Rose Stabler

International Business Brokers Association - 47th Semi-Annual Conference This Month

The International Business Brokers Association (IBBA®) is having its 47th Semi-Annual Conference this month, June 1 -7, in Denver.

The IBBA®, established in 1983, is the largest international non-profit association operating exclusively for the benefit of professionals and firms engaged in the various aspects of business brokerage and mergers and acquisitions. The association represents professional, ethical and practice standards by which its members operate. This semi-annual event is seven days of professional development and top-notch education and networking. Educational and Workshop courses number close to 100 and include such topics as:

• Up-to-date legal and tax issues that impact business transfer transactions
• Analyzing and recasting financial statements
• Techniques for pricing and maximizing value of privately-held companies
• Succession planning and exit strategies
• Negotiating the M&A Process
• M&A Tax Strategies and Deal Structures
• Solutions to closing challenging transactions
• Getting deals financed

At each conference the newest products, techniques, and services are introduced at the IBBA® Trade Fair. In addition, merger and acquisition professionals and Private Equity Groups (PEGs) from around the globe gather to make deals happen during the M&A Source Middle Market Expo. Sponsors and nationally recognized keynote speakers include global economists, banking and lending professionals, private equity and other investment groups, and tax and legal experts involved in business transfers transactions.

When choosing a business brokerage firm to represent the sale of your business, it is important to ascertain the firm's participation in the IBBA®. For more information, visit the IBBA website & M&A Source website.

Why is Buying An Existing Operating Business Better Than Starting A New One?

Don't start it, buy it! Why should you buy an established business versus start a new one? The most important reason is your chances for success are better!

Here is a list of ten solid reasons:

(1) The success rate for existing businesses purchased is significantly higher than the success rate for a new business startup. Statistics indicate a 90% failure rate for new business ventures within five years, while business brokers report that 70% of businesses they sold are still in business five years later. (Economist, Brian Headd, with SBA Office of Advocacy, report -- Redefining Business Success: Distinguishing Between Closure and Failure.)

(2) An established customer base means immediate cash flow!

(3) Bank finance options: It is much easier to find capital to buy an existing business than to start a new one. Why? Banks know the statistics. Bankers are much more willing to lend money when there is an identified source of repayment already in place (i.e. cash flow).

(4) Seller financing: Many sellers of existing businesses are willing to provide financing at very reasonable terms. Why? For income tax reasons, to increase the probability of a sale, and to increase the overall net they receive from the sale from interest on the loan. And, if a seller is willing to carry back any part of the purchase price, it tells you the seller has confidence that the business will continue to succeed under your management.

(5) Projections for a startup are nothing more than an educated guess. Projections for existing businesses for sale are based on historical results. Which is more reliable?

(6) Startups always cost more than expected and may use up initial financial resources budgeted for the venture. This is one of the reasons start ups fail within the first couple of years. Just like a baker making bread from scratch, when launching a new business, you'd be rolling out the "dough" without knowing if there will the anticipated market for your new product or service. Mistakes will be made along the way and new approaches, that require additional expenditures, will need to be formulated. You will need to stay "fluid and flexible" so you can bend and twist along with the business as it takes shape.

(7) You may actually need to come up with less cash for your down payment plus working capital when you buy an existing business than you would need if you started your own new business venture. Why? With owner financing and a performing track record, your existing business purchase is very bankable...a new startup is not. The cash required to get the new business to a cash flow positive is unknown. Unless you are rolling in "dough," this is problematic and threatens ultimate success.

(8) An established web site presence. Although each business will vary, most businesses rely to some extent on a business web site. The longer a web site has been established, and the more traffic that web site receives, the more value search engines place on that site. This is important as your web site ranking determines your placement in search engine results. In other words, building a new web site is not enough. Customers still need to find it. A quality, established web site can be a real asset, something that a new startup will not have.

(9) Many businesses listed for sale are fairly priced. One can often find a business acquisition whereby after the sale the new owner will be able to make an immediate livable salary with enough left over to pay debt service on the new loan and get a reasonable annual return on their investment.

(10) Less stress and strain: An existing business acquisition does not mean stress free. But it will be significantly less than if you were always wondering and worrying if customers would really come and, if and when, the monetary investment would pay off on a start-from-scratch business venture.

Buying an established business is a more efficient way to business ownership. Here's a list of additional advantages of buying an existing business not discussed above:

• Established suppliers / vendors
• Furniture, Office Machines & Communication Equipment are in place
• Experienced Employees
• Relationships with professional advisers, insurance companies, advertisers
• Location demographics has already been market tested & proven
• Established Market presence
• Policies and procedures are in place
• Pricing and competition are already known quantities
• Immediate Growth Potential

In the long run, buying an existing business is less costly than launching a start-up. Even if you pay a premium price for an existing business, at least you know what you are getting for your investment and can anticipate, to a certain degree, what the future will bring.

Finding an existing business with all the ingredients for success already in place is a safe investment and a great platform from which to grow and launch your entrepreneurial new ideas. By far, a much less risky avenue to achieving business ownership. No matter which road you take, however, there are no guarantees. You still need to be a sharp businessperson to make it work.

When Is The Right Time To Sell A Privately-Held Company?

There are many factors that determine best timing for selling a small business: the financial condition of the company, valuation, growth cycle, profit history, and the current market.

There is one aspect about timing that comes into play that seems to dominate all other factors....it is the business owner's emotional readiness to sell. However, if the primary determining criteria in the decision to sell your business is emotional readiness, you may put yourself in a weaker bargaining position when you do decide to sell.

Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, the mergers-and-acquisitions marketplace, industry trends, competition, stock market volatility, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value. Internal conditions within a company, of course, also change -- often in combination with external factors, sometimes independent of those factors. Changes do, and will, occur and they always tend to impact business value -- sometimes eroding value and sometimes increasing value.

Yes, it's easy to understand that you should hold on to a growing business....sell it after it grows bigger. But how should you start thinking objectively about the best time to sell? Well, imagine the life of your business plotted as a bell curve with the peak being the top of the growth cycle. The top is when you have reached the flat plane of growth...a sustaining mode. Buyers pay the best prices when they can't see the top, when it looks like it's all up from here. When others can see the top, they may not buy, or they may pay prices based on the downside trend and higher risk factor. If you wait until your revenues are already sliding over to the downside of the bell curve, you have waited too long. Your business has already started to retire before you have. Buyers are not too interested in declining businesses. To get the best deal you have to sell on the way up -- not at the top or the downside -- and when the market and prices are good.

Markets change and fortunes change from year to year. The current status of the small business market place in Houston is hot. Buyers in every category are plentiful, our economic position is one of the top in the U.S., business policies are in place for continued prosperity and growth, interest rates are at historic lows, and capital is available for business acquisitions.

Fueling the market are the different categories of buyers. For example, a variety of people in the Individual Buyer Category are:

• early baby-boomer corporate retirees
• corporate refugees who have suffered a downsize
• foreign buyers seeing U.S. businesses as investment opportunities while the dollar is still valued lower against their own currency
• 30-something-up-and-comers aggressively buying and building

Increasingly, corporate America, both public and privately-held companies, are acquiring smaller firms as part of their strategy for growth and innovation. Private equity groups, too, are actively seeking add-on acquisitions in Houston for their investment portfolios. Each of these buyer categories, the strategic buyer and the investment buyer, vary in their acquisition criteria regarding the sectors they are targeting and the revenue ranges they require. However, we have seen one major common trend occurring. More and more private equity firms and corporations are looking for smaller businesses. These strategic and investment buyers in increasing numbers are considering businesses with lower minimum cash flow and total revenue generation as acquisition candidates than they were just one year ago.

We expect this trend to accelerate, especially in Houston, for several reasons. But here are a few specific reasons:

1. While the national credit crunch may have impacted the larger transactions, the smaller transactions are still very active because all buyer categories for privately-held, small enterprises are looking to put their money to work.
2. Houston has been minimally affected by the credit crises and has been deemed recession proof. As a result, the city is a major target in the business acquisition marketplace.
3. The new 2008 Fortune 500 list of annual rankings of America's largest corporations is out. Houston is called home by the second largest number of the companies on the list, second only to New York City. Houston has been steadily adding to its collection of Fortune 500's for the past several years, while New York's number has declined.
4. Houston's pro-growth, no nonsense politics are major factors driving developers and other capitalistic-minded investors to Houston. Business experts and economists say it's a matter of simple economics — low taxes, affordable land and an expanding labor force.
5. Houston is one of America's top ten recession proof cities, according to Forbes' article, America's Recession-Proof Cities, released April 29, 2008.

Most importantly, buyers exceed sellers and we have a robust exit market for now. The time will come when the flood of baby-boomer business owners ready to sell will outweigh the ready buyers, and acquisition appetites and prices will fall. It will shift to a buyer's market rather than the seller's market that exits today. As a seller, you do not want to be participating in that buyer's market.

The time is right when the external and internal conditions are right...when the market, the buyers, and values are good and financing terms are favorable. When those factors are right, it's time to get your emotional readiness in line, or you are likely to miss the boat. It's that simple. If you turn down a great market, when buyers are willing to pay a great price, and if you wait too long for your emotional readiness to catch up, the market cycle or your business' internal conditions will likely have changed. The Market is ready and it is never wrong -- and like time, unfortunately, it waits for no one.

The Buyers For Privately-Held Companies And Why They Buy

Most owners of small and medium-sized businesses don't think about exiting their business nor do they plan for that inevitable day. They enjoy their work and their lifestyle. Many of them don't even realize that their business may be an attractive acquisition target.

With about 8,000 Americans turning 60 every day, about 20% of businesses owned by boomers will be looking for buyers within the next three years. We are now in the initial stages of what is expected to be the greatest wave of business transfer activity in U.S. history. This future large-scale baby boomer exit will make for a buyer's market for businesses rather than the seller's market that exists today.

If you have been thinking about selling, this article will help you see your company as a potential acquirer might see it. Understanding who the buyers are and their respective acquisition criteria equals better preparedness when the time comes to sell. Having realistic expectations and understanding the factors that drive value in the marketplace will further bolster an owner's readiness for a successful sale. Proper valuation and presentation to the most likely buyers is crucial to achieving a sale for the best price in the shortest time frame possible.

There are three main categories of buyers of privately-held small to midsize businesses: The Individual Buyer, The Investment Buyer, and The Strategic Buyer. Each category has distinctive characteristics and motives for making an acquisition. The price each is willing to pay is directly proportional to their motive.

THE INDIVIDUAL BUYER CATEGORY

The Individual Buyer represents the largest number of prospective buyers for small to midsize privately-held businesses. Target companies typically have gross revenues between $200,000 to $3 million. Enterprises with gross revenues under $200,000 do not provide sufficient net earnings and those with revenues over $3 million become difficult for individuals to obtain the level of financing required and to compete with the other categories of buyers.

Most Individual Buyers seek enterprises that have full-time employees or management in place, documented operating procedures, a diversified customer base, verifiable financial records, and net earnings at least similar to their most recent salary with an upside potential for growth. These qualifiers give Individuals confidence in the business' continuity and stability. Employees who can run daily operations is more appealing than a business that is highly reliant on the owner's presence or is dependent on the owner's personal relationships with customers.

While Individual Buyers may not always know the latest techniques for valuing businesses, they are capable of determining if the business makes enough money to earn a livable salary, pay the debt service on the new loan to purchase the business, and provide a reasonable return on their investment. These factors are the ultimate test to see if the price and terms of the deal make sense.

THE INVESTMENT BUYER CATEGORY

One of the major market shifts for privately-held companies has been the growth in the number of Private Equity Groups over the last decade, they number in the thousands. The Investment Buyer's primary goal is to acquire a company, grow it, and then cash out, usually within five years through either selling the business to a public company or taking the business public themselves. They are primarily influenced by return on investment and prefer to invest in companies with gross revenues in excess of $5 million with superior profit margins. Their targets usually have a unique business model with a sustainable and defensible market niche and position. Other traits that appeal to the Investment Buyer are strong growth opportunities, a compelling track record, a deep management team, low customer concentrations, and insulation from or a strategy to deal with import competition.

The relative sizes of acquisitions by category of buyer (compressed into their broader categories) is shown in the accompanying Table.

THE STRATEGIC BUYER CATEGORY

The Strategic Buyer is usually a public company or a larger privately-held company. Their targets are businesses that would compliment their own and that by combining the two would create a synergy of operations resulting in lower costs, new customers, and other advantages. Strategic Buyers are the most likely to pay more than other types of buyers because they gain a variety of financial benefits and quick business growth.

Synergy means that joining the two companies will produce more, or be worth more, than just the sum of their parts. Here's a simplified example: a large real estate company purchases a mortgage company. It can now use its existing customers (those who buy homes) and offer them the mortgage funds to finance their purchases. The benefits of this type of acquisition help both companies be more competitive and profitable.

Generally, Strategic Buyers target companies that have gross revenues in excess of $2-3 million, offer unique market share not readily available to their own company, such as opening in a new market not previously served or obtaining product lines and/or services not previously provided, but synergistic to their own customer base. Target companies will be especially attractive in industries where economies of scale are possible whereby the acquiring company can obtain significant post-deal expense savings, such as elimination of dual facilities, support staff, or other overhead expenses.