March 5, 2024
A national real estate investment and management group retain us to recover a real estate tax overpayment from 2005. The amount of the claim was $641,000. When the county finally approved the refund payment in February, 2024, the claim plus interest resulted in a payment to the client of just under $1.3mm!!!
January 16, 2020
VALUATIONS ARE SKY HIGH!!! If your business has the characteristics that Private Equity firms seek, the multiples of EBITDA are setting records. Contact us today to discuss your strategic options.
January 7th, 2019
Happy New Year. If you as a business owner, or you as an advisor to business owners are discussing selling a business in the foreseeable future, here’s some items to think about as you prepare for a sale:
EARL CORPORATE ADVISORS
Jay ehrlich
737 300 7446
Business owners are so busy running their business that frequently, when they decide that they want to sell the business, they have not taken steps to present the business in the most attractive light. In that regard, selling a business is analogous to selling a home. Usually there are steps required to create the optimal presentation. These steps should be done well in advance of bringing the business to market.
Here are the steps a business owner should consider before putting the company up for sale:
1. Determine Your Reasons for Selling
There are limitless motives for selling a business and those motives can determine the strategy of the sale process and structure of a transaction. Typical reasons for selling can include:
· Desire of owner for a lifestyle change;
This could be retirement, health, desire to slow down or enjoy the fruits of your success. It is important to consider what the financial goals are. For example, it could be maximization of sales price, income, tax avoidance or others. Replacement of the income taken out of the business must be considered.
· Transfer of the business to an employee or employees or family member;
This motivation can create a very different result for the seller. It might be possible that getting the highest price is not the goal with one of these parties as the buyer. Some of this is offset by not having the same fees for a sales commission and legal costs as an arm’s length sale would create.
· Sale to a co-owner;
Similarly to the transaction to an employee or family member, this type of transaction may not intend to realize the highest selling price.
· Diversification of assets;
In many cases, the business is a significant portion of the business owner’s net worth. The business while also providing income may inhibit the owner’s liquidity and increase the risk that lack of diversification of assets creates.
· Estate planning;
While estate planning is complex, and the details are beyond the scope of this article, there are tax and liquidity issues to consider that could very well require selling the business to minimize taxes and disruption to the business.
· Sale driven by external event such as divorce or death;
While the cause of this type of transaction might inhibit the ability to plan extensively and the timing and demand of a sale could limit the selling price, it is still possible to anticipate factors such as these and do some planning.
2. Evaluate the business objectively and address strengths and weaknesses
Whether you bring in an outside consultant or review the business internally, a SWOT (Strengths, Weaknesses, Opportunities, Threats) review is an important exercise.
Strengths- Identifying strengths is the easiest task of the SWOT review. Strengths can include personnel, vendors, customers, quality of product or service, reputation, uniqueness, intellectual property and barriers to entry.
Weaknesses- What are the main reasons you lose business to a competitor? Price, quality, production and personnel are frequently the reasons. Listen to the market feedback as well as your sales team. Address areas where improvement can be achieved prior to going to market.
Opportunities – This is a key area for outside buyers. Opportunities can come from several places. New markets, technologies, demographics, products, all can be a source of opportunities. It is important to highlight these in the sales process particularly, if these opportunities are still in the early stages.
Threats- In the same fashion that changes in demographics or markets bring opportunities, they also can bring threats. Obsolescence, shifts in market tastes, technology and stiffer competition can all be threatening. Adequately addressing threats can enhance the value of a business.
3. Develop a Strong Management Team
The same personality traits that allowed the owner to develop a successful business, drive and determination and control can also be factor in diminishing the value of the business. Said another way, if you are the main driver of value, and you are not going to remain with the business long term, the value is diminished. Ask yourself if you are the most valuable player on your team. If the answer is yes, you need to take steps to change that answer.
Conversely, the more easily replaceable you are as an owner, the more valuable your business will be. Identify those facets of the business where your presence is critical. Prepare to utilize your key employees instead.
A potential buyer is going to consider the impact of the loss of key employees, and this includes your contribution. Consider these steps to limit the impact of your departure:
• Build a strong management team by cultivating and developing key employees within the organization. If the talent is not currently in house, hiring and developing individuals to improve the weaknesses is critical.
• Address customer service issues and ensure key customers are likely to stay during a transition.
• Create teams within organization to limit the need for your input.
• Develop retention and compensation plans for key employees.
4. Address your accounting and financial information
Having a clean set of books is extremely important in supporting a business valuation. You should evaluate your financial monitoring and review procedures, as current accounting practices might be acceptable now, but bringing on an outside accounting firm to review prior years will help address any looming financial issues before buyers come in.
Additionally, you and your advisors will want to review all discretionary and extra ordinary expenses that can be added back to the income statement to show better net income and EBITDA (earnings before interest, taxes, depreciation and amortization).
Typical addback items include owner’s compensation above the market value costs of an arm’s length manager of the business, automobile and related auto expenses, phone, life insurance, travel and meals and entertainment.
5.Identify potential buyers pool
Third Parties-Strategic Buyers, Financial Buyers
Strategic buyers are loosely defined as businesses who can gain synergies by acquiring a business. Typical strategic buyers include competitors, customers and vendors.
Financial buyers include private equity and private family offices looking for investments.
Employees
Employees can be the logical buyer(s). They know the business and possibly have thoughts on how to grow it. They can partner with financial buyers or purchase the business through an ESOP.
6. Consider your long-term needs
If you are giving up a large amount of your annual income with the sale of the business, it’s important to work with your financial advisor and determine what makes sense in a sale. If you are taking $1,000,000 a year out of the business and the valuation for the business is three times that, it might not make sense to sell at all. Consider your post sale needs and what the asset reallocation post sale will look like with your advisor.
December 11, 2018
Is your business or client looking for capital but not ready or interest in selling the entire business? Here are some different options and the steps to bring capital into the business.
Determining Company’s Objectives and Liquidity Needs
The preliminary issue for a business seeking capital is determining what the goals of the business are and what needs for capital that creates. Typical reasons could be among those stated in Step 1. After determining the answers to Step 1. Step 2 analysis includes how much capital and timing issues.
Step 1
What is the objective for the liquidity need?
Shareholder dividend
Shareholder buyout
Estate or succession planning
Acquisition
Internal growth/expansion
Divorce
Step 2
How much and when will the capital be needed to fund this event?
Determining Company’s Liquidity Sources and Availability
Upon making the Step 1 and Step 2 conclusions, Step 3 is to review the available sources and resources to the Company.
Step 3
What are the company’s liquidity sources?
1. Existing Capital/Assets
Current Balance Sheet-
Excess cash
Line of credit availability
Non core assets (real estate, equipment, non core operating divisions)
2. New Capital
Debt or equity
Consider: Valuation multiples, leverage multiples/asset coverage, interest rates
Outside financial investor or other capital source
private equity/family office/mezzanine fund
Strategic Capital
Capital investment from larger strategic
Joint venture with strategic
Reviewing Transaction Options
Step 4
What transaction or combination of transactions are available to facilitate the liquidity event?
Recapitalization
Debt
Leveraged dividend
Leveraged buyout of minority equity interest
Leveraged buyout of minority equity interest through an ESOP
Growth capital investment in the form of debt (i.e. term, line of credit, subordinated)
Equity
Buyout of minority interest by an outside investor
Growth capital investment from outside equity investor
Sale of Assets
Sale of a division to a joint venture partner
Sale of non core divisions
Sale of non core equipment/facility
Sale leaseback of core facility/equipment
Debt (Leveraged) Recapitalization
Pros
Provides liquidity without diluting current/remaining shareholders
Tax advantages
Generally lower cost of capital (current low interest rates)
Cons
Increased risk as a result of higher interest expense and debt on balance sheet
Debt (Leveraged) Recapitalization utilizing an ESOP structure
Pros of Adding ESOP structure
Possible Tax advantaged structure to seller and Company
Increased employee morale/involvement through equity ownership
Generally lower upfront transaction costs
Cons of Adding ESOP structure
Repurchase liability for the Company
Additional regulatory scrutiny
Annual maintenance costs (i.e. reporting/annual valuation)
Equity Recapitalization
Pros
Provides current liquidity and upside growth participation:
With no additional debt/interest expense
While maintaining control of the business
Potential to partner with “smart money”
Strategic Partner
Financial Partner
Cons
Smaller universe of potential investors
Partner may influence strategic decisions (i.e. board seat(s))
Increase legal and reporting fees
Transaction price based on current operating income vs. pro forma operating income (i.e. generally no control premium)
Sale of Assets (ex. business segment, equipment, IP, customer lists, etc.)
Pros
Potential to unlock “hidden” value
Focus resources on core business/operations
Cons
No future participation in any upside
Selling early/cheaply
Likely longer timetable to execute
Joint Venture/Partnership
Pros
Continued participation in any upside
Potential to realize synergies from increased scale/platform
Wide range of potential transaction structures available
Cons
Increased transaction complexity (i.e. governance, exit strategy, etc.)
Continued resource/support need
Smaller universe of likely partners
Growing Your Business Through Acquisition - Published in Printwear Magazine November 12,2018
How To Grow Through Acquisition
NOVEMBER 9, 2009
by:
Nearly every company has growth in mind. In a public company, the idea is that growing earnings creates a growing stock price. While we cannot measure that in privately held companies the same way, growing earnings does increase the value of your business.
The way we spend our typical business days trying to grow the business is known as “organic” growth; this applies to any way we try and grow the company from the inside. New products, new services, new sales people, more business from existing customers, new distribution channels are all examples of organic growth. In this discussion we will consider how to grow your business externally, via acquisition of other businesses or product lines.
Reasons to acquire
Typically, if you are the owner of a privately held business, at some point you are going to need an exit strategy. The exception is if there are family members to continue the business. If there is no logical successor to the business, your thought plan should be to grow the business until it is large enough to be what’s called “of scale.” Once it reaches the critical mass of scale in revenues and earnings, there is a bigger universe of potential buyers willing to pay a higher multiple of earnings when you decide it’s time to get out.
There is another scale issue that comes into play with acquisitions: the fact that you are spreading fixed costs over a greater number of sales dollars. Following the acquisition, you still have the same number of vice-presidents, receptionists, accountants and, if you move the new business into the old one, the same real-estate costs. Yet those and other fixed expenses are now costing you less per sales dollar than they were before.
Additionally, if the acquisition contemplates adding more sales volume to your existing printing operations, there is the opportunity to expand gross margins both through better manufacturing overhead coverage and weeding out some of the lower margin products of the combined entities.
As a result of the increased sales, as well as coverage of overhead and other fixed costs, each additional sales dollar creates more money at the bottom line. The combination of increased profit margins and a greater earnings multiple produce a powerful multiplicative effect on the valuation of the business. For example:
Company 1 Company 1 plus acquisition half its revenue size.
Sales $8,000,000 $12.000.000
Gross Margin (Assumes 4% improvement due to efficiencies and overhead)
coverage).
$1,600,000 $2,880,000
Fixed Costs $ 800,000 $ 1,000,000
Ebitda (earnings before interest,taxes, depreciation and amortization)
$ 800,000 $1,880,000
Market multiple of Multiple of 5x Ebitda 6x Ebitda Multiple for “scale” and bigger
Selling Price $4,000,000 $11,280,000 universe of buyers.
The power of improved margins and overhead coverage is readily apparent here. Note that the combined company increased its sales by 50 percent and margins were conservatively increased from 20 to 24 percent. Even with an increase in fixed costs for new people and expanded sales, the EBITDA more than doubled. Finally, the value of the business has almost tripled.
Searching for acquisitions
There are various sources for finding quality companies to acquire. It is crucial to note that anybody you solicit agrees that your conversations will be held in the strictest confidence. A party considering selling its business has to be concerned that word will leak out to its customers, employees and suppliers, among others. If a potential seller’s interest in selling gets into the marketplace, it can cause damage to the value of the business. Confidentiality must, therefore, be maintained at all times.
Direct contact is the best way to do a search. You should have a preconceived idea of the characteristics of your acquisition targets; it is crucial that you get to the decision maker. When my company acquired the American Equipment product line from Advance Process Supply in 1993, it was the result of a cold call I had made nine months earlier after we had acquired the M&M Research line from Medalist Industries. Advance Process Supply had a New York Stock Exchange parent company and, in my first conversation with its CEO, I could tell he was quite skeptical that we could buy the line. Nine months later, he called me directly and asked if we were still interested. If you are not a direct competitor, the recipient might express no interest but refer you to another company that is a fit.
In addition to direct owner contact, your own employee base is an excellent source of acquisition intelligence. Your sales folks might get info from their customers, your purchasing people might hear something from a supplier, and your distribution channels hear everything going on in the market.
Bankers, lawyers and accountants are also excellent deal sources. Your own professionals should be aware that you are on the lookout for acquisitions. In fact, they should be anxious to help you since doing a deal means more business for them.
Lastly, but certainly as crucial, is your friendly neighborhood business broker or investment banker. Frequently, an intermediary will not have your firm on its distribution list and an ideal candidate will be available for sale that is unknown to you