If you're like most private business owners, you haven't given transition planning much formal thought. We'd like to show you why you need to think seriously about this important issue now, rather than later.
Over the next decade it is predicted that 20 million privately owned businesses in the western economies are going to change hands, this is estimated to be 65% of all privately owned businesses. This is a major economic consequence involving some 30 million owner managers, 100 to 200 million employees, 25 million leased or owned properties, and trillions of dollars in value. It will be the largest transfer of wealth in the history of free market economies and with many more sellers than buyers, it is inevitable that there will be downward pressure on business values.
KEYS TO SUCCESS WORKSHOPS
Although most business owners understand the importance of planning, very few private business owners have a strategy for transition, which includes ensuring that the business transfer will achieve their personal goals and satisfy their financial needs.
After all your years of dedication and hard work, successfully transitioning your business is the crown jewel. Learn how you can keep control over the process, maximize business value, minimize taxes and much more. Improve your understanding of business value and internal and external transfer methods. Get ahead of the pack and realize the true value of your investment.
Enroll today for a FREE interactive workshop where you will learn important transition strategies, hear horror stories and have the opportunity to ask pertinent questions in both a formal and informal capacity.
UPCOMING EVENTS
Natick
With: Delta Capital Group, ROCG Shepherd & Goldstein Consulting Group LLC and Tarlow Breed Hart & Rodgers, PC
When: Thursday, September 20, 2007, 2:00 pm - 6:00 pm with complimentary cocktails and hors d'oeuvres to follow. Check in from 1:30 - 2:00.
Where: The Crowne Plaza (10 minutes from Mass Pike)
1360 Worcester Road, Route 9, Natick, MA
CLICK HERE to Register for this event!
Plymouth (1)
With: Delta Capital Group, Plymouth County Business magazine, ROCG Shepherd & Goldstein Consulting Group LLC and Sovereign Bank
When: Thursday, September 27, 2007, 7:30 am - 9:00 am. Continental Breakfast will be served.
Where: Plymouth County Business conference room
225 Water Street, Plymouth, MA
CLICK HERE to Register for this event!
Plymouth (2)
With: Delta Capital Group, Plymouth County Business magazine, ROCG Shepherd & Goldstein Consulting Group LLC and Sovereign Bank
When: Friday, October 12, 2007, 7:30 am - 9:00 am. Continental Breakfast will be served.
Where: Plymouth County Business conference room
225 Water Street, Plymouth, MA
CLICK HERE to Register for this event!
Monday, August 27, 2007
Wednesday, June 20, 2007
Exit Strategy - A Business Owner's Story
At some point in time every business will transfer ownership. Some will transfer ownership to their children or key employees; others will transfer to third parties. If there is a possibility that you will transfer ownership to a third party – and there almost always is a possibility that you will – you should be very careful about the decisions that you make in the one to three years before selling your company that involve large strategic decisions that may affect the company's value.
I have some personal experience with this. I owned a software company that provided information technology to the health care market. In what I thought was a logical growth pattern, we expanded geographically into New York and New Jersey. We opened several sales offices in the area and hired salespeople to staff them. The cumulative cost of opening offices, hiring & training salespeople, travel, etc, was nearly a Million dollars. We also had to pay our trainers a premium (in addition to a per diem) as they didn't like to train in NY & NJ. We found that the market there wasn't willing to pay our standard rates, so we had to decrease our prices.
At about the same time we were being urged by some of our "early adopter" clients to develop an electronic medical record (EMR). We proceeded to do this at a cost of approximately $750K and installed the system in three of our clients’ facilities at an extremely reduced price. The extra support and maintenance required produced an additional set of costs not reflected in the above.
Our ultimate buyer already had sales offices in NY & NJ. They were interested in penetrating New England and they were having a hard time doing it. Whenever we competed against them in New England we beat them. Also, they had their own EMR. They were not interested in our technology; they were interested in our customer base, especially in New England.
So how does this affect value? In most cases, a company's value is a multiple of cash flow or EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization). If we had NOT expanded into NY & NJ and NOT developed the EMR, we would have saved $1.75 million which would have been added to EBITDA. Since value is a multiple of EBITDA, our company value would have increased substantially. An even better strategy would have been to take a fraction of the money that we spent penetrating NY & NJ and add a couple of more salespeople in New England, thus increasing our customer base in the buyer's desired territory. This most likely would have increased the multiplier effect, further increasing the company's value.
So what's the lesson learned here? Research the type of buyer that is most likely to buy your company. By knowing that, you can make the correct strategic decisions that will increase the value of your company. A good M&A Advisor (Intermediary) will help you identify the appropriate buyer type for your business (no, I didn't have a good intermediary!).
The most likely type of buyer for your company will depend on several factors – most notably the size of your company and the industry that you are in. We’ll divide the universe of buyers into three broad types: individual buyers, financial buyers, and strategic buyers. Keep in mind that these buyer types can sometimes overlap with one another.
You will encounter individual buyers if your business is worth less than $2 or $3 million. They are usually not strategic buyers because they don't already own or operate a company. They were not a factor in my situation.
Financial buyers are generally more sophisticated buyers who are looking for an ROI in excess of 25-35% per annum. Financial buyers include Private Equity Groups (PEGs), large pools of capital collected in a Fund and used to invest in Private companies. A PEG may have been a good option for me. However, PEGs were not as numerous or visible then as they are today and, consequently, they were not considered an option in the acquisition of my company.
Strategic buyers are usually companies operating in the same industry: competitors, suppliers, or even customers. These buyers are looking for cost or revenue synergies – areas in which the combined company can increase its cash flows to a greater level than the two companies could achieve separately. For this reason, strategic buyers are most likely to pay a premium over what you may think your company is worth. Ultimately, a large, public competitor acquired my company and it was a pure strategic acquisition.
Had I kept this potential exit in mind at the beginning of the process, I would have positioned my company so I could have maximized value to the potential acquirer – thereby maximizing the proceeds from the sale. Always begin with the end in mind, and weigh carefully the impact those large strategic decisions may have on your company's value.
I have some personal experience with this. I owned a software company that provided information technology to the health care market. In what I thought was a logical growth pattern, we expanded geographically into New York and New Jersey. We opened several sales offices in the area and hired salespeople to staff them. The cumulative cost of opening offices, hiring & training salespeople, travel, etc, was nearly a Million dollars. We also had to pay our trainers a premium (in addition to a per diem) as they didn't like to train in NY & NJ. We found that the market there wasn't willing to pay our standard rates, so we had to decrease our prices.
At about the same time we were being urged by some of our "early adopter" clients to develop an electronic medical record (EMR). We proceeded to do this at a cost of approximately $750K and installed the system in three of our clients’ facilities at an extremely reduced price. The extra support and maintenance required produced an additional set of costs not reflected in the above.
Our ultimate buyer already had sales offices in NY & NJ. They were interested in penetrating New England and they were having a hard time doing it. Whenever we competed against them in New England we beat them. Also, they had their own EMR. They were not interested in our technology; they were interested in our customer base, especially in New England.
So how does this affect value? In most cases, a company's value is a multiple of cash flow or EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization). If we had NOT expanded into NY & NJ and NOT developed the EMR, we would have saved $1.75 million which would have been added to EBITDA. Since value is a multiple of EBITDA, our company value would have increased substantially. An even better strategy would have been to take a fraction of the money that we spent penetrating NY & NJ and add a couple of more salespeople in New England, thus increasing our customer base in the buyer's desired territory. This most likely would have increased the multiplier effect, further increasing the company's value.
So what's the lesson learned here? Research the type of buyer that is most likely to buy your company. By knowing that, you can make the correct strategic decisions that will increase the value of your company. A good M&A Advisor (Intermediary) will help you identify the appropriate buyer type for your business (no, I didn't have a good intermediary!).
The most likely type of buyer for your company will depend on several factors – most notably the size of your company and the industry that you are in. We’ll divide the universe of buyers into three broad types: individual buyers, financial buyers, and strategic buyers. Keep in mind that these buyer types can sometimes overlap with one another.
You will encounter individual buyers if your business is worth less than $2 or $3 million. They are usually not strategic buyers because they don't already own or operate a company. They were not a factor in my situation.
Financial buyers are generally more sophisticated buyers who are looking for an ROI in excess of 25-35% per annum. Financial buyers include Private Equity Groups (PEGs), large pools of capital collected in a Fund and used to invest in Private companies. A PEG may have been a good option for me. However, PEGs were not as numerous or visible then as they are today and, consequently, they were not considered an option in the acquisition of my company.
Strategic buyers are usually companies operating in the same industry: competitors, suppliers, or even customers. These buyers are looking for cost or revenue synergies – areas in which the combined company can increase its cash flows to a greater level than the two companies could achieve separately. For this reason, strategic buyers are most likely to pay a premium over what you may think your company is worth. Ultimately, a large, public competitor acquired my company and it was a pure strategic acquisition.
Had I kept this potential exit in mind at the beginning of the process, I would have positioned my company so I could have maximized value to the potential acquirer – thereby maximizing the proceeds from the sale. Always begin with the end in mind, and weigh carefully the impact those large strategic decisions may have on your company's value.
Wednesday, May 23, 2007
In Defense of Small Business
I read an article in yesterday's Wall Street Journal that really irritated me and I feel the need to comment on it. A small Trenton, NJ manufacturer of all-natural fertilizer (TerraCycle Inc. - www.terracycle.net) is being sued by industry giant Scotts Miracle-Gro Inc. The article states that Scotts claims, among other things, that TerraCycle's green and yellow packaging infringes on the trade dress of the Scott Miracle-Gro brand and that TerraCycle made false claims about the superiority of its product. Scotts asks that all gains, profits and benefits generated by the alleged infractions be awarded to Scotts. This would destroy TerraCycle - a company with just $1.5 million in annual sales. By comparison, Scotts Miracle-Gro Inc. is a $2.7 billion company.
I'm not a lawyer so I didn't even bother reading the fine print of the lawsuit itself. However - this looks to me like a pretty cut and dry case of bullying by a huge corporation with a cadre of lawyers looking for something to do to justify their redundant jobs. Might as well wipe out an up-and-coming rival whose annual revenue is probably less than the Top Lawyer's 2006 compensation. (Have to look that one up in the annual report to verify it but it probably is not too far off!) Yeah, TerraCycle's packaging looks vaguely like Scott's. But of course your colors are going to be green and yellow if you are a fertilizer company. The "false claims" claim looks bogus too. The whole thing looks like a sham of a lawsuit to slap that pesky mosquito of a rival who can't afford a costly legal defense.
TerraCycle - a truly entrepreneurial company I first read about in Inc. magazine - is using a blog as its main defense - www.suedbyscotts.com. I believe strongly in the capitalistic system and that only companies which operate efficiently with a quality product and/or service should survive. But - I don't believe in death by lawsuit. TerraCycle did nothing deserving the harsh terms of this lawsuit - they are just good marketers. I know I for one will not be using the Scotts' 5 Step System on my lawn ever again. Too bad that the $500 in lost revenue from me as a customer will do nothing to this $2.3 billion giant.
That website again is www.suedbyscotts.com.
I'm not a lawyer so I didn't even bother reading the fine print of the lawsuit itself. However - this looks to me like a pretty cut and dry case of bullying by a huge corporation with a cadre of lawyers looking for something to do to justify their redundant jobs. Might as well wipe out an up-and-coming rival whose annual revenue is probably less than the Top Lawyer's 2006 compensation. (Have to look that one up in the annual report to verify it but it probably is not too far off!) Yeah, TerraCycle's packaging looks vaguely like Scott's. But of course your colors are going to be green and yellow if you are a fertilizer company. The "false claims" claim looks bogus too. The whole thing looks like a sham of a lawsuit to slap that pesky mosquito of a rival who can't afford a costly legal defense.
TerraCycle - a truly entrepreneurial company I first read about in Inc. magazine - is using a blog as its main defense - www.suedbyscotts.com. I believe strongly in the capitalistic system and that only companies which operate efficiently with a quality product and/or service should survive. But - I don't believe in death by lawsuit. TerraCycle did nothing deserving the harsh terms of this lawsuit - they are just good marketers. I know I for one will not be using the Scotts' 5 Step System on my lawn ever again. Too bad that the $500 in lost revenue from me as a customer will do nothing to this $2.3 billion giant.
That website again is www.suedbyscotts.com.
Monday, April 30, 2007
The Perfect Storm - Is Now the Ideal Time to Sell?
Most people are familiar with the "Perfect Storm" - probably because they read the Sebastian Junger book or saw the movie. The Perfect Storm refers to the unique combination of atmospheric conditions that led to the massive storm that claimed the fishing boat Andrea Gail described in Junger's book. I read the book while I was out to sea for a month with the US Navy. Despite the fact that the ship I was on was quite a bit larger than a fishing boat, it was somewhat disconcerting reading about that storm while at sea!
Today we are seeing some signs of a different type of "Perfect Storm" - a combination of economic factors that together make this a great time to sell a business. First, interest rates are extremely low. The Fed has recently stopped raising their short-term Fed Funds target rate, but how long short (and long) term rates will remain this low is anybody's guess. Second, the long term capital gains tax rate is a relatively low 15%. I would bet that this will be raised in the near future depending on the results of the 2008 Presidential election - perhaps even sooner. Finally, there is a lot of undeployed cash out there in companies and investment funds looking to go to work. Investors want better returns than Savings Account returns. Acquisitions are a good way to put this money to work. Like the interest rates and tax rates, the well of money will dry up at some point too - especially after a few bad acquisitions by a few too many acquirers.
Together with this "Perfect Storm" is the pending retirements of the baby boomer generation. According to consulting firm ROCG, between 2 and 3 million small to medium-sized businesses will be tranferred to new ownership as the baby boomer generation reaches their 60s. This event could create an environment where there are significantly more sellers than there are buyers. (By the way, if you are a business owner you can receive a free report on business owner transition plans by taking a survey at the following address: www.business-transition.com/survey. Your code is A5.)
I don't know how long the "Perfect Storm" conditions will last, and I don't know exactly what is going to happen when the Baby Boomers start retiring. But at the risk of sounding self serving, I do believe that now is a good time to sell a business.
P.S. Link to a good article related to above: http://www.bizquest.com/resource/private_equity_baby_boomers_soon_will_be_driving_-203.html
Today we are seeing some signs of a different type of "Perfect Storm" - a combination of economic factors that together make this a great time to sell a business. First, interest rates are extremely low. The Fed has recently stopped raising their short-term Fed Funds target rate, but how long short (and long) term rates will remain this low is anybody's guess. Second, the long term capital gains tax rate is a relatively low 15%. I would bet that this will be raised in the near future depending on the results of the 2008 Presidential election - perhaps even sooner. Finally, there is a lot of undeployed cash out there in companies and investment funds looking to go to work. Investors want better returns than Savings Account returns. Acquisitions are a good way to put this money to work. Like the interest rates and tax rates, the well of money will dry up at some point too - especially after a few bad acquisitions by a few too many acquirers.
Together with this "Perfect Storm" is the pending retirements of the baby boomer generation. According to consulting firm ROCG, between 2 and 3 million small to medium-sized businesses will be tranferred to new ownership as the baby boomer generation reaches their 60s. This event could create an environment where there are significantly more sellers than there are buyers. (By the way, if you are a business owner you can receive a free report on business owner transition plans by taking a survey at the following address: www.business-transition.com/survey. Your code is A5.)
I don't know how long the "Perfect Storm" conditions will last, and I don't know exactly what is going to happen when the Baby Boomers start retiring. But at the risk of sounding self serving, I do believe that now is a good time to sell a business.
P.S. Link to a good article related to above: http://www.bizquest.com/resource/private_equity_baby_boomers_soon_will_be_driving_-203.html
Wednesday, April 18, 2007
Value = Increased Cash Flow / Risk
If you took an Electrical Engineering course in college, you probably remember (vaguely!) the voltage formula V = IR. Well, a good basic formula when thinking about increasing value in your company is V = I/R. V is value of course. I stands for "Increased Cash Flow" and R is "Risk". Since Risk is the denominator in our formula, decreasing Risk increases Value. Let's take a quick look at each of these elements.
When thinking about increasing cash flow the first thought that comes to mind is to increase sales. But be careful you don’t go after low- or no-margin work in an effort to simply increase volume. If your gross margin dips below the industry average you will hurt your company’s value. Also – watch your expenditures. Clean up your P&L and eliminate any unnecessary expenses. The most likely valuation of a profitable private company involves the capitalization of cash flow; so every dollar saved on your P&L equates to two to four dollars (or more) of value in your company.
To decrease risk you’ll want to put yourself in the shoes of a potential buyer of your company. What would you want to see if you were looking at your company for the first time? First, you will want to have updated information systems, including up-to- date accounting software such as Quickbooks. Second, make every effort to maintain a diversified customer base. Customer concentrations for any single customer of greater than 25% can drag down value. Finally, make sure that you the owner are as separable from the company as possible. Train managers or key employees and delegate as many duties as you feel comfortable to these employees. A business is difficult to sell if the owner is too embedded in it.
If you do a little each day to increase the cash flow and decrease the risk of your company you will be sure to increase its value over time.
When thinking about increasing cash flow the first thought that comes to mind is to increase sales. But be careful you don’t go after low- or no-margin work in an effort to simply increase volume. If your gross margin dips below the industry average you will hurt your company’s value. Also – watch your expenditures. Clean up your P&L and eliminate any unnecessary expenses. The most likely valuation of a profitable private company involves the capitalization of cash flow; so every dollar saved on your P&L equates to two to four dollars (or more) of value in your company.
To decrease risk you’ll want to put yourself in the shoes of a potential buyer of your company. What would you want to see if you were looking at your company for the first time? First, you will want to have updated information systems, including up-to- date accounting software such as Quickbooks. Second, make every effort to maintain a diversified customer base. Customer concentrations for any single customer of greater than 25% can drag down value. Finally, make sure that you the owner are as separable from the company as possible. Train managers or key employees and delegate as many duties as you feel comfortable to these employees. A business is difficult to sell if the owner is too embedded in it.
If you do a little each day to increase the cash flow and decrease the risk of your company you will be sure to increase its value over time.
Delta Capital Group
Below is a summary of who we are taken from our website. Please visit us at www.deltacapitalgroup.com for more information including some articles we've written. We focus on selling "smaller" businesses. Companies fitting the "smaller" definition are between about $1m and $20m in annual sales. We feel that business of this general size range have been underserved by quality business intermediaries. Our goal is to bring the same level of service that you'll see in your sophisticated larger M&A firms to smaller companies. We work with a limited number of companies at any one time. So - you and your business will not be a small fish in a big pond at Delta Capital Group.
From our website:
Delta Capital Group is a full service Business Sales and Acquisition firm serving the lower middle market. We use our experience as former business owners, entrepreneurs, and managers to strategically position a company for maximum value.
Delta Capital Group will:
Objectively evaluate your company to determine your readiness to go to market.
Help you determine what aspects of the business are of greatest value to potential acquirers.
Give you concrete advice on how to enhance the value of your business – often in parallel with going to market.
Find the right buyer for your business, with the right price, terms, and structure so you achieve your goals for yourself and your business.
From our website:
Delta Capital Group is a full service Business Sales and Acquisition firm serving the lower middle market. We use our experience as former business owners, entrepreneurs, and managers to strategically position a company for maximum value.
Delta Capital Group will:
Objectively evaluate your company to determine your readiness to go to market.
Help you determine what aspects of the business are of greatest value to potential acquirers.
Give you concrete advice on how to enhance the value of your business – often in parallel with going to market.
Find the right buyer for your business, with the right price, terms, and structure so you achieve your goals for yourself and your business.
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