June 2012

Use the following criteria to separate the serious buyers from window-shoppers. (Add up plus points, subtract minus points. The serious buyer will rate a 6 or above.)

Minus Point Factors

• -4 needs outside financing (excluding home equity)
• -4 been looking for 6 months or more
• -3 no available cash
• -3 still working in corporate world
• -2 spouse not supportive of buying a business
• -2 uses a legal pad or clipboard and takes too many notes
• -2 feels leisurely about finding the “just-right” business
• -1 now renting (although has lived in area for some time)
• -1 under 25 or over 62

Plus Point Factors

• +3 does not have a job or has just resigned
• +3 understands that books and records are not the only indicators of value
• +2 has enough money to buy a business
• +2 no dependents
• +2 family member or close relative has been a business owner
• +2 willing to take the time to look without a lot of notice
• +1 location is not a prime consideration
• +1 age 25 to 62
• +1 skilled worker or professional

Family-owned businesses do have some options when it comes time to sell.  Selling the entire business may not be the best choice when there are no other family members involved.  Here are some choices to be considered:

Internal Transactions

• Hire a CEO – This approach is a management exit strategy in which the owner retires, lives off the company’s dividends and possibly sells the company many years later.
• Transition ownership within the family – Keeping the business in the family is a noble endeavor, but the parent seldom liquefies his investment in the short-term, and the son or daughter may run the company into the ground.
• Recapitalization – By recapitalizing the company by increasing the debt to as much as 70 percent of the capitalization, the owner(s) is/are able to liquefy most of their investment now with the intent to pay down the debt and sell the company later on.
• Employee Stock Ownership Plan (ESOP) – Many types of companies such as construction, engineering, and architectural are difficult to sell to a third party, because the employees are the major asset.  ESOPs are a useful vehicle in this regard, but are usually sold in stages over a time period as long as ten years.

External Transactions

• Third party sale – The process could take six months to a year to complete.  This method should produce a high valuation, sometimes all cash at closing and often the ability of the owner to walk away right after the closing.
• Complete sale over time – The owner can sell a minority interest now with the balance sold after maybe five years.  Such an approach allows the owner to liquefy some of his investment now, continue to run the company, and hopefully receive a higher valuation for the company years later.
• Management buy-outs (MBOs) – Selling to the owners’ key employee(s) is an easy transaction and a way to reward them for years of hard work.  Often the owner does not maximize the selling price, and usually the owner participates in the financing.
• Initial public offering (IPO) – In today’s marketplace, a company should have revenues of $100+ million to become a viable candidate.  IPOs receive the highest valuation, but management must remain to run the company.

Source: “Buying & Selling Companies,” a presentation by Russ Robb, Editor, M&A Today

It has always been the American Dream to be independent and in control of one’s own destiny. Owning your own business is the best way to meet that goal.  Many people dream about owning their own business, but when it gets right down to it, they just can’t make that leap of faith that is necessary to actually own one’s own business.  Business brokers know from their experience that out of fifteen or so people who inquire about buying a business, only one will become an owner of a business.

Today’s buyer is most likely from the corporate world and well-educated, but not experienced in the business-buying process.  These buyers are very number-conscious and detail-oriented.  They require supporting documents for almost everything and will either use outside advisors or will do the verification themselves, but verify they will.  A person who is realistic and understands that he or she can’t buy a business with a profit of millions for $10 down is probably serious.  They must be able to make decisions and not depend on outside parties to do it for them.  They must also have the financial resources available, have an open mind, and understand that owning one’s own business means being the proverbial chief cook and bottle washer.

Today’s buyers are usually what might be termed “event” driven.  This means that the desire to own their own business is coupled with a need or reason.  Maybe they have been downsized out of a job, they don’t want to be transferred, they travel too much, they see no future in their current position, etc.  Many people have the desire, but not the reason.  Most people don’t have the courage to quit a job and the paycheck to venture out on their own.

There are the perennial lookers.  Those people who dream about owning their own business, are constantly looking, but will never leave the job to fulfill the dream.  In fact, perspective business buyers who have been looking for over six months would probably fit into this category.

Business brokers spend a lot of time interviewing buyers.  Here are just a few of the questions they will ask. The answers they receive will determine whether or not the prospective buyer is serious and qualified.

• Why is the person considering buying a business?
• Has the person ever owned their own business?
• How long has the person been looking?
• Is the person currently employed?
• What kind of business is the person looking for?
• Is he or she flexible in the kind of business?
• What are the most important considerations?
• How much money is available?
• What is the person’s timeframe?
• Does the person’s experience match the type of business under consideration?
• Who else is involved in the purchase decision?
• Is the person’s spouse positive about owning a business?

There are other questions and considerations, but those cited above reveal the depth of a buyer interview.  Business brokers want to work only with buyers who are serious about purchasing a business.  They don’t want to show a business to anyone who is not qualified, which is simply a waste of their time and the seller’s time.

Deals fall apart for many reasons – some reasonable, others unreasonable.

For example:

• The seller doesn’t have all his financials up to date.
• The seller doesn’t have his legal/environmental/administrative affairs up to date.
• The buyer can’t come up with the necessary financing.
• The well known “surprise” surfaces causing the deal to fall apart.

The list could go on and on and this subject has been covered many times. However, there are more hidden reasons that threaten to end a deal usually half to three-quarters of the way to closing. These hidden reasons silently lead to a lack of or loss of momentum.

This essentially means a lack of forward progress. No one notices at first. Even the advisors who are busy doing the necessary due diligence and paperwork don’t notice the waning or missing momentum.  Even though a slow-down in momentum may not be noticeable at first, an experienced business intermediary will catch it.

Let’s say a buyer can’t get through to the seller.  The buyer leaves repeated messages, but the calls are not returned.  (The reverse can also happen, but for our example we’ll assume the seller is unresponsive.) The buyer then calls the intermediary.  The intermediary assures the buyer that he or she will call the seller and have him or her get in touch.  The intermediary calls the seller and receives the same response. Calls are not returned.  Even if calls are returned the seller may fail to provide documents, financial information, etc.

To the experienced intermediary the “red flag” goes up. Something is wrong. If not resolved immediately, the deal will lose its momentum and things can fall apart quite rapidly. What is this hidden element that causes a loss of momentum? It is generally not price or anything concrete.

It often boils down to an emotional issue. The buyer or seller gets what we call “cold feet.” Often it is the seller who has decided that he really doesn’t want to sell and doesn’t know what to do.  It may also be that the buyer has discovered something that is quite concerning and doesn’t know how to handle it. Maybe the chemistry between buyer and seller is just not there for one or the other of them. Whatever the reason, the reluctant party just tries to ignore the proceedings and lack of momentum occurs.

The sooner this loss of momentum is addressed, the better the chance for the deal to continue to closing. Because the root of the problem is often an emotional issue, it has to be faced directly. An advisor, the intermediary or someone close to the person should immediately make a personal visit. Another suggestion is to get the buyer and seller together for lunch or dinner, preferably the latter. Regardless of how it happens, the loss of momentum should be addressed if the sale has any chance of closing.

Your first question may be, “Just what is Corporate Social Responsibility (CSR)?” We see CSR demonstrated in a variety of ways in areas such as:

THE COMMUNITY:
o Contributing to local community programs through financial support and personal involvement

THE ENVIRONMENT:
o Using packaging and containers that are environmentally-friendly
o Recycling
o Using low-emission and high mileage vehicles where possible
o Seeking more efficient manufacturing processes, etc.

THE MARKETPLACE:
o Utilizing responsible advertising, public relations and business conduct
o Exercising fair treatment of suppliers/vendors, contractors and shareholder

THE WORKPLACE:
o Implementing fair and equitable treatment of employees
o Upholding workplace safety, equal opportunity employment and labor standards

Actions such as these not only uphold today’s business standards, but they also pave the way for future generations. In years past, many of these elements were considered almost anti-business and some had to be enforced by governmental regulation.

Successful companies such as Tom’s of Maine (producer of natural personal care products) and Newman’s Own have practically been built on CSR. More and more companies – public and private – are following the elements of CSR. Google is a desired workplace because of the way they treat their employees: great benefits, great food in the employee cafeteria, exercise equipment – you name it, Google provides it.

Recognizing CSR in today’s business climate not only increases shareholder/investor interest, but also increases value. Socially-conscious companies are considered sound investments.  They attract buyer interest and acquire higher selling prices when it comes time to sell. After all, most buyers want to find a business with the following attributes:

• Good relations with the local community
• Products and/or services that are meeting the current trends in the marketplace and are positioned to meet future trends
• Positive relations with employees and low-turn-over
• Excellent customer loyalty
• Good relationships with suppliers and vendors
• No “skeletons” in the company closet

In addition, good environmental practices reduce costs, create efficiencies and provide excellent public relations. Good employee relations make for happy workers, which translates to higher productivity and lower absenteeism. Good relationships with customers and suppliers eliminate, or greatly reduce, the possibility of legal entanglements.

All in all, Corporate Social Responsibility not only creates additional value and helps in creating a higher selling price when that time comes – it is also very good business for now and in the future.