‘After tax dollars’ are far more important than ‘the price’ and thus how intelligently and creatively a transaction is structured for tax purposes is of major importance. The intelligent and creative aspect is to understand that BOTH the buyer and seller want good tax structuring and in many, if not most, situations it is possible to create ‘win-win’ situations.
While neither Buyer nor Seller should pay exorbitant legal fees to get good legal documents there are ways of getting not only good legal documents but getting them on a cost effective basis. Why do you need good documents? Because if there are claims or lawsuits after the Date of Closing forget about ‘he said, she said’, verbal agreements, etc., as State law and the legal documents will control the outcome — and therefore you want legal documents that you can clearly understand and that can maximize your protection from future claims.
We are neither tax advisors nor lawyers, however, in having handled hundreds of transactions we are in a good position to express opinions and ideas on these issues that we then require our clients to verify with their independent tax and legal counsel before acting on them.
There are 7 major elements involved in The Best Possible Transaction — it is a transaction that:
- Maximizes the Purchase Price — certainly an important point.
- Minimizes tax obligations — far more important than most people realize.
- Maximizes cash paid and minimizes or avoids ‘seller financing’
- Has strong legal documents to minimize the risks of future claims or litigation.
- Creates best possible collateral for any ‘seller financing’
- MINIMIZES YOUR OBLIGATIONS training or transition services to be consistent with your life plan.
- SELLS TO A STRONG BUYER that has a high probability of success.
Some Bad Examples of NOT achieving the status of The Best Possible Transaction
- Both Company A and Company B sell for $1,000,000 all cash. One seller, after Federal taxes, nets approx. S800,000 and the other seller nets about $500,000 after Federal taxes. The tax structuring of a transaction is a major element to take into consideration.
- Company C is worth $1 million but buyer agrees to pay $1.2 million with $200,000 down and seller gets note for $1,000,000. Most Probably a Nightmare —- a high price but not enough cash + a high risk of iitigation and if you have to foreclose the business won’t be in the same condition as you sold it with the AR will be down, AP will be up and inventories gone, etc
- Seller finds and sells to the first interested party. Old Adage in the industry is that ‘One Buyer is No Buyer’and without competing buyers and offers the odds are stacked against you!
- Seller lets everyone know that his business is for sale thinking it will attract buyers — the reality is it can cause the would-be seller to lose employees, customers, business, banking relationships, etc. The only time anyone should know about a transition of ownership is on the afternoon of the day on which the transaction has actually closed.
- Seller Financing — Buyers that have problems are most certainly going to stop making payments on seller financing (leverage) and they are far more likely to sue than a cash buyer.
- Selling your business and then having the Buyer sue you a year or two later is a major disaster that is both expensive and demoralizing —- the transaction has to be done so as to dramatically minimize or come close to eliminating the prospect of litigation risk.
- While few people like to spend lots of money on lawyers it is essential to have good legal documents because if there is a dispute at a later time — ‘he said, she said’ and verbal agreements don’t mean a thing — the legal documents will be used to determine the outcome. Understand that there are cost effective ways to get good legal documents.
- You simply do not want to sell to a buyer that you fundamentally don’t believe can run your business — or someone without a work ethic — etc. because when the inevitable happens you won’t get paid on any seller financing and, with or without justification, you will most likely get sued, your employees will most probably have lost their jobs and your customers will have scattered. ‘Moral of the Story’: Sell to buyers that you believe will be successful and document completely that you have fulfilled all your transition and training obligations.
Sorry — there simply is not a ‘magic formula’ or ‘magic multiple’ used in valuing businesses.
The reason that ‘one size fits all’ does not apply is that valuations vary industry by industry, geographic region by region, by size of the business, the type of business, from buyer to buyer and by a buyer’s perceptions of either or both the Risk or Opportunity involved. There are dozens of books on the topic and even when CPA’s take 6 or more different formulas and average them to arrive at a price it might be mathematically correct —- but very rarely will it have any relationship in the real world to the fair market value of the subject business.
Many people believe that a company’s revenues determine value — but if one company does $10 million a year and loses money is it logical that it is worth more than one doing $5 million and making a $1 million a year? What can be a good starting point is ROI — Return on Investment but first you need to understand EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization and after management expense and after removing all Owner Perks). If EBITDA is expressed as a % of a given Purchase Price, you have what the ROI for that period of time if a Buyer had paid the Purchase Price in cash [i.e. no leverage]. Different buyers have different requirements and expectations when it comes to ROI — so while this starts to clarify the valuation picture it is just one of the key issues involved in valuations.
Among the other factors are the stability of margins, trend of revenues, any customer or vendor concentrations, expiring patents or contracts, environmental risks, technology changes within the industry and a number of other factors that can strongly influence a buyer’s expectation of ROI and therefore the value of a business.
With businesses with market values of less than $5 million a major factor affecting value, marketability and being able to achieve The Best Possible Transaction is whether or not the business and a given buyer can qualify for SBA guaranteed financing that can be the means to an all cash transaction with as low as a 10% to 20% buyer cash down payment.
The bottom line is that, in our opinion, the only people who can accurately provide you with an accurate Fair Market Valuation of your business are those who are actively involved in and ‘know the market’. One caveat though is you should not pay for a valuation as there are a host of people who do ‘valuations for a fee’ and they have no real contact with the marketplace, just a series of textbook formulas. Many charge significant valuation and other front end fees, costs and retainers and collecting those monies is really their core business —- not the sale of businesses. In our case, we will provide you with a fair market valuation of your business without you incurring any cost or obligation — and in many cases those business owners then retain us to sell their businesses and because we don’t get paid a dime until the business is sold, we have no incentive to ‘tell you what you want to hear so you will pay a fee’ and thus we need to be very accurate in our valuation work. As you will see elsewhere on this website, when we take a business to market we do so without naming a price —- as we do run across buyers who are willing to pay more than what we believe a business is worth and if we named a price we would have ‘left money on the table’, which is an unpardonable sin!
We feel that it is very important for the business broker and the client to be a ‘good fit’ and thus we state our criteria.
BUSINESSES THAT WE DON’T ACCEPT: Restaurants, hotels, gaming sites, marijuana dispensaries, single retail stores, taverns, startups, turnarounds and companies looking for financing.
CLIENTS WE DO ACCEPT: Manufacturing, Distribution, Service, Hi-tech and E-commerce businesses represent about 95% of the 400+ closed transactions that I have been involved with over the years. Note: ‘Service’ covers a broad range of businesses, such as medical/dental practices, engineering, testing, investment advisory firms, spas, molding, assembly, and other types of services.
SIZE OF BUSINESS HANDLED: The best measure is the Fair Market Value of the business — i.e. what it can be sold for. Over the years the largest transaction was at $27 million the smallest was under $300,000 and about 70% of the transactions have been between $1 million and $5 million in market value.
GEOGRAPHIC LOCATION: We cover Los Angeles, San Diego, and Orange Counties. In addition, via referral, over the years we have also handled transactions in Northern California, Alaska, Idaho, South Dakota, the Pacific Northwest, and a few on the East Coast.
Source of Clients: Approximately 70% referral, about 10% ‘repeat clients’ and about 20% new clients who just ‘found’ us. Perhaps the greatest compliment we can receive are the 20+ clients who engaged our services to sell their businesses after first meeting us when they bought the business through us from one of our clients — in our minds that clearly shows that they know that we ‘bring added value’ to both sides of the transaction in working towards ‘win-win’ transactions.
Buyer Data Bases: We receive numerous inquiries from individuals looking to buy a business and that continuously updated file averages about 200 people and contains their financial capacity, type of business they are interested in, their preferred geographic location, their business background and their contact information.
Larger Business Buyer Data Bases: We have built an impressive data base of regional, national and international Investment Groups that are searching for acquisition candidates in a wide range of different industries that typically include the market areas that we serve. Three subsections of this data base include (a) US corporations seeking acquisitions, (b) Private Equity firms seeking acquisitions for their corporate clients, and (c) International buyers.
Targeted Searches: While the above data bases are an effective resource, in most cases, we start the buyer search by determining who the most logical buyers might be that statistically should be willing to pay the greatest amount of money for a given company in a given industry and in a given market area. Those targeted buyers might be local, regional, national or international and we either have, or will buy/rent, the data bases necessary to identify them.
Blind Advertising: Subject to the size and nature of the client’s business we also post ‘blind listings’ on a number of websites and/or industry publications that people looking to buy businesses frequent. The listings are ‘blind’ in the sense that we never post enough information to allow someone to be able to accurately identify or even guess the identity of our client.
Industry Consultants: Subject to the size and nature of our client’s business and who the ideal targeted buyer might be we have on occasion hired industry specialists as consultants to help compile the targeted buyer data bases.
STARTING THE SEARCH: Once the targeted buyer data bases are created it is a matter of establishing contact and there is no substitute for direct person to person contact to identify the decision makers and also their degree of both interest and financial capacity.