Value of Valuation

By: Scott Lieberg, CBB, CMSBB

Valuing businesses is an advisory service we here at Sunbelt offer our clients. This multi-step process involves hours of work to establish a price for sale. Having a valuation, produced by seasoned professionals, facilitates and supports the sale process.
Using tax returns, P&L’s, balance sheets, and other business specific documents, we arrive at the adjusted earnings of the company. Buyers are looking for the revenues that are available after recurring expenses are paid and non-business expenses are added back. The next step is to analyze the business activity of the company being valued and develop projected earnings.
Coupled with earnings, we adjust the Balance Sheet, looking at changes in working capital and performance ratios. These ratios include liquidity, turnover, debt capacity, etc.
We then work toward our calculation of value using several methods. These methods are the Adjusted Asset Method, the Discounted Future Earnings Method, and the Comparable Transaction Method. Careful selection of sold comparable companies, insuring similarity, is critical to building a sound data basis for value. Digging into the business activity of the comps is essential. As the complexity of the business being valued rises, so the task of selecting and weighting comps. Weighting is a seasoned judgement call.
The last step and most difficult is the reconciliation of final values. Each method is assigned a value, a weight, and a confidence level. The market experience of the preparer is never so important, as in the valuation reconciliation.
At Sunbelt, the five of us have over 130 years of experience. Put us to work on your Valuation needs.

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A Conflict of Agents: How Attorneys Kill Deals

Russ Allred MBA 

A business broker’s job is to bring a willing buyer to a willing seller and draft a deal that benefits them both.  A typical deal, with SBA financing requires that the seller carry some paper, ensuring ongoing oversight for the new and inexperienced buyer.  A cooperative working relationship is essential to a successful deal.  The broker’s compensation depends on both sides accepting the deal and working together.  This past month I spent negotiating, cajoling, encouraging and babysitting the buyers and sellers of two deals that had been polluted by the influence of their respective attorneys.   

I have many attorney friends.  I required the advice and services of attorneys to represent me in a commission dispute.  An attorney prepared my family trust, helped me incorporate my business, and attorneys refer me as a receiver to mitigate losses while business partners work out their differences.  I like and need attorneys and my Business Broker Code of Ethics requires me to recommend my clients seek the advice of an attorney, but when it comes to selling a business they can be deal killers.

The job of an attorney is to aggressively represent one side.  They get paid based on the time that they work.  It is to their advantage to foment discord between parties.  Attorneys decry that business brokers have a conflict of interest because they may represent both the buyer and seller in a transaction.  They seldom see their own conflict of interest, in that their client wants to do the deal.  Their job should be to facilitate that transaction and prepare against a worst-case scenario. 

In one of the deals I had to save this month, I negotiated a $2.3 million dollar compensation package for my sellers.  My client had previously hired a broker who listed their business for only $1.6 million.  It was truly the best deal that anyone could have offered them.  The buyer demonstrated his competence by negotiating an SBA loan, and had a back up loan with another willing lender.  In my 36 year career working with businesses, the situation was unprecedented.  The Sellers specifically said to me, “We really like these buyers.”

The sellers hired their attorney to prepare the stock transfer.  As the transaction progressed, the attorney also prepared the seller carry note.  A job that escrow usually does.  As is often the case, the purchase loan was delayed due to bank requirements.  The sellers started to refer to the buyers as “incompetent, inexperienced.”  The seller carry note became more restrictive.  The sellers tried to infuse punitive damages on the buyers for delaying the deal.  When the loan was funded, they refused to provide the transitional consulting that they originally agreed to.  When the buyer had questions about the new requirements the sellers’ attorney told the buyer to have their attorney call her.  Their business broker certainly didn’t advise these actions.  The contention came from the attorney.  In the end the sale was consummated on the terms I had originally suggested, but the parties are off to a very bumpy relationship.  The attorney nearly killed the deal and on her advice the sellers may yet lose the $300,000 they are carrying. 

When you seek the advice of your attorney, take charge of the transaction.  Make your best deal and instruct the attorney what you want them to do.  They work for you.  Keep a lid on the cost by controlling the time they work.  Above all, recognize that you can’t sell your business without a buyer and the buyer must be successful to pay you.  Don’t let your attorney put a wedge between you and your future.

No REGRETS

“I can’t play golf every day.” “My wife wants to see more of me — but not at every breakfast, lunch, and dinner!” “What do other ex-owners do after they’ve sold out?” Failing to answer these concerns can create vacillation, reluctance, and ultimately, an unwillingness on the part of many owners to proceed with planning for their business exits. To examine these concerns, lets analyze a panel of former business owners involved in the owner to former owner transition. All three reported that selling out was the “best thing possible for me and for my family.” That said, each owner approached the sale differently and each has pursued different interests in its aftermath. Tom Frankl was 62 when he sold his high-tech manufacturing firm. He was prompted to sell first when his accountant introduced Tom to Exit Planning and helped him put in place a successor management team. Complementing this concrete Exit Planning step was Tom’s realization that his emotional connection to the business was loosening. When these objective and subjective events converged, Tom began working with his advisors to orchestrate a sale. Bill Dirrito, the owner of a clothing and apparel manufacturing company, entered his business with one goal: reach $50 million in sales and sell out. Bill reached that threshold and determined that he’d have to make a huge investment to retain his current market share so he hired a transaction attorney and an investment banker and sold the company. Unlike Bill, John Six, the 55-year old owner of a low-tech manufacturing company was not focused on an eventual sale. In fact, he didn’t want to sell because he felt he finally “had it going just right.” When confronted with the idea that the time to sell coincides with the existence of continued upside potential, John started thinking about the hard times he’d been through. If hard times returned, he wondered if the company could survive and knew that losing his “upside” would be the least of his worries. He, too, made the call to his advisors. Having all arrived at the closing table via different routes, each now-former owner, has found a similar satisfaction in the decision to sell and in life after the sale. Tom arranged his sale so that his employees kept their jobs and gained greater career opportunities. This gave and continues to give Tom more peace of mind. While he did not have a detailed plan in place for life after the sale, he quickly found new outlets for his energy. He has become the “Park Superintendent” of his 70-acre property. He’s spending time with his wife and family, has time to travel the world, is considering developing some farmland and has taken an active role in community philanthropy. In Tom’s words, “One of the things I appreciate most in this ‘retired life’ is that it isn’t a ‘retired life’ at all.” John echoes Tom’s comfort with this decision. “Of course I wondered what I would do [after the sale] because I was in that business for 30 years. But the day I walked out of there I never looked back. I never missed it. It’s incredible but my schedule is calendared 18 months ahead.” On John’s calendar are motor home vacations, developing an industrial park and expanding his world class collection of race cars. John leaves the house by seven each morning and doesn’t find his way home until late afternoon. Bill, the planner of the group, anticipated that he’d need a place to go— outside of his home — on the day after the sale. He rented and equipped an executive suite and mapped out the first three months after the sale. Today, he spends time on his hobbies (golf, horses and motorcycles). He has educated himself about investing, advises other business owners and works collaboratively with his investment manager. By any yardstick these former owners remain engaged and vital. They have moved into a new era in their lives — an era untroubled by financial concerns.  Not every former owner has the same experience, but our firm believes that owners who thoughtfully plan their exit increase the likelihood that they will be satisfied with their exit and whatever follows.  We’d like to sit down and talk about the role that we can play in crafting a future that works best for each and every business owner. Getting the most for your business and getting it in the best way. We know stuff  that our contemporaries can’t know.

BY:Paul Willingham