In many cases, the sale of a small company is “event” driven. That is, the reason for sale is health, divorce, partnership issues, even decline in business. A challenging reason is one in which the owners want to retire and live happily ever after. Here is the problem: The owners have a very prosperous distribution business. They, unfortunately, are the embodiment of a value-enhanced business (see “12 Ways to Increase the Value of Your Company,” under Selling a Business). They each draw about $250,000 annually from the business, plus cars and other benefits. If the company sold for $2 million, after debt, taxes and closing expenses, the net proceeds would be, let’s say, $1 million. Sounds good until you realize that this sum represents only 2 years income for each (and that doesn’t include the cars, health insurance, etc.) – then what? Unfortunately, many owners of smaller companies claim they want to retire when the reality is that they just want to slow down, or eliminate the … [Read more...]

Business Appraisers, before beginning an assignment, like to know the purpose of the appraisal. Usually the assignment demands “bullet proof” documentation: comparables, EBITDA multiples, projections, discount rates, etc.  Unfortunately, in situations where the purpose of the valuation is to establish a selling price, the business appraiser really doesn’t understand the business elements – or, since these business elements don’t figure into the numbers, they are largely ignored. However, they do have value; in some cases, significant value to a buyer. Valuing these business elements requires that computers, adding machines and calculators be put aside. The business should be looked at from three key business elements: the Market, the Operations, and Post-Acquisition. These elements are certainly subjective, but also critically important to a prospective buyer.  A buyer’s opinion of the business elements can drive the actual offering price significantly higher—or lower. In fact, the … [Read more...]

A buyer was interested in a building products manufacturer that did $70 million a year in sales.  Although the business was profitable, it seemed that their margins were lower than they should have been for this industry. The buyer asked the seller how they priced their products.  As the seller was explaining his pricing strategies, he happened to mention that a price increase of 1.5 percent would not really impact sales. He failed to see that the price increase of 1.5 percent on $70 million in sales would bring $1 million in profit. A smart buyer would realize how to get an additional $1 million in bottom-line profit simply by increasing prices by 1.5 percent. A recent book titled The Art of Pricing by Rafi Mohammed went immediately to the business best-seller list, and no wonder. The author stated: “One of the biggest fallacies in business is that a product’s price should be based on its costs.” Here are some of the author’s suggestions: • Restaurants: Keep the entrees priced … [Read more...]

There once was a family-owned bakery that had sales in the millions. The bakery sold bread to restaurants, supermarkets and some retail outlets. The founder gave each of his 5 children 20 percent ownership of the business.  The kids really didn’t want to work in the business, so they turned the operation and management over to 2 members of the third generation.  For some years the business had been operating on a break-even basis, and sales were not increasing. The founder’s children decided that they wanted to sell the business since they were close to retirement age. A professional business intermediary was retained to do this.  He contacted as many of the larger bakeries as possible, hoping to find a suitable acquirer, but there was very little interest. The intermediary continued his search, willing to do the hard work required to find a good buyer. He finally found a successful businessman who offered a price equal to 50 percent of sales – a generous offer. The intermediary … [Read more...]

Much has been written about “fairness opinions” due to the financial manipulations among companies such as Enron, Tyco and others.  The conflict in the use of fairness opinions  was (and is) that an investment banking firm not only handled the sale of a company,  but also got paid for doing a fairness opinion.  For example, when the Bank of America decided to buy Boston’s Fleet bank, B of A paid the investment banking firm of Goldman Sachs $3 million as a retainer, $5 million for a fairness opinion, and was prepared to pay a success fee of $17 million if the deal actually was completed. Keep in mind that a fairness opinion is prepared by one or more financial experts, or by a firm, to protect the shareholders; in other words, to assess whether or not the deal is fair to the real owners of the business.  It also protects the officers and board of directors from shareholders who feel that their company is paying too much for the business being acquired.  It is also apparent, from the … [Read more...]

This is just a partial list: Church’s Chicken, Uno Chicago Grill, Charlie Brown’s, Domino’s Pizza, Burger King, Cinnabon, Sizzler.  The first response would be that they are all in the food business, and that’s correct.  Now name the second thing that they all have in common?  Give up?  Well, they (and many others) have been purchased by private equity firms.  And, apparently, this is just the beginning.  The huge Dunkin Donuts chain is being sought after by two or three private equity firms. Why the interest in restaurants from groups that most people associate with high tech?  Many firms got burned during the dot com and high tech meltdown.  Now these same private equity firms are looking at businesses that are stable, with more predictable earnings, and that are also very familiar businesses, time-tested and still have a lot of growth ahead. One industry expert said in Nation’s Restaurant News, “What’s really driving this is the success of these deals, the numbers that the private … [Read more...]

If Starbucks raised the price of a cappuccino, sales most likely would not be affected. If your attorney raised his or her hourly rate, would you switch law firms?  If a company or service firm does not have pricing power, then its value is less than it should be. Here are a few ways to develop or increase pricing power: producing a discernible branded product or service innovating with patent production such as Apple’s i-Pod providing such exceptional service that competitors are not able to replicate it An interesting question for company management is – how should they set their prices?  Sometimes the answer is that management figures out at what price the item can be sold and then works their costs backward.  The more traditional way is to add up the cost of labor, material, and overhead plus an acceptable profit.  But times have changed, and in many cases, the power of pricing has moved from the producer to the customer.  Today, Wal-Mart tells most of their vendors what they … [Read more...]

When one sells their house, the best deal is usually the highest price.  When one decides to sell their business, there may be other factors to consider.  Many buyers are similar to the “overlooked” buyer described below, serious and qualified; and most sales of businesses are win-win transactions.  However, there are a few exceptions, and sellers should consider them carefully, balancing their prerequisites to the goals of the buyer. Selling to a Competitor – Many company owners think this is the best way to go.  They read about the mega-mergers such as Bank of America and Fleet bank, or the pending deals such as Federated and the May Company Department Stores, and U.S. Air and American West.  Consolidation may play a major role in large public companies; this is not the case in middle market companies. Many owners of middle market firms look at these mega-deals and think it might work for them.  However, upon further consideration, they realize that by disclosing a lot of … [Read more...]

A recent article in INC magazine titled”Street Smarts,” by Norm Brodsky (his column is worth the price of the magazine) addressed the subject of the title above.  However, in the very first paragraph of the article, Mr. Brodsky stated, “Unfortunately, most of them [business owners] have grossly inflated notions of what their companies are worth.” Mr. Brodsky is not one to mince words.  Some of his examples were: “One company had lost money on sales of about $60 million, and yet its owners thought it was worth between $50 million and $100 million … Another company had a net profit of less than $335,000 on sales of about $6.5 million – and still the owners somehow came to believe it was worth between $100 million and $200 million.” Mr. Brodsky feels that the reason for this is “… our egos can get us in trouble when it comes to putting a dollar value on something we’ve created.  We generally take the highest valuation we’ve heard for a company somewhat like ours – and multiply it.” He … [Read more...]

Does your business have an orphan product or service that is doing okay, but doesn’t seem to fit into your core business?  Many companies, private equity groups and even some individual buyers are seeking product lines to augment existing ones, or even to build a business around.  Here are just a few of the reasons why a company might want to divest itself of a product line or even a particular service: It may not be a good fit for the parent company, thus diffusing efforts that could be placed into the core business. Because it is an orphan, it is a distraction. It man be a break-even side business that with a full-time effort could be profitable, but resources are better devoted to the core business or service. The money received could be used to expand the core business or fund some improvements that are not currently budgeted. Certainly, there can be some disadvantages in allowing the adoption of an orphan – on both sides.  There is the all-important people issue.  Some … [Read more...]