Thursday, March 31, 2011

Succession Stories: The Good, the Bad, and the Ugly

An article by Darren Dahl for Inc. Magazine:

"Entrepreneurs face steep odds in terms of successfully keeping their business in the family over the long term. Six entrepreneurs share their experiences–often wrought with emotion–while imparting lessons learned."

Wednesday, March 16, 2011

Warning to All Business Owners

They're back…

MAXIMA has received 4 calls since the new year from business owners concerning USA based Business Brokers or Merchant Banker groups that are calling them because they have a serious Buyer waiting to buy them.

The groups are primarily from Florida, Houston and Chicago.

The "snake oil" is the same as Alberta has seen many times before. While we won't specifically name them, we Googled these companies and can assure you - there are a long list of lawsuits in play.

The call follows the same sort of script:

1) We are calling you because we have a Buyer who wants to buy your business. All we need is a few of your financial details and we will help you sell for TOP dollar! Sign here...

2) We have a Buyer for your business, why don’t you fly down at our expense to
Houston and we will help you close the deal for BIG Dollars! Sign here…

3) We have thousands of Buyers across North America. We will get you the best price
for your business! Just sign here...

Even MAXIMA has received these types of calls and they can be pretty convincing... BUT this is a SCAM!

All they need is for you to sign their simple Work Agreement and provide your financial history and they will get right after this “once in a life time” opportunity.

The small print of this simple agreement obligates you to pay $30,000.00 - $50,000.00 US funds AND it provides them exclusive rights to your business for up to 5 years! You sell your business for any reason and you owe them up to 10% of the value of the transaction.

The truth is we all know if something seems too good to be true… it is!

As the business owner you have the right to sell your business any way you like.

When you get your call to sell your business be sure to DO YOUR HOMEWORK!

Pick a proven professional who can clearly demonstrate success in selling a business and can provide you with references and successes in Western Canada history.

After all it is your business, your money, and your future!

Monday, March 7, 2011

Types of Buyers: Who should you be targeting when you sell your business?

Buyer #1 is new to the industry and is willing to pay a premium for a company with stand-alone strength. They want the owner to be able to manage at an arms’ length from daily operations. This Buyer is not an expert but feels there is an opportunity in your business model so is primarily buying for the ROI.

You might want to consider how many buyers there could be that fit this profile, who feel your company provides the best, safest, and most reliable market rate of return. A LOT of time will be spent convincing this kind of buyer about risks and "how to" and education etc. The hand holding will consume a lot of energy and resources for a year or more.

The other challenge is when buyer does not know how a market sector/company works, they apply risk discount. They reflect that in how much cash on close verses vendor carry. The higher the perceived risk the higher the vendor carry will be.

Buyer # 2 is involved in a related or competitive industry now and is looking to buy market share. When Precision Drilling bought Kenting, Hank Swartout said he did not buy 100 more rigs... he bought 30% of the marketplace over night. That was worth top dollar to him. This Buyer has access to replace whatever skill sets necessary; the existing owners are able to stay for their work agreement and the buyer is able to replace their positions when the timeframe of their agreement is up.

This Buyer does not have to be trained on the ROI opportunities or educated in potential risks and upside because he is already aware of them. He is buying based on strategic advantages and possible higher rates of return.

Buyer #3 is someone or a group of people that is/are interested in having their own shop. Perhaps they tried to buy the shop they worked for but it was too big for a buyout, or the owner was too young (and not interested in selling), etc. These buyers have skills and a strong desire to make things work.

They will maximize how they use you and your partner for first few months, but they will move you out as soon as possible as they will want to do things their way.
This buyer requires the least amount of education and is looking for encouragement to take the risks. They will have desire to manage risk but charge forward.

Buyer # 4 is from the USA or Europe and is looking for a solid foot hold into the Canadian marketplace. They are going to keep everything status quo, except they will put in leaders from their existing operation somewhere in the world. It barely matters to them what the system is inside your group as they are going to change the model to fit with their other operations. They will spend top dollar to keep you and your partner around a long time as insurance of continued momentum. The only education required is the peculiar aspects of some of the Canadian work. This buyer already knows much about the marketplace.

This leads me to the question: If you do not know what a potential buyer is looking for your specific opportunity right now, why invest the next 3 years in preparing for buyer # 1 when the market place might have hungry #2, #3, and #4s determined to do a deal?

There are always buyers who feel they are smarter than sellers and looking for the right deal. With the average transaction taking a year from when you start, why would you not make progress on every strategy concurrently and cherry pick the deal that works best for you? The time to pursue one or two strategies at a time is MUCH longer than strategically testing the market for opportunities, while you're reinforcing your team and options.

Friday, March 4, 2011

Considerations when structuring your deal

While the basic deal price model is simple (i.e. when an all cash deal leads to a lower price and less cash; more financing leads to higher price) our goal is to work with the “pieces” of a deal structure that make a difference in the overall transaction value to the Owner.

Cash payment 
  •  Typically structured as a percentage of deal value.
  • Or, to hit a round number like $2M sound better than $1,999,000.

Stock and stock options, and/or warrants – while each deal is unique typically the moving pieces include: 
  • The stock portion of the transaction is calculated based on the share value formula identified and negotiated for the final sale agreement. 
  • Stock goes up as well as down so the stated stock benchmark price is a critical part of the process. All public companies will model deal based on stock going up. Obviously this works if the initial stock offering is priced below market price.
  • Typically after a significant successful transaction, stock will be positively impacted in the short run. 
  • The negotiations process to determine how much of the stock is free-trading versus hold periods, should be specifically addressed early in process. 
  • The strength and the merit of the stock issuer will drive the strategy for addressing the stock portion of the transaction value.
Vendor Carry (VC) has several driving factors from Buyers perspective 
  • This provides the Buyer some form of control to keep the Vendor at the table and interested in the outcome and future success of the business after the deal is done. 
  • This allows the Buyer to hold back some of the VC balance owing if material differences arise going forward i.e.: Vendor represented next 12 months would generate $5m in sales and the new Owner only gets $4m in sales. The Buyer has some leverage to renegotiate the deal and hang onto some of that cash. 
  • The VC funds and control of those funds saves the Buyer legal hassles of trying to claw some money back if the Vendor turns around and spends it all or moves it out of easy legal reach. 
  • The VC amount is normally linked to some mutually agreed milestones (i.e.: performance or date) which allow the Buyer to show his investors or management or shareholders they have negotiated the best deal. Note: This is not the same as future performance bonus.

VC has several driving factors from the Vendors perspective 
  • This can reduce Tax consequences by deferring some chunk of cash to the next tax year. Note: in some cases this leads to very significant tax savings.
  • This can allow the Vendor to structure a higher price by having the purchase price increased to reflect the risk of not receiving the cash on closing. This becomes very good leverage when the Buyer is using next year’s cash flow to pay off the purchase price.
  • During the term of the VC the Vendor can insist on having access to regular financial statements to allow Vendor to be aware of how the business is performing. If business is in line with proforma everyone will be happy. If Buyer starts stripping out assets or cash, the Vendor will know about that sooner than later. A good Sale Agreement will provide protection to Vendor if that becomes an issue.
Earn out
This typically comes up when the Buyer wants to hedge the company’s future by keeping the exiting Owners vested in the game. This is not the same as VC because with VC the Vendor receives his payment regardless of how the company performs. With Earn Outs you meet X objective and you get paid a premium dollar above what the original payments covered.

This would be above the Earn Out. You meet and exceed the bench mark goals and you receive a clearly identified bonus structured around a clearly specified working agreement.

Salary or compensation for working for company after change of control 

Every Buyer expects a certain amount of Vendor participation to assist the new Owner in moving the company forward. The time frame should be negotiated early in the process to avoid any misunderstandings on expectations.
This negotiation process should also identify the terms and conditions for remaining within the operating company for a period of time beyond the initial training. The negotiation process for those salaries should address the concern of work expectations versus compensation versus market value for those skills and services. No one would agree to work for low wages, complete the same amount of work as when you were an owner, and have the rewards go to the buyer.

Working capital calculations 
The working capital calculation will peg the amount of cash or cash equivalents that are considered necessary to include in the structure of the transaction. No Buyer wants to write a check to the Vendor and then start writing checks to operate the company unless the price has been discounted to make up for the shortfall and working capital.  

Some business owners leave redundant amounts of cash in the company for a rainy day. This Redundant Capital (RC) calculation must be established and planned for outside of the transaction value. This may create tax consequences for the Vendor which should be identified and planned for early in the process.

Redundant capital is normally removed prior to transaction closing date.

Formula to represent typical Transaction Value (TV) for vendor
Cash + Stock + Stock upside + VC + EO + salary/compensation terms + performance bonus = TV + RC.

Ottawa plans crash courses on financial literacy

An article by Tara Perkins, Financial Services Reporter for the Globe and Mail:

Will the Bank of Canada's interest rate policy affect your business?

Here is the latest press release from the Bank of Canada:

Wednesday, March 2, 2011

Why do Business Valuations Vary for the Same Business?

Business valuations are completed for a long list of reasons. The results of the valuation will vary significantly based on the purpose of the valuation. The purpose will determine level of detail, complexity of analysis, degree of due diligence, and the amount of legal reps and warranties required etc. In the market place most times you will hear a business value described as 2.5X normalized income before tax, or 5X net profit after tax, or 1X gross revenues, etc. While you develop a sense for what a business might be worth, you must also develop an understanding of what type of valuation process makes the most sense.

For simplicity we will demonstrate a simple valuation based solely on normalized Earnings Before Interest Taxes Depreciation & Amortization or EBITDA. This is not meant to address the multiple variations and calculations a Certified Business Valuator (CBV) would process and calculate. This model simply demonstrates the impact of the most common rule of thumb/snap shot estimate of value: EBITDA times some multiple.

For this model we take the last 5 years Total Sales and EBITDA:

When you only look at the last years EBITDA (2010) you can see the results of the multipliers.

This method would be the simplest to calculate however when you only look at one year you have the greatest risk of misrepresenting the real value of the business. For example: if the last year was the best year ever, you are most likely over valuing the business. If the last year was the worst year ever, you are most likely under valuing the business.

You will develop a better sense of value by applying some form of weighted average for a period of time. Our chart makes use of 5 years however you can use as many years as you like. We have also demonstrated 4 variations on what that weighing per year might look like including throwing out the highest year and the lowest year.

When you look at the graphs demonstrating the difference in valuations, you see how much impact the method you apply can have on the estimated value of the business. With this variance you develop a sense for why the appropriate valuation becomes such a critical part of the process.