"> </span>There are a few
operational steps you can take quickly that will make a big difference.<span style="mso-spacerun: yes;"> </span>First, migrate all of your clients to a fee
based business model and get rid of your broker/dealer affiliation.<span style="mso-spacerun: yes;"> </span>Being affiliated with a B/D detracts from
value.<span style="mso-spacerun: yes;"> </span>Adopt a standard, technology-driven
approach to customer reporting that can be leveraged across an ever-increasing
client base.<span style="mso-spacerun: yes;"> </span>Do not agree to any
customized client reporting, no matter how large the client.<span style="mso-spacerun: yes;"> </span>Adopt a consistent investment process that
utilizes as few CUSIPs as possible.<span style="mso-spacerun: yes;">
</span>Also, limit the number of custodians you will work with to only 3 or 4.<span style="mso-spacerun: yes;"> </span>The fewer custodial relationships you must
manage and utilize for trading, the better.<span style="mso-spacerun: yes;">
</span>Efficiency is the key in all of these areas.</span></div>
<span style="font-family: inherit; font-size: large;"></span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;"><span style="font-family: inherit;">Next comes
growth.<span style="mso-spacerun: yes;"> </span>Purchasers like to see a firm
that is consistently generating annual growth of 10% or more.<span style="mso-spacerun: yes;"> </span>This type of year over year growth takes a
structured and consistent marketing effort.<span style="mso-spacerun: yes;">
</span>It is imperative that you tell your story to as many potential clients
as possible.<span style="mso-spacerun: yes;"> </span>Set goals for yourself, and
your other producers, for the number of meetings per week, month, quarter, etc.<span style="mso-spacerun: yes;"> </span>Use a firm-wide customer relationship
management (CRM) system to track and facilitate this marketing effort.<span style="mso-spacerun: yes;"> </span>The mere existence of this CRM system will add
value as it demonstrates a systematic approach to marketing that can be
transferred.<span style="mso-spacerun: yes;"> </span>Make sure your marketing
materials are up to date, this includes your website, your blog and your
collateral material.<span style="mso-spacerun: yes;"> </span>Develop a PR campaign
that positions you and your firm as the expert.<span style="mso-spacerun: yes;">
</span>This can include speaking engagements, white papers, a blog, etc.<span style="mso-spacerun: yes;"> </span></span></span></span></div>
<span style="font-family: inherit; font-size: large;"></span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-size: large;"><span style="font-family: inherit;">Lastly comes
financial and legal considerations.<span style="mso-spacerun: yes;"> </span>I
give this advice to every prospective client, regardless of industry; do not
run personal items through the company.<span style="mso-spacerun: yes;">
</span>Whether these are family members on the payroll or your college alumni
association dues, take them off the company’s books.<span style="mso-spacerun: yes;"> </span>In many transactions, these personal expenses
are shown as proforma add-backs but many buyers to not give full credit to
these add-backs.<span style="mso-spacerun: yes;"> </span>This can be an
expensive adjustment; potentially losing 5-10X the expense amount in your
ultimate enterprise value.<span style="mso-spacerun: yes;"> </span>From a legal
standpoint, consider revising your client agreement so it is assignable.<span style="mso-spacerun: yes;"> </span>In every transaction, the buyer will want to make
sure that the existing client agreements can be assigned.<span style="mso-spacerun: yes;"> </span>If they are not assignable you may have to go
to every client and have them consent to the assignment before the transaction
closes.<span style="mso-spacerun: yes;"> </span>Maybe not a deal killer but
certainly a difficult and time-consuming closing item.<span style="mso-spacerun: yes;"> </span></span></span></span></div>
<span style="font-family: inherit; font-size: large;"></span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: inherit; font-size: large;">The value of an
RIA comes down to three main items; size, efficiency and growth.<span style="mso-spacerun: yes;"> </span>Value multiples vary over time but generally
firms with $100 million of AUM will trade for 4-5X cash flow (after the owner’s
salary) while firms with more than $1 billion of AUM could trade for more than
10X.<span style="mso-spacerun: yes;"> </span>Firms with an efficient operating
model that can be leveraged by a bigger firm or with a consistent growth track-record
or both; will move themselves up within their respective multiple range. </span></div>
<span style="font-family: inherit; font-size: large;"></span><br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: inherit; font-size: large;">Alan D. Austin,
CFA</span></div>
Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-68221968290139496872017-06-06T15:25:00.000-04:002017-07-14T17:39:12.618-04:00Attractive Acquisition Attributes – Part Two, Recurring Revenue<br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">I will be
honest with you, I am not a big fan of <b style="mso-bidi-font-weight: normal;">Revenue</b>
when it comes to discussing business valuation.<span style="mso-spacerun: yes;">
</span>Multiples of revenue are frequently used to determine business value but
I generally dismiss them as misleading or meaningless.<span style="mso-spacerun: yes;"> </span>I am a firm believer that business value is
driven by earnings. <span style="mso-spacerun: yes;"> </span>I am also a firm
believer that consistency of earnings is a major factor in reducing business
risk and therefore increasing value.</span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"></span></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Even though I
do not place a great deal of reliance on revenue valuation multiples, I must
admit that revenue is where earnings start and therefore the consistency of
revenue can be an important value driver.<span style="mso-spacerun: yes;">
</span>The reliability of a recurring revenue model is the epitome of consistent
revenue and therefore consistent earnings.<span style="mso-spacerun: yes;">
</span>Given the choice, a buyer will be much more attracted to a business with
a recurring revenue model than one that is not.<span style="mso-spacerun: yes;">
</span>One of the biggest concerns business buyers have in an acquisition is
customer retention.<span style="mso-spacerun: yes;"> </span>Businesses that can
demonstrate a high level of customer retention, lower the acquisition risk for
the buyer and increase the value of their business.</span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"></span></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Recurring revenue
comes in many forms and some industries benefit from it naturally.<span style="mso-spacerun: yes;"> </span>The most obvious of these are industries such
as the utilities, cable & internet providers, cell phone companies,
security alarm monitoring companies and other subscription based companies.<span style="mso-spacerun: yes;"> </span>Even software developers and IT companies
have created recurring revenue models with the software-as-a-service business
model and the annual service contract. <span style="mso-spacerun: yes;"> </span>Consumers
of these services are frequently called subscribers.<span style="mso-spacerun: yes;"> </span>When you can realistically call your
customers subscribers, it is safe to say you have created a recurring revenue
model.</span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"></span></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;">So, what do you
do if you are not in one of these industries and the sale of your product is
not traditionally thought of as a recurring sale?<span style="mso-spacerun: yes;"> </span>Sometimes it is simply a matter of rethinking
what you do and how you do it; and at other times it may mean you need to
expand your product offering to include a recurring revenue component.<span style="mso-spacerun: yes;"> </span></span></span></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"></span></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">The software
development industry is a great example of rethinking their product offering.<span style="mso-spacerun: yes;"> </span>Traditionally, software development companies
would package and sell their product for a single, fixed price.<span style="mso-spacerun: yes;"> </span>Then that industry came up with the idea of
selling a maintenance contract along with the software sale.<span style="mso-spacerun: yes;"> </span>The monthly, quarterly or annual maintenance
fee became the recurring revenue component.<span style="mso-spacerun: yes;">
</span>Then they migrated to the software-as-a-service model where they bundled
the software and the maintenance as a single product with a recurring periodic
payment.</span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"></span></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;">A good example
of the type of company that might have to expand their product offering to
create a recurring revenue stream is a manufacturer or distributor of capital
goods.<span style="mso-spacerun: yes;"> </span>In addition to the one-time (or
let’s call it periodic) sale of the higher-priced capital goods these companies
began to offer maintenance services or even service contracts.<span style="mso-spacerun: yes;"> </span>I recently sold a distributor of capital
goods that also offered inspection services to support the equipment they
sold.<span style="mso-spacerun: yes;"> </span></span></span></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"></span></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-size: large;">Be creative,
rethink and see if there is some way to add a recurring revenue component to
your business.<span style="mso-spacerun: yes;"> </span>Recurring revenue does
not need to be 100% of your revenue stream but to the extent you can create
some component of recurring revenue you will definitely increase the
attractiveness of your company as an acquisition candidate.<span style="mso-spacerun: yes;"> </span></span></span></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , sans-serif;"><br /><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;"></span></span></div>
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Alan D. Austin,
CFA</span></div>
Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-66371433721583584162017-06-06T14:10:00.002-04:002017-06-06T14:10:45.355-04:00Buyers Buy the Future but Pay for the Past
<br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "Arial",sans-serif; font-size: 12pt;">There
is a hand full of truisms in middle-market Merger & Acquisitions (M&A) and
this is one of my favorites.<span style="mso-spacerun: yes;"> </span>It explains
so much about valuation and, even more importantly, sale price in one simple
phrase.<span style="mso-spacerun: yes;"> </span>Let me explain.</span></div>
<br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "Arial",sans-serif; font-size: 12pt;">It
is easy to understand that buyers purchase a business because they are excited
about the future prospects of the business.<span style="mso-spacerun: yes;">
</span>If they did not believe your business had a bright future they would “take
a pass’ and move on to the next opportunity.<span style="mso-spacerun: yes;">
</span>When we market your business, it is all about selling the future
prospects of your business.<span style="mso-spacerun: yes;"> </span>So, when we
are successful in receiving an offer from a buyer, we have been successful in
selling the future.<span style="mso-spacerun: yes;"> </span>The buyer has bought
the future.<span style="mso-spacerun: yes;"> </span>This is critical in getting the
buyer to say yes.<span style="mso-spacerun: yes;"> </span></span></div>
<br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "Arial",sans-serif; font-size: 12pt;">How
do most buyers evaluate the future?<span style="mso-spacerun: yes;"> </span>They
look at the past.<span style="mso-spacerun: yes;"> </span>Their excitement (and
our marketing strategy for your business) must be supported by the past.<span style="mso-spacerun: yes;"> </span>Your historical financial performance must
support your expectations of the future financial performance of your business.<span style="mso-spacerun: yes;"> </span>More importantly, your historical financial performance
must support the buyer’s expectations for the future financial performance of
your company.<span style="mso-spacerun: yes;"> </span>If there is a disconnect
between your historical financial performance and your business’ prospects (as
represented in a financial forecast), then we will have a difficult time
convincing the buyer to “buy the future.” <span style="mso-spacerun: yes;"> </span>When the financial forecast is aligned with
the past, this ‘buy-in” is much easier.<span style="mso-spacerun: yes;">
</span>Simply stated, the past is critical to supporting the future
expectations of any buyer.</span></div>
<br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "Arial",sans-serif; font-size: 12pt;">So,
what does this mean for valuation?<span style="mso-spacerun: yes;"> </span>As
you probably already know, business valuation is simply the discounted present
value of the expected future cash flows available to the owner.<span style="mso-spacerun: yes;"> </span>The focus on future cash flows underlines the
concept that buyer buy the future.<span style="mso-spacerun: yes;"> </span>This
is what they are buying; the future cash flows.<span style="mso-spacerun: yes;">
</span>Indirectly, the negotiation of value (price) becomes centered on what is
a reasonable expectation for these future cash flows.<span style="mso-spacerun: yes;"> </span>The buyer’s expectation for these future cash
flow is what will drive their perception of value.<span style="mso-spacerun: yes;"> </span>So, when the expectation of future cash flow
is consistent with the past, the price reflects both the past and the
future.<span style="mso-spacerun: yes;"> </span>But if the expected future cash
flows, as represented by the seller, are much rosier than the past, we find
that the buyer’s offer is based on the past.<span style="mso-spacerun: yes;">
</span>In both cases, they are paying for the past. <span style="mso-spacerun: yes;"> </span>In one case the past supports the seller’s
representation of the future and the asking price is largely obtainable; and in
the other, the past does not support the seller’s representation of the future
and it will be difficult to achieve the asking price.</span></div>
<br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "Arial",sans-serif; font-size: 12pt;">The
take away is to make sure that historical earnings support the seller's forecasted
cash flow and therefore the seller’s value expectations.<span style="mso-spacerun: yes;"> </span></span></div>
<br />
<div style="margin: 0in 0in 0pt;">
<span style="font-family: "Arial",sans-serif; font-size: 12pt; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">Alan D. Austin, CFA</span></div>
Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-50256147466165133522017-02-21T11:21:00.001-05:002017-02-21T11:23:01.468-05:00Low Risk is the Key to Valuation - Part One<br />
In this two part article we will discuss what really drives business value and what a business owner can do to impact their value when they ultimately sell their business. <br />
<br />
For many business owners, business value is a multiple of adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). At a fundamental level that is a correct assessment. Purchasers buy cash flow and are willing to pay a reasonable price based on the risk associated with the continuation of that cash flow (EBITDA). So the logical next question is "what multiple should be used?" The multiple is an indication of the risk to the purchaser in purchasing the business' cash flow. Whenever any of us make any investment, we hope to earn a return that is commensurate with the risk of that investment. The business purchaser is no different. The higher the risk the lower the value and vice-versa.<br />
<br />
So, how is a multiple an indication of the risk associated with purchasing a specific business and its related cash flow? Not to get to mathematical here, but multiples are simply a convenient way of expressing the actual rate of return required to entice a purchaser to acquire the business; the return commensurate with the risk. In business valuations we call this the Capitalization Rate. For example a four (4) multiple is the inverse of the rate of return or 25% (1/4, the inverse of 4). Similarly a five (5) multiple (the inverse is 1/5) is 20%. A lower risk, as represented by the 20% required return, produces a higher value (5 times) than the higher risk represented by the 25% return (4 times). In a separate article we will discuss how we develop the appropriate multiple for a specific business.<br />
<br />
If risk is the primary driver in establishing value and more specifically if lower risk leads to higher value what are the factors that reduce the risk to the purchaser in acquiring a specific business and its related cash flow? Stated another way, purchasers want to acquire a business where there is a high degree of confidence that the cash flow will continue on an uninterrupted basis; low risk. At the fundamental level purchasers want to purchase consistent, diversified, recurring cash flow. In part two of this two part article we will explore some of the specific factors that can lower risk.<br />
<br />
Alan D. Austin, CFA<br />
Graham PattersonAlan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-73757313423118318582017-02-21T11:21:00.000-05:002017-02-21T11:22:15.897-05:00Low Risk is the Key to Valuation - Part Two<br />
In part one of this two part article on business valuation we explained how the risk associated with the consistency of the acquired business' cash flow is the primary driver in establishing the business' value. As we stated in the part one, purchasers want to acquire a business where there is a high degree of confidence that the cash flow will continue on an uninterrupted basis; in other words, low risk. When the purchaser perceives a higher risk associated with the continuation of the historical cash flow of the business they respond with a lower price.<br />
<br />
If lower risk is the key, let's explore some specific factors that can lower the perceived risk associated with the continuation of the business' cash flow, post-sale. Below are some of the factors that can impact this perceived risk:<br />
<br />
Consistency - Generally, consistent positive trends in all business metrics and more specifically in revenue and earnings is probably the single most important factor in reducing risk to a purchaser. Based on consistent positive trends, they will be comfortable that the earnings capacity of the business will continue after the purchase.<br />
<br />
Management - Businesses that have a management team as opposed to an owner who runs the day-to-day operations of the company will be perceived as less risky. Having a management team in place that can continue to run the daily operations after the sale, reduces the risk that earnings will decline after the sale. It also opens the door to financial purchasers who want to buy companies with a management team in place.<br />
<br />
Diversification - A diversified customer base; diversified supplier network; and a diversified product line, just to name a few, all reduce the risk of the business purchase for the purchaser. Frequently described in its converse as concentration, purchasers are always interested in understanding if revenues or earnings are concentrated with only a few customers. Likewise, they want to make sure there are adequate sources for critical raw materials or supplies. <br />
<br />
Asset Quality - The age and quality of the asset base can be a factor in evaluating acquisition risk. A relatively new asset base that is well maintained communicates a culture of continuous reinvestment and attention to maintaining quality. <br />
<br />
Size - This is somewhat intuitive but larger companies tend to command a higher multiple simply because of their larger size. This is because larger companies are perceived to be better able to withstand competitive pressures or financial challenges that may arise from time to time. <br />
<br />
Commodity vs. Value-Added Products - Clearly there is a place in the world for companies that produce commodity products. Generally these types of companies have to differentiate themselves based on efficiency, quality and price. Having acknowledged that, there is the perception that a company that has a proprietary process or produce is less risky to a purchaser.<br />
<br />
This is not a complete list but it serves to illustrate some of the factors that can reduce the perceived risk for a purchaser, lower the capitalization rate and therefore increase value. None of these items are absolutes but to the extent a business owner can develop some of these characteristics in the years leading up to a sale, it will surely add to their overall enterprise value.<br />
<br />
Alan D. Austin, CFA<br />
Graham PattersonAlan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-72236241133335873372017-02-05T07:12:00.000-05:002017-02-05T07:12:19.609-05:00Yes, You Can Sell C-Corp Stock – It’s Just Harder<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">It is common knowledge why C-Corporation
stockholders want to sell stock when they are ready to sell their company. In short, they want to avoid the double taxation
that comes from selling C-Corporation assets and then having to distribute the
cash proceeds in the form of a dividend.
It is also common knowledge why most buyers prefer to purchase
assets. By purchasing assets, they avoid
any known or, more importantly, unknown liabilities of the selling corporation
and by purchasing assets, they can write them up to fair market value (FMV) and
depreciate them from the higher base. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">Based on my experience, almost all purchasers
prefer to purchase assets and a significant majority will not even consider
purchasing stock. I have had very interested
and qualified purchasers walk away from deals when the seller insists on a
stock sale. C-Corporation stock sellers should
recognize that by insisting on a stock sale they are reducing the number of
potential purchasers and should expect the selling process to take longer, all
things being equal.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">The key to selling C-Corporation stock is
to find the right buyer. So, what should
your investment banker look for in a purchaser in order to increase the likelihood of
finding this elusive purchaser, who is willing to buy stock. Whether the buyer is an individual or a
strategic corporate purchaser I believe the most important attribute is a buyer
who has had prior experience with a stock transaction either as a purchaser or,
even better, as a seller. The purchaser
also needs to be willing to take on some additional “controlled” risk to
complete an otherwise desirable transaction.
I say controlled because there are seller representations, warranties,
and indemnifications in the definitive purchase agreement that can help control
the liability exposure for the purchaser.
<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">The other side of the transaction, the
seller, can also affect the likelihood of being able to sell stock. Are all sellers good candidates for a stock
sale? The simple answer is no. The selling corporation should have a history
of low risk from a litigation, product liability, environmental and employee
relations standpoint. It will be almost
impossible to sell C-Corporation stock if the selling company has a history of litigation,
environmental exposure, product liability claims or any type of employee
discrimination or harassment claims.
Most purchasers will have the expectation that these types of claims
will continue in to the future and some unknown claims may already exist, only to arise after
the transaction closes. <o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">The selling shareholder(s) must also be
willing assume responsibility for any liabilities of the corporations, not
specifically assumed by the purchaser, that occurred prior to closing. This is
especially true of unknown liabilities that become known after the transaction
closes. This is accomplished through seller
representations and warranties in the definitive purchase agreement. The seller should expect these
representations and warranties to be more robust than in an asset sale
transaction. The selling shareholders
should also expect to indemnify the purchaser against these liabilities and the
purchaser may require that this indemnification be secured with some of the
sale proceeds for some period of time, post-closing. An indemnification is no good to a purchaser if
the seller making the indemnification is allowed to transfer all of their
wealth to a trust or other family members, thereby shielding it from purchaser claims.<o:p></o:p></span></div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
<span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">Stronger representations, warranties and
indemnifications will help address a buyer’s aversion to the risk of unknown
liabilities in a stock purchase transaction but they do not help with the other
purchaser drawback, which is the inability to write-up the assets to FMV and
depreciate them from the higher value. Allocating some of the
purchase price to personal goodwill can help with this. Look for a future article that discusses the
use of personal goodwill in a stock transaction. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">In summary, to sell C-Corporation stock
your intermediary will need to find a buyer that is experienced, sophisticated,
and willing to take some “controlled” risk and the seller will need to have clean history from an unexpected liability standpoint and be
willing to accept more robust representations, warranties and indemnifications.<o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif; font-size: 12.0pt;">Alan D. Austin, CFA</span></div>
Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-65304030186926608712017-01-30T09:39:00.000-05:002017-01-30T09:39:50.047-05:00Attractive Acquisition Attributes – Part One, Consistency“Slow and Steady Wins” – I saw this slogan on a tee-shirt recently and realized how true it was when related to what makes an attractive acquisition target. Stated another way, we are talking about steady, consistency in any number of business metrics that a potential purchaser might consider. <br />
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Since valuation is predominantly driven by earnings, let’s begin by looking at consistency of earnings. At times, we have clients come to us ready to go to market because they have finally had that gang-buster year they have been waiting for. Revenues are up 50% and earnings are up 60% and everything looks great for the future. Unfortunately when we pull back the curtain and look at the long-term trends, earnings have been volatile even when there has been a long-term positive trend. It is always better to go to market when you are coming off of a good year but buyers look at more than one year and tend to average out the up years with the down years.<br />
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Volatility, risk and value are undeniably linked. I have a favorite saying, “Buyers purchase the future but pay for the past.” What I mean by this is that Buyers purchase a company for what they expect they can do with the company in the future but they set the price based on past performance, not based on some optimistic forecast, which may be based on one good year. So where does risk come in? When we market a business, we present a forecast to prospective buyers. These forecasts are largely based on past performance but tend to represent some level of straight-line (consistent) growth in to the future. If this nice consistent, straight-line forecast is based on historical numbers that are volatile rather than smooth and consistent, then the risk for the purchaser of achieving the forecast is higher. Higher risk equal lower valuation when the buyer tries to determine a purchase price. So “slow and steady” (consistent) earnings are much more valuable than one great year.<br />
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There are other areas where consistency can add to the overall value of a company. Consistency in management show stability and continuity and lowers the risk to a purchaser. Consistency in the customer basis (if repeat business is a normal part of your business model) demonstrates stability and lowers risk. Similarly, consistency in a company’s supplier basis shows stability and can positively impact value. Even consistency in the presentation of financial information (financial statements) reflects stability and will make a business more attractive to purchasers and therefore more valuable. <br />
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“Slow and Steady” is not necessarily sexy or exciting but given the choice of representing a company that has slow and steady earnings vs. one that has volatile earnings; even if the average earnings over a five year period for both are identical, Slow and Steady Wins every time.<br />
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Alan D. Austin, CFAAlan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0tag:blogger.com,1999:blog-1232731955554468025.post-62061730717326848432014-03-21T23:03:00.002-04:002014-03-21T23:03:55.899-04:00WelcomeWelcome to the Mt. Vista Capital Blog! <br />
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You will find articles here with ideas on Mergers & Acquisitions, sources of capital and valuation of businesses. Check back regularly. Alan Austinhttp://www.blogger.com/profile/14905962028157998906noreply@blogger.com0